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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1999
Commission File Number 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
608 South Main Street, Stillwater, Oklahoma 74074
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (405) 372-2230.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's Common Stock is traded on the NASDAQ National Market under the
symbol OKSB. The aggregate market value of the 2,600,665 shares of Common Stock
of the registrant issued and outstanding held by nonaffiliates on March 17, 2000
was approximately $49 million based on the closing sales price of $19.00 per
share of the registrant's Common Stock on that date. Solely for purposes of this
calculation, it is assumed that directors, officers and 5% stockholders of the
registrant are affiliates.
As of the close of business on March 17, 2000, 3,854,249 shares of the
registrant's Common Stock were outstanding.
Documents Incorporated By Reference
Parts I and II: Portions of the Annual Report to Shareholders for the year
ended December 31, 1999 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual
Meeting of Shareholders to be held on April 27, 2000 (the
"Proxy Statement").
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CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Southwest Bancorp, Inc. ("Southwest") makes forward-looking statements in
this Form 10-K that are subject to risks and uncertainties. These forward-
looking statements include:
. Statements of goals, intentions, and expectations;
. Estimates of risks and of future costs and benefits; and
. Statements of Southwest's ability to achieve financial and other
goals.
These forward-looking statements are subject to significant uncertainties
because they are based upon or are affected by:
. Management's estimates and projections of future interest rates and
other economic conditions;
. Future laws and regulations; and
. A variety of other matters.
Because of these uncertainties, the actual future results may be materially
different from the results indicated by these forward-looking statements. In
addition, Southwest's past results of operations do not necessarily indicate its
future results.
PART I
ITEM 1. BUSINESS
General
Southwest is a one-bank holding company headquartered in Stillwater,
Oklahoma. Southwest provides commercial and consumer banking services through
its sole banking subsidiary, Stillwater National Bank & Trust Company
("Stillwater National" or the "Bank"). Southwest was organized in 1981 as the
holding company for Stillwater National, which was chartered in 1894. Southwest
is registered as a bank holding company pursuant to the Bank Holding Company Act
of 1956, as amended (the "Holding Company Act"). As such, Southwest is subject
to supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). The Bank is a national bank subject to
supervision and regulation by the Office of the Comptroller of the Currency (the
"OCC"). The Bank's deposit accounts are insured by the Bank Insurance Fund (the
"BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC") to
the maximum permitted by law.
Products and Services
Southwest offers a wide variety of commercial and consumer lending and
deposit services. Southwest has developed internet banking services, called
"DirectBanker," for consumer and commercial customers, a highly automated
lockbox, imaging and information service for commercial customers called
"Business Mail Processing," and a deposit product that automatically sweeps
excess funds from commercial demand deposit accounts and invests them in short-
term borrowings ("Sweep Repurchase Agreements"). The commercial loans offered by
Southwest include (i) commercial real estate loans, (ii) working capital and
other commercial loans, (iii) construction loans, and (iv) Small Business
Administration ("SBA") guaranteed loans. Consumer lending services include (i)
government-guaranteed student loans, (ii) residential real estate loans and
mortgage banking services, and (iii) personal lines of credit and other
installment loans. Southwest also offers deposit and personal banking services,
including (i) commercial deposit services such as Business Mail Processing,
commercial checking and other deposit accounts, and (ii) retail deposit services
such as certificates of deposit, money market accounts, checking accounts, NOW
accounts, savings accounts and automatic teller machine ("ATM") access. Trust
services, personal brokerage and credit cards are offered through independent
institutions.
Strategic Focus
Southwest's banking philosophy is to provide a high level of customer
service, a wide range of financial services, and products responsive to customer
needs. This philosophy has led to the development of a line of deposit and
lending products that responds to customer needs for speed, efficiency and
information. These include Southwest's Sweep Repurchase Agreements, Business
Mail Processing, and Southwest's DirectBanker and other internet banking
products, which complement Southwest's more traditional banking
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products. Southwest also emphasizes marketing to highly educated, professional
and business persons in its markets. Southwest seeks to build close
relationships with businesses, professionals and their principals and to service
their banking needs throughout their business development and professional
lives.
Organization
Southwest'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. Southwest'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 Southwest's market areas. Southwest has
a high-service philosophy. Loan officers often meet at the customer's home or
place of business to close loans. Third-party courier services often are used to
collect commercial deposits.
Home Office Business Operations. Southwest manages and offers products
that are technology based, or that otherwise are more efficiently offered
centrally, through its home office. These include products that are marketed
through the regional offices, such as Southwest's internet banking 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.
Southwest's technology products are marketed both to existing customers and
to help develop new customer relationships. Use of these products by customers
enables Southwest to serve its customers more effectively, use its resources
more efficiently, and increase fee income.
Southwest also manages its mortgage and student lending operations through
its home office. Southwest markets its lending program directly to financial aid
directors at Oklahoma colleges and universities. These loans are sold as they
enter repayment. Southwest also originates first mortgage loans for sale to the
Federal National Mortgage Association ("FNMA") or private investors. Servicing
on these loans may be released in connection with the sale.
Support and Control Functions. Support and control functions are
centralized, although each regional division has support and control personnel.
Southwest's philosophy of customer service extends to its support and control
functions. Senior managers headquartered in the Stillwater offices travel to
Oklahoma City and Tulsa to help in marketing and management. Southwest'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. Southwest has six full-service banking offices, two of
which are located in each of Stillwater and Tulsa, Oklahoma, and one each in
Oklahoma City and Chickasha, Oklahoma, and a loan production office in Oklahoma
City. See "Item 2. Properties." Before 1999, laws of the state of Oklahoma
limited the number and location of de novo branches that a bank could establish.
Southwest has developed a business strategy that does not rely on an extensive
branch network. National banks in Oklahoma now have broad ability to establish
de novo branches anywhere in the state as a result of changes in state laws
enacted in 1999, and interpretations of those laws by the OCC.
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Regulation, Supervision, and Governmental Policy
Following is a brief summary of certain statutes and regulations that
significantly affect Southwest and Stillwater National. A number of other
statutes and regulations affect Southwest and Stillwater National but are not
summarized below.
Bank Holding Company Regulation. Southwest is registered as a bank holding
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company under the Holding Company Act and, as such, is subject to supervision
and regulation by the Federal Reserve. As a bank holding company, Southwest is
required to furnish to the Federal Reserve annual and quarterly reports of its
operations and additional information and reports. Southwest is also subject to
regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any bank or bank
holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (2) acquiring
all or substantially all of the assets of another bank or bank holding company;
or (3) merging or consolidating with another bank holding company.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve prior to acquiring control of Southwest or Stillwater National.
For purposes of the Holding Company Act, "control" is defined as ownership of
more than 25% of any class of voting securities of Southwest or Stillwater
National, the ability to control the election of a majority of the directors, or
the exercise of a controlling influence over management or policies of Southwest
or Stillwater National.
The federal Change in Bank Control Act and the related regulations of the
Federal Reserve require any person or persons acting in concert (except for
companies required to make application under the Holding Company Act), to file a
written notice with the Federal Reserve before the person or persons acquire
control of Southwest or Stillwater National. The Change in Bank Control Act
defines "control" as the direct or indirect power to vote 25% or more of any
class of voting securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also limits the investments and activities of bank
holding companies. In general, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, providing services for its subsidiaries, non-bank
activities that are closely related to banking, and other financially related
activities. The activities of Southwest are subject to these legal and
regulatory limitations under the Holding Company Act and Federal Reserve
regulations.
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") made major changes in
the historical restrictions on the non-bank activities of bank holding
companies, and allows affiliations between types of companies that were
previously prohibited. (See "Competition," below.) In general, bank holding
companies that qualify as financial holding companies under the GLB Act may
engage in an expanded list of non-bank activities. The GLB Act also created a
new regulatory framework by expanding the extent to which non-bank and
financially related activities of bank holding companies, including companies
that become financial holding companies under the GLB Act, are subject to
regulation and oversight by regulators other than the Federal Reserve. Many of
the changes in law enacted by the GLB Act became effective March 11, 2000,
although some become effective at later dates.
The Federal Reserve also has the power to order a holding company or its
subsidiaries to terminate any activity, or to terminate its ownership or control
of any subsidiary, when it has reasonable cause to believe that the continuation
of such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
The Federal Reserve has adopted guidelines regarding the capital adequacy
of bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "Regulatory Capital Requirements."
The Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound
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practices. The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition.
Bank Regulation. As a national bank, Stillwater National is subject to the
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primary supervision of the OCC under the National Bank Act. The prior approval
of the OCC is required for a national bank to establish or relocate an
additional branch office or to engage in any merger, consolidation, or
significant purchase or sale of assets.
Before 1999, laws of the state of Oklahoma severely limited the number and
location of de novo branches that a bank could establish. National banks in
Oklahoma now have broad ability to establish de novo branches anywhere in the
state as a result of changes in state laws enacted in 1999, and interpretations
of those laws by the OCC.
The OCC regularly examines the operations and condition of Stillwater
National, including but not limited to its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of Stillwater National's depositors and the BIF. In addition, Stillwater
National is required to furnish quarterly and annual reports to the OCC. The
OCC's enforcement authority includes the power to remove officers and directors
and the authority to issue cease-and-desist orders to prevent a bank from
engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
The OCC has adopted regulations regarding the capital adequacy of national
banks, which require national banks to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets. See "Regulatory
Capital Requirements."
No national bank may pay dividends from its paid-in capital. All dividends
must be paid out of current or retained net profits, after deducting reserves
for losses and bad debts. The National Bank Act further restricts the payment of
dividends out of net profits by prohibiting a national bank from declaring a
dividend on its shares of common stock until the surplus fund equals the amount
of capital stock or, if the surplus fund does not equal the amount of capital
stock, until one-tenth of a bank's net profits for the preceding half year in
the case of quarterly or semi-annual dividends, or the preceding two half-year
periods in the case of annual dividends, are transferred to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend if
the total of all dividends declared by a national bank in any calendar year
would exceed the total of its net profits for that year combined with its
retained net profits for the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred stock. In addition,
Stillwater National is prohibited by federal statute from paying dividends or
making any other capital distribution that would cause Stillwater National to
fail to meet its regulatory capital requirements. Further, the OCC also has
authority to prohibit the payment of dividends by a national bank when it
determines that their payment would be an unsafe and unsound banking practice.
Stillwater National is a member of the Federal Reserve System and its
deposits are insured by the FDIC to the legal maximum of $100,000 for each
insured depositor. Some of the aspects of the lending and deposit business of
Stillwater National that are subject to regulation by the Federal Reserve and
the FDIC include reserve requirements and disclosure requirements in connection
with personal and mortgage loans and deposit accounts. In addition, Stillwater
National is subject to numerous federal and state laws and regulations that
include specific restrictions and procedural requirements with respect to the
establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms, and discrimination in credit
transactions.
Stillwater National is subject to restrictions imposed by federal law on
extensions of credit to, and certain other transactions with, Southwest and
other affiliates, and on investments in their stock or other securities. These
restrictions prevent Southwest and Stillwater National's other affiliates from
borrowing from Stillwater National unless the loans are secured by specified
collateral, and require those transactions to have terms comparable to terms of
arms-length transactions with third persons. In addition, secured loans and
other transactions and investments by Stillwater National are generally limited
in amount as to Southwest and as to any other affiliate to 10% of Stillwater
National's capital and surplus and as to Southwest and all other affiliates
together to an aggregate of 20% of Stillwater National's capital and surplus.
Certain exemptions to these limitations apply to extensions of credit by, and
other transactions between, Stillwater National to its subsidiaries. These
regulations and restrictions may limit Southwest's ability to obtain funds from
Stillwater National for its cash needs, including funds for acquisitions and for
payment of dividends, interest, and operating expenses.
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Under OCC regulations, national banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit secured by liens or interests in real estate or are made for the purpose
of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards; prudent underwriting
standards, including loan-to-value limits, that are clear and measurable; loan
administration procedures; and documentation, approval, and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Guidelines for Real Estate Lending Policies (the "Guidelines") adopted by
the federal bank regulators. The Guidelines, among other things, call for
internal loan-to-value limits for real estate loans that are not in excess of
the limits specified in the Guidelines. The Guidelines state, however, that it
may be appropriate in individual cases to originate or purchase loans with loan-
to-value ratios in excess of the supervisory loan-to-value limits.
The FDIC has established a risk-based deposit insurance premium assessment
system for insured depository institutions. Under the system, the assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC, based upon the
institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well-capitalized, adequately
capitalized, or undercapitalized -- based on the data reported to regulators.
Well-capitalized institutions are institutions satisfying the following capital
ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii)
Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage
ratio of 5.0% or greater. Adequately capitalized institutions are institutions
that do not meet the standards for well-capitalized institutions but that
satisfy the following capital ratio standards: (i) total risk-based capital
ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or
greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Institutions that
do not qualify as either well-capitalized or adequately capitalized are deemed
to be undercapitalized. Within each capital group, institutions are assigned to
one of three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other information as the
FDIC determines to be relevant to the institution's financial condition and the
risk it poses to the deposit insurance fund. Subgroup A consists of financially
sound institutions with only a few minor weaknesses. Subgroup B consists of
institutions with demonstrated weaknesses that, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the deposit insurance fund. Subgroup C consists of institutions that pose a
substantial probability of loss to the deposit insurance fund unless effective
corrective action is taken. Stillwater National has been informed that it is in
the lowest-cost/best risk assessment category for the first assessment period of
2000.
Regulatory Capital Requirements. The Federal Reserve and the OCC have
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established guidelines for maintenance of appropriate levels of capital by bank
holding companies and national banks, respectively. The regulations impose two
sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the Federal Reserve and the OCC require bank holding
companies and national banks, respectively, to maintain a minimum leverage ratio
of "Tier 1 capital" (as defined in the risk-based capital guidelines discussed
in the following paragraphs) to total assets of 3.0%. The capital regulations
state, however, that only the strongest bank holding companies and banks, with
composite examination ratings of 1 under the rating system used by the federal
bank regulators, would be permitted to operate at or near this minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. A bank or bank holding company experiencing or anticipating
significant growth is expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that it also may consider
the level of an organization's ratio of tangible Tier 1 capital (after deducting
all intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve and the OCC require
bank holding companies and national banks to maintain minimum regulatory capital
levels based upon a weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic components: a
core capital (Tier 1) requirement and a supplementary capital (Tier 2)
requirement. Core capital consists primarily of common stockholders' equity,
certain perpetual preferred stock (noncumulative perpetual preferred stock with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less all intangible assets, except for certain mortgage servicing
rights and purchased credit card relationships. Supplementary capital elements
include, subject to certain limitations, the allowance for losses on loans and
leases; perpetual preferred stock that does not qualify as Tier 1 capital; long-
term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; subordinated debt, intermediate-term preferred stock,
and up to 45% of pre-tax net unrealized gains on available for sale equity
securities.
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The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-
weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan losses that may be included in capital to 1.25% of total risk-weighted
assets.
The federal bank regulatory agencies, including the OCC, have established a
joint policy regarding the evaluation of commercial banks' capital adequacy for
interest rate risk. Under the policy, the OCC's assessment of a bank's capital
adequacy includes an assessment of Stillwater National's exposure to adverse
changes in interest rates. The OCC has determined to rely on its examination
process for such evaluations rather than on standardized measurement systems or
formulas. The OCC may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are adequate.
Federal banking regulations also require banks with significant trading
assets or liabilities to maintain supplemental risk-based capital based upon
their levels of market risk. Stillwater National did not have any trading assets
or liabilities during 1999 or 1998, and was not required to maintain such
supplemental capital.
The OCC has established regulations that classify national banks by capital
levels and provide for the OCC to take various "prompt corrective actions" to
resolve the problems of any bank that fails to satisfy the capital standards.
Under these regulations, a well-capitalized bank is one that is not subject to
any regulatory order or directive to meet any specific capital level and that
has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital
ratio of 6% or more, and a leverage ratio of 5% or more. An adequately
capitalized bank is one that does not qualify as well-capitalized but meets or
exceeds the following capital requirements: a total risk-based capital ratio of
8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i)
4% or (ii) 3% if Stillwater National has the highest composite examination
rating. A bank that does not meet these standards is categorized as
undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A national bank that falls
within any of the three undercapitalized categories established by the prompt
corrective action regulation is subject to severe regulatory sanctions. As of
December 31, 1999, Stillwater National was well-capitalized as defined in the
OCC's regulations.
For information regarding Southwest's and Stillwater National's compliance
with their respective regulatory capital requirements, see "Management's
Discussion and Analysis -- Capital Resources" on page 13 of the Annual Report,
and "Note 6-Long-Term Debt" and "Note 9- Capital Requirements" of the Notes to
Consolidated Financial Statements on pages 31 and 34, respectively, of the
Annual Report.
Supervision and Regulation of Mortgage Banking Operations
Southwest's mortgage banking business is subject to the rules and
regulations of the U.S. Department of Housing and Urban Development ("HUD"), the
Federal Housing Administration ("FHA"), the Veterans' Administration ("VA"), and
FNMA with respect to originating, processing, selling and servicing mortgage
loans. Those rules and regulations, among other things, prohibit discrimination
and establish underwriting guidelines which include provisions for inspections
and appraisals, require credit reports on prospective borrowers, and fix maximum
loan amounts. Lenders such as Southwest are required annually to submit to FNMA,
FHA and VA audited financial statements, and each regulatory entity has its own
financial requirements. Southwest's affairs are also subject to examination by
the Federal Reserve, FNMA, FHA and VA at all times to assure compliance with the
applicable regulations, policies and procedures. Mortgage origination activities
are subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National
Flood Insurance Act and the Real Estate Settlement Procedures Act and related
regulations that prohibit discrimination and require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs.
Southwest's mortgage banking operations also are affected by various state and
local laws and regulations and the
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requirements of various private mortgage investors.
Competition
Stillwater National encounters competition primarily in seeking deposits
and in obtaining loan customers. The level of competition for deposits is high.
Stillwater National's principal competitors for deposits are other financial
institutions, including other banks, credit unions, and savings institutions.
Competition among these institutions is based primarily on interest rates and
other terms offered, service charges imposed on deposit accounts, the quality of
services rendered, and the convenience of banking facilities. Additional
competition for depositors' funds comes from U.S. Government securities, private
issuers of debt obligations and suppliers of other investment alternatives for
depositors, such as securities firms. Competition from credit unions has
intensified in recent years as historic federal limits on membership have been
relaxed. Because federal law subsidizes credit unions by giving them a general
exemption from federal income taxes, credit unions have a significant cost
advantage over banks and savings associations, which are fully subject to
federal income taxes. Credit unions may use this advantage to offer rates that
are highly competitive with those offered by banks and thrifts.
Stillwater National also competes in its lending activities with other
financial institutions such as savings institutions, credit unions, securities
firms, insurance companies, small loan companies, finance companies, mortgage
companies and other sources of funds. Many of Stillwater National's nonbank
competitors are not subject to the same extensive federal regulations that
govern bank holding companies and federally-insured banks and state regulations
governing state chartered banks. As a result, such nonbank competitors have
advantages over Stillwater National in providing certain services. A number of
the financial institutions with which Stillwater National competes in both
lending and deposit activities are larger than Stillwater National. In recent
periods, competition has increased in Stillwater National's market area as new
entrants and existing competitors have sought to more aggressively expand their
loan and deposit market share, and as a result of Stillwater National's efforts
to solicit larger loan customers, for whom there is greater competition.
Southwest anticipates that competition may intensify as a result of acquisition
of Oklahoma banks by out-of-state bank holding companies, increased branching by
financial institutions taking advantage of Oklahoma's expanded branching powers,
and the special advantages given to federal credit unions under current law. See
" -- Regulation of Branch and Interstate Banking."
The business of mortgage banking is highly competitive. Southwest competes
for loan origination with other financial institutions, such as mortgage
bankers, state and national commercial banks, savings and loan associations,
credit unions and insurance companies. Many of Southwest's competitors have
financial resources that are substantially greater than those available to
Southwest. Southwest competes principally by providing competitive pricing, by
motivating its sales force through the payment of commissions on loans
originated, and by providing high quality service to builders, borrowers, and
realtors.
The Holding Company Act permits the Federal Reserve to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than that holding company's home state. The
Federal Reserve may not approve the acquisition of a bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Holding Company Act also prohibits the
Federal Reserve from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a
branch. The Holding Company Act does not affect the authority of states to limit
the percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Federal banking laws also authorize the federal banking agencies to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
expressly prohibits merger transactions involving out-of-state banks. The State
of Oklahoma allows out-of-state financial institutions to merge with Oklahoma
banks and to establish branches in Oklahoma, subject to certain limitations.
The GLB Act permits the creation of a new type of regulated entity, the
financial holding company, that can offer a broad range of financial products.
These new financial holding companies may engage in banking as well as types of
securities, insurance, and other financial activities that had been prohibited
for bank holding companies under prior law. The GLB Act also permits banks with
or without holding companies to establish and operate financial subsidiaries
that may engage in most financial activities in which
7
<PAGE>
financial holding companies may engage. Competition may increase as bank holding
companies and other large financial service companies take advantage of the new
activities and provide a wider array of products. By removing historical
restrictions on affiliations between banks and certain types of companies, the
GLB Act expands the number of potential acquirors of existing banks and bank
holding companies, and makes it possible for bank holding companies to acquire
new types of existing businesses.
Employees
As of December 31, 1999, Southwest and Stillwater National employed 314
persons, including executive officers, loan and other banking and trust
officers, branch personnel, and others. None of Southwest's or Stillwater
National's employees is represented by a union or covered under a collective
bargaining agreement. Management of Southwest and Stillwater National consider
their employee relations to be excellent.
Executive Officers
The following table sets forth information regarding the executive officers
of Southwest and Stillwater National who are not directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kerby E. Crowell......... 50 Executive Vice President, Treasurer and Chief
Financial Officer of Southwest and the Bank
Kimberly G. Sinclair..... 44 Executive Vice President and Chief
Administrative Officer of the Bank
Mark A. Poole............ 40 President, Tulsa division of the Bank
Joseph P. Root........... 35 President, Central Oklahoma division of the
Bank
Patrick E. Zimmerman..... 38 President, Stillwater division of the Bank
Jerry L. Lanier.......... 51 Executive Vice President, Credit
Administration of the Bank
Charles H. Westerheide... 51 Senior Vice President and Treasury Manager of
the Bank
</TABLE>
The principal occupations and business experience of each executive officer
of Southwest are shown below.
Kerby E. Crowell has served as Executive Vice President, Treasurer and
Chief Financial Officer of Southwest and 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 Community Bankers 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 Community Bankers 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;
8
<PAGE>
and Security Pacific Bank of Arizona from 1987 to 1991. In 1981, Mr. Poole was
drafted by the Toronto Blue Jays and played professional baseball in the A, AA
and AAA leagues until 1986. Mr. Poole is a board member of the Tulsa Area United
Way Allocations Committee and Downtown Tulsa Unlimited. He is a former board
member of Citizens Caring for Children, was chairman of the 1996 OBA Basic
Banking School, and a member of the Advisory Board for the 1994 OBA Commercial
Lending School.
Joseph P. Root was appointed President of the Central Oklahoma division of
the Bank in November 1997. Previously, Mr. Root was Senior Vice President in the
Central Oklahoma division. Prior to joining the Bank in 1992, Mr. Root served as
Credit Analyst form November 1987 to April 1989 and Private Banking Officer from
May 1989 to July 1992 with Comerica Bank in Dallas, Texas. He is a member of the
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 Associates.
Jerry L. Lanier was appointed Executive Vice President in Credit
Administration in December 1999, supervising this area Company-wide. From
January 1998 to December 1999, Mr. Lanier served as Senior Vice President in
Credit Administration. 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 OCC in Oklahoma
City, Oklahoma 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 Bank of America (previously
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, Oklahoma. Mr. Westerheide has held a number of community
leadership positions including Chairman of the Ponca City Chamber of Commerce,
President of the Ponca City Foundation for Progress, Inc., and a director and
officer of numerous community foundations and clubs. Mr. Westerheide is a
graduate of Leadership Oklahoma, Class II.
Tabular Financial Information
The following tabular financial information should be read in conjunction
with the Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Financial Statements and Notes thereto
included in the Annual Report and incorporated by reference in Items 7 and 8 of
this Form 10-K.
9
<PAGE>
Rate/Volume Analysis
The following table analyzes changes in interest income and interest
expense of Southwest for the periods indicated. For each category of interest-
earning asset and interest-bearing liability, information is provided on changes
attributable to: (i) changes in volume (changes in volume multiplied by the
prior period's rate); and (ii) changes in rates (changes in rate multiplied by
the prior period's volume). Changes in rate-volume (changes in rate multiplied
by the changes in volume) are allocated between changes in rate and changes in
volume in proportion to the relative contribution of each.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
Compared to Compared to
December 31, 1998 December 31, 1997
-------------------------------- -----------------------------
Increase (decrease) attributable to change in:
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
-------------------------------- -----------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans receivable (1) $2,726 $(2,373) $ 353 $5,137 $(1,677) $ 3,460
Investment securities 251 (220) 31 684 (109) 575
Federal funds sold (35) (6) (41) (609) (23) (632)
------ ------- ------- ------ ------- -------
Total interest income 2,942 (2,599) 343 5,212 (1,809) 3,403
Interest paid on:
NOW accounts 40 (171) (131) 142 (29) 113
Money market accounts 246 9 255 (135) (345) (480)
Savings accounts 12 (14) (2) (10) (10) (20)
Time deposits (957) (2,145) (3,102) (659) (1,470) (2,129)
Short-term borrowings 3,272 (71) 3,201 2,555 - 2,555
Long-term debt - - - 988 - 988
------ ------- ------- ------ ------- -------
Total interest expense 2,613 (2,392) 221 2,881 (1,854) 1,027
------ ------- ------- ------ ------- -------
Net interest income $ 329 $ (207) $ 122 $2,331 $ 45 $ 2,376
====== ======= ======= ====== ======= =======
</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.
10
<PAGE>
Investment Portfolio Composition
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $105,763 $121,656 $154,209
Obligations of states and political
subdivisions 31,170 15,372 10,953
Mortgage-backed securities 64,202 31,020 16,427
Other securities 10,547 6,623 6,151
-------- -------- --------
Total investment securities $211,682 $174,671 $187,740
======== ======== ========
Available for sale (fair value) $131,379 $ 92,960 $ 96,896
Held to maturity (amortized cost) 71,814 77,575 86,994
Federal Reserve Bank and Federal
Home Loan Bank Stock 8,489 4,136 3,850
-------- -------- --------
Total investment securities $211,682 $174,671 $187,740
======== ======== ========
</TABLE>
Southwest does not have any material amounts of investment securities or
other interest-earning assets, other than loans, that would have been classified
as nonperforming if such assets were loans, or which were recognized by
management as potential problem assets based upon known information about
possible credit problems of the borrower or issuer.
11
<PAGE>
Investment Portfolio Maturity
The following table shows the maturities, carrying value (amortized cost
for investment securities being held to maturity or estimated fair value for
investment securities available for sale), estimated fair market values and
average yields for Southwest's investment portfolio at December 31, 1999. Yields
are not presented on a tax-equivalent basis. Maturities of mortgage-backed
securities are based on expected maturities. Expected maturities will differ
from contractual maturities due to scheduled repayments and because borrowers on
the underlying mortgages may have the right to call or prepay obligations with
or without prepayment penalties. The securities of no single issuer (other than
the United States or its agencies), or in the case of securities issued by state
and political subdivisions, no source or group of sources of repayment,
accounted for more than 10% of shareholders' equity of Southwest at December 31,
1999.
INVESTMENT PORTFOLIO MATURITY
<TABLE>
<CAPTION>
More than One Year Five through More than
One Year or Less through Five Years Ten Years 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
obligations $20,987 6.14% $ 24,362 6.14% $ - -% $ - -%
Obligations of states and
political subdivisions 2,292 4.10 23,953 3.93 220 4.50 - -
------- -------- ------- ------
Total 23,279 5.94 48,315 5.04 220 4.50 - -
------- -------- ------- ------
Available for Sale:
U.S. government and agency
obligations 9,072 6.07 51,578 6.13 987 7.19 - -
Obligations of states and
political subdivisions - - 1,394 4.07 3,400 4.42 - -
Mortgage-backed securities 3,722 5.83 47,123 6.42 7,584 6.79 7,331 7.49
Other securities - - 32 1.23 - - 2,000 7.58
------- -------- ------- ------- ------ ------ ------
Total 12,794 6.00 100,127 6.23 11,971 6.15 9,331 7.51
------- -------- ------- ------- ------ ------ ------
Total investment securities $36,073 5.96 $148,442 5.85 $12,191 6.12 $9,331 7.51
======= ======== ======= ======
<CAPTION>
Total Investment Securities
-------------------------------
Amortized Market Average
Cost Value Yield
--------- ------ -------
<S> <C> <C> <C>
Held to Maturity:
U.S. government and agency
obligations $ 45,349 $ 45,108 6.14%
Obligations of states and
political subdivisions 26,465 25,979 3.95
-------- --------
Total 71,814 71,087 5.33
-------- --------
Available for Sale:
U.S. government and agency
obligations 61,637 60,414 6.13
Obligations of states and
political subdivisions 4,794 4,705 4.32
Mortgage-backed securities 65,760 64,202 6.55
Other securities 2,032 2,058 7.48
-------- --------
Total 134,223 131,379 6.29
-------- --------
Total investment securities $206,037 $202,466 5.96
======== ========
</TABLE>
12
<PAGE>
Loan Portfolio
The following table presents the composition of Southwest's loan portfolio, net
of unearned interest:
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ------------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage -
One-to-four family residential $102,973 12.07% $ 83,657 10.55% $ 79,843 11.10% $ 61,175 9.49% $ 42,988 8.08%
Commercial 263,216 30.86 275,729 34.75 223,672 31.10 196,163 30.43 160,126 30.10
Real estate construction 85,511 10.03 76,544 9.65 72,454 10.08 54,369 8.43 33,159 6.23
Commercial 296,415 34.77 252,341 31.81 241,007 33.52 218,515 33.90 181,081 34.04
Installment and consumer -
Government-guaranteed
student loans 69,873 8.19 65,242 8.22 64,390 8.95 61,959 9.61 67,388 12.67
Credit cards - - - - 73 0.01 20,839 3.23 21,869 4.11
Other 34,820 4.08 39,806 5.02 37,674 5.24 31,626 4.91 25,377 4.77
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
852,808 100.00% 793,319 100.00% 719,113 100.00% 644,646 100.00% 531,988 100.00%
====== ====== ====== ====== =======
Less: Allowance for loan loss (11,190) (10,401) (8,282) (7,139) (5,813)
-------- -------- -------- -------- --------
Total $841,618 $782,918 $710,831 $637,507 $526,175
======== ======== ======== ======== ========
</TABLE>
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 $17.8 million at December 31, 1999, compared to $ 22.9 million
at December 31, 1998. 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.
13
<PAGE>
Allocation of the Allowance for Loan Losses
The following table presents the allocation of the allowance for credit
losses for the past five years, along with the percentage of total loans in each
category.
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage -
One-to-four family residential $ 602 12.07% $ 321 10.55% $ 488 11.10%
Commercial 1,128 30.86 851 34.75 1,073 31.10
Real estate construction 1,893 10.03 912 9.65 732 10.08
Commercial 4,028 34.77 5,353 31.81 4,477 33.52
Installment and consumer -
Government-guaranteed
student loans 56 8.19 - 8.22 - 8.95
Credit cards - - - - 1 0.01
Other 491 4.08 510 5.02 573 5.24
Unallocated 2,992 2,454 938
------- ------- ------- ------- ------ ------
Total allowance for loan loss $11,190 100.00% $10,401 100.00% $8,282 100.00%
======= ======= ======= ======= ====== ======
<CAPTION>
1996 1995
----------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Real estate mortgage -
One-to-four family residential $ 294 9.49% $ 176 8.08%
Commercial 584 30.43 538 30.10
Real estate construction 457 8.43 310 6.23
Commercial 4,597 33.90 3,688 34.04
Installment and consumer -
Government-guaranteed
student loans - 9.61 9 12.67
Credit cards 670 3.23 456 4.11
Other 263 4.91 83 4.77
Unallocated 274 553
------ ------ ------ ------
Total allowance for loan loss $7,139 100.00% $5,813 100.00%
====== ====== ====== ======
</TABLE>
14
<PAGE>
Certificates of Deposit of $100,000 or More
The following table indicates the amount of Southwest's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999:
<TABLE>
<CAPTION>
Maturity Period Amount
--------------------------------- --------
(Dollars in thousands)
<S> <C>
Three months or less (1) $ 81,262
Over three through six months (1) 84,317
Over six through 12 months (1) 92,439
Over 12 months 12,432
--------
Total $270,450
========
</TABLE>
(1) The amount of certificates of deposit that mature
within 12 months is $258.0 million. Southwest does not
have any liquidity concerns as a result of the volume
of these maturities.
The tabular financial information set forth on pages 4 through 16 of the
Annual Report, Note 1-"Summary of Significant Accounting and Reporting Policies"
on pages 23 through 25 of the Annual Report, Note 3-"Loans Receivable" on pages
27 through 29 of the Annual Report, and Note 5-"Other Borrowed Funds" on pages
30 and 31 of the Annual Report are incorporated herein by reference.
ITEM 2. PROPERTIES
Page 43 of the Annual Report (listing executive and other offices) is
hereby incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
Note 15--"Commitments and Contingencies" on page 38 of the Annual Report is
hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1999, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of March 17, 2000, there were approximately 2,500 holders of record of
Southwest's Common Stock. The section titled "Stock Information" on page 43 of
the Annual Report is hereby incorporated by reference.
15
<PAGE>
For information regarding regulatory restrictions on Stillwater National's
and, therefore, Southwest's payment of dividends, see Note 8 -- "Shareholders'
Equity" on page 33 of the Annual Report, which is hereby incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The table titled "Selected Consolidated Financial Data" on pages 4 and 5 of
the Annual Report is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 6 through 16 of the Annual Report are hereby incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section titled "Asset/Liability Management and Quantitative and
Qualitative Disclosures about Market Risk" on pages 14 and 15 of the Annual
Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 17 through 40 of the Annual Report are hereby incorporated by
reference. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of Southwest and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is included
under the captions titled "Proposal I--Election of Directors" on pages 2 through
7 of the Proxy Statement, and Section 16(a) "Beneficial Ownership Reporting
Compliance" on page 15 of the Proxy Statement, and is hereby incorporated by
reference.
Information concerning the executive officers of Southwest is included
under the caption titled "Item 1. Business -- Executive Officers" of this report
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Southwest's directors and
executive officers is included under the captions "Corporate Governance and
Other Matters," "Executive Compensation and Other Benefits," and "Stock
Performance Comparisons" on pages 10 through 14 of the Proxy Statement, and is
hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Southwest's common stock by
certain beneficial owners and directors and executive officers of Southwest is
included under the caption "Common Stock Owned by Directors and Executive
Officers" on page 8 of the Proxy Statement and is hereby incorporated by
reference.
16
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is included under the caption "Certain Transactions" on page 14 of
the Proxy Statement and is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
--------------------------------------
(1) Financial Statements. The following consolidated financial statements
--------------------
of Southwest included in the Annual Report to Shareholders for the year
ended December 31, 1999, are incorporated herein by reference in Item 8 of
this Report. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
The following financial statements are filed as a part of this report:
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1999 and
1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements for the Years Ended December 31,
1999, 1998 and 1997
(2) Financial Statement Schedules. All schedules for which provision is
-----------------------------
made in the applicable accounting regulations of the SEC are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
--------
Annual Report on Form 10-K.
No. Exhibit
-- -------
3.1 Amended and Restated Certificate of Incorporation of Southwest
Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
3.2 Bylaws of Southwest Bancorp, Inc. (incorporated by reference as
Exhibit 3.2 to Registration Statement on Form S-1 (File No. 33-
71168))
4 Certificate of Designations for 9.20% Redeemable, Cumulative,
Preferred Stock, Series A (incorporated by reference to Exhibit 4
to Quarterly Report on Form 10-Q for the quarter ended June 30,
1995)
* 10.1 1992 Performance Unit Plan (incorporated by reference as Exhibit
10.1 to Registration Statement on Form S-1 (File No. 33-71168))
* 10.2 Severance Compensation Plan (incorporated by reference as Exhibit
10.2 to Registration Statement on Form S-1 (File No. 33-71168))
* 10.3 Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated by
reference from Exhibit 10.3 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
* 10.4 Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated
by reference from Exhibit 4.1 to Registration Statement on Form S-8
(File No. 33-97850))
* 10.5 Southwest Bancorp, Inc. 1999 Stock Option Plan (incorporated by
reference from Exhibit 4 to
17
<PAGE>
Registration Statement on Form S-8 (File No. 333-92143))
13 Annual Report to Shareholders for the Year Ended December 31, 1999
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedule
______________
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
-------------------
Southwest filed an 8-K dated December 16, 1999, reporting, in Item 5 of
such form, the authorization of a new program for the repurchase of up to 5% of
Southwest's Common Stock to replace a previously authorized repurchase program,
and confirming the planned retirement of Robert L. McCormick as Chairman of the
Board of Directors.
(c) Exhibits. See (a)(3) above for all exhibits filed herewith and the
--------
Exhibit Index.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST BANCORP, INC.
March 23, 2000 By: /s/ Rick Green
------------------------------------
Rick Green
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Rick Green March 23, 2000
- ------------------------------------
Rick Green
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Kerby E. Crowell March 23, 2000
- ------------------------------------
Kerby E. Crowell
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
A majority of the directors of Southwest executed a power of attorney
appointing Rick Green as their attorney-in-fact, empowering him to sign this
report on their behalf. This power of attorney has been filed with the
Securities and Exchange Commission under Part IV, Exhibit 24 of this Form 10-K
for the year ended December 31, 1999. This report has been signed below by such
attorney-in-fact as of March 23, 2000.
By: /s/ Rick Green
---------------------------------
Rick Green
Attorney-in-Fact for Majority of the
Directors of Southwest
<PAGE>
Exhibit 13
Oklahoma's
[LOGO]
Southwest Bancorp, Inc. ("Southwest") is a one-bank holding company
headquartered in Stillwater, Oklahoma. It provides commercial and consumer
banking services through its subsidiary, Stillwater National Bank and Trust
Company ("Stillwater National"). Southwest was organized in 1981 as the holding
company for Stillwater National, which was chartered in 1894. At December 31,
1999, Southwest had total assets of $1.1 billion, deposits of $871.2 million and
shareholders' equity of $64.3 million.
Southwest conducts its business through three regional divisions and its
home office. Southwest's 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, and one loan production office in Oklahoma
City.
Southwest's banking philosophy is to provide a high level of customer
service, a wide range of financial services, and products responsive to customer
needs. This philosophy has led to the development of deposit and lending
products that respond to customer needs for speed, efficiency and information.
These include SNB DirectBanker(R) and other Internet banking products, which
complement Southwest's more traditional banking products.
Southwest has established and pursued a strategy of independent operation
for the benefit of all of its shareholders, and has capitalized on its position
as an Oklahoma owned and operated banking organization to increase its banking
business.
1999 ANNUAL REPORT
1
<PAGE>
Oklahoma's
[LOGO]
Letter to Shareholders from the C.E.O.
February 16, 2000
Shareholders, Customers and Friends:
1999 was filled with the dynamics of change and many accomplishments for
our company. We have focused on new technology, capital growth, financial
performance, management of our resources, and leadership in the communities we
serve. Our vision to provide high quality customer service is central to our
focus.
The services we offer, including SNB DirectBanker(R), Business Mail
Processing, Check Imaging, Cash Management, and more to be announced soon, as
well as our other investment, lending and deposit services, are designed to
provide our customers with a choice of how and when they prefer to do their
business and personal banking.
During 1999, our company was successful in raising additional capital in
the market. As a result, our stock is now held by many new shareholders. The
additional capital raised is providing us with the capacity to grow and
alternatives for enhancing shareholder value.
In January 1999, we completed and moved into our newest banking facility.
Our beautiful new building located at 15th & Utica in Tulsa is designed to
accommodate our customers' needs. The new Tulsa facility is strategically
located in a primary business district of Tulsa, close to the St. John Medical
Center and Hillcrest Health Care complexes. In addition, the Mid-Town area is
populated by some of Tulsa's most mature and professional medical, dental,
accounting and financial entities in the city.
Our Oklahoma City Division had many new opportunities for service to both
established and new customers. Among the accomplishments were many major loan
projects to the health care industries, including a major surgical hospital in
South Oklahoma City and a major neurological surgery center in North Oklahoma
City. Many of our Oklahoma City loans are financing infrastructure improvements
in the metro area to enhance the quality of life, technology alternatives and
services available for the Central Oklahoma market.
The Stillwater Division is working hand-in-hand with the community to
attract new residents, whether students at Oklahoma State University,
professionals moving in from all across our country, or technology experts that
are drawn to our educational facilities and new technology park. Our staff in
Stillwater serves on various boards and meets with the private sector to ensure
that financial needs are met to enhance the future success of the many important
projects in Stillwater.
2
<PAGE>
The financial performance of our company was solid for the first nine
months ending September 30. Our fourth quarter saw a write-down on a specific
foreclosed asset, which has been in our other real estate portfolio for the past
two years. This action was important to properly maintain the value of the
property to reflect market conditions, but also resulted in a fourth quarter
shortfall of our performance goals. For the year, our income was up 20% over
1998 and our diluted earnings per share increased from $1.89 to $2.19.
Our 1999 stock repurchase program was an important action designed to
enhance shareholder value. During 1999, our company repurchased 204,000 shares,
or 5%, of our outstanding stock. In December, our Board approved an additional
repurchase program of up to 5% of the outstanding stock, dependent upon market
conditions and other factors.
The new century promises to be one of opportunity for our company. We are
planning to roll out significant new technology and financial product offerings.
Our sales staff is maturing and becoming very effective in providing excellent
customer service. The markets we serve are presenting growth opportunities as
our commercial customers expand their businesses. Stillwater National "bankers"
are focused for 2000 to make a difference in bringing solutions to our markets'
banking needs.
We said "good-bye" to Mr. Robert L. McCormick, Jr., our retiring President,
CEO and Chairman in December 1999, after 29 years of service. We thank Mr.
McCormick for the legacy he left us in customer service, community service,
public service, honesty and integrity.
The executive management team of our company has been together nearly 25
years. Our team includes our Chief Lending Officer Stan White, Chief Financial
Officer Kerby Crowell, Chief Administrative Officer Kimberly Sinclair and the
Chief Executive Officer. We have each served in different capacities during our
years with the company and we are all committed to performance standards
designed to satisfy our shareholders, customers and employees.
Our future is bright. It is a vibrant and positive market we pursue, and
our colleagues are prepared for the next opportunity to serve. The year 2000
promises to be an exciting New Year for our company and our customers.
Sincerely,
/s/ Rick Green
Rick Green
President and Chief Executive Officer
<PAGE>
Oklahoma's
[LOGO]
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents Southwest's selected consolidated financial
information for each of the five years in the period ended December 31, 1999.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of Southwest, including the accompanying
Notes, presented elsewhere in this report.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operations Data
Interest income $ 80,595 $ 80,252 $ 76,849 $ 64,668 $ 55,000
Interest expense 42,495 42,274 41,247 32,833 28,544
------------------------------------------------------------------
Net interest income 38,100 37,978 35,602 31,835 26,456
Provision for loan losses 2,495 3,380 12,104 3,100 2,000
------------------------------------------------------------------
Net interest income after provision for loan losses 35,605 34,598 23,498 28,735 24,456
Gain on sales of securities and loans 2,395 2,918 5,199 2,227 1,025
Other income 6,049 4,025 4,696 4,122 3,849
Other expenses 30,426 26,982 25,746 23,226 19,902
------------------------------------------------------------------
Income before taxes 13,623 14,559 7,647 11,858 9,428
Taxes on income 4,757 5,181 2,667 4,306 3,336
------------------------------------------------------------------
Net income $ 8,866 $ 9,378 $ 4,980 $ 7,552 $ 6,092
==================================================================
Net income available to common shareholders $ 8,866 $ 7,392 $ 3,393 $ 5,965 $ 5,426
=================================================================
Dividends Declared
Preferred stock $ - $ 1,190 $ 1,587 $ 1,587 $ 533
Common stock 1,602 1,366 1,208 1,053 901
Ratio of total dividends declared to net income 18.06% 27.26% 56.12% 34.96% 23.55%
Per Share Data
Basic earnings per common share $ 2.23 $ 1.95 $ 0.90 $ 1.59 $ 1.44
Diluted earnings per common share 2.19 1.89 0.88 1.56 1.43
Common stock cash dividends 0.40 0.36 0.32 0.28 0.24
Book value per common share (1) 16.55 15.21 13.38 12.66 11.44
Weighted average common shares outstanding:
Basic 3,973,878 3,795,136 3,773,037 3,760,370 3,755,228
Diluted 4,054,668 3,914,145 3,872,888 3,828,381 3,788,089
Financial Condition Data (1)
Investment securities $ 211,682 $ 174,671 $ 187,740 $ 147,351 $ 147,688
Loans (2) 852,808 793,319 719,113 644,646 531,988
Interest-earning assets 1,064,496 969,002 916,860 791,997 679,676
Total assets 1,120,420 1,027,865 963,286 829,117 711,135
Interest-bearing deposits 761,481 722,962 744,865 670,216 556,079
Total deposits 871,235 843,061 841,425 753,945 634,387
Long-term debt 25,013 25,013 25,013 - -
Total shareholders' equity 64,254 57,801 68,048 65,032 60,357
Common shareholders' equity 64,254 57,801 50,666 47,650 42,975
Mortgage servicing portfolio 109,297 126,410 132,824 118,953 130,188
Selected Ratios
Return on average assets 0.84% 0.95% 0.54% 0.98% 0.93%
Return on average total shareholders' equity 13.83 14.33 7.54 12.15 12.81
Return on average common equity 13.83 13.70 6.95 13.30 13.48
Net interest margin 3.82 4.04 4.03 4.32 4.23
Efficiency ratio (3) 65.37 60.07 56.59 60.83 63.52
Average assets per employee $ 3,476 $ 3,116 $ 2,667 $ 2,162 $ 2,204
</TABLE>
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for loan losses to loans (1) 1.31% 1.31% 1.15% 1.11% 1.09%
Nonperforming loans to loans (1)(4) 0.63 0.17 0.99 1.03 0.99
Allowance for loan losses to nonperforming loans (1)(4) 207.26 786.17 116.08 107.37 110.12
Nonperforming assets to loans and other real estate
owned (1)(5) 0.83 0.62 1.04 1.04 1.03
Net loan charge-offs to average loans 0.21 0.17 1.57 0.31 0.24
Capital Ratios
Average shareholders' equity to average assets
Total 6.11 6.64 7.12 8.05 7.27
Common 6.11 5.48 5.26 5.81 6.15
Tier I capital to risk-weighted assets (1) 9.76 8.88 8.96 10.21 10.02
Total capital to risk-weighted assets (1) 11.34 10.81 13.30 11.40 11.41
Leverage ratio (1) 8.06 7.69 6.95 7.77 8.19
</TABLE>
(1) At period end.
(2) Net of unearned discounts but before deduction of allowance for loan
losses.
(3) The efficiency ratio = other expenses/(net interest income + gain on sales
of securities and loans + other income).
(4) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and foreclosed assets.
Forward-Looking Statements
This management's discussion and analysis of financial condition and
results of operations and other portions of this annual report include forward-
looking statements such as: statements of Southwest's goals, intentions, and
expectations; estimates of risks and of future costs and benefits; and
statements of Southwest's ability to achieve financial and other goals. These
forward-looking statements are subject to significant uncertainties because they
are based upon: future interest rates and other economic conditions; statements
by suppliers of data processing equipment and services and government agencies;
future laws and regulations; and a variety of other matters. Because of these
uncertainties, the actual future results may be materially different from the
results indicated by these forward-looking statements. In addition, Southwest's
past growth and performance do not necessarily indicate its future results.
5
<PAGE>
Oklahoma's
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Southwest Bancorp, Inc.'s ("Southwest") net income available to common
shareholders, return on average common equity and diluted earnings per common
share exceeded the levels achieved for 1998.
. Net income available to common shareholders for 1999 was $8.9
million, up from $7.4 million in 1998 and $3.4 million in 1997;
. Return on average common equity for 1999 was 13.83%, compared to
13.70% in 1998 and 6.95% in 1997; and
. Diluted earnings per common share increased to $2.19 in 1999,
compared to $1.89 in 1998 and $0.88 in 1997.
Overall balance sheet growth was positive:
. Total assets at year-end 1999 increased 9%, to $1.1 billion,
compared to $1.0 billion for 1998, and $963.3 million for 1997.
. Total loans grew by 8% to $852.8 million at December 31, 1999,
compared to $793.3 million for 1998, and $719.1 million for 1997.
. Common shareholders' equity at year-end increased 11% to $64.3
million for 1999 compared to $57.8 million for 1998 and $50.7
million for 1997.
Southwest repurchased 204,000, or approximately 5%, of its outstanding
shares of common stock during 1999 at an average price of $22.05 per share under
its 1999 share repurchase program. Repurchases of an additional 195,000 shares
may be made under a share repurchase program authorized in December 1999. Both
of these plans were established in order to enhance shareholder value and to
acquire shares at favorable prices for future issuance by Southwest. The amount
and timing of purchases under the repurchase programs are subject to market
conditions and other factors.
Summary of Earnings
Net Income
Net income for 1999 was $8.9 million, an increase of $1.5 million, or 20%,
over the $7.4 million net income available to common shareholders recorded in
1998. Basic earnings per common share increased 14% to $2.23 per share for 1999
from $1.95 per share for 1998. Diluted earnings per common share increased 16%
to $2.19 per share for 1999 from $1.89 per share for 1998.
In 1998, net income available to common shareholders reflected dividends on
Southwest's Series A Preferred Stock, which was redeemed in 1998, and a one-time
accounting adjustment related to that redemption. All of Southwest's 1999 net
income was available to common shareholders. The increase in 1999 earnings was
the result of the elimination of preferred dividends, offset in part by
increased borrowing costs, the one-time accounting adjustment for the redemption
of preferred that reduced 1998 earnings, a $1.5 million increase in other income
primarily related to increased service charges and gains on the sale of three
branch buildings, an $885,000 decrease in the provision for loan losses, a
$546,000 decrease in salaries and benefits, and a $424,000 decrease in income
tax expense. The increase in net interest income of $122,000 in 1999 over 1998
was limited by increased use of borrowings to replace funding from the preferred
stock redeemed in 1998. These positive developments were offset in part by a
$2.0 million write-down on a single property in other real estate, a $937,000
increase in occupancy expense, and a $789,000 increase in general and
administrative expense. The write-down on other real estate related to a
property acquired in the second quarter of 1998 in foreclosure of a problem
loan. The property has been recorded by management at its estimated fair value
less selling costs in accordance with generally accepted accounting principles.
These increases and decreases in the components of income are discussed further
in other sections of this Management's Discussion.
Net income available to common shareholders for 1998 was $7.4 million, a
$4.0 million increase over the $3.4 million earned in 1997. Basic earnings per
common share increased 117% to $1.96 per share for 1998 from $0.90 per share for
1997. Diluted earnings per common share increased 115% to $1.89 per share for
1998 from
6
<PAGE>
$0.88 per share for 1997. The substantial increase in earnings was primarily the
result of an $8.7 million reduction in the provision for loan losses. Earnings
for 1998 also benefited from an increase in net interest income of $2.4 million,
or 7%. These increases in income offset a reduction in other income ($3.0
million, or 30%), and increases in other expenses ($1.2 million, or 5%) and
taxes on income ($2.5 million, or 94%). Net income available to common
shareholders, in 1998, was adversely affected by the $928,000 accounting
adjustment relating to the redemption of preferred stock, as noted above.
Net income for 1999 declined 5% from the $9.4 million earned in 1998, which
was stated before the costs of preferred stock. Net income before deduction of
preferred stock dividends and costs for 1998 was $9.4 million, an 88% increase
over the $5.0 million earned in 1997.
Net Interest Income
Years ended December 31, 1999 and 1998
Net interest income for 1999 increased to $38.1 million from $38.0 million
in 1998, primarily as a result of the increase in Southwest's loan portfolio.
The interest rate spread declined to 3.18% for 1999 from 3.34% as a result of
the decline in yields on Southwest's interest-earning assets of 46 basis points,
which exceeded the 30 basis point decrease in rates paid on Southwest's
interest-bearing liabilities. The ratio of average interest-earning assets to
average interest-bearing liabilities declined to 114.78% for 1999 from 115.53%
for 1998, in part due to borrowings to replace funding from the preferred stock
redeemed in September 1998.
Interest income for 1999 was $80.6 million, up from $80.3 million in 1998
primarily as a result of growth in interest-earning assets, which partially
offset the decline in yields. Yields on total interest-earning assets were
8.07% in 1999 and 8.53% in 1998. Loan interest and fee income increased
$353,000 because the greater volume of loans outstanding more than offset the
effect of the 54 basis point decline in loan yields. Average loans increased
$51.5 million to $808.1 million in 1999 from $756.6 million in 1998, a 7%
increase. The increase in interest-earning assets was funded by growth in
short-term borrowings and retention of earnings.
Total interest expense for 1999 was $42.5 million, a $221,000 increase from
$42.3 million in 1998. The increase in interest expense was primarily due to a
$65.2 million, or 116%, increase in average short-term borrowings from $56.2
million for the year ended December 31, 1998 to $121.4 million for the year
ended December 31, 1999. Average time deposits declined $17.9 million, or 3%.
Rates paid on interest-bearing liabilities declined to 4.89% in 1999 from 5.19%
in 1998.
Years ended December 31, 1998 and 1997
Net interest income for 1998 increased to $38.0 million from $35.6 million
in 1997, primarily as a result of the increase in Southwest's loan portfolio.
Yields on Southwest's interest-earning assets declined by 17 basis points during
1998, and the rates paid on Southwest's interest-bearing liabilities declined by
21 basis points resulting in an increase in the interest rate spread to 3.34%
for 1998 from 3.30% for 1997. The ratio of average interest-earning assets to
average interest-bearing liabilities declined to 115.53% for 1998 from 115.73%
for 1997, due primarily to the issuance in June 1997 of the Subordinated
Debentures, and the increase in short-term borrowings.
Interest income for 1998 was $80.3 million, up from $76.8 million in 1997
primarily as a result of growth in interest-earning assets, which partially
offset the decline in yields. Yields on total interest-earning assets were
8.53% in 1998 and 8.70% in 1997. Loan interest and fee income increased $3.5
million because the greater volume of loans outstanding more than offset the
effect of the 24 basis point decline in loan yields. Southwest generated growth
of $56.5 million in average loans to $756.6 million in 1998 from $700.1 million
in 1997, an 8% increase. Interest income on investment securities increased by
$575,000, despite the sale of available for sale securities in connection with
the redemption of Southwest's preferred stock on September 1, 1998. The yield
on the investment portfolio declined 8 basis points. A decrease in interest
income on federal funds sold and other short-term investments was caused by
lower volumes in those areas. The increase in interest-earning assets was
funded by growth in short-term borrowings and retention of earnings.
Total interest expense for 1998 was $42.3 million, a $1.1 million increase
from $41.2 million in 1997. The increase in interest expense was primarily due
to a $49.6 million, or 750%, increase in average short-term borrowings from $6.6
million for the year ended December 31, 1997 to $56.2 million for the year ended
December 31, 1998. Average time deposits declined $11.9 million, or 2%. Rates
paid on interest-bearing liabilities declined to 5.19% in 1998 from 5.40% in
1997.
7
<PAGE>
Oklahoma's
[LOGO]
Three Year Comparison of Consolidated Average Balance Sheets, Interest, Yields,
and Rates
The following table provides certain information relating to Southwest's
average consolidated statements of financial condition and reflects the interest
income on interest-earning assets, interest expense of interest-bearing
liabilities, and the average yields earned and rates paid for the periods
indicated. Yields and rates are derived by dividing income or expense by the
average daily balance of the related assets or liabilities, respectively, for
the periods presented. Nonaccrual loans have been included in the average
balances of loans receivable.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------- --------------------------- ----------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable $ 808,142 $69,373 8.58% $756,611 $69,020 9.12% $700,129 $65,560 9.36%
Investment securities 188,951 11,157 5.90 181,807 11,128 6.12 170,635 10,580 6.20
Other interest-earning assets 1,336 65 4.87 1,947 104 5.34 12,819 709 5.53
------------------- ------------------- ------------------
Total interest-earning assets 998,429 80,595 8.07 940,365 80,252 8.53 883,583 76,849 8.70
Noninterest-earning assets:
Other assets 51,229 44,362 44,672
---------- --------- ---------
Total assets $1,049,658 $984,727 $928,255
========== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 45,520 $ 876 1.92% $ 43,931 $ 1,007 2.29% $ 37,740 $ 894 2.37%
Money market accounts 96,371 3,611 3.75 89,642 3,356 3.74 93,118 3,836 4.12
Savings accounts 3,709 74 2.00 3,442 76 2.21 3,860 96 2.49
Time deposits 577,880 29,512 5.11 595,766 32,614 5.47 607,710 34,743 5.72
------------------- ------------------- ------------------
Total interest-bearing deposits 723,480 34,073 4.71 732,781 37,053 5.06 742,428 39,569 5.33
Short-term borrowings (1) 121,367 6,096 5.02 56,164 2,895 5.15 6,605 340 5.15
Long-term debt 25,013 2,326 9.30 25,013 2,326 9.30 14,459 1,338 9.30
------------------- ------------------- ------------------
Total interest-bearing
liabilities 869,860 42,495 4.89 813,958 42,274 5.19 763,492 41,247 5.40
------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand 101,678 90,670 88,575
Other noninterest-bearing 14,035 14,678 10,099
liabilities
Shareholders' equity 64,085 65,421 66,089
---------- --------- ---------
Total liabilities and
shareholders' equity $1,049,658 $984,727 $928,255
========== ========= =========
Net interest income $38,100 $37,978 $35,602
======= ======== =======
Interest rate spread 3.18% 3.34% 3.30%
====== ====== ======
Net interest margin (2) 3.82% 4.04% 4.03%
====== ====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 114.78% 115.53% 115.73%
====== ====== ======
</TABLE>
(1) 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.
(2) Net interest margin = net interest income / total interest-earning assets.
Provision for Loan Losses
Southwest makes provisions for loan losses in amounts necessary to maintain
the allowance for loan losses at the level Southwest deems appropriate. The
adequacy of the allowance for loan losses is determined by management based upon
a number of factors including, among others: analytical reviews of loan loss
experience in relation to outstanding loans and commitments; unfunded loan
commitments; problem and nonperforming loans and
8
<PAGE>
other loans presenting credit concerns; trends in loan growth, portfolio
composition and quality; appraisals of the value of collateral; and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio. Based upon this review, management
established an allowance of $11.2 million, or 1.31% of total loans, at December
31, 1999 compared to an allowance of $10.4 million, or 1.31% of total loans, at
December 31, 1998. During fiscal years 1999, 1998 and 1997, the provisions for
loan losses were $2.5 million, $3.4 million, and $12.1 million, respectively.
In establishing the level of the allowance for December 31, 1999,
management considered a number of factors that tended to indicate a potential
need for an increased allowance level, including: the continued growth in the
portfolio; the increased risk associated with the level of commercial and
commercial real estate loans, which are viewed as entailing greater risk than
certain other categories of loans; and charge-off history. Management also
considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk, that tended to
indicate the potential need for a lower allowance. At December 31, 1999, total
nonperforming loans were $5.4 million, or 0.63% of total loans, compared to $1.3
million, or 0.17% of total loans, at December 31, 1998. Southwest determined the
level of the allowance for loan losses at December 31, 1999 was appropriate, as
a result of considering these and other factors it deemed relevant to the
adequacy of the allowance. Management conducted a similar analysis in order to
determine the appropriate allowance as of December 31, 1998 and 1997.
In 1997, Southwest recorded significant increases in loan charge-offs and
provisions for loan losses compared with prior periods, primarily as a result of
deterioration in the financial position of the borrowers of three large lending
relationships. As a result of the unusually large charge-offs recorded in 1997,
management revised Stillwater National'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 functions.
Management strives to carefully monitor credit quality and the adequacy of
the allowance for loan losses, and to identify loans that may become
nonperforming. At any time, however, there are loans included in the portfolio
that will result in losses to Southwest, but that have not been identified as
nonperforming or potential problem loans. Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the unexpected deterioration of one or a few of such
loans may cause a significant increase in nonperforming assets, and, as occurred
in 1997, may lead to a material increase in charge-offs and the provision for
loan losses.
The following table shows the amounts of nonperforming loans at the end of
the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total nonaccrual $ 5,205 $ 872 $ 5,458 $ 4,635 $ 724
Total past due 90 days or more 194 451 1,677 1,437 951
Total restructured - - - 577 3,604
-----------------------------------------------------------------
Total nonperforming loans 5,399 1,323 7,135 6,649 5,279
Other real estate owned 1,729 3,650 362 64 195
-----------------------------------------------------------------
Total nonperforming assets $ 7,128 $ 4,973 $ 7,497 $ 6,713 $ 5,474
=================================================================
Nonperforming loans to loans 0.63 0.17 0.99 1.03 0.99
Allowance for loan losses to nonperforming loans 207.26 786.17 116.08 107.37 110.12
</TABLE>
9
<PAGE>
Oklahoma's
[LOGO]
The following table analyzes Southwest's allowance for loan losses for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 10,401 $ 8,282 $ 7,139 $ 5,813 $ 4,959
Loans charged-off:
Real estate mortgage 307 460 1,305 148 7
Real estate construction 10 - - - 1
Commercial 1,229 1,320 8,691 1,064 1,101
Installment and consumer 802 594 1,532 1,089 694
------------------------------------------------------------------
Total charge-offs 2,348 2,374 11,528 2,301 1,803
------------------------------------------------------------------
Recoveries:
Real estate mortgage 30 105 85 25 152
Real estate construction - - - - -
Commercial 382 582 300 288 334
Installment and consumer 230 426 182 214 171
------------------------------------------------------------------
Total recoveries 642 1,113 567 527 657
------------------------------------------------------------------
Net loans charged-off 1,706 1,261 10,961 1,774 1,146
Provision for loan losses 2,495 3,380 12,104 3,100 2,000
------------------------------------------------------------------
Balance at end of period $ 11,190 $ 10,401 $ 8,282 $ 7,139 $ 5,813
==================================================================
Ratio of allowance for loan losses to loans outstanding:
Average 1.38% 1.37% 1.18% 1.23% 1.23%
End of period 1.31 1.31 1.15 1.11 1.09
Ratio of net charge-offs to average loans
outstanding during the period 0.21 0.17 1.57 0.31 0.24
</TABLE>
Other Income
Southwest has sought to develop sources of noninterest income through
student lending and mortgage banking, in addition to traditional deposit and
loan service charges and fees.
Total other income increased by $1.5 million for fiscal year 1999 compared
to 1998 primarily due to increased service charges ($1.2 million) and gains on
the sales of three branch locations that were no longer being used ($840,000).
The increase in service charges can be attributed to fees earned by Southwest's
ATM network, which has expanded into adjoining states during the past several
months. These increases were offset by reductions in the gains on sales of
residential mortgage loans ($408,000) and government-guaranteed student loans
($222,000). The principal balance of residential mortgage loans sold was $85.7
million during 1999 compared to $124.3 million during 1998. Government-
guaranteed student loans sold during 1999 totaled $38.4 million compared to
$40.4 million during 1998. Sales of mortgage loans declined principally as a
result of increased interest rates, which reduced refinances and overall
originations.
Total other income declined by $3.0 million for fiscal year 1998 compared
to 1997 primarily due to the $3.7 million gain on sale of the credit card
portfolio in 1997. This reduction was partially offset by increased gains on
sales of residential mortgage loans, increased gains on sales of investment
securities and increased service charges attributable to its higher demand
deposit base during 1998. The principal balance of residential mortgage loans
sold was $124.3 million during 1998 compared to $71.0 million during 1997. The
gain on sales of investment securities during 1998 occurred when "available for
sale" securities were called prior to their stated maturity date or were sold to
fund the redemption of Southwest's preferred stock.
10
<PAGE>
Other Expenses
Southwest's other expenses increased $3.4 million, or 13%, for fiscal year
1999 compared to fiscal year 1998. This increase was primarily the result of a
$2.0 million write-down on a single property in other real estate. This
property was acquired in the second quarter of 1998 in foreclosure of a problem
loan. The property has been recorded by management at its best estimate of fair
value less selling costs in accordance with generally accepted accounting
principles. Southwest is actively marketing this property. Occupancy expense
increased $937,000, due primarily to increased data processing, depreciation,
and equipment costs, as systems, facilities and equipment were upgraded.
General and administrative expenses increased $789,000. The increase in general
and administrative expenses was due primarily to a $600,000 payment to settle
pending litigation and $303,000 in offering expenses paid on behalf of the
selling shareholders in Southwest's public offering. These increases were
offset by a $546,000 reduction in salaries and employee benefits.
Southwest's other expenses increased $1.2 million, or 5%, for fiscal year
1998 compared to fiscal year 1997. This increase was primarily the result of an
increase in general and administrative expenses. In addition, occupancy expense
increased $299,000, due primarily to increased data processing, depreciation,
and equipment costs, as systems, facilities and equipment continue to be
upgraded, and salaries and employee benefits increased $339,000. These increases
were offset by a $305,000 reduction in credit card expense during 1998,
reflecting the sale of credit card assets in 1997.
Taxes on Income
Southwest's income tax expense for fiscal years 1999, 1998, and 1997 was
$4.8 million, $5.2 million, and $2.7 million, respectively. Southwest's
effective tax rates have been lower than statutory federal and state rates
primarily because of tax-exempt income on municipal obligations and loans.
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
----------------------------------------------------
12-31-99 09-30-99 06-30-99 03-31-99
---------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Operations Data
Interest income $ 21,097 $ 20,038 $ 19,644 $ 19,816
Interest expense 11,438 10,534 10,147 10,376
---------------------------------------------------
Net interest income 9,659 9,504 9,497 9,440
Provision for loan losses 795 600 425 675
---------------------------------------------------
Net interest income after provision for loan losses 8,864 8,904 9,072 8,765
Gain on sales of securities and loans 563 743 402 687
Other income 1,525 1,751 1,692 1,081
Other expenses 8,537 7,305 7,338 7,246
---------------------------------------------------
Income before taxes 2,415 4,093 3,828 3,287
Taxes on income 754 1,453 1,373 1,177
---------------------------------------------------
Net income $ 1,661 $ 2,640 $ 2,455 $ 2,110
===================================================
Per Share Data
Basic earnings per common share $ 0.42 $ 0.66 $ 0.60 $ 0.55
Diluted earnings per common share $ 0.42 $ 0.64 $ 0.59 $ 0.54
Weighted average common shares outstanding:
Basic 3,937,058 4,036,097 4,077,420 3,843,223
Diluted 4,006,752 4,114,164 4,153,725 3,941,217
</TABLE>
11
<PAGE>
Oklahoma's
[LOGO]
Selected Quarterly Financial Data (Unaudited) (Continued)
<TABLE>
<CAPTION>
For the Quarter Ended
---------------------------------------------------
12-31-98 09-30-98 06-30-98 03-31-98
---------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Operations Data
Interest income $ 19,722 $ 20,301 $ 20,282 $ 19,947
Interest expense 10,418 10,584 10,634 10,638
---------------------------------------------------
Net interest income 9,304 9,717 9,648 9,309
Provision for loan losses 675 930 950 825
---------------------------------------------------
Net interest income after provision for loan losses 8,629 8,787 8,698 8,484
Gain on sales of securities and loans 774 1,078 480 586
Other income 1,029 956 1,014 1,026
Other expenses 7,040 7,050 6,440 6,452
---------------------------------------------------
Income before taxes 3,392 3,771 3,752 3,644
Taxes on income 1,177 1,351 1,342 1,311
---------------------------------------------------
Net income $ 2,215 $ 2,420 $ 2,410 $ 2,333
===================================================
Per Share Data
Basic earnings per common share (1) $ 0.59 $ 0.32 $ 0.53 $ 0.51
Diluted earnings per common share (1) $ 0.57 $ 0.31 $ 0.51 $ 0.50
Weighted average common shares outstanding:
Basic 3,798,379 3,796,886 3,794,839 3,790,332
Diluted 3,902,731 3,913,883 3,926,988 3,908,292
</TABLE>
(1) The amount for the three months ended September 30, 1998 is shown after
adjustment for $928,000, or $0.24 per common share, of original issue costs
relating to the redemption of Southwest's Series A Preferred Stock on
September 1, 1998.
Financial Condition
Southwest's total assets increased by $92.6 million, or 9%, from $1,027.9
million at December 31, 1998 to $1,120.4 million at December 31, 1999 after
increasing by $64.6 million, or 7%, between December 31, 1997 and 1998. The
growth in assets in 1999 was attributable to increases in both investment
securities and outstanding loans. The increase in assets in 1998 was
attributable to an increase in outstanding loans.
Southwest's investment securities increased by $37.0 million, or 21%, from
$174.7 million at December 31, 1998 to $211.7 million at December 31, 1999 after
decreasing by $13.0 million, or 7%, between December 31, 1997 and 1998. The
growth during 1999 came primarily from mortgage-backed securities, which
increased by $33.2 million, or 107%, from December 31, 1998 to December 31,
1999. The reduction during 1998 was due primarily to the sale of available for
sale securities in connection with the redemption of Southwest's preferred stock
on September 1, 1998.
Loans were $852.8 million at December 31, 1999, an increase of $59.5
million, or 8%, compared to December 31, 1998. Southwest experienced increases
in all categories of outstanding loans other than commercial real estate
mortgage loans and consumer loans. The allowance for loan losses increased by
$789,000, or 8%, from December 31, 1998 to December 31, 1999. At December 31,
1999, the allowance for loan losses was $11.2 million, or 1.31% of total loans,
compared to $10.4 million, or 1.31% of total loans, at December 31, 1998.
Loans were $793.3 million at December 31, 1998, an increase of $74.2
million, or 10%, compared to December 31, 1997. Southwest experienced increases
in all categories of outstanding loans other than credit card receivables.
Southwest sold its credit card portfolio in the fourth quarter of 1997 after a
review of the increasing price competition for its affinity card groups. The
allowance for loan losses increased by $2.1 million, or 26%, from December 31,
1997 to December 31, 1998. At December 31, 1998, the allowance for loans losses
was $10.4 million, or 1.31% of total loans, compared to $8.3 million, or 1.15%
of total loans, at December 31, 1997.
Southwest's deposits increased by $28.5 million, or 3%, from $843.1 million
at December 31, 1998 to $871.6 million at December 31, 1999 after increasing by
$1.7 million, or less than 1%, between December 31, 1997 and December 31, 1998.
The growth in deposits occurred primarily in time deposits, which increased
$32.0 million, or 6% from December 31, 1998 to December 31, 1999. This increase,
as well as a $4.2 million increase in money market accounts, was partially
offset by a $10.0 million decrease in demand deposits.
12
<PAGE>
Capital Resources
On March 19, 1999, Southwest completed a public offering of its common
stock, including 811,231 shares sold by the Estate of Paul C. Wise and Dr. James
B. Wise and 250,000 newly issued shares sold by Southwest. Southwest received
proceeds of $5.4 million, after offering expenses and underwriting discount. The
net proceeds were invested in Stillwater National, where the funds were used for
general corporate purposes and lending and investment activities.
At December 31, 1999, total shareholders' equity was $64.3 million compared
to $57.8 million at December 31, 1998. Earnings, net of common dividends,
contributed $7.3 million to shareholders' equity. Sales of common stock through
the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $477,000 to shareholders'
equity in 1999.
In April 1999, Southwest implemented a stock repurchase program covering
204,000 shares, or 5% of its outstanding common stock. The program was
completed by the end of 1999 with Southwest purchasing 204,000 shares at an
average price of $22.05 per share, which reduced common shareholders' equity
$4.5 million. In December 1999, Southwest authorized the repurchase of a
maximum of an additional 5% of its current outstanding common stock.
Repurchases may be made from time to time based on market conditions and other
factors.
Net unrealized holding losses on investment securities available for sale
(net of tax) declined to $(1.7) million at December 31, 1999 compared to a net
unrealized holding gain of $513,000 at December 31, 1998.
Southwest redeemed its Series A Preferred Stock on September 1, 1998 for
$17.25 million. Funds for this redemption came from the sale of securities
purchased with proceeds from the Trust Preferred issued in 1997. At December 31,
1998, total and common shareholders' equity was $57.8 million compared to $68.0
million in total shareholders' equity and $50.7 million in common shareholders'
equity at December 31, 1997.
During 1998, earnings, net of common and preferred stock dividends,
contributed $6.8 million to common shareholders' equity. Sale of common stock
through the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $248,000 to common
shareholders' equity in 1998. Net unrealized gains on investment securities
available for sale (net of tax) declined to $513,000 at December 31, 1998 as
compared to $580,000 at December 31, 1997. As a result, common shareholders'
equity increased $7.1 million, or 14%, in 1998.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board. The guidelines
are commonly known as Risk-Based Capital Guidelines. On December 31, 1999,
Southwest exceeded all applicable capital requirements, having a total risk-
based capital ratio of 11.34%, a Tier 1 risk-based capital ratio of 9.76%, and a
leverage ratio of 8.06%. As of December 31, 1999, Stillwater National also met
the criteria for classification as a "well-capitalized" institution under the
prompt corrective action rules promulgated under the Federal Deposit Insurance
Act. Designation as a well-capitalized institution under these regulations does
not constitute a recommendation or endorsement of Southwest or Stillwater
National by Federal bank regulators.
Liquidity
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans. Southwest'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 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.
Southwest has available 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"). Stillwater National also
carries interest-bearing demand notes issued by the U.S. Treasury in connection
with the Treasury Tax and Loan note program. Stillwater National has approved
federal funds purchase lines totaling $19.0 million with three other banks. In
addition, Stillwater National has available a $35.0 million line of credit from
the SLMA and a $152.2 million line of credit from the FHLB. Borrowings under
the SLMA line would be secured by student loans. Borrowings under the FHLB line
13
<PAGE>
Oklahoma's
[LOGO]
would be secured by all unpledged securities and other loans. Stillwater
National also has available unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Morgan Stanley Dean Witter and Salomon Smith Barney that total
$260.0 million.
During 1997, Stillwater National began selling securities under agreements
to repurchase with Stillwater National retaining custody of the collateral.
Collateral consists of direct obligations of the U.S. Government or U.S.
Government Agency issues, which are designated as pledged with Stillwater
National's safekeeping agent. The type of collateral required, and the retention
of the collateral and the security sold minimize Stillwater National's risk of
exposure to loss. These transactions are for one-to-four day periods.
Cash and cash equivalents decreased by $6.0 million during 1999. This
decrease was the result of cash generated from financing activities (primarily
increased deposits and short-term borrowings) of $85.6 million and operating
activities of $11.9 million offset by $103.5 million in cash used in investing
activities.
During 1998, cash and cash equivalents decreased by $3.9 million as
compared to the year ended December 31, 1997. The increase was the result of
cash generated from financing activities (primarily increased deposits) of $56.1
million and operating activities of $12.1 million offset by $72.1 million in
cash used in investing activities.
Asset/Liability Management and Quantitative and Qualitative Disclosures about
Market Risk
Southwest's net income is largely dependent on its net interest income.
Southwest seeks to maximize its net interest margin within an acceptable level
of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
Net interest income is also affected by changes in the portion of interest-
earning assets that are funded by interest-bearing liabilities rather than by
other sources of funds, such as noninterest-bearing deposits and shareholders'
equity.
Southwest attempts to manage interest rate risk while enhancing net
interest margin by adjusting its asset/liability position. At times, depending
on the level of general interest rates, the relationship between long- and
short-term interest rates, market conditions and competitive factors, Southwest
may determine to increase its interest rate risk position somewhat in order to
increase its net interest margin. Southwest 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. Southwest's asset/liability committee reviews its interest rate risk
position and profitability, and recommends adjustments. The asset/liability
committee also reviews the securities portfolio, formulates investment
strategies, and oversees the timing and implementation of transactions.
Notwithstanding Southwest's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
"Gap analysis" is a measure of interest rate sensitivity traditionally used
in the banking industry. Gap analysis measures the cumulative differences
between the amounts of assets and liabilities maturing or repricing within
various time periods.
14
<PAGE>
The following table shows Southwest's interest rate sensitivity gaps for
selected maturity periods at December 31, 1999:
<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 $436,851 $ 241,751 $131,475 $ 42,731 $ 852,808
Investment securities 18,552 26,047 146,059 21,024 211,682
Federal funds sold - - - - -
Due from banks 6 - - - 6
-------------------------------------------------------------------
Total 455,409 267,798 277,534 63,755 1,064,496
Interest-bearing liabilities:
Money market deposit accounts 101,302 - - - 101,302
Time deposits 185,070 373,218 52,242 883 611,413
Savings accounts 3,984 - - - 3,984
NOW accounts 44,782 - - - 44,782
Short-term borrowings 151,820 - - - 151,820
Long-term debt - - - 25,013 25,013
-------------------------------------------------------------------
Total 486,958 373,218 52,242 25,896 938,314
-------------------------------------------------------------------
Interest sensitivity gap $(31,549) $(105,420) $225,292 $ 37,859 $126,182
===================================================================
Cumulative interest sensitivity gap $(31,549) $(136,969) $ 88,323 $126,182 $ 126,182
===================================================================
Percentage of interest-earning assets
to interest-bearing liabilities 93.52% 71.75% 531.25% 246.20% 113.45%
===================================================================
Percentage of cumulative gap to total assets (2.82)% (12.22)% 7.88% 11.26% 11.26%
===================================================================
</TABLE>
It is Southwest's goal to maintain a percentage of rate-sensitive assets to
rate-sensitive liabilities of between 75% and 125%. This percentage of rate-
sensitive assets to rate-sensitive liabilities presents a static position as of
a single day and is not necessarily indicative of Southwest's position at any
other point in time and does not take into account the sensitivity of yields and
costs of specific assets and liabilities to changes in market rates. The
foregoing analysis assumes that Southwest's mortgage-backed securities mature
during the period in which they are estimated to prepay. No other prepayment or
repricing assumptions have been applied to Southwest's interest-earning assets.
A principal objective of Southwest's asset/liability management effort is
to balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of Southwest within acceptable risk
levels. To measure its interest rate sensitivity position, Southwest utilizes a
simulation model that facilitates the forecasting of net interest income under a
variety of interest rate and growth scenarios. At December 31, 1999, the model
projected net income would decrease by 0.55% if interest rates would immediately
fall by 200 basis points. It projects a decrease in net income of 1.66% if
interest rates would immediately rise by 200 basis points. The model projected
net income would decrease by 0.72% if interest rates would gradually fall by 200
basis points over a one-year time horizon. It projects an increase in net income
of 0.34% if interest rates would gradually rise by 200 basis points over a one-
year time horizon. The earnings simulation model includes assumptions about how
the various components of the balance sheet and rate structure are likely to
react through time in different interest rate environments. These assumptions
are derived from historical analysis and Management's judgment.
15
<PAGE>
Oklahoma's
[LOGO]
Year 2000
Many computer programs now in use were not designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. Southwest created a task force to establish a Year 2000
("Y2K") plan to prevent or mitigate the adverse effects of the Y2K issue on
Southwest and its customers. Goals of the Y2K plan included identifying Y2K
risks of information systems and equipment used by Southwest, 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 were
effective. The Comptroller of the Currency examined Stillwater National's Y2K
compliance plan and its progress in implementation. In addition, the Board of
Directors monitored progress under the plan on a monthly basis.
Southwest has successfully managed the Y2K transition, through the date of
this report. No Y2K problems have been detected in the systems used by
Southwest, and Southwest is not aware of any material Y2K problems encountered
by its customers that would be likely to adversely affect Southwest. Although
considered unlikely, unanticipated problems in Southwest's core business
processes, including problems associated with non-compliant third parties and
disruptions to the economy in general, could still occur. Southwest will
continue to monitor all business processes in the year 2000 to address any
issues and ensure all processes continue to function properly.
Southwest's total cash outlay for Y2K compliance in 1999 was less than $1.0
million. This amount includes approximately $469,000 in costs of software and
equipment upgrades or replacements and approximately $15,000 in consulting,
legal and temporary staffing costs. Southwest estimates that the total effect
on net income through year-end 1999, after tax deductions, of these Y2K
expenditures and the accelerated write-off of replaced software and equipment
was less than $1.0 million. These amounts do not include allocations of the
salary and other costs of the Bank's regular personnel. Southwest is funding
Y2K expenditures through continuing operations. Final project costs of
approximately $5,000 are expected to be incurred in 2000 for ongoing monitoring
and support activities.
Effects of Inflation
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles and practices within the banking industry that require the
measurement of financial position and operating results in terms of historical
dollars without considering fluctuations in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Southwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Southwest Bancorp, Inc. and subsidiaries ("Southwest") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Southwest's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Southwest Bancorp, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Oklahoma City, Oklahoma
January 28, 2000
17
<PAGE>
Oklahoma's
[LOGO]
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 26,340 $ 32,339
Investment securities:
Held to maturity, fair value $71,087 (1999) and $78,772 (1998) 71,814 77,575
Available for sale, amortized cost $134,223 (1999) and $92,104 (1998) 131,379 92,960
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 8,489 4,136
Loans receivable, net of allowance for loan losses
of $11,190 (1999) and $10,401 (1998) 841,618 782,918
Accrued interest receivable 9,413 8,658
Premises and equipment, net 20,800 19,204
Other assets 10,567 10,075
---------- ----------
Total assets $1,120,420 $1,027,865
========== ==========
Liabilities and shareholders' equity Deposits:
Noninterest-bearing demand $ 109,754 $ 119,755
Interest-bearing demand 44,782 43,079
Money market accounts 101,302 97,102
Savings accounts 3,984 3,416
Time deposits 611,413 579,365
---------- ----------
Total deposits 871,235 842,717
---------- ----------
Income taxes payable - 151
Accrued interest payable 6,004 5,584
Other liabilities 2,094 2,027
Short-term borrowings 151,820 94,572
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
---------- ----------
Total liabilities 1,056,166 970,064
---------- ----------
Commitments and contingencies - -
Shareholders' equity:
Serial preferred stock -
Series A, $1 par value; 1,000,000 shares authorized; none issued - -
Class B, $1 par value; 1,000,000 shares authorized; none issued - -
Common stock - $1 par value; 20,000,000 shares authorized; issued
and outstanding 4,081,056 (1999) and 3,799,065 (1998) 4,081 3,799
Capital surplus 14,855 9,369
Retained earnings 51,385 44,120
Accumulated other comprehensive income (loss) (1,708) 513
Treasury stock, at cost; 197,931 shares at December 31, 1999 (4,359) -
---------- ----------
Total shareholders' equity 64,254 57,801
---------- ----------
Total liabilities & shareholders' equity $1,120,420 $1,027,865
========== ==========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $69,373 $69,020 $65,560
Investment securities:
U.S. Government and agency obligations 7,036 8,873 8,667
State and political subdivisions 868 582 508
Mortgage-backed securities 2,705 1,245 1,234
Other securities 579 457 173
Federal funds sold 34 75 707
---------- ---------- ----------
Total interest income 80,595 80,252 76,849
Interest expense:
Interest-bearing demand 876 1,007 894
Money market accounts 3,611 3,356 3,836
Savings accounts 74 76 96
Time deposits 29,512 32,614 34,743
Short-term borrowings 6,096 2,895 340
Long-term debt 2,326 2,326 1,338
---------- ---------- ----------
Total interest expense 42,495 42,274 41,247
---------- ---------- ----------
Net interest income 38,100 37,978 35,602
Provision for loan losses 2,495 3,380 12,104
---------- ---------- ----------
Net interest income after provision for loan losses 35,605 34,598 23,498
Other income:
Service charges and fees 4,712 3,550 3,177
Credit cards 42 63 659
Other noninterest income 1,295 412 360
Gain on sale of credit card portfolio - - 3,745
Gain on sales of loans receivable 2,025 2,652 1,936
Gain on sales of investment securities 370 266 18
---------- ---------- ----------
Total other income 8,444 6,943 9,895
Other expenses:
Salaries and employee benefits 13,601 14,147 13,808
Occupancy 5,917 4,980 4,681
FDIC and other insurance 239 248 254
Credit cards 7 8 313
Other real estate 2,446 172 68
General and administrative 8,216 7,427 6,622
---------- ---------- ----------
Total other expenses 30,426 26,982 25,746
---------- ---------- ----------
Income before taxes 13,623 14,559 7,647
Taxes on income 4,757 5,181 2,667
---------- ---------- ----------
Net income $ 8,866 $ 9,378 $ 4,980
========== ========== ==========
Net income available to common shareholders $ 8,866 $ 7,392 $ 3,393
========== ========== ==========
Basic earnings per common share $ 2.23 $ 1.95 $ 0.90
========== ========== ==========
Diluted earnings per common share $ 2.19 $ 1.89 $ 0.88
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Oklahoma's
[LOGO]
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income $8,866 $9,378 $4,980
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for
sale securities (3,330) 154 643
Reclassification adjustment for (gains) losses
arising during the period (370) (266) (18)
---------- ---------- ----------
Other comprehensive income (loss), before tax (3,700) (112) 625
Tax (expense) benefit related to items
of other comprehensive income (loss) 1,479 45 (250)
---------- ---------- ----------
Other comprehensive income (loss), net of tax (2,221) (67) 375
---------- ---------- ----------
Comprehensive income $6,645 $9,311 $5,355
========== ========== ----------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Stock Common Stock Capital Retained Comprehensive Treasury
Shares Amount Shares Amount Surplus Earnings Income (Loss) Stock
-----------------------------------------------------------------------------------------
<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 -
Cash dividends paid:
Common, $0.24 per share - - - - - (905) - -
Preferred, $2.30 per share - - - - - (1,587) - -
Cash dividends declared:
Common, $0.08 per share - - - - - (303) - -
Common stock issued:
Employee Stock Option Plan - - 14,000 14 237 - - -
Employee Stock Purchase - - 3,767 4 78 - - -
Plan
Dividend Reinvestment Plan - - 5,856 6 117 - - -
Other comprehensive income
(loss), net of tax - - - - - - 375 -
Net income - - - - - 4,980 - -
-----------------------------------------------------------------------------------------
Balance, December 31, 1997 690,000 690 3,787,839 3,788 24,764 38,226 580 -
Cash dividends paid:
Common, $0.27 per share - - - - - (1,024) - -
Preferred, $1.725 per - - - - - (1,190) - -
share
Cash dividends declared:
Common, $0.09 per share - - - - - (342) - -
Common stock issued:
Employee Stock Option Plan - - 5,000 5 68 - - -
Employee Stock Purchase - - 2,557 2 69 - - -
Plan
Dividend Reinvestment Plan - - 3,669 4 100 - - -
Preferred Stock Redeemed (690,000) (690) - - (15,632) (928) - -
Other comprehensive income
(loss), net of tax - - - - - - (67) -
Net income - - - - - 9,378 - -
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 3,799,065 3,799 9,369 44,120 513 -
Cash dividends paid:
Common, $0.30 per share - - - - - (1,214) - -
Cash dividends declared:
Common, $0.10 per share - - - - - (387) - -
Common stock issued:
Employee Stock Option Plan - - 30,000 30 352 - - -
Employee Stock Purchase - - 1,269 1 29 - - $ 29
Plan
Dividend Reinvestment Plan - - 722 1 17 - - 18
Public Offering - - 250,000 250 5,101 - - -
Other comprehensive income
(loss), net of tax - - - - - - (2,221) -
Treasury shares purchased, net - - - - (13) - - (4,406)
Net income - - - - - 8,866 - -
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 - - 4,081,056 $4,081 $14,855 $51,385 $(1,708) $(4,359)
=========================================================================================
<CAPTION>
Total
Share-
holders'
Equity
--------
<S> <C>
Balance, January 1, 1997 $ 65,032
Cash dividends paid:
Common, $0.24 per share (905)
Preferred, $2.30 per share (1,587)
Cash dividends declared:
Common, $0.08 per share (303)
Common stock issued:
Employee Stock Option Plan 251
Employee Stock Purchase 82
Plan
Dividend Reinvestment Plan 123
Other comprehensive income
(loss), net of tax 375
Net income 4,980
--------
Balance, December 31, 1997 68,048
Cash dividends paid:
Common, $0.27 per share (1,024)
Preferred, $1.725 per (1,190)
share
Cash dividends declared:
Common, $0.09 per share (342)
Common stock issued:
Employee Stock Option Plan 73
Employee Stock Purchase 71
Plan
Dividend Reinvestment Plan 104
Preferred Stock Redeemed (17,250)
Other comprehensive income
(loss), net of tax (67)
Net income 9,378
--------
Balance, December 31, 1998 57,801
Cash dividends paid:
Common, $0.30 per share (1,214)
Cash dividends declared:
Common, $0.10 per share (387)
Common stock issued:
Employee Stock Option Plan 382
Employee Stock Purchase 59
Plan
Dividend Reinvestment Plan 36
Public Offering 5,351
Other comprehensive income
(loss), net of tax (2,221)
Treasury shares purchased, net (4,419)
Net income 8,866
--------
Balance, December 31, 1999 $ 64,254
========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Oklahoma's
[LOGO]
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 8,866 $ 9,378 $ 4,980
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 2,495 3,380 12,104
Depreciation and amortization expense 2,284 1,883 1,577
Amortization of premiums and accretion of
discounts on securities, net 278 171 113
Amortization of intangibles 273 293 221
(Gain) Loss on sales/calls of securities (370) (266) (18)
(Gain) Loss on sales of loans receivable (2,025) (2,652) (1,936)
(Gain) Loss on sale of credit card portfolio - - (3,745)
(Gain) Loss on sales of premises/equipment (851) 37 (25)
(Gain) Loss on other real estate owned, net 1,950 (34) 13
Proceeds from sales of residential mortgage loans 86,845 125,885 71,710
Residential mortgage loans originated for resale (86,203) (124,307) (69,205)
Changes in assets and liabilities:
Accrued interest receivable (755) 225 (1,483)
Other assets (1,205) (1,034) (1,879)
Income taxes payable (151) (370) 334
Accrued interest payable 420 (920) 1,443
Other liabilities 21 417 (720)
---------- --------- ----------
Net cash (used in) provided from operating activities 11,872 12,086 13,484
---------- --------- ----------
Investing activities:
Proceeds from sales of available for sale securities 283 14,097 -
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 24,291 29,001 19,649
Available for sale securities 28,136 34,610 18,017
Purchases of held to maturity securities (21,141) (19,734) (23,178)
Purchases of available for sale securities (67,837) (44,635) (51,439)
Purchases of Federal Reserve Bank and Federal Home Loan
Bank stock (4,353) (286) (2,908)
Loans originated and principal repayments, net (99,106) (119,769) (145,116)
Proceeds from sale of credit card portfolio - - 21,798
Proceeds from sales of guaranteed student loans 39,265 41,503 40,545
Purchases of premises and equipment (4,186) (7,680) (5,603)
Proceeds from sales of premises and equipment 1,157 127 129
Proceeds from sales of other real estate owned - 619 210
---------- --------- ----------
Net cash (used in) provided from investing activities (103,491) (72,147) (127,896)
---------- --------- ----------
Financing activities:
Net increase (decrease) in deposits 28,518 1,636 87,480
Net increase (decrease) in short-term borrowings 57,248 74,024 17,563
Net proceeds from issuance of common stock 5,768 248 456
Redemption of preferred stock - (17,250) -
Proceeds from issuance of subordinated debentures - - 25,013
Purchases of treasury stock, net (4,359) - -
Common stock dividends paid (1,555) (1,327) (1,168)
Preferred stock dividends paid - (1,190) (1,587)
---------- --------- ----------
Net cash (used in) provided from financing activities 85,620 56,141 127,757
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents (5,999) (3,920) 13,345
Cash and cash equivalents,
Beginning of period 32,339 36,259 22,914
---------- --------- ----------
End of period $ 26,340 $ 32,339 $ 36,259
========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
SOUTHWEST BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Summary of Significant Accounting and Reporting Policies
Organization and Nature of Operations - Southwest Bancorp, Inc.
("Southwest") was incorporated in 1981 as a bank holding company headquartered
in Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the State of Oklahoma. The accompanying consolidated financial
statements include the accounts of Stillwater National Bank and Trust Company
("Stillwater National"), a national bank established in 1894, and SBI Capital
Trust, a Delaware business trust established in 1997. Stillwater National and
SBI Capital Trust are wholly owned, direct subsidiaries of Southwest. 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.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
and federal funds sold. Federal funds sold are sold for one-to-four day
periods.
Investment Securities - Investments in debt and equity securities are
identified as held to maturity and available for sale based on management
considerations of asset/liability strategy, changes in interest rates and
prepayment risk, the need to increase capital and other factors. Southwest had
no investments held for trading purposes for any period presented. Under
certain circumstances (including the deterioration of the issuer's
creditworthiness, a change in tax law, or statutory or regulatory requirements),
Southwest may change the investment security classification. The
classifications Southwest utilizes determines the related accounting treatment
for each category of investments. Available for sale securities are accounted
for at fair value with unrealized gains or losses, net of taxes, excluded from
operations and reported as accumulated other comprehensive income in the
consolidated statements of financial condition. 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 operations over the contractual maturity or estimated life of the
individual investment on the level yield method. Southwest has the ability and
intent to hold to maturity its investment securities classified as held to
maturity. Gain or loss on sale of investments is based upon the specific
identification method. Income earned on Southwest's investments in state and
political subdivisions is not taxable.
Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are
not readily marketable, therefore these investments are carried at cost which
approximates fair value.
Loans Receivable - Interest on loans is accrued and credited to operations
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. Stillwater National originates real estate mortgage loans and
government-guaranteed student loans for portfolio investment or sale in the
secondary market. During the period of origination, real estate mortgage loans
are designated as held either for investment purposes or sale. Mortgage loans
held for sale are generally sold within a one-month period from loan closing at
amounts approximating par value of the loans. Government-guaranteed student
loans are generally sold after Southwest has been notified of the borrower's
change from deferment status, which can range from one to five years, or longer.
Real estate mortgage loans held for sale and government-guaranteed student loans
are carried at cost, which does not exceed market. Gains or losses recognized
upon the sales of loans are determined on a specific identification basis.
Allowance for Loan Losses - The allowance for loan losses is established
through a provision for loan losses charged to operations. Loans which are
determined to be impaired are charged against this allowance, to the
23
<PAGE>
Oklahoma's
[LOGO]
extent of the impairment, and recoveries, if any, are added to the allowance. A
loan is considered to be impaired when, based on current information and events,
it is probable that Southwest will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The allowance for loan
losses related to loans that are identified for evaluation of impairment is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
Smaller balance, homogeneous loans, including mortgage, student and consumer,
are collectively evaluated for impairment. This evaluation is inherently
subjective as it requires material estimates including the amounts and timing of
future cash flows expected to be received on impaired loans that may be
susceptible to significant change. All of Southwest's nonaccrual loans have been
defined as impaired loans.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful life of each asset,
which ranges from three to forty years. Southwest reviews the carrying value of
long-lived assets used in operations when changes in events or circumstances
indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated
to be generated by those assets. If this review indicates that an asset is
impaired, Southwest records a charge to operations to reduce the asset's
carrying value to fair value, which is based on estimated discounted cash flows.
Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less cost to sell.
Other Real Estate Owned - Other real estate owned is initially recorded at
the lesser of the fair value less the estimated costs to sell the asset or the
recorded amount of the related loan. Write-downs of carrying value required at
the time of foreclosure are recorded as a charge to the allowance for loan
losses. Costs related to the development of such real estate are capitalized
whereas those related to holding the property are expensed. Foreclosed property
is subject to periodic revaluation based upon estimates of fair value. In
determining the valuation of other real estate owned, management obtains
independent appraisals for significant properties. Valuation adjustments are
provided, as necessary, by charges to operations.
Profit from sales of foreclosed property by Southwest is recognized in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 66, Accounting for Sales of Real Estate. Losses are recognized as
incurred.
Intangibles - Intangibles consist of goodwill and mortgage servicing rights
and are included in other assets in the consolidated statements of financial
condition. Goodwill is amortized using the straight-line method over 15 years.
Mortgage servicing rights are capitalized based on estimated fair market value
at the point of origination. The servicing rights are amortized on an
individual loan by loan basis over the period of estimated net servicing income.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. The capitalized amounts and amortization of the mortgage
servicing rights is not material. Southwest reviews the carrying value of
intangible assets annually for impairment. Assets are considered impaired when
the balances are not recoverable from estimated future cash flows. At December
31, 1999 and 1998, Stillwater National had recorded cumulative amortization of
$1.8 million and $1.5 million, respectively.
Deposits - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $270.5 million and $174.4 million at December 31,
1999 and 1998, respectively. The total amount of overdrawn deposit accounts
that were reclassified as loans at December 31, 1999 and 1998 was $574,000 and
$1.5 million, respectively.
Long-term Debt - The long-term debt consists of the Guaranteed Preferred
Beneficial Interests in Southwest's Subordinated Debentures purchased from SBI
Capital Trust. See Note 6.
Loan Servicing Income - Southwest earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
Taxes on Income - Southwest and its subsidiaries file consolidated income
tax returns. Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities. A valuation
allowance will be established if it is more likely than not that some portion of
the deferred tax asset will not be realized.
Earnings per Common Share - Basic earnings per common share is computed
based upon net income, after deducting the dividend requirements of preferred
stock, divided by the weighted average number of common shares outstanding
during each period. Diluted earnings per common share is computed based upon net
income, after deducting the preferred stock dividend requirements, divided by
the weighted average number of common shares outstanding during each period
adjusted for the effect of dilutive potential common shares calculated using
24
<PAGE>
the treasury stock method. For 1998, earnings available to common shareholders
also reflected an adjustment of $928,000 of original issue costs relating to the
redemption of Southwest's Series A Preferred Stock on September 1, 1998. At
December 31, 1999, 1998 and 1997, Southwest had 194,925, zero, and 3,858
antidilutive options to purchase common shares, respectively. The following is a
reconciliation of net income available to common shareholders and the common
shares used in the calculations of basic and diluted earnings per common share:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Net income $ 8,866 $ 9,378 $ 4,980
Less: preferred stock dividend requirement - (1,058) (1,587)
Less: redemption price of preferred stock
in excess of the carrying amount - (928) -
---------- ---------- ----------
Net income available to common shareholders $ 8,866 $ 7,392 $ 3,393
========== ========== ==========
Weighted average common shares outstanding:
Basic earnings per share 3,973,878 3,795,136 3,773,037
Effect of dilutive securities:
Stock options 80,790 119,009 99,851
---------- ---------- ----------
Weighted average common shares outstanding:
Diluted earnings per share 4,054,668 3,914,145 3,872,888
========== ========== ==========
</TABLE>
Comprehensive Income - During 1998, Southwest adopted the provisions of
SFAS No. 130, Reporting Comprehensive Income. This statement requires
presentation of comprehensive income (net income plus all other changes in
shareholders' equity from non-equity sources). The Company's comprehensive
income consists of its net income and unrealized holding gains (losses) in its
available for sale securities.
Segment Reporting - During 1998, Southwest adopted the provision of SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
Southwest has determined it only has one segment, as that term is defined in
SFAS No. 131.
Trust - Southwest offers trust services to customers through its
relationship with the Trust Company of Oklahoma, a trust services company.
Property (other than cash on deposit) held by Stillwater National 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
Stillwater National.
Liquidity - Stillwater National is required by the Federal Reserve Bank to
maintain average reserve balances. Cash and due from banks in the consolidated
statements of financial condition include restricted amounts of $61,000 and
$809,000 at December 31, 1999 and 1998, respectively.
Reclassifications - Certain reclassifications have been made to the prior
year amounts to conform to the current year presentation.
25
<PAGE>
Oklahoma's
[LOGO]
2. Investment Securities
A summary of the amortized cost and fair values of investment securities
follows:
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------
Gross Unrealized
Amortized Fair
Cost Gains Losses Value
----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $ 45,349 $ 76 $ 317 $ 45,108
Obligations of state and political subdivisions 26,465 1 487 25,979
------------ ------------ ----------- -----------
Total $ 71,814 $ 77 $ 804 $ 71,087
============ ============ =========== ===========
Available for Sale:
U.S. Government and agency obligations $ 61,637 $ 37 $1,260 $ 60,414
Obligations of state and political subdivisions 4,794 - 89 4,705
Mortgage-backed securities 65,760 83 1,641 64,202
Equity securities 2,032 28 2 2,058
------------ ------------ ----------- -----------
Total $134,223 $ 148 $2,992 $131,379
============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------
Gross Unrealized
Amortized Fair
Cost Gains Losses Value
----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $ 64,063 $1,193 $ - $ 65,256
Obligations of state and political subdivisions 13,512 77 73 13,516
------------ ------------ ----------- -----------
Total $ 77,575 $1,270 $ 73 $ 78,772
============ ============ =========== ===========
Available for Sale:
U.S. Government and agency obligations $ 57,001 $ 667 $ 75 $ 57,593
Obligations of state and political subdivisions 1,852 12 4 1,860
Mortgage-backed securities 31,213 35 228 31,020
Equity securities 2,038 449 - 2,487
------------ ------------ ----------- -----------
Total $ 92,104 $1,163 $ 307 $ 92,960
============ ============ =========== ===========
</TABLE>
As required by law, investment securities are pledged to secure public and
trust deposits, as well as the Sweep Repurchase Agreement Product and borrowings
from the FHLB. Securities with an amortized cost of $188.5 million and $162.1
million were pledged to meet such requirements of $80.6 million and $89.6
million at December 31, 1999 and 1998, respectively. Any amount overpledged can
be released at any time.
26
<PAGE>
A comparison of the amortized cost and approximate fair value of
Southwest's debt securities by maturity date at December 31, 1999 follows.
Mortgage-backed securities are included in the period in which they are
estimated to prepay.
<TABLE>
<CAPTION>
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
One year or less $ 12,794 $ 12,671 $23,279 $23,295
Two years through five years 100,095 97,846 48,315 47,574
Five years through ten years 11,971 11,887 220 218
More than ten years 7,331 6,917 - -
----------- ----------- ----------- -----------
Total $132,191 $129,321 $71,814 $71,087
=========== =========== =========== ===========
</TABLE>
Gross realized gains/(losses) on sales of investment securities were
$370,000, $266,000, and $18,000 during 1999, 1998 and 1997, respectively. The
gross proceeds from such sales of investment securities totaled approximately
$283,000, $14.1 million, and $0 during 1999, 1998 and 1997, respectively. All
of the gain on sales of investment securities during 1997 and a portion of the
gain on sales of investment securities during 1999 and 1998 occurred when
securities classified as "held to maturity" and "available for sale", originally
purchased at a discount, were called prior to their stated maturity dates.
3. Loans Receivable
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1998
-----------------------------
(dollars in thousands)
<S> <C> <C>
Real estate mortgage:
Commercial $263,216 $275,729
One-to-four family residential 102,973 83,657
Real estate construction 85,511 76,544
Commercial 296,415 252,341
Installment and consumer:
Government-guaranteed student loans 69,873 65,242
Other 34,820 39,806
----------- -----------
852,808 793,319
Allowance for loan losses (11,190) (10,401)
----------- -----------
Loans receivable, net $841,618 $782,918
=========== ===========
</TABLE>
Stillwater National 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, 1999 and 1998,
substantially all of Stillwater National's loans are collateralized with real
estate, inventory, accounts receivable and/or other assets or guaranteed by
agencies of the United States Government.
Loans to individuals and businesses in the healthcare industry totaled
$102.1 million, or 12% of total loans. Stillwater National does not have any
other concentrations of loans to individuals or businesses involved in a single
industry of more than 5% of total loans. In the event of total nonperformance by
the borrowers, Stillwater National's accounting loss would be limited to the
recorded investment in the loans receivable reduced by proceeds received from
disposition of the related collateral.
27
<PAGE>
Oklahoma's
[LOGO]
Stillwater National had loans which were held for sale of $14.9 million and
$14.2 million at December 31, 1999 and 1998, respectively. These loans are
carried at cost, which does not exceed market. Government-guaranteed student
loans are generally sold to a single servicer. A substantial portion of the
one-to-four family residential loans and loan servicing rights are sold to three
servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $5.2 million and $872,000 at December 31,
1999 and 1998, 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 $549,000, $682,000 and $144,000
for 1999, 1998 and 1997, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $109.3 million and $126.4 million at December 31, 1999 and 1998,
respectively. Stillwater National maintained escrow accounts totaling $512,000
and $474,000 for real estate mortgage loans serviced for others at December 31,
1999 and 1998, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 1999. 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 $ 24,983 $ 50,448 $187,785 $263,216
One-to-four family residential 15,512 42,671 44,790 102,973
Real estate construction 53,168 16,361 15,982 85,511
Commercial 133,096 106,297 57,022 296,415
Installment and consumer:
Government-guaranteed student loans 69,873 - - 69,873
Other 12,947 21,082 791 34,820
--------- ---------- ---------- -----------
Total $309,579 $236,859 $306,370 $852,808
========= ========== ========== ===========
</TABLE>
The following table sets forth at December 31, 1999 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 $ 46,057 $192,176 $238,233
One-to-four family residential 31,526 55,935 87,461
Real estate construction 3,716 28,627 32,343
Commercial 26,362 136,957 163,319
Installment and consumer:
Government-guaranteed student loans - - -
Other 19,461 2,412 21,873
--------- --------- ----------
Total $127,122 $416,107 $543,229
========= ========= ==========
</TABLE>
28
<PAGE>
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $10,401 $ 8,282 $ 7,139
Provision for loan losses 2,495 3,380 12,104
Loans charged off (2,348) (2,374) (11,528)
Recoveries 642 1,113 567
---------- --------- ----------
Total $11,190 $10,401 $ 8,282
========== ========= ==========
</TABLE>
As of December 31, 1999 and 1998, impaired loans totaled $7.3 million and
$923,000 and had been allocated a related allowance for loan loss of $1.6
million and $155,000, respectively. The average balance of impaired loans
totaled $5.9 million and $3.4 million for the years ended December 31, 1999 and
1998. Interest income recognized on impaired loans totaled $330,000, $203,000
and $187,000, respectively, for the years ended December 31, 1999, 1998 and
1997.
Directors and officers of Southwest and Stillwater National were customers
of, and had transactions with, Stillwater National 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 Stillwater National totaling $1.2 million and $1.4 million at December 31,
1999 and 1998, respectively. During 1999, $2.4 million of new loans were made to
these persons and repayments totaled $2.6 million.
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
(dollars in thousands)
Land $ 4,407 $ 4,361
Buildings and improvements 9,864 4,081
Furniture, fixtures, and equipment 17,551 15,225
Construction/Remodeling in progress 675 5,654
--------- ----------
32,497 29,321
Accumulated depreciation and amortization (11,697) (10,117)
--------- ----------
Premises and equipment, net $ 20,800 $ 19,204
========= ==========
</TABLE>
29
<PAGE>
Oklahoma's
[LOGO]
5. Other Borrowed Funds
During 1999, the only categories of short-term borrowings whose averages
exceeded 30% of ending shareholders' equity were repurchase agreements and funds
borrowed from the FHLB.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
Treasury, tax and loan note option $ 2,500 $ 601 $ 1,595
Federal funds purchased and securities sold
under repurchase agreements 40,270 55,971 18,953
Borrowed from the Federal Home Loan Bank 109,050 38,000 -
Other short-term borrowings - - -
Weighted average rate outstanding:
Treasury, tax and loan note option 4.52% 4.11% 5.25%
Federal funds purchased and securities sold
under repurchase agreements 5.08 4.65 4.94
Borrowed from the Federal Home Loan Bank 5.64 5.14 -
Other short-term borrowings - - -
Maximum amounts of borrowings outstanding at any month-end:
Treasury, tax and loan note option $ 2,715 $ 2,500 $ 1,843
Federal funds purchased and securities sold
under repurchase agreements 52,588 56,329 19,953
Borrowed from the Federal Home Loan Bank 124,150 38,000 -
Other short-term borrowings - - 5,000
Approximate average short-term borrowings outstanding for the year:
Treasury, tax and loan note option $ 1,568 $ 1,589 $ 1,205
Federal funds purchased and securities sold
under repurchase agreements 41,087 33,965 4,657
Borrowed from the Federal Home Loan Bank 78,701 20,576 -
Other short-term borrowings 11 26 743
Approximate weighted average rate for the year:
Treasury, tax and loan note option 4.85% 5.14% 5.36%
Federal funds purchased and securities sold
under repurchase agreements 4.56 4.99 4.98
Borrowed from the Federal Home Loan Bank 5.27 5.43 -
Other short-term borrowings 4.50 5.80 5.84
</TABLE>
Southwest entered into an agreement with the FHLB to obtain advances from
the FHLB from time to time. The terms of the agreement are set forth in the
Advance, Pledge and Security Agreement (the "Agreement"). The FHLB requires that
Southwest pledge collateral on such advances. Under the terms of the Agreement,
the discounted value of the collateral, as defined by the FHLB, should at all
times be at least equal to the amount
30
<PAGE>
borrowed by Southwest. Such advances outstanding are subject to a blanket
collateral arrangement which requires the pledging of eligible collateral to
secure such advances. Such collateral principally includes certain loans and
securities. At December 31, 1999, loans pledged under the Agreement were $93.4
million and investment securities (at carrying value) were $58.9 million. The
FHLB did not require specific identification of loans or securities pledged in
1998.
6. Long-Term Debt
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the "Trust
Preferred") in an underwritten public offering for an aggregate price of
$25,012,500. Proceeds of the Trust Preferred were invested in the 9.30%
Subordinated Debentures (the "Subordinated Debentures") of Southwest. After
deducting underwriter's compensation and other expenses of the offering, the net
proceeds were available to Southwest to increase capital and for general
corporate purposes, including use in investment activities and Stillwater
National's lending activities, and the redemption, in whole, of Southwest's
9.20% Redeemable Cumulative Preferred Stock, Series A (the "Series A Preferred
Stock"). Interest payments on the Subordinated Debentures are deductible for
federal income tax purposes.
The Trust Preferred and the Subordinated Debentures each mature on July 31,
2027. If certain conditions are met, the maturity dates of the Trust Preferred
and the Subordinated Debentures may be shortened to a date not earlier than July
31, 2002, or extended to a date not later than July 31, 2036. The Trust
Preferred and the Subordinated Debentures also may be redeemed prior to maturity
if certain events occur. The Trust Preferred is subject to mandatory
redemption, in whole or in part, upon repayment of the Subordinated Debentures
at maturity or their earlier redemption. Southwest also has the right, if
certain conditions are met, to defer payment of interest on the Subordinated
Debentures, which would result in a deferral of dividend payments on the Trust
Preferred, at any time or from time to time for a period not to exceed 20
consecutive quarters in a deferral period.
Southwest and SBI Capital Trust believe that, taken together, the
obligations of Southwest under the Trust Preferred Guarantee Agreement, the
Amended and Restated Trust Agreement, the Subordinated Debentures, the Indenture
and the Agreement As To Expenses and Liabilities, entered into in connection
with the offering of the Trust Preferred and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by Southwest of the
obligations of SBI Capital Trust under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Trust Preferred and purchasing the Subordinated Debentures, which
are its sole assets. Southwest owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of SBI
Capital Trust.
The Trust Preferred meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Trust
Preferred and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 1999, $22.0 million of the Trust Preferred was
included in Tier I Capital.
For accounting purposes, the Trust Preferred is presented on the
Consolidated Statements of Financial Condition as a separate category of long-
term debt entitled "Guaranteed Preferred Beneficial Interests in Southwest's
Subordinated Debentures."
31
<PAGE>
Oklahoma's
[LOGO]
7. Income Taxes
The components of taxes on income follow:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $4,959 $5,437 $3,266
State 711 726 366
Deferred tax benefit:
Federal (766) (849) (820)
State (147) (133) (145)
------------ ----------- ------------
Taxes on income $4,757 $5,181 $2,667
============ =========== ============
</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,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Computed tax expense at statutory rates $4,768 $5,096 $2,600
Increase (decrease) in income
taxes resulting from:
Benefit of income not subject to U.S. Federal
income tax (403) (287) (240)
State income taxes, net of Federal income
tax benefit 377 386 146
Other 15 (14) 161
------------ ----------- ------------
Taxes on income $4,757 $5,181 $2,667
============ =========== ============
</TABLE>
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses $(305) $(897) $(772)
Accumulated depreciation 193 239 158
Intangibles 18 (4) (16)
Write-downs on other real estate owned (754) 17 5
Other (65) (337) (340)
------------ ----------- ------------
Total $(913) $(982) $(965)
============ =========== ============
</TABLE>
Net deferred tax assets of $5.9 million and $3.4 million at December 31,
1999 and 1998, respectively, are reflected in the accompanying consolidated
statements of financial condition in other assets. There were no valuation
allowances at December 31, 1999 or 1998.
32
<PAGE>
Temporary differences that give rise to the deferred tax assets
(liabilities) include the following:
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
(dollars in thousands)
Provision for loan losses $ 4,327 $ 4,022
Accumulated depreciation (1,242) (1,073)
Intangibles 164 182
Write-downs on other real estate owned 767 13
Deferred compensation accrual 260 186
Other 501 534
-------------- ---------------
4,777 3,864
Deferred taxes (payable) receivable on
investment securities available for sale 1,138 (447)
-------------- ---------------
Net deferred tax asset $ 5,915 $ 3,417
============== ===============
</TABLE>
8. Shareholders' Equity
On March 19, 1999, Southwest completed a public offering of common stock.
The offering included 811,231 shares sold by the Estate of Paul C. Wise and Dr.
James B. Wise and 250,000 newly issued shares sold by Southwest. Southwest
received proceeds of $5.4 million, after offering expenses and underwriting
discount. The net proceeds were invested in Stillwater National, where the
funds were used for general corporate purposes and lending and investment
activities. Southwest recorded $303,000 in offering expenses paid on behalf of
the selling shareholders.
In April 1999, Southwest's Board of Directors (the "Board") authorized the
repurchase of up to 5%, or 204,000 shares, of its outstanding common stock, par
value $1.00 per share, in connection with shares expected to be issued under
Southwest's dividend reinvestment, stock option, and employee benefit plans and
for other corporate purposes. In December 1999, Southwest had completed the
repurchase of shares under the program and the Board authorized the repurchase
of up to an additional 5%, or approximately 195,000 shares. The additional
repurchases will also be made in connection with shares expected to be issued
under Southwest's dividend reinvestment, stock option, and employee benefit
plans and for other corporate purposes. The share repurchases are expected to be
made primarily on the open market from time to time until April 30, 2001, or
earlier termination of the repurchase program by the Board. Repurchases under
the program will be made at the discretion of management based upon market,
business, legal, accounting and other factors.
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board believes are unfair or
otherwise not in the best interests of Southwest and its shareholders. Under
the Rights Plan, each holder of record of Southwest's common stock, as of the
close of business on April 22, 1999, received one right per common share. The
rights generally become exercisable if an acquiring party accumulates, or
announces an offer to acquire, 10% or more of Southwest's voting stock. The
rights will expire on April 22, 2009. Each right will entitle the holder (other
than the acquiring party) to buy, at the right's then current exercise price,
Southwest's common stock or equivalent securities having a value of twice the
right's exercise price. The exercise price of each right was initially set at
$110.00. In addition, upon the occurrence of certain events, holders of the
rights would be entitled to purchase, at the then current exercise price, common
stock or equivalent securities of an acquiring entity worth twice the exercise
price. Under the Rights Plan, Southwest also may exchange each right, other than
rights owned by an acquiring party, for a share of its common stock or
equivalent securities.
Southwest has reserved for issuance 200,000 shares of common stock pursuant
to the terms of the Dividend Reinvestment and Employee Stock Purchase Plans.
The Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Company employees to acquire additional
common shares through payroll deductions. At December 31, 1999, 26,828 shares
had been issued by these plans.
33
<PAGE>
Oklahoma's
[LOGO]
9. Capital Requirements
Southwest and Stillwater National are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators, that if undertaken, could have a
direct material effect on Southwest's and Stillwater National's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Southwest and Stillwater National must meet specific
capital guidelines that involve quantitative measures of Southwest's and
Stillwater National's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. Southwest's and Stillwater
National's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Southwest and Stillwater National 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 (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1999 and 1998, that Southwest and Stillwater National met all capital
adequacy requirements to which they are subject.
As of December 31, 1999 and 1998, the most recent notification from the
Office of the Comptroller of the Currency ("OCC") categorized Stillwater
National as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, Stillwater National
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed Stillwater National's
category.
Southwest's and Stillwater National'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, 1999:
Total Capital (to risk-weighted assets)
Southwest $101,899 11.34% N/A N/A $71,877 8.00%
Stillwater National 100,031 11.14 $89,807 10.00% 71,846 8.00
Tier I Capital (to risk-weighted assets)
Southwest 87,671 9.76 N/A N/A 35,939 4.00
Stillwater National 88,828 9.89 53,884 6.00 35,923 4.00
Tier I Leverage (to average assets)
Southwest 87,671 8.06 N/A N/A 43,504 4.00
Stillwater National 88,828 8.18 54,269 5.00 43,415 4.00
As of December 31, 1998:
Total Capital (to risk-weighted assets)
Southwest $92,527 10.81% N/A N/A $68,491 8.00%
Stillwater National 90,628 10.61 $85,444 1 0.00% 68,355 8.00
Tier I Capital (to risk-weighted assets)
Southwest 76,006 8.88 N/A N/A 34,245 4.00
Stillwater National 80,026 9.37 51,267 6.00 34,178 4.00
Tier I Leverage (to average assets)
Southwest 76,006 7.69 N/A N/A 39,529 4.00
Stillwater National 80,026 8.12 49,297 5.00 39,437 4.00
</TABLE>
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by Stillwater National in any calendar year exceeds the
total of its net profits of that year combined with its retained net profits of
the preceding two years. In addition, Stillwater National may not pay a
dividend if, after paying the dividend, Stillwater National would be under
capitalized. Stillwater National's maximum amount of dividends available for
payment totaled approximately $15.2 million at December 31, 1999. Dividends
declared by Stillwater National for the years ended December 31, 1999, 1998 and
1997 did not exceed the threshold requiring regulatory approval.
34
<PAGE>
10. Stock Option Plan
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option
Plan (the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Southwest applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the Stock Plans; accordingly, no compensation expense has been recorded in the
accompanying consolidated statements of operations. Had compensation cost for
the Stock Plans been determined based upon the fair value of the options at
their grant date as prescribed in SFAS No. 123, Accounting for Stock-Based
Compensation, Southwest's proforma data would have been as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Proforma net income
$7,896,184 $8,706,952 $4,778,707
Proforma net income available to common shareholders
$7,896,184 $6,720,952 $3,191,707
Basic earnings per common share $ 1.99 $ 1.77 $ 0.85
Diluted earnings per common share $ 1.95 $ 1.72 $ 0.82
Weighted average fair value at grant date $ 10.05 $ 10.98 $ 9.24
</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,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.72% 1.36% 1.30%
Expected volatility 31.23% 30.67% 17.87%
Risk-free interest rate 6.12% 4.68% 5.89%
Expected option term (in years) 10 10 10
</TABLE>
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 247,000 $13.69
Granted 35,000 25.47
Exercised (14,000) 17.95
Canceled/expired (7,500) 18.50
--------------------------------
Outstanding at December 31, 1997 260,500 14.90
Granted 100,000 26.12
Exercised (5,000) 14.55
Canceled/expired (3,000) 13.38
--------------------------------
Outstanding at December 31, 1998 352,500 18.10
Granted 158,000 22.79
Exercised (30,000) 12.75
Canceled/expired (10,000) 26.00
--------------------------------
Outstanding at December 31, 1999 470,500 $19.85
================================
Total exercisable at December 31, 1997 126,000 $13.30
Total exercisable at December 31, 1998 158,000 $14.33
Total exercisable at December 31, 1999 174,700 $15.94
</TABLE>
35
<PAGE>
Oklahoma's
[LOGO]
At December 31, 1999, Southwest had reserved 795,522 shares under the Stock
Plans, and had 470,500 shares under option. The following summarizes the
information concerning options outstanding and exercisable at December 31, 1999.
<TABLE>
<CAPTION>
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Price Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
173,000 $12.75-$13.38 4.51 $12.83 127,000 $12.79
127,000 $19.25-$21.81 8.54 $21.10 15,700 $20.70
170,000 $24.75-$27.22 8.56 426.09 32,000 $26,10
</TABLE>
11. Employee Benefits
Southwest sponsors a noncontributory, defined contribution profit sharing
plan intended to provide retirement benefits for employees of Southwest. The
plan covers all employees who have completed one year of service and have
attained the age of 21. The plan is subject to the Employee Retirement Income
Security Act of 1974, as amended. Company contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not
exceed 15% of the total annual compensation of all participants. Southwest made
contributions of $650,000, $1.2 million and $588,000 in 1999, 1998, and 1997,
respectively.
12. Operating Leases
Southwest leases certain equipment and facilities for its operations.
Future minimum annual rental payments required under operating leases, net of
sublease agreements, that have initial or remaining lease terms in excess of one
year as of December 31, 1999 follow:
2000 $992,504
2001 830,491
2002 404,790
2003 10,101
Thereafter 1,525
The total rental expense was $1.2 million in 1999, 1998 and 1997,
respectively.
13. Fair Value Disclosures of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by Southwest using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts Southwest could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
Cash and cash equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment securities - The fair value of U.S. Government and agency
obligations, other securities and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
36
<PAGE>
Loans receivable - Fair values are estimated for certain homogeneous
categories of loans adjusted for differences in loan characteristics.
Stillwater National's loans have been aggregated by categories consisting of
commercial, real estate, student, and other consumer. The fair value of loans
is estimated by discounting the cash flows using credit and interest rate risks
inherent in the loan category and interest rates currently offered for loans
with similar terms and credit risks.
Accrued interest receivable - The carrying amount is a reasonable estimate
of fair value for accrued interest receivable.
Deposits - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the statement of
financial condition date. The fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
Short-term borrowings - The fair values of short-term borrowings are the
amounts payable at the statement of financial condition date, as the carrying
amount is a reasonable estimate of fair value. Included in short-term
borrowings are federal funds purchased, securities sold under agreements to
repurchase, and treasury tax and loan demand notes.
Long-term debt - The fair value of long-term debt, which consists of the
Subordinated Debentures, is estimated based on quoted market prices or dealer
quotes.
Other liabilities and accrued interest payable - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
Commitments - Commitments to extend credit, standby letters of credit and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
The carrying values and estimated fair values of Southwest's financial
instruments follow:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Values Values Values Values
--------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 26,340 $ 26,340 $ 32,339 $ 32,339
Investment securities:
Held to maturity 71,814 71,087 77,575 78,772
Available for sale 131,379 131,379 92,960 92,960
FRB and FHLB stock 8,489 8,489 4,136 4,136
Loans receivable 841,618 855,460 782,918 807,037
Accrued interest receivable 9,413 9,413 8,658 8,658
Deposits 871,235 870,151 842,717 848,444
Accrued interest payable 6,004 6,004 5,584 5,584
Other liabilities 2,094 2,094 2,027 2,027
Short-term borrowings 151,820 151,820 94,572 94,572
Long-term debt 25,013 24,892 25,013 26,513
Commitments - - - -
</TABLE>
14. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, Stillwater National 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.
37
<PAGE>
The following table provides a summary of Stillwater National's off-balance
sheet financial instruments:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1999 1998
-------------------------------------
(dollars in thousands)
<S> <C> <C>
Commitments to extend commercial and real estate mortgage credit $255,175 $263,623
Standby and commercial letters of credit 3,041 3,001
Credit card lines of credit 304,772 621,876
---------------- ----------------
Total $562,988 $888,500
================ ================
</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
Stillwater National to honor a financial commitment by issuing a guarantee to a
third party should Stillwater National'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 Stillwater
National. 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. Stillwater National'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. Stillwater National has an agreement with other financial
institutions to purchase $304.8 million and $621.9 million of unadvanced credit
card lines of credit at December 31, 1999 and 1998, 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. Stillwater National does not anticipate any material losses as a
result of the commitments.
15. Commitments and Contingencies
In the normal course of business, Southwest is at all times subject to
various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and threatened
actions with counsel, management considers that the outcome of such actions will
not have a material adverse effect on Southwest's financial position; however,
Southwest is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular
future period as the timing and amount of any resolution of such actions and
relationship to the future results of operations are not known.
At periodic intervals, the Federal Reserve Bank and the Office of the
Comptroller of the Currency routinely examine Southwest's and Stillwater
National's financial statements as part of their legally prescribed oversight of
the banking industry. Based on these examinations, the regulators can direct
that Southwest's and Stillwater National's financial statements be adjusted in
accordance with their findings.
Stillwater National 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 Stillwater National by providing severance compensation to them upon
their involuntary termination of employment after a change in control of
Stillwater National. At December 31, 1999, Stillwater National 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 $844,000.
38
<PAGE>
16. Supplemental Cash Flows Information
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
(dollars in thousands)
<S> <S> <C> <C>
Cash paid for interest $42,075 $43,194 $39,804
Cash paid for taxes on income 5,431 5,664 2,333
Loans transferred to other real estate owned 29 3,873 521
Unrealized gain/(loss) on investment
securities available for sale, net of tax (2,221) (67) 375
</TABLE>
17. Accounting Standard Issued But Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS No. 133 requires that Southwest
measure all derivatives at fair value and to recognize them in the statement of
financial condition as an asset or liability, depending on Southwest's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 for one year. Southwest will adopt SFAS No. 133 on January 1, 2001, as
required. Management of Southwest believes that adoption of the new method of
accounting for derivatives and hedging activities will not have a material
impact on Southwest's consolidated financial condition or results of operations.
18. Parent Company Condensed Financial Information
Following are the condensed financial statements of Southwest Bancorp, Inc.
("Parent Company only") for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1999 1998
------------------------------------
Statements of Financial Condition (dollars in thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 170 $ 176
Investment in subsidiary bank 87,403 80,929
Investment securities, available for sale 904 925
Other assets 1,576 1,530
--------------- ----------------
Total $90,053 $83,560
=============== ================
Liabilities:
Subordinated debentures $25,013 $25,013
Other liabilities 786 746
Shareholders' Equity:
Common 64,254 57,801
--------------- ----------------
Total $90,053 $83,560
=============== ================
</TABLE>
39
<PAGE>
Oklahoma's
[LOGO]
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
Statements of Operations (dollars in thousands)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary bank $ 6,989 $2,933 $1,875
Investment income 53 636 585
Other income - - 2
Security gains/(losses) - 129 -
---------------- --------------- ----------------
Total income 7,042 3,698 2,462
Expense:
Interest on subordinated debentures 2,326 2,326 1,338
Other expense 632 378 227
---------------- --------------- ----------------
Total expense 2,958 2,704 1,565
---------------- --------------- ----------------
Total income before taxes and equity in
undistributed income of subsidiary bank 4,084 994 897
Taxes on income (1,098) (752) (383)
---------------- --------------- ----------------
Income before equity in undistributed
income of subsidiary bank 5,182 1,746 1,280
Equity in undistributed income of subsidiary bank 3,684 7,632 3,700
---------------- --------------- ----------------
Net income $ 8,866 $9,378 $4,980
================ =============== ================
Net income available to common shareholders $ 8,866 $7,392 $3,393
================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Statements of Cash Flows
Operating activities:
Net income $ 8,866 $ 9,378 $ 4,980
Equity in undistributed income of subsidiary bank (3,684) (7,632) (3,700)
Other, net (42) 149 (871)
---------------- --------------- ----------------
Net cash provided by operating activities 5,140 1,895 409
---------------- --------------- ----------------
Investing activities:
Available for sale securities:
Purchases (400) (504) (15,506)
Sales - 13,963 -
Maturities 400 835 1,635
---------------- --------------- ----------------
Net cash provided by (used in) investing activities - 14,294 (13,871)
---------------- --------------- ----------------
Financing activities:
Proceeds from issuance of:
Common stock 5,768 248 456
Subordinated debentures - - 25,013
Redemption of preferred stock - (17,250) -
Purchases of treasury stock, net (4,359) - -
Capital contribution to Bank (5,000) - (6,500)
Cash dividends paid:
Preferred stock - (1,190) (1,587)
Common stock (1,555) (1,327) (1,168)
---------------- --------------- ----------------
Net cash provided by (used in) financing activities (5,146) (19,519) 16,214
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (6) (3,330) 2,752
Cash and cash equivalents,
Beginning of year 176 3,506 754
---------------- --------------- ----------------
End of year $ 170 $ 176 $ 3,506
================ =============== ================
</TABLE>
* * * * * * * * * *
40
<PAGE>
MANAGEMENT'S REPORT
January 28, 2000
To the Shareholders of Southwest Bancorp, Inc.:
Financial Statements
The management of Southwest Bancorp, Inc. and its subsidiary, Stillwater
National Bank and Trust Company (the "Company"), is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based
upon informed judgments and estimates made by management.
Internal Control
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding of assets, for
financial presentations in conformity with both generally accepted accounting
principles and the Federal Financial Institutions Examination Council
Instructions for Consolidated Reports of Condition and Income ("Call Report
instructions"). The internal control contains monitoring mechanisms, and actions
are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of an internal
control may vary over time.
Management assessed Southwest's internal control over financial reporting,
including safeguarding of assets, for financial presentations in conformity with
both generally accepted accounting principles and Call Report instructions as of
December 31, 1999. This assessment was based on criteria for effective internal
control over financial reporting, including safeguarding of assets, described in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that Southwest maintained effective internal control over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and Call Report instructions as of
December 31, 1999.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of Company management. The Audit Committee
is responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with management, the independent
auditors and the internal auditors to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of Southwest in addition to reviewing Southwest's financial
reports. The independent auditors and the internal auditors have full and free
access to the Audit Committee, with or without the presence of management, to
discuss the adequacy of internal control over financial reporting and any other
matters which they believe should be brought to the attention of the Audit
Committee.
Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with the federal
laws and regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are designated
by the Federal Deposit Insurance Corporation (the "FDIC") as safety and
soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that Southwest has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended December
31, 1999.
/s/ Rick Green /s/ Kerby E. Crowell
President and Chief Executive Officer Executive Vice President and Chief
Financial Officer
41
<PAGE>
Oklahoma's
[LOGO]
Board of Directors of Southwest Bancorp, Inc.
Stillwater National Bank & Trust Company
Robert B. Rodgers
Chairman of the Board President, Bob Rodgers Ford-Lincoln-Mercury
Rick Green
President and Chief Executive Officer, Vice Chairman of the Board
James E. Berry II
President, Shading Concepts, Drapery Manufacturing/Sales
Joyce Berry
Investments
Tom D. Berry
Investments
Joe Berry Cannon
Professor of Management, Oral Roberts University School of Business
J. Berry Harrison
Rancher
Erd M. Johnson
Petroleum Engineer & Operating Partner, Johnson Oil Partnership
Betty Kerns
Owner, Betty Kerns & Associates, Government Relations Consulting
David P. Lambert
President, Lambert Construction Company
Al Litchenburg
Senior Vice President,
American Fidelity Assurance Co.
Linford R. Pitts
President, Stillwater Transfer & Storage Co.
Russell W. Teubner
Founder and Director, Esker S.A., Software
Stanley R. White
Chief Lending Officer, Stillwater National Bank & Trust Co.
Officers of Southwest Bancorp, Inc.
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and Chief Financial Officer
Kay W. Smith
Vice President and Comptroller
Deborah T. Bradley
Secretary
Senior Management of Stillwater National
Bank & Trust Company
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and Chief Financial Officer
Kimberly G. Sinclair
Executive Vice President and Chief Administrative Officer
Stanley R. White
Executive Vice President and Chief Lending Officer
Mark A. Poole
President, Tulsa Division
Joseph P. Root
President, Central Oklahoma Division
Patrick E. Zimmerman
President, Stillwater Division
Jerry Lanier
Executive Vice President, Credit Administration
Chuck Westerheide
Senior Vice President
and Treasury Manager
Corporate Information
Independent Auditors
Deloitte & Touche LLP
20 N. Broadway, Suite 900
Oklahoma City, OK 73102-8203
Special Counsel
Kennedy, Baris & Lundy, L.L.P.
4701 Sangamore Road
Suite P-15
Bethesda, MD 20816
General Counsel
Hert & Baker
222 E. 7th Avenue
Stillwater, OK 74074
Transfer Agents and Registrars
Common Stock:
Harris Trust & Savings Bank
111 W. Monroe St.
Chicago, IL 60690
Trust Preferred Securities:
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
Annual Meeting
The 2000 Annual Meeting of Shareholders will be held on April 27, 2000 at 11:00
a.m. in the Auditorium (Room 215) at the Stillwater Public Library, 1107 S.
Duck, Stillwater, Oklahoma.
Annual Report on Form 10-K:
Copies of Southwest's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, as filed with the Securities and Exchange Commission, may be
obtained by shareholders as of the record date for the Annual Meeting at no
charge by writing to Kerby E. Crowell, Chief Financial Officer, Southwest
Bancorp, Inc., P.O. Box 1988, Stillwater, Oklahoma 74076.Southwest Bancorp, Inc.
42
<PAGE>
Corporate Headquarters
P.O. Box 1988
608 S. Main Street
Stillwater, Oklahoma 74076
405-372-2230
Stillwater National Bank & Trust Company Locations
<TABLE>
<S> <C> <C>
Corporate Headquarters Drive-in & Mortgage Lending 6305 Waterford Blvd.,
P.O. Box 1988 P.O. Box 1988 Suite 205
608 S. Main Street 3rd & Main Oklahoma City,
Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 Oklahoma 73118
405-372-2230 405-372-2230 405-427-4000
500 W. Grand Avenue P.O. Box 521500 P.O. Box 521500
Chickasha, Oklahoma 73018 1500 S. Utica Ave. 2431 E. 61st, Suite 170
405-427-4800 Tulsa, Oklahoma 74152 Tulsa, Oklahoma 74152
918-523-3900 918-523-3600
Operations Center OSU Marketing Office OUHSC Loan Office
P.O. Box 1988 P.O. Box 1988 1106 N. Stonewall
1624 Cimarron Plaza Student Union, Room 179 Oklahoma City,
Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 Oklahoma 73190
405-744-5961 405-271-3113
</TABLE>
Website Address
www.banksnb.com
Stock Information
NASDAQ National Market Symbols:
Common Stock - OKSB
Trust Preferred Securities - OKSBO
The following table sets forth the common stock dividends paid for each quarter
during 1999 and 1998 and the range of high and low closing trade prices for the
common stock for those periods.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
Dividend Dividend
High Low Declared High Low Declared
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
For the Quarter Ending:
March 31 $27.000 $23.630 $0.10 $29.000 $26.063 $0.09
June 30 23.625 20.125 0.10 32.750 27.000 0.09
September 30 24.625 20.875 0.10 30.000 26.000 0.09
December 31 23.250 19.500 0.10 28.625 19.750 0.09
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the Registrant.
Jurisdiction of
Name Incorporation
--------------------------------------------------------------
SBI Capital Trust Delaware
Stillwater National Bank & Trust Company United States
Stillwater National Building Corporation* Oklahoma
CRK Properties, Inc.* Oklahoma
Stillwater Properties, Inc.* Oklahoma
Cash Source, Inc.* Oklahoma
BNS, Inc.** Oklahoma
* Direct subsidiaries of Stillwater National Bank & Trust Company.
** Direct subsidiary of CRK Properties, Inc.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No. 33-
81276 (1994 Stock Option Plan), 333-92143 (1999 Stock Option Plan), and 33-97850
(Employee Stock Purchase Plan), each on Form S-8, and Registration Statement No.
33-94378 (Dividend Reinvestment Plan) on Form S-3, of our report dated January
28, 2000, appearing in this Annual Report on Form 10-K of Southwest Bancorp,
Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
OKLAHOMA CITY, OKLAHOMA
MARCH 22, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally
constitute and appoint Rick Green our true and lawful attorney and agent, to do
any and all things in our names in the capacities indicated below which said
person may deem necessary or advisable to enable the Registrant to comply with
the Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
annual report on Form 10-K for the year ended December 31, 1999, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the annual report and any amendments
thereto; and we hereby approve, ratify, and confirm all that said person shall
do or cause to be done by virtue thereof.
/s/ Jim Berry February 24, 2000
- --------------------------------
Jim Berry, Director
/s/ Joyce P. Berry February 24, 2000
- --------------------------------
Joyce P. Berry, Director
/s/ Thomas D. Berry February 24, 2000
- --------------------------------
Thomas D. Berry, Director
/s/ Joe Berry Cannon February 24, 2000
- --------------------------------
Joe Berry Cannon, Director
/s/ J. Berry Harrison February 24, 2000
- --------------------------------
J. Berry Harrison, Director
/s/ Erd M. Johnson February 24, 2000
- --------------------------------
Erd M. Johnson, Director
/s/ Betty B. Kerns February 24, 2000
- --------------------------------
Betty B. Kerns, Director
/s/ David P. Lambert February 24, 2000
- --------------------------------
David P. Lambert, Director
/s/ Alfred L. Litchenburg February 24, 2000
- --------------------------------
Alfred L. Litchenburg, Director
/s/ Linford R. Pitts February 24, 2000
- --------------------------------
Linford R. Pitts, Director
/s/ Robert B. Rodgers February 24, 2000
- --------------------------------
Robert B. Rodgers, Director
/s/ Russell W. Teubner February 24, 2000
- --------------------------------
Russell W. Teubner, Director
/s/ Stanley R. White February 24, 2000
- --------------------------------
Stanley R. White, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,344
<INT-BEARING-DEPOSITS> 6
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,868
<INVESTMENTS-CARRYING> 71,814
<INVESTMENTS-MARKET> 81,087
<LOANS> 852,808
<ALLOWANCE> 11,190
<TOTAL-ASSETS> 1,120,420
<DEPOSITS> 871,235
<SHORT-TERM> 151,820
<LIABILITIES-OTHER> 8,098
<LONG-TERM> 25,013
0
0
<COMMON> 4,081
<OTHER-SE> 60,173
<TOTAL-LIABILITIES-AND-EQUITY> 1,120,420
<INTEREST-LOAN> 69,373
<INTEREST-INVEST> 11,188
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 80,595
<INTEREST-DEPOSIT> 34,073
<INTEREST-EXPENSE> 42,495
<INTEREST-INCOME-NET> 38,100
<LOAN-LOSSES> 2,495
<SECURITIES-GAINS> 370
<EXPENSE-OTHER> 30,426
<INCOME-PRETAX> 13,623
<INCOME-PRE-EXTRAORDINARY> 13,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,866
<EPS-BASIC> 2.23
<EPS-DILUTED> 2.19
<YIELD-ACTUAL> 3.82
<LOANS-NON> 5,205
<LOANS-PAST> 194
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 17,820
<ALLOWANCE-OPEN> 10,401
<CHARGE-OFFS> 2,348
<RECOVERIES> 642
<ALLOWANCE-CLOSE> 11,190
<ALLOWANCE-DOMESTIC> 11,190
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
