<PAGE>
Registration Statement Nos. 333-72027
333-72027-01
Filed pursuant to Rule 424(b)(1)
Prospectus
1,061,231 Shares
Southwest Bancorp, Inc.
Parent Company of
Stillwater National Bank & Trust Company
Common Stock
This offering includes 250,000 shares to be sold by Southwest and 811,231
shares to be sold by selling shareholders. See "Selling Shareholders; Ownership
of Common Stock" (page 53). Southwest Bancorp, Inc. common stock is traded on
the Nasdaq National Market under the symbol "OKSB."s
-----------------
Shares of Southwest's common stock are not deposits, savings accounts, or
other obligations of a depository institution and are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency. Investing in
common stock involves investment risks.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if this
prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense.
------------------
Consider carefully the "Risk Factors" beginning on page 7 of this Prospectus.
Price to Public:
Per Share: $24.375
Total: $25,867,506
<TABLE>
<CAPTION>
Southwest Selling Shareholders
-------------------------------- -------------------------------
Per Share Total Per Share Total
-------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts:
Shares sold by Southwest $ 1.4625 $ 365,625 - -
Shares sold by the selling shareholders $ 1.5860 $ 396,489 $ 0.9738 $ 789,936
Net proceeds of the offering $21.3265 $5,331,636 $23.4013 $18,983,819
</TABLE>
Southwest has agreed to pay a portion of the underwriting discounts of
the selling shareholders. The per share underwriting discounts paid by Southwest
for the selling shareholders in the table above are stated per share sold by
Southwest. Southwest has granted the underwriters a 30-day option to purchase up
to 159,185 additional shares to cover any over-allotments.
------------------
Stifel, Nicolaus & Company Dain Rauscher Wessels
Incorporated a division of Dain Rauscher Incorporated
March 16, 1999
<PAGE>
[Map of Oklahoma showing Southwest offices goes here]
Southwest serves businesses and individuals throughout the state of
Oklahoma from its six offices located in Stillwater, Tulsa, Oklahoma City, and
Chickasha, from its telephone banking center, and through DirectBanker, its
24-hour, real time, internet banking service.
2
<PAGE>
SUMMARY
This summary presents selected information from this Prospectus. Items in
this summary include page references that direct you to more complete
descriptions in this document of the topics discussed. See "Additional
Information" (page 59).
Southwest Bancorp, Inc. and two holders of its common stock are selling up
to 1,061,231 shares of Southwest's common stock in this offering. Southwest has
granted the underwriters an option to purchase up to 159,185 additional shares
from Southwest to cover over-allotments.
The Offering
<TABLE>
<S> <C>
Shares of common stock offered by:
Selling shareholders.............................................. 811,231
Southwest......................................................... 250,000
----------
Total......................................................... 1,061,231
Southwest, if over-allotment option is exercised in full.......... 159,185
Total......................................................... 1,220,416
Shares of common stock outstanding after the offering:
If the over-allotment option is not exercised..................... 4,049,800
If the over-allotment option is exercised in full................. 4,208,985
Gross proceeds to Southwest:
If the over-allotment option is not exercised..................... $ 6,093,750
If the over-allotment option is exercised in full................. $ 9,973,884
Net proceeds to Southwest (after deduction of estimated expenses and
underwriting discounts):
If the over-allotment option is not exercised...................... $ 5,178,338
If the over-allotment option is exercised in full.................. $ 8,824,520
Use of Proceeds......................................................... Southwest intends to use its net proceeds from the offering
for general corporate purposes, which may include lending
and investment activities. Pending such investment, the net
proceeds may be invested in a variety of short-term,
interest-bearing assets including federal funds
transactions, interest-bearing deposits in other banks, and
similar investments.
Nasdaq National Market Symbol........................................... "OKSB"
Dividend Policy......................................................... Southwest has paid regular cash dividends on the Common
Stock since December 31, 1981. See "Market for Common
Stock and Dividends" (page 16).
</TABLE>
3
<PAGE>
Reasons for the Offering
The Selling Shareholders
The selling shareholders are the Estate of Paul C. Wise and James B. Wise,
M.D. Paul C. Wise, who passed away in February 1998, had been an executive and a
member of the boards of directors of Southwest and its subsidiary, Stillwater
National Bank & Trust Company, for many years. Dr. James B. Wise, who is the son
of Paul C. Wise, serves on the boards of directors of Southwest and Stillwater
National. He and his brother, Allen H. Wise, are co-executors of their father's
estate. The selling shareholders are selling all of their shares in order to
fund estate taxes and to realign their investment portfolios.
The selling shareholders together own 811,231 shares of common stock or
approximately 21.4% of Southwest's outstanding shares. They have entered into
selling agreements with Southwest and Stifel, Nicolaus & Company, Incorporated
that relate to the sale of their shares in this offering. The selling agreements
limit the selling shareholders' costs to the approximate amount they would incur
if they sold their shares to a small number of investors rather than in this
offering.
Southwest
Southwest believes this offering will benefit it and its shareholders
by encouraging broader public ownership of Southwest's common stock and
improving the trading liquidity of the stock. Southwest has agreed to pay a
portion of the underwriters' compensation that applies to the shares sold by the
selling shareholders.
The selling shareholders together are the largest holders of Southwest's
common stock. The offering is expected to decrease the concentration of
ownership significantly, and to increase the number of shares held by the
public, that is, persons who are not officers, directors, or holders of more
than 5% of Southwest's common stock. After the offering, the percentage of
Southwest's common stock owned by directors and executive officers is expected
to decrease from 35.4% to 13.8%, and the percentage of Southwest's common stock
beneficially owned by its officers, directors, and holders of more than 5% of
its shares is expected to decrease from 51.4% to approximately 30%. These
percentages do not reflect shares that may be issued on exercise of the
over-allotment option. See "Selling Shareholders; Ownership of Common Stock"
(page 53).
Southwest Bancorp, Inc.
Southwest Bancorp, Inc.
608 S. Main Street
Stillwater, Oklahoma 74074
(405) 372-2230
Southwest is a one-bank holding company headquartered in Stillwater,
Oklahoma. It provides commercial and consumer banking services through its sole
banking subsidiary, Stillwater National Bank & Trust Company. Southwest was
organized in 1981 as the holding company for Stillwater National, which was
chartered in 1894. At September 30, 1998, Southwest had total assets of $977.8
million, deposits of $830.8 million, and shareholders' equity of $56.5 million.
See "Recent Developments" (page 13).
Southwest conducts its business through three regional divisions and
its home office.
Southwest's three regional divisions operate six full-service banking
offices, two of which are located in Stillwater, two in Tulsa, one in Oklahoma
City, and one in Chickasha, Oklahoma. Southwest pursues a broad-based, community
banking strategy in Stillwater, where it has over 50% of the deposit market. In
contrast, Southwest has less than a 5% deposit share in each of Tulsa and
Oklahoma City, the two largest banking markets in the state. In those markets,
Southwest pursues a more targeted growth strategy that focuses on the banking
needs of managers, professionals, and Oklahoma-based businesses.
Southwest offers traditional banking products to consumers and businesses
in all three markets, and also serves customers throughout Oklahoma through the
internet and by telephone. Technology driven products and other products for
which centralized product delivery is more efficient are offered by the home
office. See Products, below (page 5) and "Southwest Bancorp, Inc." (page 17).
Southwest's strategy is based upon delivery of high levels of customer
service with the goal of developing long-term, multiple product customer
relationships. To support this strategy, Southwest uses written performance
standards for the timeliness and
4
<PAGE>
quality of responses to customers, and strives to enable its sales
representatives to meet those standards by providing them with information and
prompt access to senior decision makers. Whenever it is practical, Southwest
enables the customer to choose how to receive information and products: by
internet, by telephone, or face-to-face with assigned sales representatives.
The Chairman of Southwest's Board of Directors, the Chief Executive
Officer, the three regional Presidents, the Chief Lending Officer, the Chief
Administrative Officer, and the Chief Financial Officer each has between 12 and
35 years of banking experience. See "Management" (page 50).
Asset Growth
Southwest completed its initial public offering of common stock in
December 1993. It has grown from $434 million in assets at year-end 1993 to $978
million at September 30, 1998, which represents a compound annual growth rate of
18.6%. It achieved this asset growth without acquiring other financial
institutions. Because of its increased asset size, future percentage growth
rates may be more moderate. Southwest's asset growth has been a product of:
. increased lending penetration in the Tulsa and Oklahoma City
markets;
. continued addition of experienced, sales-oriented personnel;
. Southwest's introduction of new banking products;
. Southwest's ability to capitalize on the disruption of customer
relationships caused by consolidation in the Oklahoma banking
industry; and
. continued growth in the Oklahoma economy.
See "Recent Developments" (page 13) and "Management's Discussion and
Analysis" (page 19).
Income
Since 1993, Southwest's net income and its net income available to common
shareholders increased in each year except 1997. For 1997, net income available
to common shareholders declined significantly, mainly as a result of unusually
large loan loss provisions. See Asset Quality, below (page 6). For the first
nine months of 1998, return on average assets was 0.97% and return on average
common equity was 13.07%. Net income available to common shareholders for the
first nine months of 1998 was reduced by a one-time accounting adjustment of
$928,000 related to Southwest's redemption of its Preferred Stock. See Capital,
below (page 6), "Recent Developments" (page 13), and "Management's Discussion
and Analysis" (page 19).
Products
Southwest offers a wide variety of commercial and consumer lending and
deposit services. Southwest offers its traditional banking products and services
through its offices and sales representatives, by phone, and through its web
site on the internet. In the past two years, it has developed products designed
to complement its traditional banking products, including internet banking
services for consumer and commercial customers called DirectBanker; a highly
automated lockbox, imaging and information service for commercial customers
called Business Mail Processing; and a product that automatically sweeps excess
funds from commercial demand deposit accounts and invests them in short-term
borrowings called Sweep Repurchase Agreements.
Loans. Loans have been Southwest's primary source of asset and revenue
growth. Southwest is a commercial, real estate, and consumer lender. It also is
the largest originator of government-guaranteed student loans in Oklahoma.
Commercial loans and commercial loans secured by real estate are Southwest's two
largest loan categories. Together these loans accounted for over 60% of the loan
portfolio at September 30, 1998.
The majority of Southwest's loan growth since year-end 1993 has originated
in the Oklahoma City and Tulsa metropolitan areas. The outstanding balance of
loans originated by Southwest in those markets increased at a compound annual
growth rate of 34.3% from year-end 1993 to September 30, 1998. At September 30,
1998, outstanding loans originated by the Tulsa and Oklahoma City offices
totaled $486.3 million, and represented 64% percent of the total loan portfolio.
Deposits. Southwest's principal sources of funds 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 its offices. The largest source of funds for Southwest is
certificates of deposit. Southwest's deposits grew at a compound annual growth
rate of 17.0% from year-end 1993 through September 30, 1998. In 1997, Southwest
developed a funding strategy that uses alternative sources of funds in order to
reduce overall funding costs. As a result of this strategy, time
5
<PAGE>
deposits of $590 million at September 30, 1998 were 3% less than at year-end
1997, and total deposits of $831 million were 1% less than at year-end 1997.
See "Southwest Bancorp, Inc." (page 17), "Management's Discussion and
Analysis" (page 19), and "Consolidated Financial Statements" (page F-1).
Asset Quality
In 1997, Southwest recorded significant increases in loan charge-offs and
the provision for loan losses. The 1997 provisions were well in excess of the
provisions recorded in 1996 and earlier years. These provisions led to a
substantial decline in net income for 1997 from 1996. The charge-offs were
primarily the result of deterioration in the financial condition of borrowers in
a small number of large commercial or commercial real estate lending
relationships.
In 1997, management reviewed and revised Southwest's credit and loan
review policies and standards, revised individual and committee loan
authorities, and committed additional resources to the credit administration and
loan review function.
Southwest's asset quality ratios for the first nine months of 1998 are
substantially improved over 1997. For the first nine months of 1998, the ratio
of net charge-offs to average loans was 0.23% on an annualized basis compared to
1.57% for 1997. At September 30, 1998, nonperforming loans were $1.4 million
(0.19% of loans) compared to $7.1 million (0.99% of loans) at year-end 1997, and
total nonperforming assets were $5.2 million (0.69% of loans and other real
estate owned) compared to $7.5 million (1.04% of loans and other real estate
owned) at year-end 1997. At September 30, 1998, the allowance for loan losses
was 1.29% of total loans, compared to 1.15% at year-end 1997. See "Recent
Developments" (page 13) and "Management's Discussion and Analysis" (page 19).
Capital
In 1995, Southwest sold $17.25 million of Redeemable, Cumulative Preferred
Stock Series A. In 1997, Southwest issued $25.0 million of trust preferred
securities, through a subsidiary formed for that purpose. The trust preferred
meets the regulatory criteria for Tier I capital, subject to guidelines that
limit the amount of the preferred securities and cumulative perpetual preferred
stock to 25% of Tier I capital for calculation of the Tier I capital ratio. The
proceeds of the trust preferred were invested in subordinated debentures issued
by Southwest.
The trust preferred is less expensive to Southwest than the Series A
Preferred Stock, since trust preferred dividends are, in effect, deductible for
federal income tax purposes. Because the trust preferred is less expensive,
Southwest used proceeds from the trust preferred to redeem all of the Series A
Preferred Stock when it first became redeemable on September 1, 1998. The
redemption of the preferred stock caused a decrease in total shareholders'
equity, but did not reduce regulatory Tier I capital and leverage ratios or
common shareholders' equity. The redemption caused Southwest to record a
one-time accounting adjustment of $928,000 that relates to the calculation of
earnings per share and the components of shareholders' equity. This adjustment
reduced basic and fully diluted earnings per common share by $0.24 for the first
nine months of 1998. See "Management's Discussion and Analysis" (page 19).
6
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below. These risk
factors may cause Southwest's future earnings to be less or its financial
condition to be less favorable than it expects. You should read this section
together with the other information in this Prospectus and the documents that
are incorporated into the Prospectus by reference.
Credit Risk
Loan charge-offs or problem loans could be higher than Southwest
expects, which would adversely affect its income and financial condition.
Southwest's loan portfolio contains a high percentage of commercial and
commercial real estate loans in relation to its total loans and total assets.
Commercial and commercial real estate loans are generally viewed as having more
risk of default than residential real estate loans or other loans or
investments. These types of loans are also typically larger than residential
real estate loans and other consumer loans. Because the loan portfolio contains
a significant number of commercial and commercial real estate loans with
relatively large balances, the deterioration of one or a few of these loans may
cause a significant increase in nonperforming assets. An increase in
nonperforming loans could result in: a loss of earnings from these loans; an
increase in the provision for loan losses, which would reduce operating income;
and an increase in loan charge-offs.
At any time, there are loans included in Southwest's loan portfolio that
will result in losses, but that have not been identified as nonperforming or
potential problem loans. Southwest has procedures that it uses to help it
identify potential problem loans at a time when they can be worked out with
minimal loss. However, Southwest cannot be sure that it will be able to identify
deteriorating loans before they become nonperforming assets, or that it will be
able to limit losses on those loans that are identified.
Local Economic Conditions
Changes in local economic conditions could reduce Southwest's income and
growth, and could lead to higher levels of problem loans and charge-offs.
Southwest makes loans throughout the State of Oklahoma, but its commercial
lending operations are concentrated in the Stillwater, Tulsa, and Oklahoma City
areas. Adverse changes in economic conditions in those areas could hurt
Southwest's ability to collect loans, could reduce the demand for loans, and
otherwise could negatively affect Southwest's performance and financial
condition.
Southwest's loan portfolios in its Tulsa and Central Oklahoma (Oklahoma
City and Chickasha) divisions, account for approximately two-thirds of the total
loan portfolio. The loan portfolios in these divisions are more heavily
concentrated in commercial and commercial real estate loans than is the
Stillwater division. Adverse developments affecting business conditions in Tulsa
and Oklahoma City could significantly hurt Southwest's performance and financial
condition. In addition, although Oklahoma's economy has diversified from its
traditional dependencies on the energy and agriculture industries, and although
Southwest has low direct lending to the energy and agriculture industries, a
substantial decline in the price of oil or in agricultural commodity prices may
hurt economic conditions generally in Southwest's markets.
Loan Portfolio Concentration
Adverse changes in healthcare-related businesses could lead to higher
levels of problem loans and charge-offs.
Southwest has a substantial amount of loans to individuals and businesses
involved in the healthcare industry, including business and personal loans to
physicians, dentists and other healthcare professionals, and loans to hospitals,
nursing homes, suppliers and other healthcare-related businesses. At September
30, 1998, $81.3 million of Southwest's loans, or 11% of the total loan
portfolio, involved loans to individuals and businesses in the healthcare
industry. This concentration exposes Southwest to the risk that adverse
developments in the healthcare industry could increase the levels of
nonperforming loans and charge-offs, and reduce loan demand and deposit growth.
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. See
"Management's Discussion and Analysis - Lending" (page 29).
7
<PAGE>
Interest Rate Risk
Changes in interest rates may adversely affect Southwest's earnings and
financial condition.
Southwest's net income depends to a great extent upon the level of its
net interest income. Changes in interest rates can increase or reduce net
interest income and net income. Net interest income is the difference between
the interest income Southwest earns on its loans, investments and other
interest-earning assets, and the interest it pays on its interest-bearing
liabilities, such as deposits and borrowings. Because different types of assets
and liabilities owned by Southwest may react differently, and at different
times, to changes in market interest rates, net interest income is affected by
changes in market interest rates. When interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a period, an increase in
market rates of interest could reduce net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond
Southwest's control, including inflation, unemployment, money supply,
international events, and events in world financial markets. Southwest attempts
to manage its risk from changes in market interest rates by adjusting the rates,
maturity, repricing, and balances of the different types of interest-earning
assets and interest-bearing liabilities, but interest rate risk management
techniques are not exact. As a result, a rapid increase or decrease in interest
rates could have an adverse effect on Southwest's net interest margin and
results of operations. See "Management's Discussion and Analysis -
Asset/Liability Management and Quantitative and Qualitative Disclosures About
Market Risk" (page 44).
Provisions that Could Discourage Acquisitions of Southwest
Restrictions on unfriendly acquisitions could prevent a takeover.
Southwest's Certificate of Incorporation and Bylaws contain provisions
that could discourage takeover attempts that are not approved by the Board of
Directors. The Oklahoma General Corporation Act includes provisions that make an
acquisition of Southwest more difficult. These provisions may prevent a future
takeover attempt in which shareholders of Southwest otherwise might receive a
substantial premium for their shares over then-current market prices.
These provisions include supermajority provisions for the approval of
certain business combinations and certain provisions relating to meetings of
shareholders. The Certificate of Incorporation also authorizes the issuance of
additional shares without shareholder approval on terms or in circumstances that
could deter a future takeover attempt. See "Description of the Capital Stock"
(page 54).
Restrictions on Branching
Oklahoma's restrictions on branching could adversely affect Southwest.
Oklahoma law significantly restricts the ability of banks to establish
branches without the acquisition of an existing branch or financial institution.
Southwest has developed a business strategy that does not rely on an extensive
branch network. Southwest cannot be certain, however, that it will not lose
customers to other institutions that have more branches or branches in better
locations.
In January 1999, Southwest received approval to establish four additional
branches under a provision of Oklahoma law that recently has been interpreted to
permit more extensive branching. The interpretation of this law is being
challenged in the courts. If the interpretation is rejected in the courts,
Southwest may not be able to operate these branches. Even if Southwest is
permitted to establish and retain these additional branches, it cannot be
certain of its ability to compete successfully. If wider branching authority
becomes available to all banks in Oklahoma, either under the provision under
which Southwest has applied, or as a result of changes in state or federal law,
Southwest may need to open more branches in order to compete effectively, which
may adversely affect returns on the common stock. See "Southwest Bancorp, Inc. -
Banking Offices" (page 18).
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Dividend Restrictions
Southwest's ability to pay dividends is limited by law and contract.
The ability of Southwest to pay dividends on the common stock largely
depends on its receipt of dividends from Stillwater National. The amount of
dividends that Stillwater National may pay to Southwest is limited by federal
laws and regulations. Southwest or Stillwater National may decide to limit the
payment of dividends even where it has the legal ability to pay them, in order
to retain earnings for use in Southwest's business. Southwest also is prohibited
from paying dividends on the common stock if the scheduled payments on its
subordinated debentures and its trust preferred have not been made. See "Market
for Common Stock and Dividends" (page 16).
Competition
Southwest competes with others for its business.
Southwest competes for loans, deposits, and investment dollars with other
banks and other kinds of financial institutions and enterprises, such as
securities firms, insurance companies, savings and loan associations, credit
unions, mortgage brokers, and private lenders, many of which have substantially
greater resources than those available to Southwest. In addition, non-depository
institution competitors are generally not subject to the extensive regulation
applicable to Southwest and Stillwater National. The differences in resources
and regulation may make it harder for Southwest to compete profitably, reduce
the rates that Southwest can earn on loans and investments, increase the rates
Southwest must offer on deposits and other funds, and adversely affect
Southwest's financial condition and earnings.
Year 2000 Risk
The year 2000 problem may have significant adverse effects on Southwest
and its customers.
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 after December 31, 1999. This year 2000 ("Y2K") issue
affects the entire banking industry because of the industry's reliance on
computers and other equipment that uses computer chips, and may have significant
effects on banking customers, bank regulators, and the general economy.
Southwest is implementing a Y2K plan to prevent or limit adverse effects of the
Y2K issue on Southwest and its customers. Southwest's Y2K compliance is not yet
complete, however, and Southwest cannot be certain that it can take all
necessary steps in sufficient time. Although Southwest believes that total
expenditures will be less than $500,000, Y2K compliance may cost more than it
estimates, and may cause a decrease in its net income.
Southwest believes it will be able to successfully implement its Y2K plan.
Southwest's belief that it, and its principal suppliers of software and data
processing services, will achieve Y2K compliance, is based on assumptions that
may not prove accurate, and on statements made by its data processing suppliers
and other third parties, and is therefore subject to uncertainty. Although
Southwest has undertaken a customer awareness program, customer concerns about
the Y2K issue may adversely impact Southwest. The actual effects on individual
customers of Southwest, on governmental authorities that regulate Southwest, the
financial markets and economy in general, and any resulting consequences to
Southwest, cannot be estimated with any assurance. Because of these
uncertainties, Southwest cannot be certain that Y2K compliance will be achieved.
Southwest, its principal software and data processing suppliers, and its
customers may not achieve Y2K compliance in spite of Southwest's efforts.
Failure to achieve Y2K compliance by Southwest, its principal software
suppliers, the payments system of banks and the Federal Reserve System, and the
telecommunications and power suppliers upon which they rely, could cause
disruptions in services to Southwest's customers. Failure by Southwest's
borrowers to achieve Y2K compliance could have adverse financial effects on
them, and make it more difficult for them to pay their loans, which in turn
could result in reduced income or additional loan losses for Southwest. See
"Management's Discussion and Analysis - Year 2000" (page 46).
9
<PAGE>
Regulatory Risk
Government regulation significantly affects Southwest's business.
The banking industry is heavily regulated. Banking regulations are
primarily intended to protect the federal deposit insurance funds and
depositors, not shareholders. Stillwater National is subject to regulation and
supervision by the Office of the Comptroller of the Currency. Southwest is
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System. The burden imposed by federal and state regulations puts banks
and bank holding companies at a competitive disadvantage compared to less
regulated competitors such as finance companies, mortgage banking companies and
leasing companies. Changes in the laws, regulations and regulatory practices
affecting the banking industry could impose additional costs on Southwest, or
could hurt Southwest's ability to compete profitably with other financial
institutions.
Litigation Risk
Legal claims could have material adverse effects on Southwest.
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.
CAUTION ABOUT FORWARD LOOKING STATEMENTS
Southwest makes forward looking statements in this Prospectus that are
subject to risks and uncertainties. These forward looking statements include:
o Statements of goals, intentions, and expectations;
o Estimates of risks and of future costs and benefits;
o Statements of the ability to achieve "Y2K" compliance; and
o 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:
o Management's estimates and projections of future interest rates and
other economic conditions;
o Statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to "Y2K" compliance
and costs;
o Future laws and regulations; and
o 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.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical financial data for
Southwest. You should read it in connection with the historical financial
information and with the other information provided in this Prospectus. Detailed
historical financial information is included in the Consolidated Financial
Statements (page F-1) and in the documents incorporated by reference. See
"Additional Information" (page 59). The financial information for the interim
periods ended September 30, 1998 and 1997 has not been audited and in the
opinion of management reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of that data. The
results of operations for the nine months do not necessarily indicate the
results for the full year. See "Recent Developments" (page 13).
<TABLE>
<CAPTION>
At and for the nine
months ended
September 30, At and for the years ended December 31,
---------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ----------- ---------- ----------- ---------- ----------- -----------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operating Results
Interest income................ $ 60,530 $ 56,816 $ 76,849 $ 64,668 $ 55,000 $ 37,654 $ 29,639
Interest expense............... 31,856 30,339 41,247 32,833 28,544 16,637 12,417
---------- ----------- ---------- ----------- ---------- ----------- -----------
Net interest income............ 28,674 26,477 35,602 31,835 26,456 21,017 17,222
Provision for loan losses...... 2,705 8,903 12,104 3,100 2,000 1,800 1,400
---------- ----------- ---------- ----------- ---------- ----------- -----------
Net interest income after
provision for loan losses..... 25,969 17,574 23,498 28,735 24,456 19,217 15,822
Gain on sales of securities
and loans..................... 2,144 1,388 5,199 2,227 1,025 1,694 931
Other income................... 2,996 3,187 4,696 4,122 3,849 3,427 3,284
Other expenses................. 19,942 19,340 25,746 23,226 19,902 16,440 13,733
---------- ----------- ---------- ----------- ---------- ----------- -----------
Income before taxes............ 11,167 2,809 7,647 11,858 9,428 7,898 6,304
Taxes on income................ 4,004 886 2,667 4,306 3,336 2,754 2,108
---------- ----------- ---------- ----------- ---------- ----------- -----------
Net income..................... $ 7,163 $ 1,923 $ 4,980 $ 7,552 $ 6,092 $ 5,144 $ 4,196
========== =========== ========== =========== ========== =========== ===========
Net income available to common
shareholders (1).............. $ 5,177 $ 733 $ 3,393 $ 5,965 $ 5,426 $ 5,144 $ 4,196
========== =========== ========== =========== ========== =========== ===========
Per Share Data (2)
Basic earnings per common
share (1)..................... $ 1.36 $ 0.20 $ 0.90 $ 1.59 $ 1.44 $ 1.37 $ 1.44
Diluted earnings per common
share (1)..................... 1.32 0.19 0.88 1.56 1.43 1.37 1.44
Common stock cash dividends.... 0.27 0.24 0.32 0.28 0.24 0.20 0.14
Book value per common share (3) 14.87 12.74 13.38 12.66 11.44 10.09 9.21
Weighted average common shares
outstanding:
Basic......................... 3,794,043 3,768,663 3,773,037 3,760,370 3,755,228 3,755,228 2,910,535
Diluted....................... 3,916,744 3,864,556 3,872,888 3,828,381 3,788,089 3,756,674 2,910,535
Financial Condition Data (3)
Investment securities (4)...... $ 170,698 $ 188,591 $ 187,740 $ 147,351 $ 147,688 $ 143,517 $ 83,442
Loans (5)...................... 755,056 723,971 719,113 644,646 531,988 412,614 319,260
Interest-earning assets........ 927,605 917,262 916,860 791,997 679,676 556,131 416,202
Total assets................... 977,787 971,176 963,286 829,117 711,135 582,170 434,119
Interest-bearing deposits (6).. 725,743 761,889 744,865 670,216 556,079 458,899 339,605
Total deposits (6)............. 830,811 869,299 841,425 753,945 634,387 525,560 394,521
Long-term debt (7)............. 25,013 25,013 25,013 - - - -
Total shareholders' equity (8). 56,476 65,428 68,048 65,032 60,357 37,888 34,570
Common shareholders' equity.... 56,476 48,046 50,666 47,650 42,975 37,888 34,570
Mortgage servicing portfolio... 121,587 133,456 132,824 118,953 130,188 143,899 129,648
</TABLE>
(See notes on following page.)
11
<PAGE>
<TABLE>
<CAPTION>
At and for the nine
months ended
September 30, At and for the years ended December 31,
---------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ----------- ---------- ----------- ---------- ----------- -----------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios
Return on average assets (9)... 0.97% 0.28% 0.54% 0.98% 0.93% 1.01% 1.07%
Return on average total
shareholders' equity (9)...... 14.02 3.92 7.54 12.15 12.81 14.17 17.76
Return on average common
equity (1)(9)................. 13.07 2.03 6.95 13.30 13.48 14.17 17.76
Net interest margin (9)........ 4.08 4.08 4.03 4.32 4.23 4.34 4.61
Efficiency ratio (10).......... 58.98 62.28 56.59 60.83 63.52 62.90 64.06
Average assets per employee.... $3,026 $2,566 $2,667 $2,162 $2,204 $2,089 $1,917
Asset Quality Ratios
Allowance for loan losses to
loans (3)..................... 1.29% 1.12% 1.15% 1.11% 1.09% 1.20% 1.24%
Nonperforming loans to
loans (3)(11)................. 0.19 0.55 0.99 1.03 0.99 0.60 0.98
Allowance for loan losses to
nonperforming loans (3) (11).. 678.48 205.14 116.08 107.37 110.12 199.16 126.07
Nonperforming assets to loans
and other real estate owned
(3)(12)....................... 0.69 0.62 1.04 1.04 1.03 0.67 1.13
Net loan charge-offs to average
loans (9)..................... 0.23 1.53 1.57 0.31 0.24 0.22 0.30
Capital Ratios
Average shareholders' equity to
average assets
Total......................... 6.95 7.18 7.12 8.05 7.27 7.12 6.01
Common........................ 5.39 5.29 5.26 5.81 6.15 7.12 6.01
Tier I capital
(to risk-weighted assets)(13). 9.37 8.61 8.96 10.21 10.02 9.64 12.39
Total capital
(to risk-weighted assets)(13). 11.47 13.12 13.30 11.40 11.41 10.89 13.64
Leverage ratio (13)............ 7.46 6.72 6.95 7.77 8.19 6.76 8.04
</TABLE>
(1) Amounts for the nine months ended September 30, 1998 are shown after
reduction for a one-time accounting adjustment of $928,000, or $0.24 per
common share, relating to the redemption of Southwest's Series A Preferred
Stock on September 1, 1998.
(2) Per share information for 1993 has been restated to reflect the
fourteen-for-one stock split effected in the form of a stock dividend paid
November 15, 1993.
(3) At period end.
(4) Includes investment securities available for sale.
(5) Net of unearned discounts but before deduction of allowance for loan
losses.
(6) In late 1997, Southwest adopted a funding strategy that uses alternative
sources of funds in order to reduce overall funding cost.
(7) In 1997, Southwest issued $25.0 million in subordinated debentures in
connection with the sale of trust preferred securities.
(8) On September 1, 1998, Southwest redeemed all of its Series A Preferred
Stock at its stated liquidation value of $17.25 million.
(9) The ratios for the nine-month periods are annualized.
(10) The efficiency ratio = other expense/(net interest income + gain on sales
of securities and loans + other income).
(11) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more plus loans with restructured terms.
(12) Nonperforming assets consist of nonperforming loans plus foreclosed
assets.
(13) Computed in accordance with current regulatory guidelines.
12
<PAGE>
Recent Developments
Financial Condition and Performance. For the year ended December 31, 1998,
Southwest recorded net income of $9.4 million and net income available to common
shareholders of $7.4 million. At December 31, 1998, total assets were $1.028
billion, total loans were $793.3 million, and total shareholders' equity was
$57.8 million. For the year 1998, return on average common equity was 13.70%,
basic earnings per common share were $1.95 and diluted earnings per common share
were $1.89. Net income per common share, return on common equity and earnings
per share for 1998 were reduced by the effects of the $928,000 one-time
accounting adjustment that related to the redemption of Southwest's Series A
Preferred Stock. Without this adjustment, return on average common equity was
15.42%, basic earnings per common share were $2.19 and diluted earnings per
common share were $2.13. At December 31, 1998, the ratio of nonperforming loans
to loans was 0.17% and the ratio of nonperforming assets to loans and other real
estate was 0.62%. The ratio of net charge-offs to average loans for the full
year 1998 was 0.17%. Results for the year 1998 have not yet been audited.
Management. Effective December 31, 1998, Robert L. McCormick, the
President and Chief Executive Officer of Southwest and Stillwater National since
1970, retired from those positions. Mr. McCormick continues to serve as Chairman
of the Board of Directors of Southwest. Succeeding Mr. McCormick as President
and Chief Executive Officer is Rick J. Green, who had been Chief Operating
Officer of Southwest since 1997, and previously was President of the Central
Oklahoma Division. Mr. Green has been with Southwest and Stillwater National
since 1972. Mr. Green was elected to the Board of Directors in November 1998.
Stanley R. White, Chief Lending Officer of Southwest, formerly President
of the Stillwater Division, was also elected to the Board of Directors in
November 1998. Mr. White has been with Southwest and Stillwater National since
1974.
Mark A. Poole, formerly with BancOne and BankIV, joined Southwest as
President of the Tulsa Division in December 1998. See "Management" (page 50).
Stock Options. In December 1998, Southwest granted options to purchase
140,000 shares of common stock to senior and other officers of Southwest. The
exercise price of these options was $26.00 per share, the market price per share
on the date of grant. 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.
Dividend Increase. On February 18, 1999, the Board of Directors of
Southwest declared a quarterly cash dividend on its common stock of $0.10 per
share, payable April 1, 1999 to shareholders of record as of March 19, 1999.
This quarterly dividend represents an increase from the $0.09 cash dividend
declared in the fourth quarter of 1998.
13
<PAGE>
USE OF PROCEEDS
Southwest will receive net proceeds of $5.2 million ($8.8 million if the
Underwriters' over-allotment option is exercised in full), after deduction of
all estimated expenses of the offering and the underwriting discount payable by
Southwest. Southwest will not receive any of the proceeds from sales of shares
by the Selling Shareholders. Southwest has agreed to pay a portion of the
underwriting discount on the shares to be sold by the Selling Shareholders. See
"Capitalization" (page 15).
The proceeds of the offering will strengthen Southwest's capital base and
position Southwest to continue to exceed minimum regulatory capital ratios,
which will allow for future growth through expansion of its existing businesses
and possible acquisitions of other financial services institutions. Southwest,
however, does not now have any specific plans, arrangements, agreements or
understandings with any other person for any acquisitions. Southwest proposes to
use the net proceeds for general corporate purposes, which may include
investment in Stillwater National where such proceeds will be available for
general corporate purposes and for use in Stillwater National's lending and
investment activities. Pending such investment, the net proceeds may be invested
in a variety of short-term, interest-bearing assets including federal funds
transactions, interest-bearing deposits in other banks and similar investments.
14
<PAGE>
CAPITALIZATION
The following table shows (i) the consolidated capitalization of Southwest
at September 30, 1998, and (ii) the consolidated capitalization of Southwest on
a pro forma basis giving effect to the issuance of 250,000 shares by Southwest
and the receipt by Southwest of the net proceeds from the offering of such
shares, after deduction of all estimated expenses of the offering and the
underwriting discount payable by Southwest (including the portion of the selling
shareholders' underwriting discount that Southwest has agreed to pay), as if the
sale of the shares had been consummated on September 30, 1998, and assuming the
underwriters' over-allotment option is not exercised:
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------
Pro Forma
Actual (1)(2)
------------- --------------
(dollars in thousands)
<S> <C> <C>
Long-Term Debt:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures (3)........... $ 25,013 $ 25,013
=========== ============
Shareholders' Equity:
Serial preferred stock, par value $1.00 per
share; 1,000,000 authorized, none issued....... - -
Class B serial preferred stock, par value $1.00
per share; 1,000,000 authorized, none issued... - -
Common stock, par value $1.00 per share;
10,000,000 shares authorized; 3,797,107 shares
issued and outstanding actual, and 4,047,107
shares issued and outstanding pro forma........ 3,797 4,047
Capital surplus................................. 9,332 14,564
Retained earnings............................... 42,247 42,053
Accumulated other comprehensive income.......... 1,100 1,100
----------- ------------
Total shareholders' equity...................... $ 56,476 $ 61,764
=========== ============
Capital Ratios:
Leverage ratio (4).............................. 7.46 % 8.18 %
Tier 1 capital (to risk-weighted assets)........ 9.37 10.26
Total capital (to risk-weighted assets)......... 11.47 12.14
</TABLE>
(1) Reflects Company-paid expenses of the offering of $245,798 and
underwriting discount of $762,114 (including $396,489 of underwriting
discount relating to shares sold by the Selling Shareholders which
Southwest has agreed to pay). Underwriting discount paid by Southwest for
the selling shareholders, net of certain reimbursements, will be expensed
in the quarter in which it is incurred.
(2) If the over-allotment option is exercised in full, pro forma total
shareholder's equity would be $65.41 million, and the pro forma capital
ratios would be as follows: leverage ratio 8.66%; Tier 1 capital to
risk-weighted assets 10.88%; and total capital to risk-weighted assets
12.60%.
(3) Southwest's subordinated debentures were issued in connection with the
public offering of the trust preferred securities issued by SBI Capital
Trust, Southwest's subsidiary. For purposes of regulatory capital
requirements, the Federal Reserve allows preferred securities which meet
certain requirements and which are issued by subsidiaries of bank holding
companies to be included as Tier 1 capital, up to a maximum of 25% of Tier
1 capital. Southwest believes that its trust preferred meets the
requirements for inclusion in Tier 1 capital. As of September 30, 1998,
Southwest included $18,348,000 of the trust preferred in Tier 1 capital.
If the offering had been completed as of September 30, 1998, $20,111,000
of the trust preferred would have been included in Tier 1 capital.
(4) The Leverage ratio is Tier 1 capital divided by quarterly average total
assets less intangibles.
15
<PAGE>
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock. The common stock is listed for quotation on
the Nasdaq National Market under the symbol "OKSB." As of February 26, 1999, the
common stock was held by approximately 3,000 shareholders of record.
Dividends. Holders of the common stock are entitled to receive dividends
as and when declared by the Board of Directors. Southwest has paid quarterly
cash dividends since 1981. It is the policy of the Board of Directors to
consider the payment of dividends each quarter in light of Stillwater National's
and Southwest's earnings, capital position, anticipated capital requirements,
and other factors that the Board of Directors deems relevant. Funds for the
payment of dividends are obtained primarily from dividends paid to Southwest by
Stillwater National.
Southwest and Stillwater National are subject to regulatory capital
requirements that may limit dividends. Southwest's or Stillwater National's
capital ratios may be a factor in the determination of the Board of Directors,
or the ability of Stillwater National, to pay dividends. Although management
believes that sufficient funds for the payment of dividends will be available,
there can be no assurance that funds for the payment of dividends will continue
to be available in sufficient amounts to pay dividends in accordance with
Southwest's past practice. Even if sufficient funds for the payment of dividends
are available, there can be no assurance that the Board of Directors will elect
to pay dividends, as opposed to retaining earnings to fund growth or expansion,
or for other corporate purposes.
Additionally, Southwest is prohibited from paying dividends on the common
stock if the scheduled payments on its subordinated debentures and its trust
preferred securities have not been made.
Set forth below are the high and low prices for the common stock for each
quarter of 1997 and 1998, and for 1999 through the date of this Prospectus, as
well as the amount of cash dividends declared in each quarter.
<TABLE>
<CAPTION>
1999 (1) 1998 1997
------------------------------------------------------------------------------------------
For the Quarter Ended: High Low Dividend High Low Dividend High Low Dividend
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31............. $ 27.00 $ 24.00 $ 0.10 $ 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>
(1) Through March 16, 1999.
16
<PAGE>
SOUTHWEST BANCORP, INC.
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,
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 commercial loans offered by the Company include (i)
commercial real estate loans, (ii) working capital and other commercial loans,
(iii) construction loans, and (iv) Small Business Administration ("SBA")
guaranteed loans. Consumer lending services include (i) government-guaranteed
student loans, (ii) residential real estate loans and mortgage banking services,
and (iii) personal lines of credit and other installment loans. The Company also
offers deposit and personal banking services, including (i) commercial deposit
services such as lockbox services, commercial checking and other deposit
accounts, (ii) retail deposit services such as certificates of deposit, money
market accounts, checking accounts, NOW accounts, savings accounts and automatic
teller machine ("ATM") access. Trust services, personal brokerage and credit
cards are offered through independent institutions. 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").
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.
17
<PAGE>
Management believes that the bank consolidation in the Tulsa and Central
Oklahoma markets has created opportunities for growth by the Company. At
September 30, 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 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 FNMA or private investors. Servicing
on these loans may be released in connection with the sale. See "Management's
Discussion & Analysis" (page 19).
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.
Oklahoma law significantly restricts the ability of the Bank to establish
branches without the acquisition of an existing branch or financial institution.
In general, an Oklahoma commercial bank may open only two full service branches,
which must be in the city where its home office is located. An exception exists
for branches acquired from other institutions. The Company has developed a
business strategy that does not rely on an extensive branch network. It has
acquired offices selectively, and has opened loan production offices in areas
where branch acquisitions were not feasible or necessary to its strategy.
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 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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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" (page 10).
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 Prospectus.
General
Performance for the First Nine Months of 1998. In the first nine months of
1998, the Company's total assets increased by $14.5 million, or 2%, loans
increased by $35.9 million, or 5%, and common shareholders' equity increased by
$5.8 million, or 11%. For the nine months, return on assets was 0.97% and return
on common equity was 13.07%. At September 30, 1998, nonperforming assets were
0.69% percent of the total of loans and other real estate, and the allowance for
loan losses was 1.29% of total loans and 678% percent of nonperforming loans. In
the first nine months of 1998, the Company increased its net interest income by
8% over the same period of 1997. Operating expense increased 3% from the 1997
period. Diluted net income per common share of $1.32 increased $1.13 over
diluted net income per common share of $0.19 for the first nine months of 1997,
which were significantly depressed due to unusually high loan loss provisions.
The Company redeemed all of its Series A Preferred Stock on September 1,
1998. The redemption of the Series A Preferred Stock caused a decrease in total
shareholders' equity, but did not reduce regulatory Tier I capital and leverage
ratios or common shareholders' equity. The redemption caused the Company to
record a one-time accounting adjustment of $928,000 that relates to the
calculation of earnings per share and the components of shareholders' equity.
This adjustment reduced basic and fully diluted earnings per common share by
$0.24 for the first nine months of 1998.
Performance since Year-end 1993
Asset Growth. The Company's assets and revenues have increased
significantly since December 31, 1993. From year-end 1993 through September 30,
1998, assets have grown at an 18.6% compound annual growth rate. The Company's
growth since year-end 1993 reflects increased penetration of the Tulsa and
Oklahoma City markets, continued addition of experienced, sales-oriented
personnel, the Company's introduction of new banking products, the Company's
ability to capitalize on the disruption of customer relationships caused by
consolidation in the Oklahoma banking industry, and continued growth in the
Oklahoma economy. Asset growth has been driven by loan growth. Because of the
increased size of the Company's asset base, future percentage growth rates may
be more moderate. See "Loan Quality" below.
Net Income Growth. The Company also has increased its net income, and its
net income available to common shareholders (net income after dividends on
preferred stock) each year but 1997. Net income available to common shareholders
grew at a compound annual growth rate of 12.4% from year-end 1993 through 1996.
For 1997, however, net income available to common shareholders declined by 43%,
mainly as a result of unusually large loan loss provisions relating to the
deterioration of a small number of large loan relationships. See "Loan Quality"
below.
19
<PAGE>
Loans. Loans have been the primary source of asset and revenue growth.
Since 1993, loans have grown at a 19.9% compound annual growth rate. As noted
above, the Company's future loan growth may be more moderate as a result of the
larger base. Future loan growth also is subject to a variety of economic and
competitive considerations.
The Company is a commercial, real estate, and consumer lender. Commercial
loans and commercial loans secured by real estate (commercial mortgage loans)
are its two largest loan categories, and together have accounted for over 60% of
the loan portfolio at September 30, 1998 and each year end since 1993. The
majority of the growth in commercial and commercial mortgage loans, and in total
loans, has originated in the Oklahoma City and Tulsa metropolitan areas,
Oklahoma's largest markets in terms of population and banking. The outstanding
balances of the Company's loans originated in those markets increased at a
compound annual growth rate of 34.3% from year-end 1993 to $486.3 million at
September 30, 1998. At September 30, 1998, outstanding loans originated by the
Tulsa and Oklahoma City offices comprised 64% percent of the total loan
portfolio. All categories of loans have increased since the initial public
offering with the exception of government-guaranteed student loans, which rise
and fall from period to period, and 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 Company recorded
a premium of $3.7 million on the credit card sale before taxes, but net of other
related expenses. The Company continues to offer credit cards to its customers
through a financial institution that is not affiliated with the Company.
Loan Quality. 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 to those recorded in
corresponding periods of 1996 and earlier years. These provisions led to a
substantial decline in net income for 1997 from 1996. The charge-offs were
primarily the result of deterioration in the financial position of borrowers in
a small number of large commercial or commercial real estate lending
relationships. A motel property that is included in other real estate at
September 30, 1998, is the only asset relating to these relationships that
remains on the Company's books. Net charge-offs for the first nine months of
1998 were $1.3 million. Net charge-offs for 1997 were approximately $11.0
million, compared with net charge-offs of $1.8 million for 1996.
In 1997, management reviewed and revised the Company's credit and loan
review policies and standards, revised individual and committee loan
authorities, and committed additional resources to the credit administration and
loan review function.
At September 30, 1998, nonperforming loans were $1.4 million and total
nonperforming assets were $5.2 million. From December 31, 1993 to September 30,
1998, the Company's ratio of nonperforming loans to total loans declined from
0.98% to 0.19%, and its ratio of nonperforming assets to total loans plus other
real estate declined from 1.13% to 0.69%, while loans increased from $319.3
million to $755.1 million. For the first nine months of 1998, the ratio of net
charge-offs to average loans was 0.23% on an annualized basis.
Deposits. The Company's principal sources of funds 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 its offices. The largest source of funds for the Company
remains certificates of deposit. The Company's deposits grew at a compound
annual growth rate of 17.0% from year-end 1993 through September 30, 1998. In
February 1998, the Company began a new program that reclassifies excess funds in
transaction accounts as money market accounts for regulatory purposes. The freed
funds can then be used to support the Company's lending and investment
operations. In 1997, the Company developed a funding strategy that uses
alternative sources of funds in order to reduce overall funding costs. As part
of this strategy, the Company entered into retail certificate of deposit
programs with Merrill Lynch, Salomon Smith Barney and Morgan Stanley Dean Witter
(the "brokerage companies") and has obtained lines of credit from the Federal
Home Loan Bank. The brokerage companies do not offer the Company's certificates
of deposit through their Oklahoma offices. As of September 30, 1998, the Company
had $35.0 million in deposits through the retail certificate of deposit
programs. As a result of the Company's funding strategy, time deposits at
September 30, 1998, were 3% less than at December 31, 1997 and overall deposits
were 1% less.
20
<PAGE>
Capital and Trust Preferred Securities. In 1995, the Company sold 9.20%
Redeemable, Cumulative Preferred Stock ("Series A Preferred Stock") for total
proceeds of $17.25 million. In 1997, the Company issued $25.0 million of trust
preferred securities ("Trust Preferred") through a subsidiary formed for that
purpose. The Trust Preferred meets the regulatory criteria for Tier I capital,
subject to guidelines that limit the amount of the preferred securities and
cumulative perpetual preferred stock to an aggregate of 25% of Tier I capital
for the calculation of Tier I capital. The proceeds of the Trust Preferred were
invested in subordinated debentures ("Subordinated Debentures") issued by the
Company. The issuance of the Subordinated Debentures decreased the ratio of
interest-earning assets to interest-bearing liabilities.
The Trust Preferred is less expensive to the Company than the Series A
Preferred Stock, since Trust Preferred dividends are, in effect, deductible for
federal income tax purposes. Accordingly, the Company used proceeds from the
Subordinated Debentures to redeem all of the Series A Preferred Stock when it
first became redeemable on September 1, 1998. The redemption of the Series A
Preferred Stock caused a decrease in total shareholder's equity, but did not
reduce common shareholders' equity. The Company recorded a one-time accounting
adjustment of $928,000 in connection with the redemption. The adjustment caused
a decrease in basic and diluted net income available to common shareholders and
earnings per common share, and affected the components of shareholders' equity.
New Tulsa Office. The Company occupied a newly constructed Tulsa facility
in January 1999. The building includes space for rental to third parties,
although no leases have yet been executed. The total cost of the building is
approximately $10.5 million. A substantial portion of these costs have been
capitalized and, except for the cost of the land, will be expensed over the
useful life of the property.
Summary of Earnings
Net Income
Nine months ended September 30, 1998 and 1997. For the first nine months
of 1998, the Company recorded net income of $7.2 million, 272% more than the
$1.9 million recorded for the first nine months of 1997. Net income available to
common shareholders, after deduction of dividends on Series A Preferred Stock
and a one-time accounting adjustment of approximately $928,000 relating to the
redemption of the Company's Series A Preferred Stock on September 1, 1998, was
$5.2 million, compared with $733,000 for the first nine months of 1997.
The substantial increase in earnings was primarily the result of the
after-tax effect of a $6.2 million reduction in the provision for loan losses.
Basic and diluted earnings per common share increased to $1.36 and $1.32 per
share for the first nine months of 1998 from $0.20 and $0.19 per share for the
same period in 1997. The adjustment relating to the redemption of the Series A
Preferred Stock reduced basic earnings per common share and diluted earnings per
common share by $0.24. Without this adjustment, basic net income per common
share would have been $1.61 and diluted net income per common share would have
been $1.56. Total net income and total common shareholders' equity were not
affected by this adjustment.
Net interest income increased $2.2 million, or 8%, for the first nine
months of 1998 compared to the same period in 1997. This increase in net
interest income, as well as a $6.2 million, or 70%, reduction in the provision
for loan losses, and a $565,000, or 12%, increase in other income, was offset in
part by a $602,000, or 3%, increase in other expenses and a $3.1 million, or
352%, increase in tax expense. For the first nine months of 1998, the return on
average total equity was 14.02% and the return on average common equity was
13.07% compared to a 3.92% return on average total equity and a 2.03% return on
average common equity for the first nine months of 1997. Without reduction for
the one-time accounting adjustment recorded in connection with the redemption of
the Series A Preferred Stock, the return on common equity for the nine months
ended September 30, 1998, would have been 15.41%.
Years ended December 31, 1997 and 1996. 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. The increase in the provision
for loan losses resulted
21
<PAGE>
from the deterioration of a small number of large commercial and commercial real
estate lending relationships. 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.
Years ended December 31, 1996 and 1995. Net income for 1996 was $7.6
million, a 24% increase over the $6.1 million earned in 1995. The increase in
net income during 1996 was due principally to a $5.4 million, or 20%, increase
in net interest income. Net income for 1996 also benefited from a $1.5 million,
or 30% increase in other income. These increases in income offset a $3.3
million, or 17%, increase in other expenses, a $1.1 million, or 55%, increase in
the provision for loan losses, and a $970,000, or 29%, increase in taxes on
income. Net income, after dividends on the Series A Preferred Stock issued in
July 1995, was $6.0 million, an increase of $539,000, or 10%, over 1995. Basic
earnings per common share increased 10% to $1.59 per share for 1996 from $1.44
per share for 1995. Diluted earnings per common share increased 9% to $1.56 per
share for 1996 from $1.43 per share for 1995.
Net Interest Income
Nine months ended September 30, 1998 and 1997. Net interest income
increased to $28.7 million for the first nine months of 1998 from $26.5 million
for the same period in 1997 as continued growth in the loan portfolio enabled
the Company to post a $3.7 million increase in interest income that exceeded the
$1.5 million increase in interest expense during the period. Yields on the
Company's interest-earning assets declined by 14 basis points, and the rates
paid on the Company's interest-bearing liabilities declined by 16 basis points,
resulting in an increase in the interest rate spread to 3.36% for the first nine
months of 1998 from 3.34% for the first nine months of 1997. The net interest
margin was unchanged at 4.08% for both periods. The ratio of average
interest-earning assets to average interest-bearing liabilities was 115.79% for
the first nine months of 1998 compared to 115.68% for the first nine months of
1997. Total interest income for the first nine months of 1998 was $60.5 million,
up 7% from $56.8 million during the same period in 1997. The principal factor
providing greater interest income was the $60.2 million, or 9%, increase in the
volume of average loans outstanding. The Company's average yield on loans
declined to 9.22% for the first nine months of 1998 from 9.41% in 1997. During
the same period, the Company's average investment securities increased $20.7
million, or 13%, and the related yield declined to 6.17% from 6.21%. Total
interest expense for the first nine months of 1998 was $31.8 million, an
increase of 5% from $30.3 million for the same period in 1997. The increase in
total interest expense can be attributed to an increase in average
interest-bearing liabilities of $61.6 million, or 8%. During the same period,
the rates paid on average interest-bearing liabilities declined to 5.25% from
5.41%. The increase in non interest-bearing money market accounts is the result
of the reserve sweep program implemented in February 1998. The reclassification
of excess funds in demand and NOW accounts in the sweep program 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.
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 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
22
<PAGE>
total interest expense is mainly the result of an increase in average
interest-bearing liabilities of $140.7 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.
Years ended December 31, 1996 and 1995. Net interest income for 1996
increased to $31.8 million from $26.5 million in 1995, primarily as a result of
the increase in the Company's loan portfolio. Yields on the Company's
interest-earning assets declined by only 2 basis points during 1996, and the
rates paid on the Company's interest-bearing liabilities declined by 10 basis
points resulting in an increase in the interest rate spread to 3.51% for 1996
from 3.43% for 1995. Net interest income benefited from an increase in the ratio
of average interest-earning assets to average interest-bearing liabilities to
118.29% for 1996 from 117.56% for 1995. The improvement in this ratio reflects
an increase in noninterest-bearing demand deposits as well as an increase in the
Company's average shareholders' equity from the sale of Series A Preferred Stock
in July 1995 and through retention of earnings. Interest income for 1996 was
$64.7 million, up from $55.0 million in 1995 primarily as a result of growth in
interest-earning assets, which offset the slight decline in yields. Yields on
total interest-earning assets were 8.78% in 1996 and 8.80% in 1995. Loan
interest and fee income increased $9.6 million because the greater volume of
loans outstanding more than offset the effect of the 14 basis point decline in
loan yields. The Company generated growth of $107.5 million in average loans to
$580.6 million in 1996 from $473.1 million in 1995, a 23% increase. Interest
income on investment securities increased by $186,000 despite lower yields
earned, due to an increase in the size of the investment portfolio. The yield on
the investment portfolio declined 8 basis points. A decrease in interest income
on federal funds sold and other short-term investments was caused by slightly
lower volumes in those areas. The increase in interest-earning assets was funded
by growth in deposits at the Company's existing branches, the proceeds from the
July 1995 offering of preferred stock and retention of earnings. Total interest
expense for 1996 was $32.8 million, a $4.3 million increase from $28.5 million
in 1995. The increase in interest expense was primarily due to a $93.5 million,
or 18%, increase in average interest-bearing deposits from $527.4 million for
the year ended December 31, 1995 to $620.9 million for the year ended December
31, 1996. Growth in average time deposits of $85.7 million, or 21%, accounted
for most of the increase in average interest-bearing deposits, although average
NOW and money market accounts also increased. Use of federal funds declined
significantly for the year. Rates paid on interest-bearing liabilities declined
to 5.27% in 1996 from 5.37% in 1995.
23
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by the prior period's rate); and (ii) changes in
rates (change in rate multiplied by the prior period's volume). Changes in
rate-volume (changes in rate multiplied by the changes in volume) are allocated
between changes in rate and changes in volume in proportion to the relative
contribution of each.
<TABLE>
<CAPTION>
Nine Months ended Year ended Year ended
September 30, 1998 December 31, 1997 December 31, 1996
Compared to Compared to Compared to
September 30, 1997 December 31, 1996 December 31, 1995
---------------------------- ---------------------------- ---------------------------
Increase (decrease) attributable to change in:
Yield/ Net Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change Volume Rate Change
--------- -------- --------- -------- -------- --------- -------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans receivable (1).. $ 4,119 $ (957) $ 3,162 $11,182 $ (799) $ 10,383 $10,201 $ (615) $ 9,586
Investment securities. 980 (42) 938 1,534 49 1,583 243 (57) 186
Federal funds sold.... (385) (1) (386) 199 16 215 (46) (58) (104)
--------- -------- --------- -------- -------- --------- -------- -------- ----------
Total interest
income.............. 4,714 (1,000) 3,714 12,915 (734) 12,181 10,398 (730) 9,668
--------- -------- --------- -------- -------- --------- -------- -------- ----------
Interest paid on:
NOW accounts.......... (520) (5) (525) 38 18 56 90 (16) 74
Money market accounts
(2).................. 631 (326) 305 449 258 707 332 (364) (32)
Savings accounts...... (8) (8) (16) (18) - (18) (22) 3 (19)
Time deposits......... (277) (895) (1,172) 6,222 (126) 6,096 4,916 (477) 4,439
Short-term borrowings. 1,943 (6) 1,937 240 (5) 235 (143) (30) (173)
Long-term debt........ 988 - 988 1,338 - 1,338 - 0 0
--------- -------- --------- -------- -------- --------- -------- -------- ----------
Total interest
expense............. 2,757 (1,240) 1,517 8,269 145 8,414 5,173 (884) 4,289
--------- -------- --------- -------- -------- --------- -------- -------- ----------
Net interest income.. $ 1,957 $ 240 $ 2,197 4,646 $ (879) $ 3,767 5,225 $ 154 $ 5,379
========= ======== ========= ======== ======== ========= ======== ======== ==========
</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.
24
<PAGE>
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 and interest expense of interest-bearing
liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. These yields and costs are derived by dividing
income or expense by the average daily balance of the related assets or
liabilities for the periods presented. Nonaccrual loans have been included in
the average balances of loans receivable.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, (1)
-----------------------------------------------------------------
1998 1997
------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- --------- -------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable............... $ 752,785 $ 51,886 9.22% $ 692,554 $ 48,724 9.41%
Investment securities.......... 185,500 8,588 6.17 164,754 7,650 6.21
Other interest-earning assets.. 1,883 56 5.47 10,763 442 5.49
---------- --------- ---------- ---------
Total interest-earning assets. 940,168 60,530 8.61 868,071 56,816 8.75
--------- ---------
Noninterest-earning assets:
Other assets................... 43,273 45,266
---------- ----------
Total assets.................. $ 983,441 $ 913,337
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand (2).... $ 7,915 $ 139 2.35% $ 37,437 $ 664 2.37
Money market accounts (2)...... 124,554 3,137 3.37 91,029 2,832 4.16
Savings accounts............... 3,454 58 2.25 3,947 74 2.51
Time deposits.................. 599,219 24,733 5.52 604,522 25,905 5.73
--------- --------- ---------- ----------
Total interest-bearing
deposits..................... 735,142 28,067 5.10 736,935 29,475 5.35
Short-term borrowings (3)...... 51,826 2,045 5.28 2,571 108 5.62
Long-term debt................. 25,013 1,744 9.30 10,902 756 9.30
---------- --------- ---------- ----------
Total interest-bearing
liabilities.................. 811,981 31,856 5.25 750,408 30,339 5.41
---------- --------- ---------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing demand (2). 24,160 86,776
Noninterest-bearing money
market accounts (2)........... 64,256 -
Other noninterest-bearing
liabilities................... 14,740 10,560
Shareholders' equity........... 68,304 65,593
---------- ----------
Total liabilities and
Shareholders' equity......... $ 983,441 $ 913,337
========== ==========
Net interest income........... $ 28,674 $ 26,477
========= ==========
Interest rate spread.......... 3.36% 3.34%
Net interest margin (4)....... 4.08 4.08
Ratio of average interest-earning
Assets to average
Interest-bearing liabilities.. 115.79 115.68
</TABLE>
(1) Ratios for the nine month periods are annualized.
(2) Non-interest-bearing demand and money market accounts and interest-bearing
demand and money market accounts reflect the Company's program of
reclassifying excess demand deposits into money market accounts. The
effect is to reduce the reserve amount required to be maintained on
deposit at the Federal Reserve Bank.
(3) 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.
(4) Net interest margin = net interest income/total interest-earning assets.
25
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------ ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------- --------- -------- --------- --------- --------- --------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$700,129 $ 65,560 9.36% $580,590 $ 55,177 9.50% $473,080 $ 45,591 9.64%
170,635 10,582 6.20 146,973 8,999 6.12 142,254 8,813 6.20
12,819 707 5.53 9,200 492 5.35 10,007 596 5.96
- ----------- --------- --------- --------- --------- ----------
883,583 76,849 8.70 736,763 64,668 8.78 625,341 55,000 8.80
--------- --------- ----------
44,672 35,019 29,145
=========== ========= =========
$928,255 $771,782 $654,486
=========== ========= =========
$ 37,740 $ 894 2.37% 36,088 $ 838 2.32% 32,261 $ 764 2.37%
93,118 3,836 4.12 81,939 3,129 3.82 77,147 3,161 4.10
3,860 96 2.49 4,580 114 2.49 5,441 133 2.44
607,710 34,743 5.72 498,283 28,647 5.75 412,570 24,208 5.87
- ----------- --------- --------- --------- --------- ----------
742,428 39,569 5.33 620,890 32,728 5.27 527,419 28,266 5.36
6,605 340 5.15 1,940 105 5.41 4,527 278 6.14
14,459 1,338 9.30 - - - - - -
- ----------- --------- --------- --------- --------- ----------
763,492 41,247 5.40 622,830 32,833 5.27 531,946 28,544 5.37
- ----------- --------- --------- --------- --------- ----------
88,575 79,739 68,540
- - -
10,099 7,066 6,437
66,089 62,147 47,563
- ----------- --------- ---------
$928,255 $771,782 $654,486
=========== ========= =========
$ 35,602 $ 31,835 $ 26,456
========= ========= =========
3.30% 3.51% 3.43%
4.03 4.32 4.23
115.73 118.29 117.56
</TABLE>
26
<PAGE>
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. Provisions for loan losses and recoveries of loans charged off
increase the allowance for loan losses. Loan charge-offs decrease the allowance.
Management established an allowance of $9.7 million, or 1.29% of total
loans, at September 30, 1998 compared to an allowance of $8.3 million, or 1.15%
of total loans at December 31, 1997 and $7.1 million, or 1.11% of total loans,
at December 31, 1996. The Company recorded a provision for loan losses of $2.7
in the first nine months of 1998 to increase the allowance. This provision was
$6.2 million less than the $8.9 million provision recorded in the first nine
months of 1997. The main reason for the decrease in the provision for loan
losses was the significant reduction in the level of charge-offs for the 1998
period compared to the unusually high levels of 1997. The provision for loan
losses was $12.1 million in 1997, compared with $3.1 million for 1996. See
"Allowance for Loan Losses" (page 36) and the "Summary of Earnings" (page 21).
Other Income
The following table shows the Company's other income by category.
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30, For the Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges and fees.. $ 2,610 $ 2,342 $ 3,177 $ 2,985 $ 2,574
Credit cards.............. 66 568 659 869 901
Other noninterest income.. 320 277 360 268 374
Gain on sale of credit
card portfolio........... - (26) 3,745 - -
Gain on sales of loans
receivable............... 1,959 1,407 1,936 1,768 1,033
Gain (loss) on sales of
investment Securities.... 185 7 18 459 (8)
---------- ---------- ---------- ---------- ----------
Total other income..... $ 5,140 $ 4,575 $ 9,895 $ 6,349 $ 4,874
========== ========== ========== ========== ==========
</TABLE>
Nine months ended September 30, 1998 and 1997. Other income increased by
$565,000 for the first nine months of 1998 compared to the first nine months of
1997 primarily as a result of a $672,000 increase in gains on sales of
residential mortgages and student loans. Other increases were $268,000 in
service charges and fees, $178,000 in gains on sales of securities and $43,000
in other noninterest income. These increases were offset by a $502,000 reduction
in credit card income that resulted from the sale of the Company's credit card
portfolio in 1997. The gains on sales of securities in 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 Series A Preferred Stock.
Years ended December 31, 1997 and 1996. 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. The gain on sale of investment securities of
$18,000 occurred when $1.0 million in "held to maturity" and $5.0 million in
"available for sale" Agency securities, originally purchased at a discount, were
called prior to their stated maturity date.
Years ended December 31, 1996 and 1995.Total other income increased by
$1.5 million for 1996 compared to 1995 primarily due to increased gains on sales
of student loans and residential mortgage loans, increased gains on sales of
investment securities and increased service charges attributable to its higher
deposit base. During 1996, the Company sold $46.7 million in student loans
compared to $40.2 million in such sales during 1995. The Company also was able
to increase its gain on sales of student loans by packaging its loans in a
manner that allowed it to obtain a higher premium from the Student Loan
27
<PAGE>
Marketing Association ("SLMA"). The principal balance of residential mortgage
loans sold was $45.1 million during 1996 compared to $33.6 million during 1995.
The gain on sales of investment securities during 1996 occurred when $4.6
million in agency securities classified as "held to maturity", and $11.2 million
in agency securities classified as "available for sale", originally purchased at
a discount, were called prior to their stated maturity date, and $150,000 in
corporate stock classified as "available for sale" was sold. During 1995, a loss
on sales of investment securities occurred when the Company sold securities
classified as "held to maturity". The Company concluded that these securities
were sold at a time near enough to their maturity dates that interest rate risk
was substantially eliminated as a pricing factor in conformity with SFAS No.
115.
The Company offers trust services through its relationship with the Trust
Company of Oklahoma, (the "Trust Company"). In December 1996, the Company sold
its investment in the capital stock of the parent corporation of the Trust
Company for a pre-tax gain of approximately $287,000, but continues to offer
trust services through the Trust Company.
Other Expenses
The following table shows the Company's other expenses by category.
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30, For the Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits... $ 10,510 $ 10,559 $ 13,808 $ 12,164 $ 10,057
Occupancy........................ 3,673 3,393 4,681 3,671 3,080
FDIC and other insurance......... 190 190 254 859 856
Credit cards..................... 5 247 313 411 547
General and administrative....... 5,564 4,951 6,690 6,121 5,362
---------- ---------- ---------- ---------- ---------
Total other expenses......... $ 19,942 $ 19,340 $ 25,746 $ 23,226 $ 19,902
========== ========== ========== ========== =========
</TABLE>
Nine months ended September 30, 1998 and 1997. The Company's other
expenses increased $602,000 for the first nine months of 1998 compared to the
first nine months of 1997. This increase was primarily the result of a $613,000
increase in general and administrative expense. In addition, occupancy expenses
increased $280,000. These increases were offset by reductions in salaries and
employee benefits ($49,000) and credit card expense ($242,000). The increase in
occupancy expense was due primarily to increased data processing, depreciation
and equipment costs, as systems, facilities and equipment continue to be
upgraded. The Company's salaries and employee benefits expense decreased by
$49,000 as a result of the Company's efforts to reduce staffing levels in
selected areas and improve efficiency. The Company reduced staffing to 325
full-time equivalent employees at September 30, 1998 from 348 at year end 1997
and 357 at year end 1996.
Years ended December 31, 1997 and 1996. 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 in selected areas 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.
28
<PAGE>
Years ended December 31, 1996 and 1995.The Company's other expenses
increased $3.3 million, or 17%, for fiscal year 1996 compared to fiscal year
1995. This increase was primarily the result of an increase in salaries and
employee benefits, which increased $2.1 million, or 21%, as a result of a 20%
increase in staffing. The increase in staffing is related to the expansion of
the Company's asset and deposit bases. In addition, occupancy expense increased
$591,000, due primarily to the leasing of additional office space and the
depreciation on furniture and equipment purchased to furnish those new offices,
and general and administrative expense increased $759,000. Included in general
and administrative expense was $139,000 in expenses related to an unsuccessful
effort to establish additional branches. Despite the increase in the Company's
deposit base, FDIC and other insurance for 1996 increased only $3,000 compared
to 1995. Regular deposit insurance premium rates decreased beginning July 1,
1995 as the Bank Insurance Fund ("BIF"), of which the Bank is a member, achieved
its statutory reserve ratio. However, legislation enacted by Congress required
that the Bank pay a one-time special assessment of $436,000 to the FDIC with
respect to deposits it acquired from a savings association in 1991. After the
payment of this special assessment, the insurance premiums related to these
acquired deposits were also reduced.
Income Taxes
The Company's income tax expense for the first nine months of 1998 and
1997 was $4.0 million and $886,000. The Company's effective tax rates have been
lower than the Federal and State statutory rates primarily because of tax-exempt
income on municipal obligations and loans. The Company's income tax expense for
fiscal years 1997, 1996 and 1995 was $2.7 million, $4.3 million and $3.3
million.
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, student loans and other consumer loans. The Company
emphasizes commercial lending to professionals and businesses. Commercial loans
and loans secured by commercial real estate accounted for 65.4% of total loans
at September 30, 1998, and represented over 60% of total loans at year end 1997,
1996, 1995, and 1994. These loans increased at more than a 25% compound annual
growth to September 30, 1998 from year-end 1993, although annual growth rates
have declined over this period. Commercial and commercial mortgage loans grew
$29.3 million, or 6.3%, in the first nine months of 1998, $50.0 million, or
12.1%, in 1997, and $73.5 million, or 21.5%, in 1996. Most of the growth in
loans, and in commercial loans, originated in the Tulsa and Oklahoma City
markets.
The Company sold its credit card portfolio in 1997 for a $3.7 million
pre-tax gain. See "Summary of Earnings" (page 21). Total loans increased $35.9
million, or 5%, in the first nine months of 1998, but have increased at a 19.9%
annual compound growth rate from year-end 1993 through September 30, 1998.
Because of the Company's increased base, the Company expects that the percentage
growth of loans may moderate in the future.
Loans were $755.1 million at September 30, 1998, an increase of $35.9
million, or 5%, compared to December 31, 1997. The Company experienced increases
in the categories of commercial mortgages ($30.2 million, or 14%), real estate
construction loans ($3.1 million, or 4%), residential mortgages ($3.0 million,
or 4%) and other consumer loans ($1.0 million, or 3%). These increases were
offset by a slight reduction in commercial loans ($929,000, or less than 1%) and
government-guaranteed student loans ($416,000, or less than 1%).
29
<PAGE>
Loan Portfolio
Composition of Loan Portfolio. The following table presents the
composition of the Company's loan portfolio, net of unearned interest:
<TABLE>
<CAPTION>
At December 31,
At September 30, ----------------------------------------------------------------
1998 1997 1996 1995
------------------ ---------------------- -------------------- --------------------
Total Total
Amount % Amount % Amount Loans Amount Loans
--------- ---------- --------- --------- --------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential............... $ 82,848 10.97 $ 79,843 11.10 $ 61,175 9.49 $ 42,988 8.08
Commercial................ 253,859 33.62 223,672 31.10 196,163 30.43 160,126 30.10
Real estate construction... 75,594 10.01 72,454 10.08 54,369 8.43 33,159 6.23
Commercial................. 240,078 31.80 241,007 33.52 218,515 33.90 181,081 34.04
Installment and consumer
Guaranteed student loans.. 63,974 8.47 64,390 8.95 61,959 9.61 67,388 12.67
Credit cards.............. - 0.00 73 0.01 20,839 3.23 21,869 4.11
Other consumer............ 38,703 5.13 37,674 5.24 31,626 4.91 25,377 4.77
--------- ------- --------- ------- -------- ------- -------- ------
755,056 100.00 719,113 100.00 644,646 100.00 531,988 100.00
======= ======= ======= ======
Less:
Allowance for loan losses.. (9,709) (8,282) (7,139) (5,813)
--------- --------- -------- --------
Total................... $ 745,347 $ 710,831 $637,507 $526,175
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1994 1993
------------------- -----------------------
Total
Amount Loans Amount %
---------- -------- --------- -----------
<S> <C> <C> <C> <C>
Real estate mortgage:
Residential............... $ 33,882 8.21 $ 31,864 9.98
Commercial................ 132,297 32.06 88,953 27.87
Real estate construction... 20,725 5.02 9,844 3.08
Commercial................. 120,781 29.27 80,732 25.29
Installment and consumer
Guaranteed student loans.. 61,752 14.97 69,739 21.84
Credit cards.............. 20,958 5.08 19,189 6.01
Other consumer............ 22,219 5.39 18,939 5.93
--------- ------- -------- ---------
$ 412,614 100.00 $319,260 100.00
======= =========
Less:
Allowance for loan losses.. (4,959) (3,960)
========= ========
Total................... $ 407,655 315,300
========= ========
</TABLE>
30
<PAGE>
Collateral and Concentration. At September 30, 1998 and at December 31,
1997 and 1996, 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 $81.3 million, or 11% of total loans, at
September 30, 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. At September 30, 1998, approximately $10.0 million in outstanding loans
were directly related to the petroleum or natural gas industry. The Bank's
lending limit under federal law to any one borrower was $13.2 million at
September 30, 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 September 30, 1998 had outstanding loans of $8.5 million.
Loan Portfolio Maturity. The following table shows the remaining
maturities of loans at September 30, 1998. Student loans, which do not have
stated maturities, are shown 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.......................... $ 16,855 $ 47,640 $ 189,364 $ 253,859
One-to-four family residential...... 12,492 33,795 36,561 82,848
Real estate construction............. 55,273 9,943 10,378 75,594
Commercial........................... 95,919 101,565 42,594 240,078
Installment and consumer:
Guaranteed student loans............ 63,974 - - 63,974
Credit Cards........................ - - - -
Other............................... 11,884 25,436 1,383 38,703
--------- --------- --------- ---------
Total.............................. $ 256,397 $ 218,379 $ 280,280 $ 755,056
========= ========= ========= =========
</TABLE>
Loan Portfolio Sensitivity. The following table shows the sensitivity of
loans due after September 30, 1999 by dollar amount outstanding.
<TABLE>
<CAPTION>
Fixed Variable Total
----------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Real estate mortgage:
Commercial........................ $ 64,261 $172,743 $237,004
One-to-four family residential.... 21,748 48,608 70,356
Real estate construction........... 5,116 15,205 20,321
Commercial......................... 23,450 120,709 144,159
Installment and consumer:
Guaranteed student loans.......... - - -
Credit Cards...................... - - -
Other............................. 24,653 2,166 26,819
----------- ---------- ----------
Total.............................. $139,228 $359,431 $498,659
=========== ========== ==========
</TABLE>
31
<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
September 30, 1998, approximately $177,000, or 12% 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 loans:
<TABLE>
<CAPTION>
At At December 31,
September 30, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Commercial:
Nonaccrual....................... $ 186 $ 3,938 $ 191 $ 107 $ 179 $ 261
Past due 90 days or more......... 297 179 614 88 - -
Restructured terms............... - - 577 608 639 676
One-to-four family residential:
Nonaccrual....................... 595 110 265 18 58 95
Past due 90 days or more......... 69 700 363 251 72 37
Restructured terms............... - - - - - -
Real estate construction:
Nonaccrual....................... - - - - 86 101
Past due 90 days or more......... - 603 119 - - -
Restructured terms............... - - - - - -
Commercial:
Nonaccrual....................... 258 1,403 4,149 567 805 1,473
Past due 90 days or more......... - 195 71 435 241 32
Restructured terms............... - - - 2,996 - 195
Installment and consumer:
Guaranteed student loans:
Nonaccrual...................... - - - - - -
Past due 90 days or more........ - - - - - 17
Restructured terms.............. - - - - - -
Credit cards:
Nonaccrual...................... - - - - - -
Past due 90 days or more........ - - 82 63 138 52
Restructured terms.............. - - - - - -
Other consumer:
Nonaccrual...................... 16 7 30 32 210 28
Past due 90 days or more........ 10 - 188 114 62 174
Restructured terms.............. - - - - - -
---------- -------- ---------- ---------- --------- ---------
Total nonperforming loans...... 1,431 7,135 6,649 5,279 2,490 3,141
Other real estate owned............ 3,788 362 64 195 264 472
========== ======== ========== ========== ========= =========
Total nonperforming assets..... $ 5,219 $ 7,497 $ 6,713 $ 5,474 $ 2,754 $ 3,613
========== ======== ========== ========== ========= =========
Loans receivable................... $755,056 $719,113 $644,646 $531,988 $412,614 $319,260
Summary:
Total nonaccrual.................. $ 1,055 $ 5,458 $ 4,635 $ 724 $ 1,338 1,958
Total past due 90 days or more.... 376 1,677 1,437 951 513 312
Total restructured................ - - 577 3,604 639 871
---------- -------- ---------- ---------- --------- ---------
Total nonperforming loans........ 1,431 7,135 6,649 5,279 2,490 3,141
Other real estate owned........... 3,788 362 64 195 264 472
========== ======== ========== ========== ========= =========
Total nonperforming assets $ 5,219 $ 7,497 $ 6,713 $ 5,474 $ 2,754 $ 3,613
========== ======== ========== ========== ========= =========
Allowance for loan losses to loans. 1.29% 1.15% 1.11% 1.09% 1.20% 1.24%
Nonperforming loans to loans....... 0.19 0.99 1.03 0.99 0.60 0.98
Allowance for loan losses to
nonperforming loans............... 678.48 116.08 107.37 110.12 199.16 126.07
Nonperforming assets to loans and
other real estate owned........... 0.69 1.04 1.04 1.03 0.67 1.13
</TABLE>
32
<PAGE>
Other real estate owned consisted mainly 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.
A new appraisal of this property was ordered in February 1999. If the appraisal
is below the current $3.7 million carrying value of the property, the Company
will be required to write down the property to the appraised value and the
difference will be charged as an expense, reducing income.
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 the first nine months of
1998, $92,000 in interest income was received on nonaccrual loans. If interest
on those loans had been accrued, total interest income of $497,000 would have
been recorded. During the years ended December 31, 1997 and 1996 gross interest
income of $144,000 and $398,000 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 such periods
amounted to approximately $30,000 and $37,000.
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 $24.0 million at September 30, 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 $1.4 million, or 17%, from December 31, 1997 to September 30, 1998. At
September 30, 1998, the allowance for loan losses was $9.7 million, or 1.29% of
total loans, compared to $8.3 million, or 1.15% of total loans, at December 31,
1997.
33
<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30, For the Year Ended December 31,
---------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- --------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period..... $ 8,282 $ 7,139 $ 7,139 $ 5,813 $ 4,959 $ 3,960 $ 3,393
Loans charged-off:
Real estate mortgage:
Commercial....................... 325 37 1,150 68 - 156 14
One-to-four family
residential..................... 93 153 155 80 7 16 58
Real estate construction.......... - - - - 1 - 13
Commercial........................ 1,140 7,016 8,691 1,064 1,101 461 675
Installment and consumer:
Guaranteed student loans......... - 1 1 - - 1 8
Credit cards..................... 11 746 829 803 528 370 519
Other consumer................... 440 395 702 286 166 199 129
-------- -------- -------- -------- -------- -------- --------
Total charge-offs.................. 2,009 8,348 11,528 2,301 1,803 1,203 1,416
-------- -------- -------- -------- -------- -------- --------
Recoveries:
Real estate mortgage:
Commercial....................... 66 4 6 10 119 34 251
One-to-four family
residential..................... 6 77 79 15 33 23 15
Real estate construction.......... - - - - - - -
Commercial........................ 318 248 300 288 334 94 76
Installment and consumer:.
Guaranteed student loans......... - 2 2 - 1 - 3
Credit cards..................... 46 87 108 106 111 139 130
Other consumer................... 295 30 72 108 59 112 108
-------- -------- -------- -------- -------- -------- --------
Total recoveries................... 731 448 567 527 657 402 583
-------- -------- -------- -------- -------- -------- --------
Net loans charged-off.............. 1,278 7,900 10,961 1,774 1,146 801 833
Provision for loan losses.......... 2,705 8,903 12,104 3,100 2,000 1,800 1,400
-------- -------- -------- -------- -------- -------- --------
Balance at end of period........... $ 9,709 $ 8,142 $ 8,282 $ 7,139 $ 5,813 $ 4,959 $ 3,960
======== ======== ======== ======== ======== ======== ========
Loans outstanding:
Average........................... $752,785 $692,554 $700,129 $580,590 $473,080 $356,323 $277,099
End of period..................... 755,056 723,971 719,113 644,646 531,988 412,614 319,260
Ratio of allowance for loan losses
to loans outstanding:
Average.......................... 1.29% 1.18% 1.18% 1.23% 1.23% 1.39% 1.43%
End of period.................... 1.29 1.12 1.15 1.11 1.09 1.20 1.24
Ratio of net charge-offs to average
loans outstanding during the
period (1)........................ 0.23 1.53 1.57 0.31 0.24 0.22 0.30
</TABLE>
(1) Ratios for the nine-month periods are annualized.
In establishing the level of the allowance for September 30, 1998,
management considered a number of factors, including the increased risk inherent
in commercial and commercial real estate loans, which are viewed as entailing
greater risk than certain other categories of loans, charge-off history, and the
rapid expansion of the loan portfolio over the last several years. Management
also considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk. At September
30, 1998, total nonperforming loans were $1.4 million, or 0.19% 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 September 30,
1998 was appropriate, after assessing these and other factors it deemed
relevant. Management conducted a similar analysis in order to determine the
appropriate allowance as of December 31, 1997.
Based upon its year-end 1997 review, management established an allowance
of $8.3 million, or 1.15% of total loans, at December 31, 1997 compared to an
allowance of $7.1 million, or 1.11% of total loans, at December 31, 1996. In
establishing this level of allowance for December 31, 1997, management
considered a number of
34
<PAGE>
factors that tended to indicate a potential need for an increased allowance
level, including the continued growth in the loan portfolio, the increased risk
associated with the level of real estate construction loans (10% of the loan
portfolio at December 31, 1997 and 8% of the portfolio at December 31, 1996),
which are viewed as entailing greater risk than certain other categories of
loans, and the increased level of one-to-four family residential mortgage loans
(11% of the loan portfolio at December 31, 1997 versus 9% at December 31, 1996),
which are viewed as entailing less risk than certain other categories of loans.
Government-guaranteed student loans, which are viewed as entailing relatively
low risk, comprised 9% of the portfolio at December 31, 1997 versus 10% at
year-end 1996. The level of commercial loans, which comprise the largest
category in the portfolio, remained unchanged at approximately 34% of the total
portfolio at December 31, 1997 and 1996. The level of commercial mortgage loans
increased slightly to 31% of the total loan portfolio at year-end 1997 from 30%
at the previous year-end. Overall, the loan portfolio, before deduction of the
allowance for loan losses, increased by $74.5 million, or 12%, from year-end
1996 to year-end 1997, while the allowance grew by $1.1 million, or 16%.
At December 31, 1997, nonperforming loans were $7.1 million, or 0.99% of
the portfolio, compared with $6.6 million, or 1.03% of the portfolio, at
December 31, 1996. The allowance for loan losses equaled 116.08% of
nonperforming loans at December 31, 1997, and 107.37% of nonperforming loans at
December 31, 1996. Large changes in the ratio of the allowance to nonperforming
loans may occur from period to period because of variations in the amounts of
nonperforming loans, which depend largely on the condition of a small number of
individual loans and borrowers relative to the total loan portfolio.
At December 31, 1997 and 1996, impaired loans totaled $5.5 million and
$4.8 million, and had been allocated a related allowance for loan losses of
$707,000 in 1997 and $2.0 million in 1996.
The amount of the allowance deemed appropriate by management, and the
levels of loan charge-offs and nonperforming loans, are affected by changing
economic conditions and economic prospects and the financial positions of
borrowers. Management strives to carefully monitor credit quality and the
adequacy of the allowance for loan losses, and to identify loans that may become
nonperforming. At any time, however, there are loans included in the portfolio
that will result in losses to the Company, but that have not been identified as
nonperforming or potential problem loans. Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the unexpected deterioration of one or a few of such
loans may cause a significant increase in nonperforming assets, and lead to a
material increase in charge-offs and the provision for loan losses. Since
problems with commercial and commercial real estate loans do not necessarily
appear early in their lives, the Company may experience increased levels of
nonperforming loans and loan charge-offs as the relatively large volume of
recently originated loans mature. In addition, the United States Comptroller of
the Currency, as an integral part of its examination process, periodically
reviews the Bank's allowance for loan losses. The Comptroller of the Currency
may require the Bank to recognize additions to its allowance based upon
judgments of bank examiners about information available to them at the time of
their examination.
The allowance for loan losses related to loans that are identified for
evaluation in accordance with Statement of Financial Accounting Standards No.
114 Accounting by Creditors for Impairment of a Loan ("SFAS No. 114") as
superseded by Statement of Financial Accounting Standards No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures is based
on discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The allowance for loan
losses is established through a provision for loan losses charged to expense. A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All of the Company's
nonaccrual loans have been defined as impaired loans.
35
<PAGE>
Allowance for Loan Losses
Allocation of the Allowance for Loan Losses. The following table allocates
the allowance for loan losses by loan category. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
At September 30, -------------------------------------------------------------------
1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
Percentage of Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------ ------ ------------ ------ ------------ ------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential.................... $ 464 10.97% $ 488 11.10% $ 294 9.49% $ 176 8.08%
Commercial..................... 679 33.62 1,073 31.10 584 30.43 538 30.10
Real estate construction........ 971 10.01 732 10.08 457 8.43 310 6.23
Commercial..................... 4,659 31.80 4,477 33.52 4,597 33.90 3,688 34.04
Installment and consumer:
Guaranteed student loans....... - 8.47 - 8.95 - 9.61 9 12.67
Credit cards................... - - 1 0.01 670 3.23 456 4.11
Other consumer................. 654 5.13 573 5.24 263 4.91 83 4.77
Unallocated..................... 2,282 938 - 274 - 553 -
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses......................... $9,709 100.00% $8,282 100.00% $7,139 100.00% $5,813 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
--------------------------------------------
1994 1993
--------------------- ---------------------
Percentage of Percentage of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------ ------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage:
Residential.................... $ 178 8.21% $ 103 9.98%
Commercial..................... 941 32.06 519 27.87
Real estate construction........ 195 5.02 32 3.08
Commercial..................... 2,616 29.27 1,302 25.29
Installment and consumer:
Guaranteed student loans....... 6 14.97 65 21.84
Credit cards................... 247 5.08 747 6.01
Other consumer................. 137 5.39 88 5.93
Unallocated..................... 639 - 1,104 -
------ ------ ------ ------
Total allowance for loan
losses......................... $4,959 100.00% $3,960 100.00%
====== ====== ====== ======
</TABLE>
36
<PAGE>
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. Investment securities were $170.7 million at September 30, 1998, a
reduction of $17.0 million, or 9%, compared to December 31, 1997. This large
reduction was due primarily to the sale of available for sale securities in
connection with the redemption of the Company's Series A Preferred Stock on
September 1, 1998.
Investment Portfolio
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------
1998 1997 1996 1995
--------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities....... $ 124,266 $ 154,209 $ 109,989 $ 110,785
State and municipal obligations............. 15,045 10,953 13,153 11,579
Mortgage-backed securities.................. 24,952 16,427 23,060 24,222
Other securities............................ 6,435 6,151 1,149 1,102
--------- --------- --------- ---------
Total investment securities............... $ 170,698 $ 187,740 $ 147,351 $ 147,688
========= ========= ========= =========
Available for sale (fair value)............. $ 89,219 $ 100,746 $ 63,762 $ 73,044
Held to maturity (amortized cost)........... 81,479 86,994 83,589 74,644
--------- --------- --------- ---------
Total investment securities............... $ 170,698 $ 187,740 $ 147,351 $ 147,688
========= ========= ========= =========
</TABLE>
37
<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
September 30, 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 September 30, 1998.
<TABLE>
<CAPTION>
One Year of Less One to Five Years Five to Ten Years More than Ten Years
----------------- ----------------- ----------------- -------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government and agency
securities....................... $18,048 6.31% $ 50,062 6.15% $ - -% $ - -%
State and municipal
obligations...................... 1,894 4.08 11,475 4.01 - - - -
Mortgage-backed securities......... - - - - - - -
Other securities................... - - - - - - -
------- -------- ------ ------
Total held to maturity........... 19,942 6.10 61,537 5.75 - - - -
------- -------- ------ ------
Available for Sale:
U.S. government and agency
securities....................... 1,500 7.05 48,489 6.32 4,885 7.05 - -
State and municipal
obligations...................... 1,229 5.07 440 3.98 - - - -
Mortgage-backed securities......... 6,120 6.39 17,323 6.16 1,277 5.79 - -
Other securities................... - - 4,122 6.89 - - 2,000 6.81
------- -------- ------ ------
Total available for sale......... 8,849 6.32 70,374 6.30 6,162 6.79 2,000 6.81
------- -------- ------ ------
Total investment securities...... $28,791 6.17% $131,911 6.05% $6,162 6.79% $2,000 6.81%
======= ======== ====== ======
<CAPTION>
Total Investment Securities
------------------------------
Amortized Market Average
Cost Value Yield
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Held to Maturity:
U.S. government and agency
securities....................... $ 68,110 $ 69,671 6.20%
State and municipal
obligations...................... 13,369 13,247 4.02
Mortgage-backed securities......... - - -
Other securities................... - - -
-------- --------
Total held to maturity........... 81,479 82,918 5.84
-------- --------
Available for Sale:
U.S. government and agency
securities....................... 54,874 56,156 6.41
State and municipal
obligations...................... 1,669 1,676 4.78
Mortgage-backed securities......... 24,720 24,952 6.20
Other securities................... 6,122 6,435 6.86
-------- --------
Total available for sale......... 87,385 89,219 6.35
-------- --------
Total investment securities...... $168,864 $172,137 6.10%
======== ========
</TABLE>
38
<PAGE>
At September 30, 1998, the Company held mortgage-backed securities with a
book value of $25.0 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 September 30, 1998 and at
December 31, 1997, 1996, and 1995, the Company had no investments in privately
issued mortgage-backed securities, and had no mortgage-related securities that
were rated "high risk" under regulatory guidelines.
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 $35.0
million at September 30, 1998.
In February 1998, the Company began a new program that reclassifies excess
funds in transaction accounts as money market accounts for regulatory purposes.
At September 30, 1998, $66.7 million and $36.3 million of demand and NOW account
balances had been reclassified as money market accounts. Without these
reclassifications, demand deposits would have increased $8.5 million, or 9%, NOW
accounts would have increased $8.3 million, or 22%, and money market deposits
would have decreased $8.5 million, or 9%, as compared to December 31, 1997. 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.
39
<PAGE>
Deposit Composition
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
At September 30, 1998 (1) 1997 1996 1995
------------------------- ---------------------- ---------------------- ----------------------
Percent Percent Percent Percent
of of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits............. $ 38,322 4.61% N/A $ 96,560 11.48% N/A $ 83,729 11.11% N/A $ 78,308 12.34% N/A
Noninterest-bearing money
market accounts............ 66,746 8.03 N/A - - N/A - - N/A - - N/A
NOW accounts................ 9,473 1.14 2.35% 37,447 4.45 2.37% 34,309 4.55 2.32% 33,762 5.32 2.37%
Money market accounts....... 122,314 14.72 3.37 94,496 11.23 4.12 86,910 11.53 3.82 75,330 11.87 4.10
Savings accounts............ 3,492 0.42 2.25 3,655 0.43 2.49 4,086 0.54 2.49 4,788 0.76 2.44
Time deposits............... 590,464 71.08 5.52 609,267 72.41 5.72 544,911 72.27 5.75 442,199 69.71 5.87
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits............ $830,811 100.00% $841,425 100.00% $753,945 100.00% $634,387 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
(1) Without the effects of the reserve reclassification program, deposits at
September 30, 1998 would have been as follows:
<TABLE>
<CAPTION>
Percent
of
Amount Deposits
--------- --------
<S> <C> <C>
Demand deposits......... $ 105,068 12.65%
NOW accounts............ 45,755 5.51
Noninterest-bearing money
market accounts........ - -
Money market accounts... 86,032 10.34
Savings accounts........ 3,492 .42
Time deposits........... 590,464 71.08
--------- ------
Total deposits........ $ 830,811 100.00%
========= ======
</TABLE>
The Company offers a variety of cash management services to its commercial
deposit customers including lockbox collections, imaging, deposit reconciliation
and verification. 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.
40
<PAGE>
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 September 30,
1998:
<TABLE>
<CAPTION>
Maturity Period Amount
---------------------------------------- ----------
(dollars in thousands)
<S> <C>
Three months or less(1)............. $ 51,746
Over three through six months (1)... 36,395
Over six through 12 months (1)...... 59,370
Over 12 months...................... 25,343
===========
Total............................. $ 172,854
===========
</TABLE>
(1) The amount of certificates of deposit that mature within 12 months is
$147.5 million. The Company does not have any liquidity concerns as a
result of the volume of these maturities.
41
<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 September 30, 1998, repurchase agreements were $33.2 million and
federal funds purchased were $2.4 million.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- --------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amounts outstanding at end of period
Treasury, tax and loan note option........... $ 1,494 $ 1,500 $ 1,595 $ 1,185 $ 471
Federal funds purchased and securities
sold under repurchase agreements............ 35,620 1,546 18,953 1,800 2,800
Borrowed from the Federal Home Loan Bank..... 20,000 - - - -
Other short-term borrowings.................. - - - - 7,500
Weighted average rate outstanding
Treasury, tax and loan note option........... 5.41% 5.41% 5.25% 4.99% 5.15%
Federal funds purchased and securities
sold under repurchase agreements............ 5.05 4.97 4.94 6.70 5.75
Borrowed from the Federal Home Loan Bank..... 5.45 - - - -
Other short-term borrowings.................. - - - - 5.55
Maximum amount of borrowings outstanding
at any month-end:
Treasury, tax and loan note option........... $ 2,500 $ 1,843 $ 1,843 $ 1,500 $ 1,710
Federal funds purchased and securities
sold under repurchase agreements............ 47,570 2,546 19,953 2,300 11,200
Borrowed from the Federal Home Loan Bank..... 37,000 - - - -
Other short-term borrowings.................. - 5,000 5,000 - 12,500
Approximate average short-term borrowings
outstanding with respect to:
Treasury, tax and loan note option........... 1,543 1,181 1,205 1,135 1,152
Federal funds purchased and securities
sold under repurchase agreements............ 29,957 397 4,657 251 1,536
Borrowed from the Federal Home Loan Bank..... 20,292 - - - -
Other short-term borrowings.................. - 988 739 554 1,839
Approximate weighted average rate paid on:
Treasury, tax and loan note option........... 5.15% 5.50% 5.36% 4.96% 5.79%
Federal funds purchased and securities
sold under repurchase agreements............ 5.11 5.52 4.98 5.78 6.05
Borrowed from the Federal Home Loan Bank..... 5.53 - - - -
Other short-term borrowings.................. - 5.84 5.84 5.59 6.41
</TABLE>
42
<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
September 30, 1998, total shareholders' equity was $56.5 million, compared to
$68.0 million at December 31, 1997.
In the first nine months of 1998, earnings, net of common and preferred
stock dividend payments, contributed $4.9 million to common shareholders'
equity. In addition, net unrealized gains on investment securities available for
sale (net of tax) increased to $1.1 million at September 30, 1998 compared to
$580,000 at December 31, 1997. Sale of common stock through the dividend
reinvestment plan, the employee stock purchase plan and the employee stock
option plan contributed an additional $209,000 to shareholders' equity in the
first nine months of 1998. As a result, common shareholders' equity increased
$5.8 million, or 11%, in the first nine months of 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 dividend payments. Net
unrealized gains on investment securities available for sale (net of tax)
increased to $580,000 at December 31, 1997 compared to $205,000 at December 31,
1996. The 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 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 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 for the calculation of Tier I 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 Company'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 September 30, 1998, the
Company exceeded all applicable capital requirements, having a total risk-based
capital ratio of 11.47%, a Tier I risk-based capital ratio of 9.37%, and a
leverage ratio of 7.46%. As of September 30, 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.
43
<PAGE>
Liquidity
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans. The Company's portfolio of
government-guaranteed student loans and SBA loans are also readily salable.
Additional sources of liquidity, including cash flow from the repayment of
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets,
and accessibility to the capital and money markets. These funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans and operate the
organization. Core deposits, defined as demand deposits, interest-bearing
transaction accounts, savings deposits and certificates of deposit of less than
$100,000 were 71% and 84% of total deposits at September 30, 1998 and 1997.
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 Company also carries
interest-bearing demand notes issued to the U.S. Treasury in connection with the
Treasury Tax and Loan note program. The Company has approved federal funds
purchase lines with three other banks. The Company has available a $35.0 million
line of credit from the SLMA and a $195.6 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 unpledged securities and other loans.
The Company 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 million. During the first nine months and third quarter of 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.
During 1997 and 1996, no category of borrowings averaged more than 30% of
ending shareholders' equity. During 1997, the Company began selling securities
under agreements to repurchase with the Company retaining custody of the
collateral. Collateral consists of direct obligations of the U.S. Government or
U.S. Government Agency issues and the Company retains custody of the security,
which is designated as pledged with the Company's safekeeping agent. The type of
collateral required, and the retention of the collateral and the security sold
minimize the Company's risk of exposure to loss.
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 Company 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 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
44
<PAGE>
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 amount 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 September 30, 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....................... $383,297 $ 216,413 $ 99,959 $ 55,387 $ 755,056
Investment securities.................. 10,186 23,095 129,080 8,337 170,698
Federal funds sold..................... - - - - -
Due from banks......................... 1,851 - - - 1,851
-------- --------- -------- -------- ---------
Total................................. 395,334 239,508 229,039 63,724 927,605
Interest-bearing liabilities:
Money market accounts.................. 122,314 - - - 122,314
Time deposits.......................... 144,046 353,599 92,810 9 590,464
Savings accounts....................... 3,492 - - - 3,492
NOW accounts........................... 9,473 - - - 9,473
Short-term borrowings.................. 57,114 - - - 57,114
Long-term debt......................... - - - 25,013 25,013
-------- --------- -------- -------- ---------
Total................................. 336,439 353,599 92,810 25,022 807,870
-------- --------- -------- -------- ---------
Interest sensitivity gap................ $ 58,895 $(114,091) $136,229 $ 38,702 $ 119,735
======== ========= ======== ======== =========
Cumulative interest sensitivity gap..... $ 58,895 $ (55,196) $ 81,033 $119,735 $ 119,735
======== ========= ======== ======== =========
Percentage of interest-earning assets
to interest-bearing liabilities........ 117.51% 67.73% 246.78% 254.67% 114.82%
Percentage of cumulative gap to total
assets................................. 6.02% (5.64)% 8.29% 12.25% 12.25%
</TABLE>
45
<PAGE>
It is the Company's goal to maintain a total 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.
Quantitative and Qualitative Disclosures about Market Risk. 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 the forecasting of net interest income under a
variety of interest rate and growth scenarios. At December 31, 1997, the model
projected net income would increase by 1.15% if interest rates would immediately
fall by 200 basis points. It projects a decrease in net income of 0.94% if
interest would immediately rise by 200 basis points. 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. Management has determined that no additional disclosures
are necessary to assess changes in information about market risk that have
occurred from December 31, 1997 through September 30, 1998.
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.
Risks Related To Year 2000. 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.
46
<PAGE>
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's State of Readiness. The Company has created a task force to
establish a Y2K plan to prevent or mitigate the adverse effects of 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 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 issues 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 is 100% complete.
. 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. The tasks to be performed
in this phase are 70% complete. All system renovations are expected
to 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 back up 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 September
30, 1998. The Company is funding Y2K expenditures through continuing operations.
47
<PAGE>
All 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.
Forward Looking Statements. 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 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 the changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
Recently Adopted Accounting Standards
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 129, Disclosure
of Information About Capital Structure. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The adoption
of SFAS No. 129 did not affect the Company.
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, remove financial assets from its statement of
condition when control has been surrendered, and remove liabilities when they
are 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.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes
48
<PAGE>
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. Comprehensive
income includes gains or losses based upon changes in the market values of
certain assets. 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.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
reporting standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. 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.
Accounting Standards Issued But Not Yet Adopted
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits-an amendment of FASB Statements
No. 87, 88, and 106. SFAS No. 132 revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement of
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer considered useful. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1998. The Company does not offer
defined benefit plans or other postretirement benefit plans to its employees;
therefore, the adoption of SFAS No. 132 will not affect the Company's financial
statement disclosures.
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.
49
<PAGE>
MANAGEMENT
The Company has assembled a management team of experienced bankers. The
Company's executive officers are listed below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert L. McCormick...................... 64 Chairman of the Board of Directors of the Company and the Bank
Rick J. Green............................ 51 Chief Executive Officer of the Company and the Bank; Director of the
Company and the Bank
Stanley R. White......................... 52 Chief Lending Officer of the Bank; Director of the Company and the Bank
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
</TABLE>
The principal occupations and business experience of each executive
officer of the Company are shown below.
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.
50
<PAGE>
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.
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.
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.
51
<PAGE>
Previously, Mr. Root was Senior Vice President in the Central Oklahoma division.
Mr. Root joined the Bank in 1992. He is a member of the Oklahoma City Chamber of
Commerce and the State Chamber of Commerce of Oklahoma, and of Robert Morris
Associates. In addition, he is a member of the Oklahoma City Men's Dinner Club.
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.
52
<PAGE>
SELLING SHAREHOLDERS; OWNERSHIP OF COMMON STOCK
Selling Shareholders
The following shareholders are selling common stock in this offering.
Percentage ownership is based upon the 3,799,065 common shares outstanding at
December 31, 1998. The selling shareholders will sell all of the shares of
common stock that they own in the offering.
<TABLE>
<CAPTION>
Shares Owned
---------------------
Percentage of
Outstanding
Selling Shareholder Position with the Company Number Shares
- --------------------- --------------------------------------------------------------------------- ------ -----------
<S> <C> <C> <C>
Estate of Paul C. Wise Paul C. Wise was an officer and director of the Company and the Bank until
his death in February 1998. James B. Wise, M.D. is a co-executor of the Estate. 696,311 18.33%
James B. Wise, M.D. Director of the Company and the Bank 114,920 3.02
------- ------
Total 811,231 21.35%
======= =====
</TABLE>
Beneficial Ownership of Securities
The following table shows the common stock owned by directors and
executive officers of the Company and persons known by the Company to
beneficially own more than 5% of the Company's outstanding common stock as of
December 31, 1998. The table includes the numbers and percentages of shares
owned after the offering is completed. This information has been prepared based
upon the SEC's "beneficial ownership" rules. Under these rules a person is
deemed to be a beneficial owner of a security if that person has or shares
voting power, which includes the power to vote or to direct the voting of a
security, or investment power, which includes the power to dispose or to direct
the disposition of a security. More than one person may be deemed to be a
beneficial owner of the same securities. A person is deemed to be a beneficial
owner of any security that the person has the right to acquire within 60 days.
The shares of common stock issuable upon exercise of options exercisable within
60 days from the record date are assumed to be outstanding for the purpose of
determining the percentage of shares beneficially owned by that person. The
SEC's rules sometimes cause the total percentage ownership disclosed to be less
than the sum of the individual ownership percentages. The table does not reflect
shares that American Fidelity Corporation has indicated it may purchase in the
offering, which could bring its ownership to 9.99% of outstanding shares.
<TABLE>
<CAPTION>
Ownership Prior Ownership After
to the Offering the Offering
--------------------- Shares to --------------------
Beneficial Owner Shares Percentage Be Sold Shares Percentage
- --------------------------------------------------- --------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Selling Shareholders:
Estate of Paul C. Wise 696,311 18.33% 696,311 - -
James B. Wise, M.D. (1) 114,920 3.02 114,920 - -
--------- ----- -------
Total Selling Shareholders 811,231 21.35 811,231 - -
All Directors (15 persons) (2) (3) % 1,333,064 34.41 811,231 521,833 12.65%
Executive officers (11 persons) (4) 191,211 4.88 - 191,211 4.58
All directors and executive officers (2) (4) 1,388,721 35.41 811,231 577,490 13.84
Known holders of more than 5% of the Company's
outstanding common stock (2) (5) 1,660,430 43.71 811,231 849,199 20.97
Directors, officers and known holders of more
than 5% of the Company's common stock (2) (4) (5) 2,017,019 51.43 811,231 1,205,788 28.90
</TABLE>
(1) James B. Wise, M.D. is a director of the Company. The shares of
common stock held in the Estate of Paul C. Wise are deemed to be
owned by Dr. Wise because he is co-executor of the estate.
(2) Includes shares to be sold by the selling shareholders, all of which
are deemed to be owned by Dr. Wise.
(3) Also includes 75,000 shares of common stock issuable upon exercise
of options that were exercisable at December 31, 1998, or that
become exercisable by March 16, 1999. These options are held by
three executive officers who are directors of the Company.
(4) Includes 122,000 shares of common stock issuable upon exercise of
options that were exercisable at December 31, 1998, or that become
exercisable by March 16, 1999. Includes shares owned by executive
officers who are directors of the Company and other executive
officers.
(5) Includes shares owned by Joyce P. Berry, a director of the Company,
which will represent 5.46% of outstanding shares after the offering.
Also includes 234,380 shares owned by George M. Berry, which will
represent 5.79% of outstanding shares after the offering, and
347,918 shares owned by American Fidelity Corporation, which will
represent 8.60% of outstanding shares after the offering. (Including
shares it may purchase in the offering, American Fidelity
Corporation's ownership could increase to 9.99% of outstanding
shares.) Mr. Berry is the retired Chairman of the Board of Directors
of the Company. Mr. Alfred L. Litchenburg, who is a director of the
Company, is an executive officer of the principal subsidiary of
American Fidelity Corporation. The Bank holds 200,000 shares in
trust beneficially owned by Mr. Berry, and 46,000 additional shares
included above.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company has 12,000,000 shares of capital stock authorized, of which
10,000,000 are shares of common stock, 1,000,000 are shares of serial preferred
stock, and 1,000,000 are shares of Class B serial preferred stock. As of
September 30, 1998, 3,797,107 shares of common stock, and no shares of serial
preferred stock or Class B serial preferred stock were issued and outstanding.
Common Stock
Each share of common stock is entitled to one vote on all matters
submitted to shareholders, except that in the election of directors, cumulative
voting is permitted. Cumulative voting gives each shareholder the right to cast,
in the aggregate, a number of votes equal to the total number of the holder's
shares, multiplied by the number of directors to be elected, all of which may be
cast for any one or more candidates.
Holders of shares of common stock do not have preemptive rights to
subscribe for shares of common stock or any other class of stock that may be
issued in the future. The shares of common stock are not subject to redemption
and, upon receipt by the Company of the full purchase price therefor, will be
fully paid and nonassessable.
Each share of common stock participates equally in dividends which are
payable when, as and if declared by the Company's Board of Directors out of
funds legally available for such purpose, and is entitled to share equally in
the assets of the Company available for distribution to common shareholders in
the event of liquidation of the Company. If any shares of preferred stock are
outstanding, such shares may have priority in dividends or liquidation over the
Shares.
Preferred Stock
The Board of Directors of the Company is authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The serial preferred stock may rank prior to the shares as
to dividend rights or liquidation preferences, or both, and may have full or
limited voting rights. In 1995, the Board of Directors authorized the issuance
of the Series A Preferred Stock, all shares of which were redeemed on September
1, 1998. Upon redemption, shares of Series A Preferred Stock returned to the
status of authorized but unissued shares.
Restrictions on Changes in Control
The Company's Amended and Restated Certificate of Incorporation requires
the affirmative vote of not less than 80% of the outstanding voting stock of the
Company to authorize the merger or consolidation of the Company with, or a sale,
exchange or lease of more than 25% of the assets of the Company to any person or
entity unless approval of the transaction is recommended by at least a majority
of the entire Board of Directors.
Under the Amended and Restated Certificate of Incorporation, the holders
of at least 80% of the Company's outstanding shares of voting stock and at least
a majority of the Company's outstanding shares of voting stock not including
shares held by a "Related Person," would be required to approve certain
"Business Combinations," as defined. The increased voting requirements would
apply in connection with Business Combinations involving a Related Person,
except in cases where the proposed transaction was approved in advance by
two-thirds of the members of the Board of Directors who are unaffiliated with
the Related Person and who were directors prior to the time when the Related
Person became a Related Person (the "Continuing Directors"). The term "Related
Person" is defined to include any individual, corporation, partnership, or other
entity, which owns beneficially or controls, directly or indirectly, more than
10% of the outstanding shares of voting stock of the Company. A "Business
Combination" is defined to include: (i) any merger or consolidation of the
Company with or into any Related Person; (ii) any sale, lease, exchange,
mortgage, transfer or other disposition of all or a Substantial Part of the
assets of the Company or a subsidiary to any Related Person (the term
"Substantial Part" is defined to include more than 25% of the Company's total
assets); (iii) any merger or consolidation of a Related Person with or into the
Company or a subsidiary of the Company; (iv) any sale, lease, exchange,
transfer, or other disposition of all or any Substantial Part of the assets of a
Related Person to the Company or a subsidiary of the Company; (v) the issuance
of any securities of the Company or subsidiary of the Company to a Related
Person; (vi) any reclassification of the Company's common stock, or any
54
<PAGE>
recapitalization involving the Company's common stock; (vii) the acquisition by
the Company or any subsidiary of any securities of the Related Person; and
(viii) any agreement, contract or other arrangement providing for any of the
above transactions.
Under the Oklahoma General Corporation Act, mergers, consolidations and
sales of substantially all of the assets of an Oklahoma corporation must
generally be approved by a vote of the holders of a majority of the outstanding
shares of stock entitled to vote thereon. Section 1090.3 of the Oklahoma General
Corporation Act, however, restricts certain transactions between an Oklahoma
corporation (or its majority owned subsidiaries), and a holder of 15% or more of
the corporation's outstanding voting stock, together with affiliates or
associates thereof (excluding persons who were 15% shareholders on September 1,
1991, or who become such by action of the corporation alone) (an "Interested
Shareholder"). For a period of three years following the date that a shareholder
became an Interested Shareholder, Section 1090.3 prohibits the following types
of transactions between the corporation and the Interested Shareholder (unless
certain conditions, described below, are met): (i) mergers or consolidations;
(ii) sales, leases, exchanges, mortgages, pledges, transfers, or other
dispositions of 10% or more of the aggregate assets of the corporation; (iii)
issuances or transfers by the corporation of any stock of the corporation that
would have the effect of increasing the Interested Shareholder's proportionate
share of the stock of any class or series of the corporation; (iv) receipt by
the Interested Shareholder of the benefit, except proportionately as a
shareholder of the corporation, of loans, advances, guarantees, pledges or other
financial benefits provided by the corporation; and (v) any other transaction
which has the effect of increasing the proportionate share of the stock of any
class or series of the corporation that is owned by the Interested Shareholder.
This restriction does not apply if: (1) before such person became an Interested
Shareholder, the Board of Directors approved the transaction in which the
Interested Shareholder becomes an Interested Shareholder or approved the
business combination; or (2) upon consummation of the transaction which resulted
in the shareholder's becoming an Interested Shareholder, the Interested
Shareholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced, excluding for purposes of determining the
number of shares outstanding, those shares owned by (i) persons who are
directors and also officers, and (ii) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or (3)
on or subsequent to such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of shareholders, and
not by written consent, by the affirmative vote of at least 66-2/3% of the
outstanding voting stock which is not owned by the Interested Shareholder. An
Oklahoma corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation.
The Amended and Restated Certificate of Incorporation and Bylaws of the
Company provide that the Board of Directors of the Company shall be divided into
three classes which shall be as nearly equal in number as possible. The
directors of each class hold office following their election for a period of
three years, with only one-third (1/3) of the directors coming up for
re-election each year. Each director serves until his or her successor is
elected and qualified. Although such provisions may have the effect of making it
more difficult and time consuming for a shareholder to gain control of the
Company, the Board of Directors believes these provisions provide greater
continuity and stability in the management of the Company and provide the Board
with greater ability to negotiate with respect to any proposal for a business
combination, corporate restructuring or other significant transaction in order
to help assure that favorable terms are made available to all of the Company's
shareholders.
Under the Amended and Restated Certificate of Incorporation and Bylaws of
the Company any director or the entire Board may be removed at any time, but
only for cause and only by the affirmative vote of the holders of at least 80%
of the outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors, cast at a meeting of shareholders called
for that purpose. Additionally, the number of directors may be increased to as
many as 21 (exclusive of directors, if any, to be elected by holders of
preferred stock of the Company, voting separately as a class) or decreased to as
few as three by the Board of Directors, but no decrease shall result in the
shortening of the term of any incumbent director. Vacancies in the Board of the
Company, however caused, and newly created directorships shall be filled by a
vote of two-thirds (2/3) of the directors then in office, whether or not a
quorum.
The Amended and Restated Certificate of Incorporation and Bylaws of the
Company provide that special meetings of shareholders for any purpose can only
be called by the Board of Directors of the Company, or by a committee of the
Board of Directors which has been duly designated by the Board. Neither
shareholders nor any other person or persons may call a special meeting.
55
<PAGE>
The Amended and Restated Certificate of Incorporation of the Company
provides that the affirmative vote of not less than 80% of the outstanding
shares of the Company is required to amend the provisions regarding election and
removal of directors, amendment of the Certificate of Incorporation and Bylaws,
indemnification, directors liability and certain business combinations and other
transactions. The Bylaws may be repealed, altered, amended or rescinded by a
vote of a majority of the Board of Directors or by the holders of at least 80%
of the outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors at a meeting of the shareholders called
for that purpose.
The Amended and Restated Certificate of Incorporation authorizes the
Company to issue 10,000,000 shares of Common stock, 1,000,000 shares of serial
preferred stock, and 1,000,000 shares of Class B serial preferred stock, from
time to time as approved by the Board of Directors of the Company without the
approval of the shareholders. The ability of the Company to issue additional
shares could be construed as having an anti-takeover effect because it can
dilute the voting or other rights of the proposed acquiror or create a
substantial voting block in institutional or other hands.
The Amended and Restated Certificate of Incorporation of the Company
provides that nominations for the election of directors and proposals for any
new business to be taken up at an annual or special meeting of shareholders may
be made by the board of directors or by any shareholder of the Company entitled
to vote generally in the election of directors. However, in order for a
shareholder to make any such nominations or proposals, he or she must give
notice in writing of such nomination or proposal to the Secretary of the Company
not less than 30 nor more than 60 days prior to any such meeting unless less
than 40 days notice of the meeting has been given to shareholders in which case
notice may be given up to the tenth day following notice to the shareholders.
56
<PAGE>
UNDERWRITING
The Underwriters named below, have severally agreed, subject to the terms
and conditions set forth in the Underwriting Agreement to purchase from the
Company and the selling shareholders the total number of shares of common stock
set forth opposite their respective names. The Underwriters have agreed, subject
to the terms and conditions set forth in the Underwriting Agreement (including,
without limitation, the approval of certain legal matters by counsel to the
Underwriters), to purchase all of the shares offered hereby (other than the
shares subject to the over-allotment option described below) if any of the
shares are purchased. In the event of a default by an Underwriter, the
Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the Underwriters which do not default may be increased, or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
- ----------------------------------------------------------------- ---------
<S> <C>
Stifel, Nicolaus & Company, Incorporated......................... 564,738
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.. 376,493
EVEREN Securities, Inc. ......................................... 30,000
Howe Barnes Investments, Inc. ................................... 30,000
Keefe, Bruyette & Woods, Inc. ................................... 30,000
Stephens Inc..................................................... 30,000
---------
Total.......................................................... 1,061,231
</TABLE>
Concessions and Discounts
The Underwriters have advised the Company and the selling shareholders
that they propose initially to offer the shares to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $0.74 per share. The
underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per share to certain other dealers.
The following table shows the per share and total offering price of the
shares offered hereby, the underwriting discount to be paid by the Company and
the selling shareholders, and the proceeds of the offering to the Company and
the selling shareholders, before expenses of the offering, assuming that the
over-allotment option is not exercised, and assuming the exercise in full of the
over-allotment option.
<TABLE>
<CAPTION>
If the Over-Allotment If the Over-Allotment
Option Option
is Not Exercised is Fully Exercised
---------------------- -----------------------
Per Share Total Per Share Total
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Offering Price................... $24.3750 $25,867,506 $24.3750 $29,747,640
Underwriting discount
Company......................... 1.4625 365,625 1.4625 598,433
Selling Shareholders............ 0.9738 789,936 0.9738 789,936
Company portion of selling
shareholders' underwriting
discount (per share sold by
the Company).................... 1.5860 396,489 0.9690 396,489
Net proceeds (before expenses)
Company......................... $21.3265 $ 5,331,636 $21.9435 $ 8,978,962
Selling shareholders............ $23.4013 $18,983,819 $23.4013 $18,983,819
</TABLE>
The Company's expenses of the offering (exclusive of the underwriting
discount) are estimated at $245,798.
Over-Allotment Option
The Company has granted the Underwriters an option to purchase up to an
additional 159,185 shares of common stock at the initial offering price, less
underwriting discounts and commissions. Such option, which expires 30
57
<PAGE>
days from the date of this Prospectus, may be exercised solely to cover
over-allotments incurred in connection with the sale of the shares offered
hereby. To the extent that the Underwriters exercise their option to purchase
additional shares, each Underwriter will, subject to certain conditions, become
obligated to purchase approximately the same percentage of additional shares as
the number of shares set forth opposite such Underwriter's name bears to the
total number of shares listed in the table.
Price Stabilization and Short Positions
In connection with the offering of the shares, the Underwriters and any
selling group members may engage in transactions (effected in accordance with
Rule 104 of the Securities and Exchange Commission's Regulation M) that are
intended to stabilize, maintain or otherwise affect the market price of the
common stock. Such transactions may include over-allotment transactions in which
the Underwriters create a short position for their own account by selling more
shares than they are committed to purchase. In such case, to cover all or part
of the short position, the Underwriters may exercise the over-allotment option
described above or may purchase common stock in the open market following
completion of the offering of the shares. The Underwriters may also engage in
stabilizing transactions in which they bid for and purchase common stock at a
level above that which might otherwise prevail in the open market, for the
purpose of preventing or retarding a decline in the market price of the common
stock. The Underwriters also may reclaim any selling concession allowed to an
Underwriter or dealer if the Underwriters repurchase shares distributed by that
Underwriter or dealer. Any of the foregoing transactions may cause the price for
the common stock to be maintained at a level above that which might otherwise
prevail in the open market. Neither the Company, the selling shareholders nor
any of the Underwriters make any representation or prediction as to the
direction or magnitude of any effect that such transactions may have on the
price of the common stock. The Underwriters are not required to engage in the
foregoing transactions and, if commenced, such transactions may be discontinued
without notice.
Restrictions on Affiliates on Sale of Similar Securities
During a period of 180 days from the date of this Prospectus, the Company,
its directors or executive officers or the persons known to the Company to own
more than 5% of the Company's outstanding common stock will not, subject to
certain exceptions, without the prior written consent of Stifel, Nicolaus &
Company, Incorporated, directly or indirectly, issue, sell, offer to sell, grant
any option for sale of, or otherwise dispose of, any shares of common stock, or
any security convertible into or exchangeable into or exercisable for common
stock.
Indemnification
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, or contribute to payments that the Underwriters may be
required to make in respect of, certain liabilities, including liabilities under
the Securities Act.
Other Services
The Underwriters engage in transactions with, and, from time to time, have
performed services for, the Company and its subsidiaries in the ordinary course
of business.
LEGAL MATTERS
The validity of the Shares offered hereby and certain other legal matters
will be passed upon for the Company by the law firm of Kennedy, Baris & Lundy,
L.L.P., Bethesda, Maryland. Certain legal matters will be passed upon for the
Underwriters by Bryan Cave LLP, St. Louis, Missouri.
EXPERTS
The consolidated financial statements at December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included and
incorporated by reference in this Prospectus have been audited by
58
<PAGE>
Deloitte & Touche LLP, independent auditors, as stated in their reports, which
are included and incorporated by reference herein, and have been so included and
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that the Company files with the SEC at the SEC's
public reference room at 450 Fifth Street, NW, Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. The SEC maintains a World Wide Web site on the Internet at
"http://www.sec.gov" that contains reports, proxy and information statements,
and other information regarding companies that file electronically with the SEC,
including the Company.
The Company filed a Registration Statement on Form S-2 (the "Registration
Statement") to register the common stock to be sold in the offering. This
Prospectus is a part of that Registration Statement. As allowed by SEC rules,
this Prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to that Registration Statement.
SEC regulations allow the Company to "incorporate by reference"
information into this Prospectus, which means that the Company can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
part of this Prospectus. Information incorporated by reference from earlier
documents is superceded by information that has been incorporated by reference
from more recent documents.
This Prospectus incorporates by reference the documents listed below that
the Company has previously filed with the SEC (file no. 0-23064). These
documents contain important information about the Company and its finances. Some
of these filings have been amended by later filings, which are also listed.
1. Annual Report on Form 10-K for the Year ended December 31, 1997;
2. Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998;
3. Current Report on Form 8-K dated June 8, 1998;
4. Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998;
5. Form 15-12G dated September 3, 1998;
6. Quarterly Report on Form 10-Q/A for the Quarter ended September 30,
1998;
7. Current Report on Form 8-K dated January 6, 1999.
The Company also incorporates by reference additional documents that may
be filed with the SEC after the date of this Prospectus and before the
termination of the offering. These additional documents shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on
Form 8-K, as well as proxy statements.
The Company has supplied all information contained or incorporated by
reference in this Prospectus relating to the Company, and the Selling
Shareholders have supplied all such information relating to them.
You can obtain any of the documents incorporated by reference through the
Company, the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from the Company
59
<PAGE>
without charge, including any exhibits, specifically incorporated by reference
therein. You may obtain documents incorporated by reference in this Prospectus
by requesting them in writing or by telephone from the Company at the following
address:
Deborah T. Bradley
Corporate Secretary
Southwest Bancorp, Inc.
608 South Main Street
Stillwater, Oklahoma 74074.
Telephone: (405) 372-2230.
You should rely only on the information contained or incorporated by
reference in this Prospectus. The Company has not authorized anyone to provide
you with information that is different from what is contained in this
Prospectus. This Prospectus is dated March 16, 1999. You should not assume that
the information contained in this Prospectus is accurate as of any date other
than that date.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Unaudited Consolidated Statements of Financial Condition at September 30, 1998 and
December 31, 1997............................................................................. F-2
Unaudited Consolidated Statements of Operations for the
Nine Months Ended September 30, 1998 and 1997................................................. F-3
Unaudited Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 1998 and 1997................................................. F-4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997................................................. F-5
Unaudited Consolidated Statements of Comprehensive Income........................................ F-6
Notes to Consolidated Financial Statements....................................................... F-7
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
Independent Auditors' Report..................................................................... F-13
Consolidated Statements of Financial Condition at December 31, 1997 and 1996..................... F-14
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.............................................................. F-15
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.............................................................. F-16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.............................................................. F-17
Notes to Consolidated Financial Statements....................................................... F-18
</TABLE>
F-1
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,020 $ 26,259
Federal funds sold - 10,000
-------------- -----------------
Cash and cash equivalents 25,020 36,259
Investment securities:
Held to maturity, fair value $82,918 (1998) and $87,592 (1997) 81,479 86,994
Available for sale, amortized cost $87,385 (1998) and $99,778 (1997) 89,219 100,746
Loans receivable, net of allowance for loan losses
of $9,709 (1998) and $8,282 (1997) 745,347 710,831
Accrued interest receivable 9,102 8,883
Premises and equipment, net 17,894 13,571
Other assets 9,726 6,002
-------------- -----------------
Total assets $977,787 $963,286
============== =================
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 38,322 $ 96,560
Interest-bearing demand 9,473 37,447
Money market accounts 189,060 94,496
Savings accounts 3,492 3,655
Time deposits 590,464 609,267
-------------- -----------------
Total deposits 830,811 841,425
-------------- -----------------
Income taxes payable 108 521
Accrued interest payable 5,508 6,504
Other liabilities 2,757 1,227
Short-term borrowings 57,114 20,548
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
-------------- -----------------
Total liabilities 921,311 895,238
-------------- -----------------
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; 690,000 shares issued and outstanding (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 3,797,107 (1998) and 3,787,839 (1997) 3,797 3,788
Capital surplus (As restated. See Note 10.) 9,332 24,764
Retained earnings (As restated. See Note 10.) 42,247 38,226
Accumulated other comprehensive income:
Unrealized gain (loss) on investment securities available for sale,
net of tax 1,100 580
-------------- -----------------
Total shareholders' equity 56,476 68,048
-------------- -----------------
Total liabilities & shareholders' equity $977,787 $963,286
============== =================
</TABLE>
See notes to unaudited consolidated financial statements.
F-2
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
AS RESTATED. SEE NOTE 10.
-----------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
-------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $51,886 $48,724
Investment securities:
U.S. Government and agency obligations 6,980 6,213
State and political subdivisions 427 392
Mortgage-backed securities 836 962
Other securities 345 83
Federal funds sold 56 442
-------------- --------------
Total interest income 60,530 56,816
Interest expense:
Interest-bearing demand 139 664
Money market accounts 3,137 2,832
Savings accounts 58 74
Time deposits 24,733 25,905
Short-term borrowings 2,045 108
Long-term debt 1,744 756
-------------- --------------
Total interest expense 31,856 30,339
-------------- --------------
Net interest income 28,674 26,477
Provision for loan losses 2,705 8,903
-------------- --------------
Net interest income after provision for loan losses 25,969 17,574
Other income:
Service charges and fees 2,610 2,342
Credit cards 66 568
Other noninterest income 320 277
Gain (loss) on sales of loans receivable 1,959 1,381
Gain (loss) on sales of investment securities 185 7
-------------- --------------
Total other income 5,140 4,575
Other expenses:
Salaries and employee benefits 10,510 10,559
Occupancy 3,673 3,393
FDIC and other insurance 190 190
Credit cards 5 247
General and administrative 5,564 4,951
-------------- --------------
Total other expenses 19,942 19,340
-------------- --------------
Income before taxes 11,167 2,809
Taxes on income 4,004 886
-------------- --------------
Net income $ 7,163 $ 1,923
============== ==============
Net income available to common shareholders $ 5,177 $ 733
============== ==============
Basic earnings per common share $ 1.36 $ 0.20
============== ==============
Diluted earnings per common share $ 1.32 $ 0.19
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements.
F-3
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
OTHER SHARE-
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED COMPREHENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS INCOME EQUITY
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 690,000 $690 3,764,216 $3,764 $24,332 $36,041 $205 $65,032
Cash dividends paid:
Preferred, $1.15 per share - - - - - (1,190) - (1,190)
Common, $0.08 per share - - - - - (603) - (603)
Cash dividends declared:
Common, $0.08 per share - - - - - (302) - (302)
Common stock issued:
Employee Stock Option Plan - - - - - - - -
Employee Stock Purchase Plan - - 2,886 3 58 - - 61
Dividend Reinvestment Plan - - 4,356 4 87 - - 91
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 416 416
Net income - - - - - 1,923 - 1,923
------------------------------------------------------------------------------------------------
Balance, September 30, 1997 690,000 $690 3,771,458 $3,771 $24,477 $35,869 $621 $65,428
================================================================================================
Balance, January 1, 1998 690,000 $690 3,787,839 $3,788 $24,764 $38,226 $580 $68,048
Cash dividends paid:
Preferred, $1.15 per share - - - - - (1,190) - (1,190)
Common, $0.09 per share - - - - - (683) - (683)
Cash dividends declared:
Preferred, $0.575 per share - - - - - - - -
Common, $0.09 per share - - - - - (341) - (341)
Common stock issued:
Employee Stock Option Plan - - 4,000 4 55 - - 59
Employee Stock Purchase Plan - - 1,913 2 52 - - 54
Dividend Reinvestment Plan - - 3,355 3 93 - - 96
Preferred Stock Redeemed (1) (690,000) (690) - - (15,632) (928) - (17,250)
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 520 520
Net income - - - - - 7,163 - 7,163
------------------------------------------------------------------------------------------------
Balance, September 30, 1998 (1) - - 3,797,107 $3,797 $9,332 $42,247 $1,100 $56,476
================================================================================================
</TABLE>
See notes to unaudited consolidated financial statements.
(1) As restated. See Note 10.
F-4
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
-------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 7,163 $ 1,923
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 2,705 8,903
Depreciation and amortization expense 1,384 1,171
Amortization of premiums and accretion of
discount on securities, net 117 101
Amortization of intangibles 186 157
(Gain) Loss on sales of securities (185) (7)
(Gain) Loss on sales of loans receivable (1,959) (1,381)
(Gain) Loss on sales of premises/equipment 17 (28)
(Gain) Loss on other real estate owned, net 60 2
Proceeds from sales of residential mortgage loans 95,464 51,326
Residential mortgage loans originated for resale (94,453) (48,842)
Changes in assets and liabilities:
Accrued interest receivable (219) (3,592)
Other assets (831) (1,285)
Income taxes payable (413) (187)
Accrued interest payable (996) 1,229
Other liabilities 1,491 154
-------------- -------------
Net cash (used in) provided from operating activities 9,531 9,644
-------------- -------------
Investing activities:
Proceeds from sales of held to maturity securities - -
Proceeds from sales of available for sale securities 13,968 -
Proceeds from principal repayments and maturities:
Held to maturity securities 24,521 13,812
Available for sale securities 25,112 13,795
Purchases of held to maturity securities (19,105) (21,245)
Purchases of available for sale securities (26,519) (47,002)
Loans originated and principal repayments, net (65,332) (119,769)
Proceeds from sales of guaranteed student loans 25,186 30,992
Purchases of premises and equipment (5,806) (4,812)
Proceeds from sales of premises and equipment 82 115
Proceeds from sales of other real estate 387 17
-------------- -------------
Net cash (used in) provided from investing activities (27,506) (134,097)
-------------- -------------
Financing activities:
Net increase (decrease) in deposits (10,614) 115,354
Net increase (decrease) in short-term borrowings 36,566 61
Net proceeds from issuance of common stock 209 152
Redemption of preferred stock (17,250) -
Proceeds from issuance of subordinated debentures - 25,013
Common stock dividends paid (985) (866)
Preferred stock dividends paid (1,190) (1,190)
-------------- -------------
Net cash (used in) provided from financing activities 6,736 138,524
-------------- -------------
Net increase (decrease) in cash and cash equivalents (11,239) 14,071
Cash and cash equivalents,
Beginning of period 36,259 22,914
============== =============
End of period $ 25,020 $ 36,985
============== =============
</TABLE>
See notes to unaudited consolidated financial statements.
F-5
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1997
------------- ------------
<S> <C> <C>
Net income $ 7,163 $ 1,923
Other comprehensive income, net of tax:
Unrealized gain (loss) on investment
securities available for sale 866 692
Less: Tax (expense) benefit (346) (276)
------------- ------------
Comprehensive income $ 7,683 $ 2,339
============= ============
</TABLE>
See notes to unaudited consolidated financial statements.
F-6
<PAGE>
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, the
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation. The results of operations and cash flows for the nine
months ended September 30, 1998 and 1997 should not be considered indicative of
the results to be expected for the full year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Southwest Bancorp, Inc. Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. (the Company) and its wholly owned
subsidiaries, The Stillwater National Bank and Trust Company (the Bank) and SBI
Capital Trust (SBI Capital). All significant intercompany transactions and
balances have been eliminated in consolidation.
NOTE 3: RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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.
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.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. 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.
NOTE 4: ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement of
F-7
<PAGE>
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer considered useful. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1998. The Company does not offer
defined benefit plans or other postretirement benefit plans to its employees;
therefore, the adoption of SFAS No. 132 will not affect the Company's financial
statement disclosures.
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 July 1, 1999, 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.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
For the nine For the
months ended years ended
September 30, 199? December 31, 1997
------------------ -----------------
(Dollars in thousands)
Balance at beginning of period $ 8,282 $ 7,139
Loans charged-off:
Real estate mortgage 418 1,305
Real estate construction - -
Commercial 1,140 8,691
Installment and consumer 451 1,532
----------- ----------
Total charge-offs 2,009 11,528
Recoveries:
Real estate mortgage 72 85
Real estate construction - -
Commercial 318 300
Installment and consumer 341 182
----------- ----------
Total recoveries 731 567
----------- ----------
Net loans charged-offs 1,278 10,961
Provision for loan losses 2,705 12,104
----------- ----------
Balance at end of period $ 9,709 $ 8,202
=========== ==========
Loans outstanding:
Average $ 752,785 $ 700,129
End of period 755,056 719,113
Net charge-offs to total average
loans (annualized) 0.23% 1.57%
Allowance for loan losses to total
loans 1.29% 1.15%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates:
F-8
<PAGE>
At At
September 30, 199? December 31, 1997
------------------ -----------------
(Dollars in thousand)
Nonaccrual loans (1) $ 1,055 $ 5,458
Past due 90 days or more (2) 376 1,677
Restructured terms - -
------------ ------------
Total nonperforming loans 1,431 7,135
Other real estate owned 3,788 362
------------ ------------
Total nonperforming assets $ 5,219 $ 7,497
============ ============
Nonperforming loans to loans receivable 0.19% 0.99%
Allowance for loan losses to
nonperforming loans 678.48% 116.08%
Nonperforming assets to loans receivable
and other real estate owned 0.69% 1.04%
(1) The government-guaranteed portion of loans includes in these total was $177
(1998) and $541 (1997).
(2) The government-guaranteed portion of loans includes in these total was $0
(1998) and $2223 (1997).
In the first and third quarters of 1997, the Company recorded significant
increases in loan charge-offs and provisions for loan losses compared with
corresponding periods in earlier years. The large charge-offs during the first
quarter of 1997 were primarily the result of deterioration in the financial
position of a single commercial borrower. The higher provision recorded in the
third quarter of 1997 was the amount deemed necessary by management to restore
the allowance for loan losses to an appropriate level after charging-off
substantially the entire balance of a group of related loans, which totaled $4.8
million. These loans were not related to the loans that resulted in the larger
than normal provision for loan losses in the first quarter of 1997. 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
committee loan authorities, and committed additional resources to the credit
administration and loan review function. Net charge-offs and the provision for
loan losses declined during the first nine months of 1998 to $1.3 million and
$2.7 million, respectively.
The Company makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The adequacy of
the allowance for loan losses is determined by management based upon a number of
factors including, among others, analytical reviews of loan loss experience in
relation to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may also occur because of changing economic
conditions and their impact on economic prospects and the financial position of
borrowers. Based upon this review, management established an allowance of $9.7
million, or 1.29% of total loans, at September 30, 1998 compared to an allowance
of $8.3 million, or 1.15% of total loans, at December 31, 1997.
In establishing the level of the allowance for September 30, 1998, management
considered a number of factors, including the increased risk inherent in
commercial and commercial real estate loans, which are viewed as entailing
greater risk than certain other categories of loans, charge-off history, and the
rapid expansion of the loan portfolio over the last several years. Management
also considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk. At September
30, 1998, total nonperforming loans were $1.4 million, or 0.19% 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 September 30,
1998 was appropriate, after assessing these and other factors it deemed
relevant. Management conducted a similar analysis in order to determine the
appropriate allowance as of December 31, 1997.
F-9
<PAGE>
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.
NOTE 6: LOANS RECEIVABLE
The Bank extends commercial and consumer credit primarily to customers in the
State of Oklahoma, which subjects the loan portfolio to the general economic
conditions within the state. At September 30, 1998 and December 31, 1997,
substantially all of the Bank's loans are collateralized with real estate,
inventory, accounts receivable and/or other assets, or are guaranteed by
agencies of the United States Government.
At September 30, 1998, loans to individuals and businesses in the healthcare
industry totaled approximately $81.3 million, or 11% of total loans. Other
notable concentrations of credit within the loan portfolio include $22.2
million, or 3% of total loans, in residential construction loans, $16.7 million,
or 2% of total loans, in hotel/motel loans, and $14.7 million, or 2% of total
loans, in restaurant loans. In the event of total nonperformance by the
borrowers, the Company's accounting loss would be limited to the recorded
investment in the loans receivable reduced by proceeds received from disposition
of the related collateral.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $1.1 million at September 30, 1998. During
the first nine months of 1998, $92,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, total interest
income of $497,000 would have been recorded.
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 $24.0
million at September 30, 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.
NOTE 7: LONG-TERM DEBT
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of the Company,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the
"Preferred Securities") in an underwritten public offering for an aggregate
price of $25,012,500. Proceeds of the Preferred Securities were invested in the
9.30% Subordinated Debentures (the "Subordinated Debentures") of the Company.
After deducting underwriter's compensation and other expenses of the offering,
the net proceeds were available to the Company to increase capital and for
general corporate purposes, including use in the Bank's lending and investment
activities, and, on September 1, 1998, redemption of all of the Company's 9.20%
Redeemable Cumulative Preferred Stock, Series A (the "Series A Preferred
Stock"). See "Capital Resources" at Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"). Unlike interest payments
on the Subordinated Debentures, dividends paid on the Series A Preferred Stock
are not deductible for federal income tax purposes.
The Preferred Securities and the Subordinated Debentures each mature on July 31,
2027. If certain conditions are met, the maturity dates of the Preferred
Securities and the Subordinated Debentures may be shortened to a date not
earlier than July 31, 2002, or extended to a date not later than July 31, 2036.
The Preferred Securities and the Subordinated Debentures also may be redeemed
prior to maturity, if certain events occur. The Preferred Securities are subject
to mandatory redemption, in whole or in part, upon repayment of the Subordinated
Debentures at maturity or their earlier redemption. The Company also has the
right, if certain conditions are met, to defer payment
F-10
<PAGE>
of interest on the Subordinated Debentures, which would result in a deferral of
dividend payments on the Preferred Securities, at any time or from time to time
for a period not to exceed 20 consecutive quarters in a deferral period.
The Company and SBI Capital believe that, taken together, the obligations of the
Company under the Preferred Securities Guarantee Agreement, the Amended and
Restated Trust Agreement, the Subordinated Debentures, the Indenture and the
Agreement As To Expenses and Liabilities, entered into in connection with the
offering of the Preferred Securities and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by the Company of the
obligations of SBI Capital under the Preferred Securities.
SBI Capital is a Delaware business trust created for the purpose of issuing the
Preferred Securities and purchasing the Subordinated Debentures, which are its
sole assets. The Company owns all of the 30,960 outstanding common securities,
liquidation value $25, (the "Common Securities") of SBI Capital.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital.
For accounting purposes, the Preferred Securities and the Common Securities are
presented on the Consolidated Statements of Financial Condition as a separate
category of long-term debt entitled "Guaranteed Preferred Beneficial Interests
in the Company's Subordinated Debentures".
NOTE 8: EARNINGS PER SHARE
Basic earnings per common share is computed based upon net income, after
deducting the dividend requirements of preferred stock and the excess of the
redemption price of preferred stock over its carrying value, 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
dividend requirements of preferred stock, divided by the weighted average number
of common shares outstanding during each period adjusted for the effect of
dilutive potential common shares calculated using the treasury stock method. At
September 30, 1998 and 1997, there were no antidilutive options to purchase
common shares. 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:
For the nine months
ended September 30,
1998 1997
---------- ----------
(dollars in thousands)
Net income $7,163 $1,923
Less: preferred stock dividend requirement (1,058) (1,190)
Redemption of preferred stock in excess of
the carrying amount (928) -
---------- ----------
Net income available to common shareholders $5,177 $ 733
========== ==========
Weighted average common shares outstanding:
Basic earnings per share 3,794,043 3,768,663
Effect of dilutive securities:
Stock options 122,857 95,893
---------- ----------
Weighted average common shares outstanding:
Diluted earnings per share 3,916,900 3,864,556
========== ==========
F-11
<PAGE>
NOTE 9: REDEMPTION OF PREFERRED STOCK
The Company redeemed all of the outstanding shares of its 9.20% Redeemable,
Cumulative Preferred Stock, Series A, 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 Preferred
Securities. (See "Capital Resources" at MD&A.)
NOTE 10: RESTATEMENT
Subsequent to the issuance of the Company's September 30, 1998 financial
statements, the Company's management determined that its calculation of net
income available to common shareholders was not in accordance with Emerging
Issues Task Force D-42, The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock ("EITF D-42"). The
Company redeemed its Series A, Redeemable, Cumulative Preferred Stock on
September 1, 1998. The redemption price was $928,000 in excess of the carrying
amount of the preferred stock; such excess represents original issue costs
charged to capital surplus. EITF D-42 requires that the excess of the fair value
of the consideration transferred to the preferred shareholders over the carrying
amount of the preferred stock should be subtracted from net income to arrive at
net income available to common shareholders in the calculation of earnings per
share. In addition, this excess should be reclassified to retained earnings. As
a result, the accompanying financial statements for the three month and nine
month periods ended September 30, 1998 have been restated as follows:
At September 30, 1998
As previously
reported As restated
--------------- ----------------
(Dollars in thousands)
Capital surplus $ 8,404 $ 9,332
Retained earnings 43,175 42,247
Nine months ended September 30, 1998
As previously
reported As restated
--------------- ----------------
(Dollars in thousands except share data)
Net income available to common
shareholders $ 6,105 $ 5,177
Basic earnings per common share 1.61 1.36
Diluted earning per common share 1.56 1.32
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF SOUTHWEST BANCORP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Southwest Bancorp, Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Southwest Bancorp, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Oklahoma City, Oklahoma
January 30, 1998
F-13
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,259 $ 22,914
Federal funds sold 10,000 -
---------- ----------
Cash and cash equivalents 36,259 22,914
Investment securities:
Held to maturity, fair value $87,592 (1997) and $83,963 (1996) 86,994 83,589
Available for sale, amortized cost $99,778 (1997) and $63,419 (1996) 100,746 63,762
Loans receivable, net of allowance for loan losses
of $8,282 (1997) and $7,139 (1996) 710,831 637,507
Accrued interest receivable 8,883 7,400
Premises and equipment, net 13,571 9,649
Other assets 6,002 4,296
---------- ----------
Total assets $963,286 $829,117
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 96,560 $ 83,729
Interest-bearing demand 37,447 34,309
Money market accounts 94,496 86,910
Savings accounts 3,655 4,086
Time deposits 609,267 544,911
---------- ----------
Total deposits 841,425 753,945
---------- ----------
Income taxes payable 521 187
Accrued interest payable 6,504 5,061
Other liabilities 1,227 1,907
Short-term borrowings 20,548 2,985
Long-term debt:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures 25,013 -
---------- ----------
Total liabilities 895,238 764,085
---------- ----------
Commitments and contingencies - -
Shareholders' equity:
Serial preferred stock -
Series A, 9.20% Redeemable, Cumulative Preferred Stock;
$1 par value; 1,000,000 shares authorized; liquidation value
$17,250,000; 690,000 shares issued and outstanding 690 690
Series B, $1 par value; 1,000,000 shares authorized; none issued - -
Common stock - $1 par value; 10,000,000 shares authorized; issued
and outstanding 3,787,839 (1997) and 3,764,216 (1996) 3,788 3,764
Capital surplus 24,764 24,332
Retained earnings 38,226 36,041
Unrealized gain (loss) on investment securities available for sale, net of tax 580 205
---------- ----------
Total shareholders' equity 68,048 65,032
---------- ----------
Total liabilities & shareholders' equity $963,286 $829,117
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $65,560 $ 55,177 $45,591
Investment securities:
U.S. Government and agency obligations 8,667 6,815 6,737
State and political subdivisions 508 577 477
Mortgage-backed securities 1,234 1,531 1,535
Other securities 173 76 64
Federal funds sold 707 492 596
------- -------- -------
Total interest income 76,849 64,668 55,000
Interest expense:
Interest-bearing demand 894 838 764
Money market accounts 3,836 3,129 3,161
Savings accounts 96 114 133
Time deposits 34,743 28,647 24,208
Short-term borrowings 340 105 278
Long-term debt 1,338 - -
------- -------- -------
Total interest expense 41,247 32,833 28,544
------- -------- -------
Net interest income 35,602 31,835 26,456
Provision for loan losses 12,104 3,100 2,000
------- -------- -------
Net interest income after provision for loan losses 23,498 28,735 24,456
Other income:
Service charges and fees 3,177 2,985 2,574
Credit cards 659 869 901
Other non interest income 360 268 374
Gain on sale of credit card portfolio 3,745 - -
Gain on sales of loans receivable 1,936 1,768 1,033
Gain (loss) on sales of investment securities 18 459 (8)
------- -------- -------
Total other income 9,895 6,349 4,874
Other expenses:
Salaries and employee benefits 13,808 12,164 10,057
Occupancy 4,681 3,671 3,080
FDIC and other insurance 254 859 856
Credit cards 313 411 547
General and administrative 6,690 6,121 5,362
------- -------- -------
Total other expenses 25,746 23,226 19,902
------- -------- -------
Income before taxes 7,647 11,858 9,428
Taxes on income 2,667 4,306 3,336
------- -------- -------
Net income $ 4,980 $ 7,552 $ 6,092
======= ======== ========
Net income available to common shareholders $ 3,393 $ 5,965 $ 5,426
======= ======== ========
Basic earnings per common share $ 0.90 $ 1.59 $ 1.44
======= ======== ========
Diluted earnings per common share $ 0.88 $ 1.56 $ 1.43
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) TOTAL
ON AVAILABLE SHARE-
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED FOR SALE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS SECURITIES EQUITY
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 - - 3,755,228 $ 3,755 $ 8,539 $26,471 $ (877) $37,888
Cash dividends paid:
Common, $0.18 per share - - - - - (676) - (676)
Preferred, $0.7731 per share - - - - - (533) - (533)
Cash dividends declared:
Common, $0.06 per share - - - - - (225) - (225)
Issuance of preferred stock,
net of offering costs 690,000 $ 690 - - 15,632 - - 16,322
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 1,489 1,489
Net income - - - - - 6,092 - 6,092
---------------------------------------------------------------------------------------------
Balance, December 31, 1995 690,000 690 3,755,228 3,755 24,171 31,129 612 60,357
Cash dividends paid:
Common, $0.21 per share - - - - - (790) - (790)
Preferred, $2.30 per share - - - - - (1,587) - (1,587)
Cash dividends declared:
Common, $0.07 per share - - - - - (263) - (263)
Common stock issued:
Employee Stock Purchase Plan - - 3,552 4 64 - - 68
Dividend Reinvestment Plan - - 5,436 5 97 - - 102
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - (407) (407)
Net income - - - - - 7,552 - 7,552
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 690,000 690 3,764,216 3,764 24,332 36,041 205 65,032
Cash dividends paid:
Common, $0.24 per share - - - - - (905) - (905)
Preferred, $2.30 per share - - - - - (1,587) - (1,587)
Cash dividends declared:
Common, $0.08 per share - - - - - (303) - (303)
Common stock issued:
Employee Stock Purchase Plan - - 3,767 4 78 - - 82
Dividend Reinvestment Plan - - 5,856 6 117 - - 123
Stock Option Plan - - 14,000 14 237 - - 251
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 375 375
Net income - - - - - 4,980 - 4,980
---------------------------------------------------------------------------------------------
Balance, December 31, 1997 690,000 $ 690 3,787,839 $3,788 $24,764 $38,226 $ 580 $68,048
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,980 $ 7,552 $ 6,092
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 12,104 3,100 2,000
Depreciation and amortization expense 1,577 1,254 1,026
Amortization of premiums and accretion of
discounts on securities, net 113 244 248
Amortization of intangibles 221 174 174
(Gain) Loss on sales of securities (18) (459) 8
(Gain) Loss on sales of loans receivable (1,936) (1,768) (1,033)
(Gain) Loss on sale of credit card portfolio (3,745) - -
(Gain) Loss on sales of premises/equipment (25) (10) 3
(Gain) Loss on other real estate owned, net 13 (2) (52)
Proceeds from sales of residential mortgage loans 71,710 45,519 34,002
Residential mortgage loans originated for resale (69,205) (48,469) (34,947)
Changes in assets and liabilities:
Accrued interest receivable (1,483) (283) (1,240)
Other assets (1,879) (1,188) (986)
Income taxes payable 334 (84) 78
Accrued interest payable 1,443 795 1,632
Other liabilities (720) 786 (449)
---------- ----------- -----------
Net cash (used in) provided from operating activities 13,484 7,161 6,556
---------- ----------- -----------
Investing activities:
Proceeds from sales of held to maturity securities - - 5,993
Proceeds from sales of available for sale securities - 438 -
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 19,649 25,388 17,193
Available for sale securities 18,017 28,969 6,286
Purchases of held to maturity securities (23,178) (34,538) (23,363)
Purchases of available for sale securities (54,347) (20,383) (8,054)
Loans originated and principal repayments, net (145,116) (157,501) (159,227)
Proceeds from sale of credit card portfolio 21,798 - -
Proceeds from sales of guaranteed student loans 40,545 47,768 40,738
Purchases of premises and equipment (5,603) (4,693) (1,936)
Proceeds from sales of premises and equipment 129 24 18
Proceeds from sales of other real estate 210 152 68
---------- ----------- -----------
Net cash (used in) provided from investing activities (127,896) (114,376) (122,284)
---------- ----------- -----------
Financing activities:
Net increase in deposits 87,480 119,558 108,827
Net increase (decrease) in short-term borrowings 17,563 (7,786) (3,629)
Net proceeds from issuance of common stock 456 170 -
Net proceeds from issuance of preferred stock - - 16,322
Proceeds from issuance of subordinated debentures 25,013 - -
Common stock dividends paid (1,168) (1,015) (864)
Preferred stock dividends paid (1,587) (1,587) (533)
---------- ----------- -----------
Net cash (used in) provided from financing activities 127,757 109,340 120,123
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 13,345 2,125 4,395
Cash and cash equivalents,
Beginning of period 22,914 20,789 16,394
---------- ----------- -----------
End of period $ 36,259 $ 22,914 $ 20,789
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
SOUTHWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Organization and Nature of Operations - Southwest Bancorp, Inc. ("the
Company") was incorporated in 1981 as a bank holding company headquartered in
Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the State of Oklahoma. The accompanying consolidated financial
statements include the accounts of Stillwater National Bank and Trust Company
(the "Bank"), a national bank established in 1894, and SBI Capital Trust, a
Delaware Business Trust established in 1997. The Bank and SBI Capital Trust are
wholly owned, direct subsidiaries of the Company. The Company has six full-
service banking offices, two of which are located in each of Stillwater and
Tulsa, Oklahoma, with one each in Oklahoma City and Chickasha, Oklahoma. The
Company pursues a decentralized community banking strategy and operates through
three regional divisions. All significant intercompany balances and transactions
have been eliminated.
MANAGEMENT ESTIMATES - In preparing its financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities as
of the dates shown on the consolidated statements of financial position and
revenues and expenses during the periods reported. Actual results could differ
significantly from those estimates. Changes in economic conditions could impact
the determination of material estimates such as the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
INVESTMENT SECURITIES - Investments in debt and equity securities are
identified as held to maturity, trading, and available for sale based on
management considerations of asset/liability strategy, changes in interest rates
and prepayment risk, the need to increase capital and other factors. Under
certain circumstances (including the deterioration of the issuer's
creditworthiness, a change in tax law, or statutory or regulatory requirements),
the Company may change the investment security classification. The
classifications the Company utilizes determines the related accounting treatment
for each category of investments. Investments classified as trading are
accounted for at fair value with unrealized gains and losses included in other
income. Available for sale securities are accounted for at fair value with
unrealized gains or losses, net of taxes, excluded from earnings and reported as
a separate component of shareholders' equity. Held to maturity securities are
accounted for at amortized cost.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to income over the contractual maturity or estimated life of the
individual investment on the level yield method. The Company has the ability and
intent to hold to maturity its investment securities classified as held to
maturity. Declines in the fair value of securities below their cost that are
other than temporary result in write-downs of the individual securities to their
fair value. The related write-down is included in earnings as realized losses.
Gain or loss on sale of investments is based upon the specific identification
method. Income earned on the Company's investments in state and political
subdivisions is not taxable.
LOANS RECEIVABLE - Interest on loans is accrued and credited to income
based upon the principal amount outstanding. In general, accrued interest income
on impaired loans is written off after the loan is 90 days past due; subsequent
interest income is recorded when cash receipts are received from the borrower.
The Bank originates real estate mortgage loans and guaranteed student loans for
portfolio investment or sale in the secondary market. During the period of
origination, real estate mortgage loans are designated as held either for
investment purposes or sale. Mortgage loans held for sale are generally sold
within a one-month period from loan closing at amounts approximating par value
of the loans. Guaranteed student loans are generally sold after the Company has
been notified of the borrower's change from deferment status, which can range
from one to five years, or longer. Real estate mortgage loans held for sale and
guaranteed student loans are carried at cost, which does not exceed market.
Gains or losses recognized upon the sales of loans are determined on a specific
identification basis.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans which are
determined to be impaired are charged against this allowance, to the extent of
the impairment, and recoveries, if any, are added to the allowance. A loan is
considered to be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The allowance for loan losses
related to loans that are
F-18
<PAGE>
identified for evaluation of impairment is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. Smaller balance, homogeneous loans,
including mortgage, student and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. All of
the Company's nonaccrual loans have been defined as impaired loans.
The adequacy of the allowance for loan losses is determined by management
based upon a number of factors including, among others, analytical reviews of
loan loss experience in relationship to outstanding loans and commitments;
unfunded loan commitments; problem and nonperforming loans and other loans
presenting credit concerns; trends in loan growth, portfolio composition and
quality; use of appraisals to estimate the value of collateral; and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio. Changes in the allowance may occur
because of changing economic conditions and economic prospects or financial
positions of borrowers. While there can be no assurance that the allowance for
loan losses will be adequate to cover all losses from all loans, management
believes that the allowance for loan losses is adequate. While management uses
all available information to estimate the adequacy of the allowance for loan
losses, the ultimate collectability of a substantial portion of the loan
portfolio and the need for future additions to the allowance will be based upon
changes in economic conditions and other relevant factors. Recovery of the
carrying value of such loans is dependent to a great extent on conditions that
may be beyond the Company's control. Actual future losses could differ
significantly from the amounts estimated by management adversely affecting net
income.
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $132.0 million and $123.1 million at December 31,
1997 and 1996, respectively. The total amount of overdrawn deposit accounts that
were reclassified as loans at December 31, 1997 and 1996 was $437,000 and
$952,000, respectively.
LOAN SERVICING INCOME - The Company earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Major additions or improvements are
charged to the asset account while normal maintenance and repairs are expensed
as incurred. Depreciation and amortization are computed using the straight-line
and declining-balance methods based on asset lives which vary from three to
forty years.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at
the lesser of the fair value less the estimated costs to sell the asset or the
recorded amount of the related loan. Write-downs of carrying value required at
the time of foreclosure are recorded as a charge to the allowance for loan
losses. Costs related to the development of such real estate are capitalized
whereas those related to holding the property are expensed. Foreclosed property
is subject to periodic reevaluation based upon estimates of fair value. In
determining the valuation of other real estate owned, management obtains
independent appraisals for significant properties. Valuation adjustments are
provided, as necessary, by charges to operations. The net cost of operating
other real estate owned, including provision for losses, rental income, and
gains and losses on sales of real estate, is not significant.
Profit from sales of foreclosed property by the Company is recognized in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 66, Accounting for Sales of Real Estate. Losses are recognized as
incurred.
INTANGIBLES - Intangibles consist of a core deposit intangible, goodwill
and mortgage servicing rights. The core deposit intangible is amortized over the
estimated life of the assumed deposits, ranging from four to seven years using
the level yield method. Goodwill is amortized using the straight-line method
over 15 years. Mortgage servicing rights are capitalized using an allocated cost
of the observable market price at the point of origination. The servicing rights
are amortized on an individual loan by loan basis in proportion to, and over the
period of, estimated net servicing income. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. The capitalized
amounts and amortization of the mortgage servicing rights is not material. At
December 31, 1997 and 1996, the Bank had recorded cumulative amortization of
$1.2 million and $1.0 million, respectively.
LONG-TERM DEBT - The long-term debt consists of the Guaranteed Preferred
Beneficial Interests in the Company's Subordinated Debentures purchased from SBI
Capital Trust. See Note 6.
TAXES ON INCOME - The Company and its subsidiaries file consolidated income
tax returns. Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities. A
F-19
<PAGE>
valuation allowance will be established if it is more likely than not that some
portion of the deferred tax asset will not be realized.
EARNINGS PER COMMON SHARE - The Company has adopted Financial Accounting
Standards Board ("FASB") SFAS No. 128, Earnings Per Share, and has restated
earnings per share for all periods presented in accordance with that Statement.
Basic earnings per common share is computed based upon net income, after
deducting the dividend requirements of preferred stock, divided by the weighted
average number of common shares outstanding during each period. Diluted
earnings per common share is computed based upon net income, after deducting the
preferred stock dividend requirements, divided by the weighted average number of
common shares outstanding during each period adjusted for the effect of dilutive
potential common shares calculated using the treasury stock method. At December
31, 1997 and 1996, the Company had 3,858 and 302 antidilutive options to
purchase common shares, respectively. There were no antidilutive options at
December 31, 1995. The following is a reconciliation of the common shares used
in the calculations of basic and diluted earnings per common share:
1997 1996 1995
--------- --------- ---------
Weighted average common shares outstanding:
Basic earnings per share 3,773,037 3,760,370 3,755,228
Effect of dilutive securities:
Stock options 99,851 68,011 32,861
--------- --------- ---------
Weighted average common shares outstanding:
Diluted earnings per share 3,872,888 3,828,381 3,788,089
========= ========= =========
TRUST - The Company offers trust services to customers through its
relationship with the Trust Company of Oklahoma, a trust services company.
Property (other than cash on deposit) held by the Bank in a fiduciary or agency
capacity for its customers is not included in the consolidated statements of
financial condition as it is not an asset or liability of the Bank.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
and federal funds sold. Federal funds sold are sold for one day periods.
LIQUIDITY - The Bank is required by the Federal Reserve Bank to maintain
average reserve balances. Cash and due from banks in the consolidated
statements of financial condition include restricted amounts of $4.6 million and
$5.1 million at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Bank had available unsecured lines of credit from
correspondent banks, the Student Loan Marketing Association ("SLMA"), and the
Federal Home Loan Bank of Topeka ("FHLB") totaling $20.0 million, $35.0 million,
and $177.0 million, respectively. Short-term borrowings outstanding on these
lines of credit totaled $1.8 million, with weighted average rates of 6.70%, at
December 31, 1996; there were no borrowings outstanding on these lines of credit
at December 31, 1997. The average balances outstanding on these lines of credit
were not material for either year.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts to conform to the current year presentation.
F-20
<PAGE>
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $77,261 $ 677 $ 30 $ 77,908
Obligations of state and political subdivisions 9,733 29 78 9,684
------- ------- ---- --------
Total $86,994 $ 706 $108 $ 87,592
======= ======= ==== ========
Available for Sale:
U.S. Government and agency obligations $76,277 $ 690 $ 19 $ 76,948
Obligations of state and political subdivisions 1,220 1 1 1,220
Mortgage-backed securities 16,388 72 33 16,427
Other securities 5,893 268 10 6,151
------- ------- ---- --------
Total $99,778 $ 1,031 $ 63 $100,746
======= ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $72,345 $ 467 $ 100 $ 72,712
Obligations of state and political subdivisions 11,244 52 45 11,251
------- ------- ------- --------
Total $83,589 $ 519 $ 145 $ 83,963
======= ======= ======= ========
Available for Sale:
U.S. Government and agency obligations $37,440 $ 253 $ 50 $ 37,643
Obligations of state and political subdivisions 1,892 17 - 1,909
Mortgage-backed securities 23,108 56 103 23,061
Other securities 979 170 - 1,149
------- ------- ------- --------
Total $63,419 $ 496 $ 153 $ 63,762
======= ======= ======= ========
</TABLE>
As required by law, investment securities are pledged to secure public and
trust deposits. Securities with an amortized cost of $99.7 million and $134.9
million were pledged to meet such requirements of $34.9 million and $15.4
million at December 31, 1997 and 1996, respectively. Any amount overpledged can
be released at any time.
F-21
<PAGE>
A comparison of the amortized cost and approximate fair value of the
Company's investment securities by maturity date at December 31, 1997 follows.
Mortgage-backed securities are included in the period in which they are
estimated to prepay.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
One year or less $13,633 $ 13,648 $27,920 $27,970
Two years through five years 72,396 72,973 59,074 59,622
Five years through ten years 7,856 7,974 - -
More than ten years 2,000 2,000 - -
Other securities not due at a single maturity date 3,893 4,151 - -
------------- ---------- --------- -----------
Total $99,778 $100,746 $86,994 $87,592
============= ========== ========= ===========
</TABLE>
Realized gross gains/(losses) on sales of investment securities were $18,000,
$459,000 and $(8,000) during 1997, 1996 and 1995, respectively. The gross
proceeds from such sales of investment securities totaled approximately $0,
$438,000 and $6.0 million during 1997, 1996 and 1995, respectively. All of the
gain on sales of investment securities during 1997 and a portion of the gain on
sales of investment securities during 1996 occurred when securities classified
as "held to maturity" and "available for sale", originally purchased at a
discount, were called prior to their stated maturity dates. During 1995, a loss
on sales of investment securities occurred when the Bank sold securities
classified as "held to maturity". The Company concluded that these securities
were sold at a time near enough to their maturity dates that interest rate risk
was substantially eliminated as a pricing factor.
3. LOANS RECEIVABLE
Major classifications of loans are as follows:
At December 31,
---------------------------------
1997 1996
---------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $ 223,672 $ 196,163
One-to-four family residential 79,843 61,175
Real estate construction 72,454 54,369
Commercial 241,007 218,515
Installment and consumer:
Guaranteed student loans 64,390 61,959
Credit cards 73 20,839
Other 37,674 31,626
---------- ---------
719,113 644,646
Allowance for loan losses (8,282) (7,139)
---------- ---------
Loans receivable, net $ 710,831 $ 637,507
========== =========
The Bank extends commercial and consumer credit primarily to customers in
the State of Oklahoma which subjects the loan portfolio to the general economic
conditions within this area. At December 31, 1997 and 1996, substantially all of
the Bank's loans, except for credit cards, are collateralized with real estate,
inventory, accounts receivable and/or other assets or guaranteed by agencies of
the United States Government.
Loans to individuals and businesses in the healthcare industry totaled
approximately $71.1 million, or 10% of total loans. The loan portfolio also
includes $17.7 million, or 2% of total loans, in hotel/motel loans, $22.4
million, or 3% of total loans, in residential construction loans, and $14.8
million, or 2% of total loans, in restaurant
F-22
<PAGE>
loans. In the event of total nonperformance by the borrowers, the Company's
accounting loss would be limited to the recorded investment in the loans
receivable reduced by proceeds received from disposition of the related
collateral.
The Company had loans which were held for sale of $13.0 million and $12.3
million at December 31, 1997 and 1996, respectively. These loans are carried at
cost, which does not exceed market. Guaranteed student loans are generally sold
to a single servicer. A substantial portion of the one-to-four family
residential loans and loan servicing rights are sold to two servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $5.5 million and $4.6 million at December 31,
1997 and 1996, respectively. If interest on those loans had been accrued, the
interest income as reported in the accompanying consolidated statements of
operations would have increased by approximately $144,000, $398,000 and $48,000
for 1997, 1996 and 1995, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $132.8 million and $119.0 million at December 31, 1997 and 1996,
respectively. The Bank maintained escrow accounts totaling $547,000 and
$366,000 for real estate mortgage loans serviced for others at December 31, 1997
and 1996, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 1997. Credit card and student loans that do not have
stated maturities are treated as due in one year or less.
<TABLE>
<CAPTION>
One year One to Over
or less five years five years Total
------------ ---------------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage:
Commercial $ 10,228 $ 54,713 $ 158,731 $ 223,672
One-to-four family residential 11,683 28,615 39,545 79,843
Real estate construction 51,304 11,246 9,904 72,454
Commercial 104,690 87,273 49,044 241,007
Installment and consumer:
Guaranteed student loans 64,390 - - 64,390
Credit Cards 73 - - 73
Other 11,332 25,415 927 37,674
---------- ----------- ---------- ------------
Total $ 253,700 $ 207,262 $ 258,151 $ 719,113
========== =========== ========== ============
</TABLE>
The following table sets forth December 31, 1997 the dollar amount of all
loans due more than one year after December 31, 1999.
<TABLE>
<CAPTION>
Fixed Variable Total
----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Real estate mortgage:
Commercial $ 39,264 $ 174,180 $ 213,444
One-to-four family residential 18,857 49,303 68,160
Real estate construction 3,178 17,972 21,150
Commercial 24,921 111,396 136,317
Installment and consumer:
Guaranteed student loans - - -
Credit Cards - - -
Other 24,134 2,208 26,342
----------- ---------- ------------
Total $ 110,354 $ 355,059 $ 465,413
=========== ========== ============
</TABLE>
F-23
<PAGE>
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 7,139 $ 5,813 $ 4,959
Provision for loan losses 12,104 3,100 2,000
Loans charged off (11,528) (2,301) (1,803)
Recoveries 567 527 657
----------- ---------- ---------
Total $ 8,282 $7,139 $ 5,813
=========== ========== =========
</TABLE>
As of December 31, 1997 and 1996, impaired loans totaled $5.5 million and
$4.8 million and had been allocated a related allowance for loan loss of
$707,000 and $2.0 million, respectively. The average balance of impaired loans
totaled $4.1 million and $3.8 million and interest income recognized on impaired
loans totaled $187,000 and $37,000, respectively, for the years ended December
31, 1997 and 1996.
Directors and officers of the Company and the Bank were customers of, and
had transactions with, the Bank in the ordinary course of business, and similar
transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of loss or present other
unfavorable features. Certain officers, directors, employees, and companies in
which they have partial ownership had indebtedness to the Bank totaling $2.1
million and $1.0 million at December 31, 1997 and 1996, respectively. During
1997, $1.6 million of new loans were made to these persons and repayments
totaled $509,000.
4. PREMISES AND EQUIPMENT
These consist of the following:
<TABLE>
<CAPTION>
At December 31,
----------------------
1997 1996
----------------------
(dollars in thousands)
<S> <C> <C>
Land $ 4,397 $ 1,214
Buildings and improvements 4,115 3,869
Furniture, fixtures, and equipment 13,750 12,024
-------- -------
22,262 17,107
Accumulated depreciation and amortization (8,691) (7,458)
-------- -------
Premises and equipment, net $13,571 $ 9,649
======== =======
</TABLE>
5. OTHER BORROWED FUNDS
During 1997, the Company began selling securities under agreements to
repurchase with the Company retaining custody of the collateral. Collateral
consists of direct obligations of the U.S. Government or U.S. Government Agency
issues and the Company retains custody of the security which is designated as
pledged with the Company's safekeeping agent. The type of collateral required,
and the retention of the collateral and the security sold, minimizes the
Company's risk of exposure to loss. These transactions are for one-to-three day
periods and do not materially impact the Company's liquidity or operations. As
of December 31, 1997, no material repurchase agreements exist with any one
customer.
F-24
<PAGE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
End of period balance $18,953 - -
Average balance 4,412 - -
Maximum month-end balance 18,953 - -
Average interest rate 4.94% - -
</TABLE>
6. LONG-TERM DEBT
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of the
Company, issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities
(the "Preferred Securities") in an underwritten public offering for an aggregate
price of $25,012,500. Proceeds of the Preferred Securities were invested in the
9.30% Subordinated Debentures (the "Subordinated Debentures") of the Company.
After deducting underwriter's compensation and other expenses of the offering,
the net proceeds were available to the Company to increase capital and for
general corporate purposes, including use in investment activities and the
Bank's lending activities, and, after September 1, 1998, possible redemption, in
whole or in part, of the Company's 9.20% Redeemable Cumulative Preferred Stock,
Series A (the "Series A Preferred Stock"). Unlike interest payments on the
Subordinated Debentures, dividends paid on the Series A Preferred Stock are not
deductible for federal income tax purposes.
The Preferred Securities and the Subordinated Debentures each mature on
July 31, 2027. If certain conditions are met, the maturity dates of the
Preferred Securities and the Subordinated Debentures may be shortened to a date
not earlier than July 31, 2002, or extended to a date not later than July 31,
2036. The Preferred Securities and the Subordinated Debentures also may be
redeemed prior to maturity if certain events occur. The Preferred Securities
are subject to mandatory redemption, in whole or in part, upon repayment of the
Subordinated Debentures at maturity or their earlier redemption. The Company
also has the right, if certain conditions are met, to defer payment of interest
on the Subordinated Debentures, which would result in a deferral of dividend
payments on the Preferred Securities, at any time or from time to time for a
period not to exceed 20 consecutive quarters in a deferral period.
The Company and SBI Capital Trust believe that, taken together, the
obligations of the Company under the Preferred Securities Guarantee Agreement,
the Amended and Restated Trust Agreement, the Subordinated Debentures, the
Indenture and the Agreement As To Expenses and Liabilities, entered into in
connection with the offering of the Preferred Securities and the Subordinated
Debentures, in the aggregate constitute a full and unconditional guarantee by
the Company of the obligations of SBI Capital Trust under the Preferred
Securities.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Preferred Securities and purchasing the Subordinated Debentures,
which are its sole assets. The Company owns all of the 30,960 outstanding
common securities, liquidation value $25 per share, (the "Common Securities") of
SBI Capital Trust.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 1997, all of the Company's Preferred Stock and
$580,000 of the Preferred Securities were included in Tier I Capital.
For accounting purposes, the Preferred Securities are presented on the
Consolidated Statements of Financial Condition as a separate category of long-
term debt entitled "Guaranteed Preferred Beneficial Interests in the Company's
Subordinated Debentures".
F-25
<PAGE>
7. INCOME TAXES
The components of taxes on income follow:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
--------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $3,266 $4,275 $3,366
State 366 667 508
Deferred tax benefit:
Federal (820) (543) (458)
State (145) (93) (80)
-------- -------- --------
Taxes on income $2,667 $4,306 $3,336
======== ======== ========
</TABLE>
The taxes on income reflected in the accompanying consolidated statements
of operations differs from the expected U.S. Federal income tax rates for the
following reasons:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Computed tax expense at 34% $2,600 $4,032 $3,206
Increase (decrease) in income
taxes resulting from:
Benefit of income not subject to
U.S. Federal income tax (240) (210) (202)
State income taxes, net of Federal
income tax benefit 146 379 281
Other 161 105 51
------ ------ ------
Taxes on income $2,667 $4,306 $3,336
====== ====== ======
</TABLE>
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses $ (772) $ (754) $ (494)
Accelerated depreciation 158 135 56
Intangibles (16) (26) (25)
Sales of other real estate owned 5 225 -
Other (340) (216) (75)
------- ------- -------
Total $ (965) $ (636) $ (538)
======= ======= =======
</TABLE>
Net deferred tax assets of $2.9 million and $2.2 million at December 31,
1997 and 1996, respectively, are reflected in the accompanying consolidated
statements of financial condition in other assets. There were no valuation
allowances at December 31, 1997 or 1996.
F-26
<PAGE>
Temporary differences that give rise to the deferred tax assets and
(liabilities) include the following:
<TABLE>
<CAPTION>
At December 31,
------------------------
1997 1996
-------------------------
(dollars in thousands)
<S> <C> <C>
Allowance for loan losses $3,125 $2,353
Accumulated depreciation (834) (676)
Write-down on other real estate owned 30 35
Deferred compensation accrual 103 88
Intangibles 178 162
Other 726 401
------ ------
3,328 2,363
Deferred taxes (payable) receivable on
investment securities available for sale (387) (137)
------ ------
Net deferred tax asset $2,941 $2,226
====== ======
</TABLE>
8. SHAREHOLDERS' EQUITY
In 1996, the Company's shareholders increased the authorized shares of
capital stock from 7,000,000 to 12,000,000, consisting of 10,000,000 shares of
common stock, par value $1.00 per share ("Common Stock"), and an aggregate of
2,000,000 shares of serial preferred stock, par value $1.00 per share. The
Company's Board of Directors can determine the voting powers, dividend rights,
liquidation preferences and other limitations on the preferred stock prior to
issuance. On July 31, 1995, the Company issued 690,000 shares of 9.20%
Redeemable, Cumulative Preferred Stock, Series A (the "Shares"), and received
net proceeds of $16.3 million. The liquidation preference of the Shares is $25
per share plus an amount equal to accrued and unpaid dividends. The Shares may
not be redeemed by the Company prior to September 1, 1998. Subject to prior
regulatory approval, the Shares may be redeemed at the option of the Company, in
whole or in part, on or after September 1, 1998, at a price equal to $25 per
share plus accumulated unpaid dividends to the redemption date. Such dividends
are cumulative from the date of issuance and payable quarterly at the rate of
9.20% of the original liquidation preference, or $2.30 per annum per share. For
the year ended December 31, 1997, the cumulative accrued dividend requirement
was $1.6 million, $1.5 million of which was declared and paid.
In the first quarter of 1998, the Company adopted a policy which prohibits
the declaration of dividends on common stock while the Company is operating at a
loss. Dividends on common stock were declared in the third quarter of 1997,
prior to the adoption of this policy, although a loss was incurred for that
quarter.
The Company has reserved for issuance 200,000 shares of common stock
pursuant to the terms of Dividend Reinvestment and Employee Stock Purchase
Plans. The Dividend Reinvestment Plan allows shareholders of record a
convenient and economical method of increasing their equity ownership of the
Company. The Employee Stock Purchase Plan allows Company employees to acquire
additional common shares through payroll deductions. At December 31, 1997,
18,611 shares had been issued by these plans.
9. CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators, that if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
F-27
<PAGE>
As of December 31, 1997 and 1996, the most recent notifications from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total Capital,
Tier I Capital, and Tier I Leverage ratios as set forth in the table below.
Since the notifications, management believes there are no conditions or events
that have changed the Bank's category.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets and Tier I capital to average assets (all
as defined). Management believes the Company and the Bank meet all capital
adequacy requirements to which they are subject as of December 31, 1997 and
1996.
The Company's and Bank's actual capital amounts and ratios are presented
below.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to risk-weighted assets) Company $100,322 13.30% N/A N/A $60,331 8.00%
Bank 80,631 10.72% $75,182 10.00% 60,145 8.00%
Tier I Capital (to risk-weighted assets) Company 67,607 8.96% N/A N/A 30,165 4.00%
Bank 72,349 9.62% 45,109 6.00% 30,073 4.00%
Tier I Leverage (to average assets) Company 67,607 6.95% N/A N/A 38,901 4.00%
Bank 72,349 7.57% 47,756 5.00% 38,205 4.00%
As of December 31, 1996:
Total Capital (to risk-weighted assets) Company $ 71,376 11.40% N/A N/A $50,077 8.00%
Bank 69,139 11.06% $62,490 10.00% 49,992 8.00%
Tier I Capital (to risk-weighted assets) Company 63,886 10.21% N/A N/A 25,039 4.00%
Bank 62,000 9.92% 37,494 6.00% 24,996 4.00%
Tier I Leverage (to average assets) Company 63,886 7.77% N/A N/A 32,894 4.00%
Bank 62,000 7.56% 41,026 5.00% 32,821 4.00%
</TABLE>
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by the Bank in any calendar year exceeds the total of its
net profits of that year combined with its retained net profits of the preceding
two years. In addition, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be under capitalized. The Bank's maximum amount of
dividends available for payment totaled approximately $13.2 million at December
31, 1997. Dividends declared by the Bank for the years ended December 31, 1997,
1996 and 1995 did not exceed the threshold requiring regulatory approval.
F-28
<PAGE>
10. STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan (the "Stock Plan")
provides selected key employees with the opportunity to acquire common stock.
The exercise price of all options granted under the Stock Plan is the fair
market value on the grant date The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for the Stock Plan;
accordingly, no compensation expense has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plan
been determined based upon the fair value of the options at their grant date as
prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's proforma data would have been as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Proforma net income $4,778,707 $7,382,355 $5,986,700
Proforma net income available to common shareholders $3,191,707 $5,795,355 $5,320,700
Basic earnings per common share $ 0.85 $ 1.54 $ 1.42
Diluted earnings per common share $ 0.82 $ 1.51 $ 1.40
Weighted average fair value at grant date $ 9.24 $ 7.57 $ 5.40
</TABLE>
The compensation cost is calculated using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.30% 1.47% 1.79%
Expected volatility 17.87% 20.66% 25.20%
Risk-free interest rate 5.89% 6.90% 6.61%
Expected option term (in years) 10 10 10
</TABLE>
The Stock Plan's activity follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
-----------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 182,000 $12.75
Granted 30,000 13.38
Exercised - -
Canceled/expired - -
---------------------------------------
Outstanding at December 31, 1995 212,000 12.84
Granted 35,000 18.82
Exercised - -
Canceled/expired - -
---------------------------------------
Outstanding at December 31, 1996 247,000 13.69
Granted 35,000 25.47
Exercised (14,000) 17.95
Canceled/expired (7,500) 18.50
---------------------------------------
Outstanding at December 31, 1997 260,500 $14.90
=======================================
Total exercisable at December 31, 1995 72,000 $12.78
Total exercisable at December 31, 1996 116,500 $13.36
Total exercisable at December 31, 1997 126,000 $13.30
</TABLE>
At December 31, 1997, the Company had reserved 375,522 shares under the
Stock Plan, 260,500 shares of which are under option. The following summarizes
the information concerning options outstanding and exercisable at December 31,
1997.
F-29
<PAGE>
<TABLE>
<CAPTION>
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
210,500 $12-75-$13.38 6.51 $12.84 119,500 $12.79
20,000 $19.25-$21.81 8.74 $19.89 3,500 $19.62
30,000 $24.75-$26.75 9.91 $26.08 3,000 $26.08
</TABLE>
11. EMPLOYEE BENEFITS
The Company sponsors a noncontributory, defined contribution profit sharing
plan intended to provide retirement benefits for employees of the Company. The
plan covers all employees who have completed one year of service and have
attained the age of 21. The plan is subject to the Employee Retirement Income
Security Act of 1974, as amended. Company contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not
exceed 15% of the total annual compensation of all participants. The Company
made contributions of $588,000, $671,000 and $680,000 in 1997, 1996, and 1995,
respectively.
12. OPERATING LEASES
The Company leases certain equipment and facilities for its operations.
Future minimum annual rental payments required under operating leases that have
initial or remaining lease terms in excess of one year as of December 31, 1997
follow:
<TABLE>
<S> <C>
1998 $1,001,620
1999 746,070
2000 613,093
2001 519,967
2002 368,313
</TABLE>
The total rental expense was $1.2 million, $1.0 million and $803,000 in
1997, 1996 and 1995, respectively.
13. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - The fair value of U.S. Government and agency
obligations, other securities and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
LOANS RECEIVABLE - Fair values are estimated for certain homogeneous
categories of loans adjusted for differences in loan characteristics. The
Bank's loans have been aggregated by categories consisting of commercial, real
estate, student, credit card and other consumer. The fair value estimate for
student loans is the current historical cost carrying value as such loans are
typically sold in the secondary market at par value. The fair value of all
other loans is estimated by discounting the cash flows using credit and interest
rate risks inherent in the loan category and interest rates currently offered
for loans with similar terms and credit risks.
F-30
<PAGE>
ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable estimate
of fair value for accrued interest receivable.
DEPOSITS - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the statement of
financial condition date. The fair value of fixed-maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
SHORT-TERM BORROWINGS - The fair values of short-term borrowings are the
amounts payable at the statement of financial condition date, as the carrying
amount is a reasonable estimate of fair value. Included in short-term
borrowings are federal funds purchased, securities sold under agreements to
repurchase, and treasury tax and loan demand notes.
LONG-TERM DEBT - The fair value of long-term debt, which consists of the
Subordinated Debentures, is estimated based on quoted market prices or dealer
quotes.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
The carrying values and estimated fair values of the Company's financial
instruments follow:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
Values Values Values Values
-------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 36,259 $ 36,259 $ 22,914 $ 22,914
Investment securities:
Held to maturity 86,994 87,592 83,589 83,963
Available for sale 100,746 100,746 63,762 63,762
Loans receivable 710,831 731,459 637,507 643,927
Accrued interest receivable 8,883 8,883 7,400 7,400
Deposits 841,425 841,935 753,945 756,093
Accrued interest payable 6,504 6,504 5,061 5,061
Other liabilities 1,227 1,227 1,907 1,907
Short-term borrowings 20,548 20,548 2,985 2,985
Long-term debt 25,013 25,607 - -
Commitments - - - -
</TABLE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with generally accepted accounting principles, these
transactions are not presented in the accompanying consolidated financial
statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial
and real estate mortgage credit, standby and commercial letters of credit and
available credit card lines of credit.
F-31
<PAGE>
The following table provides a summary of the Company's off-balance sheet
financial instruments:
<TABLE>
<CAPTION>
At December 31,
------------------------
1997 1996
------------------------
(dollars in thousands)
<S> <C> <C>
Commitments to extend commercial and real estate mortgage credit $242,401 $154,041
Standby and commercial letters of credit 4,505 4,214
Credit card lines of credit 559,261 348,144
-------- --------
Total $806,167 $506,399
-------- --------
</TABLE>
A loan commitment is a binding contract to lend up to a maximum amount for
a specified period of time provided there is no violation of any financial,
economic or other terms of the contract. A standby letter of credit obligates
the Company to honor a financial commitment by issuing a guarantee to a third
party should the Company's customer fail to perform. Many loan commitments and
most standby letters of credit expire unfunded, and, therefore, total
commitments do not represent future funding obligations of the Company. Loan
commitments and letters of credit are made under normal credit terms, including
interest rates and collateral prevailing at the time, and usually require the
payment of a fee by the customer. Commercial letters of credit are commitments
generally issued to finance the movement of goods between buyers and sellers.
The Bank's exposure to credit loss, assuming commitments are funded, in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual amount of those instruments. The Bank has an
agreement with other financial institutions to purchase $558.1 million and
$285.0 million of unadvanced credit card lines of credit at December 31, 1997
and 1996, respectively, if such credit card lines of credit are funded. Such
commitments are made with the same terms as similarly funded extensions of
credit including collateral, rates and maturities. The Bank does not anticipate
any material losses as a result of the commitments.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is at all times subject to
various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and
threatened actions with counsel, management considers that the outcome of such
actions will not have a material adverse effect on the Company's financial
position; however, the Company is not able to predict whether the outcome of
such actions may or may not have a material adverse effect on results of
operations in a particular future period as the timing and amount of any
resolution of such actions and relationship to the future results of operations
are not known.
At periodic intervals, the Federal Reserve Bank and the Office of the
Comptroller of the Currency routinely examine the Company's and the Bank's
financial statements as part of their legally prescribed oversight of the
banking industry. Based on these examinations, the regulators can direct that
the Company's and the Bank's financial statements be adjusted in accordance with
their findings.
The Bank has adopted a Severance Compensation Plan (the "Plan") for the
benefit of certain officers and key members of management. The Plan's purpose
is to protect and retain certain qualified employees in the event of a change in
control (as defined) and to reward those qualified employees for loyal service
to the Bank by providing severance compensation to them upon their involuntary
termination of employment after a change in control of the Bank. At December
31, 1997, the Bank has not recorded any amounts in the consolidated financial
statements relating to the Plan. If a change of control were to occur, the
maximum amount payable to certain officers and key members of management would
approximate $1.1 million.
F-32
<PAGE>
16. SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid for interest $39,804 $32,038 $26,913
Cash paid for taxes on income 2,333 4,390 3,600
Loans originated to finance the
sale of other real estate owned - - 68
Loans transferred to other real estate owned 521 21 15
Reclassification of investment securities
from held to maturity to available for sale - - 32,672
Unrealized gain/(loss) on investment
securities available for sale, net of tax 375 (407) 1,489
</TABLE>
17. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In December of 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125. The Company
will adopt SFAS No. 127 on January 1, 1998 as required. Management believes the
adoption of SFAS No. 127 will not have a material impact on the Company's
consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
Standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company will adopt SFAS No.
131 on January 1, 1998 as required and believes the Company has only one
segment, as that term is defined in SFAS No. 131.
F-33
<PAGE>
18. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Following are the condensed financial statements of Southwest Bancorp, Inc.
("Parent Company only") for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1997 1996
----------------------------------
(dollars in thousands)
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash and due from banks $ 3,506 $ 754
Investment in subsidiary bank 73,297 62,808
Investment securities, available for sale 15,408 1,446
Other assets 1,603 423
---------- ---------
Total $93,814 $ 65,431
========== =========
Liabilities:
Subordinated debentures $25,013 -
Other liabilities 753 $ 399
Shareholders' Equity:
Preferred 17,382 17,382
Common 50,666 47,650
---------- ---------
Total $93,814 $ 65,431
========== =========
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Income:
Cash dividends from subsidiary bank $ 1,875 $ 1,053 $ 901
Dividend income - 22 28
Investment income 585 116 98
Other income 2 - -
Security gains/(losses) - 288 -
---------------- ------------- ---------------
Total income 2,462 1,479 1,027
Expense:
Interest on subordinated debentures 1,338 - -
General and administrative expense 227 150 95
---------------- ------------- ---------------
Total expense 1,565 150 95
---------------- ------------- ---------------
Total income before tax expense and equity in
undistributed income of subsidiary bank 897 1,329 932
Taxes on income (383) 99 4
---------------- ------------- ---------------
Income before equity in undistributed
income of subsidiary bank 1,280 1,230 928
Equity in undistributed income of subsidiary bank 3,700 6,322 5,164
---------------- ------------- ---------------
Net income $ 4,980 $ 7,552 $ 6,092
================ ============= ===============
Net income available to common shareholders $ 3,393 $ 5,965 $ 5,426
================ ============= ===============
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 4,980 $ 7,552 $ 6,092
Equity in undistributed income of subsidiary bank (3,700) (6,322) (5,164)
Other, net (871) 140 (421)
-------- -------- --------
Net cash provided by operating activities 409 1,370 507
-------- -------- --------
Investing activities:
Available for sale securities:
Purchases (15,506) (1,806) (3,146)
Sales - - -
Maturities 1,635 3,325 1,245
-------- -------- --------
Net cash provided by (used in) investing activities (13,871) 1,519 (1,901)
-------- -------- --------
Financing activities:
Proceeds from issuance of:
Preferred stock - - 16,322
Common stock 456 170 -
Subordinated debentures 25,013 - -
Capital contribution to Bank (6,500) - (13,500)
Cash dividends paid:
Preferred stock (1,587) (1,587) (533)
Common stock (1,168) (1,015) (864)
-------- -------- --------
Net cash provided by (used in) financing activities 16,214 (2,432) 1,425
-------- -------- --------
Net increase in cash and cash equivalents 2,752 457 31
Cash and cash equivalents,
Beginning of year 754 297 266
-------- -------- --------
End of year $ 3,506 $ 754 $ 297
======== ======== ========
</TABLE>
* * * * * * * * *
F-35
<PAGE>
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary................................................. 3
Risk Factors............................................ 7
Credit Risk............................................ 7
Local Economic Conditions.............................. 7
Loan Portfolio Concentrations.......................... 7
Interest Rate Risk..................................... 8
Provisions that Could Discourage Acquisitions
of Southwest.......................................... 8
Restrictions on Branching.............................. 8
Dividend Restrictions.................................. 9
Competition............................................ 9
Year 2000 Risk......................................... 9
Regulatory Risk........................................ 10
Litigation Risk........................................ 10
Caution About Forward Looking Statements................ 10
Selected Consolidated Financial Data.................... 11
Recent Developments..................................... 13
Use of Proceeds......................................... 14
Capitalization.......................................... 15
Market For Common Stock and Dividends................... 16
Southwest Bancorp, Inc.................................. 17
Management's Discussion and Analysis.................... 19
Management.............................................. 50
Selling Shareholders; Ownership of Common Stock......... 53
Description of Capital Stock............................ 54
Underwriting............................................ 57
Legal Matters........................................... 58
Experts................................................. 58
Additional Information.................................. 59
Index to Consolidated Financial Statements.............. F-1
</TABLE>
-------------------
Southwest has not authorized anyone to give any information a division of Dain
Rauscher Incorporated or make any representation about the offering that differs
from, or adds to, the information in this Prospectus or in Southwest's documents
that are publicly filed with the Securities and Exchange Commission. Therefore,
if anyone does give you different or additional information, you should not rely
on it. The delivery of this Prospectus and/or the sale of shares of Common Stock
do not mean that there have not been any changes in the condition of Southwest
since the date of this Prospectus. If you are in a jurisdiction where it is
unlawful to offer to sell, or to ask for offers to buy, the securities offered
by this Prospectus, or if you are a person to whom it is unlawful to direct such
activities, then the offer presented by this Prospectus does not extend to you.
This Prospectus speaks only as of its date except where it indicates that
another date applies. Documents that are incorporated by reference in this
Prospectus speak only as of their date, except where they specify that other
dates apply.
================================================================================
================================================================================
1,061,231 Shares
SOUTHWEST BANCORP, INC.
Parent Company of
Stillwater National
Bank & Trust Company
Common Stock
___________________
Prospectus
March 16,1999
___________________
Stifel, Nicolaus & Company
Incorporated
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
================================================================================
