SECURITIES AND EXCHANGE COMMISSIONG
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File 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
incorporation or organization) Identification
Number)
608 South Main Street 74074
Stillwater, Oklahoma (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (405) 372-2230
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 twelve 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 ninety days.
[x] YES [_] NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
4,066,687
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1
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SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at
June 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Operations for the
six months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5
Unaudited Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 1999 and 1998 6
Unaudited Consolidated Statements of Comprehensive Income for the
six months ended June 30, 1999 and 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Average Balances, Yields and Rates 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
PART II. OTHER INFORMATION 24
SIGNATURES 25
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except per share data)
June 30, December 31,
1999 1998
-------------- --------------
Assets
Cash and due from banks $ 23,779 $ 32,339
Federal funds sold 7,500 -
----------- -----------
Cash and cash equivalents 31,279 32,339
Investment securities:
Held to maturity, fair value $74,803 (1999) and $78,772 (1998) 74,868 77,575
Available for sale, amortized cost $97,873 (1999) and $96,240 (1998) 96,862 97,096
Loans receivable, net of allowance for loan losses
of $10,941 (1999) and $10,401 (1998) 776,193 782,918
Accrued interest receivable 9,124 8,658
Premises and equipment, net 20,481 19,204
Other assets 10,931 10,075
----------- -----------
Total assets $ 1,019,738 $ 1,027,865
=========== ===========
Liabilities & shareholders' equity
Deposits:
Noninterest-bearing demand $ 111,242 $ 120,099
Interest-bearing demand 49,686 43,079
Money market accounts 94,843 97,102
Savings accounts 3,759 3,416
Time deposits 563,556 579,365
----------- -----------
Total deposits 823,086 843,061
----------- -----------
Income taxes payable 150 151
Accrued interest payable 5,255 5,584
Other liabilities 2,060 1,683
Short-term borrowings 98,234 94,572
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
----------- -----------
Total liabilities 953,798 970,064
----------- -----------
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;
4,081,056 (1999) and 3,799,065 (1998) shares issued 4,081 3,799
Capital surplus 14,931 9,369
Retained earnings 47,871 44,120
Accumulated other comprehensive income (loss) (606) 513
Treasury stock, at cost; 15,000 shares at June 30, 1999 (337) -
----------- -----------
Total shareholders' equity 65,940 57,801
----------- -----------
Total liabilities & shareholders' equity $ 1,019,738 $ 1,027,865
============ ============
See notes to unaudited consolidated financial statements.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except earnings per share data)
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 17,114 $ 17,391 $ 34,372 $ 34,387
Investment securities:
U.S. Government and agency obligations 1,747 2,381 3,579 4,806
State and political subdivisions 187 139 343 267
Mortgage-backed securities 446 257 894 511
Other securities 131 113 249 224
Federal funds sold 19 1 23 34
-------- -------- -------- --------
Total interest income 19,644 20,282 39,460 40,229
Interest expense:
Interest-bearing demand 205 261 419 497
Money market accounts 866 815 1,726 1,682
Savings accounts 18 19 35 38
Time deposits 7,301 8,167 14,810 16,696
Short-term borrowings 1,176 791 2,370 1,196
Long-term debt 581 581 1,163 1,163
-------- -------- -------- --------
Total interest expense 10,147 10,634 20,523 21,272
-------- -------- -------- --------
Net interest income 9,497 9,648 18,937 18,957
Provision for loan losses 425 950 1,100 1,775
-------- -------- -------- --------
Net interest income after provision for loan
losses 9,072 8,698 17,837 17,182
Other income:
Service charges and fees 1,127 912 2,125 1,736
Other noninterest income 565 102 648 304
Gain (loss) on sales of loans receivable 398 477 1,004 1,046
Gain (loss) on sales of investment securities 4 3 85 20
-------- -------- -------- --------
Total other income 2,094 1,494 3,862 3,106
Other expenses:
Salaries and employee benefits 3,497 3,430 6,856 6,772
Occupancy 1,321 1,214 2,793 2,400
FDIC and other insurance 61 64 121 128
General and administrative 2,459 1,732 4,814 3,592
-------- -------- -------- --------
Total other expenses 7,338 6,440 14,584 12,892
-------- -------- -------- --------
Income before taxes 3,828 3,752 7,115 7,396
Taxes on income 1,373 1,342 2,550 2,653
-------- -------- -------- --------
Net income $ 2,455 $ 2,410 $ 4,565 $ 4,743
======== ======== ========= ========
Net income available to common shareholders $ 2,455 $ 2,013 $ 4,565 $ 3,949
======== ======== ========= ========
Basic earnings per common share $ 0.60 $ 0.53 $ 1.15 $ 1.04
======== ======== ========= ========
Diluted earnings per common share $ 0.59 $ 0.51 $ 1.13 $ 1.01
======== ======== ========= ========
See notes to unaudited consolidated financial statements.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the six months
ended June 30,
1999 1998
------------ ------------
Operating activities:
Net income $ 4,565 $ 4,743
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 1,100 1,775
Depreciation and amortization expense 1,099 875
Amortization of premiums and accretion of
discount on securities, net 155 71
Amortization of intangibles 141 134
(Gain) Loss on sales of securities (85) (20)
(Gain) Loss on sales of loans receivable (1,004) (1,046)
(Gain) Loss on sales of premises and equipment (409) 14
(Gain) Loss on other real estate owned, net 150 (9)
Proceeds from sales of residential mortgage loans 50,193 57,339
Residential mortgage loans originated for resale (52,731) (61,488)
Changes in assets and liabilities:
Accrued interest receivable (466) (797)
Other assets (399) (330)
Income taxes payable (1) (521)
Accrued interest payable (329) (519)
Other liabilities 312 522
-------- --------
Net cash (used in) provided from operating activities 2,291 743
-------- --------
Investing activities:
Proceeds from sales/calls of available for sale securities 11,415 -
Proceeds from principal repayments and maturities:
Held to maturity securities 10,410 14,366
Available for sale securities 4,850 15,629
Purchases of held to maturity securities (10,310) (15,650)
Purchases of available for sale securities (15,361) (14,193)
Loans originated and principal repayments, net (8,654) (49,006)
Proceeds from sales of guaranteed student loans 17,821 11,197
Purchases of premises and equipment (2,549) (4,028)
Proceeds from sales of premises and equipment 582 58
Proceeds from sales of other real estate owned - 267
-------- --------
Net cash (used in) provided from investing activities 8,204 (41,360)
-------- --------
Financing activities:
Net increase (decrease) in deposits (19,975) (16,045)
Net increase (decrease) in short-term borrowings 3,662 43,944
Net proceeds from issuance of common stock 5,844 162
Purchases of treasury stock (337) -
Common stock dividends paid (749) (643)
Preferred stock dividends paid - (794)
-------- --------
Net cash (used in) provided from financing activities (11,555) 26,624
-------- --------
Net increase (decrease) in cash and cash equivalents (1,060) (13,993)
Cash and cash equivalents,
Beginning of period 32,339 36,259
-------- --------
End of period $ 31,279 $ 22,266
======== ========
See notes to unaudited consolidated financial statements.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Accumulated Total
Other Share-
Preferred Stock Common Stock Capital Retained Comprehensive Treasury holders'
Shares Amount Shares Amount Surplus Earnings Income Stock Equity
------------------------------------------------------------------------------------------
Balance, January 1, 1998 690,000 $690 3,787,839 $3,788 $24,764 $38,226 $580 - $68,048
Cash dividends paid:
Preferred, $1.15 per share - - - - - (794) - - (794)
Common, $0.09 per share - - - - - (341) - - (341)
Cash dividends declared:
Preferred, $0.575 per share - - - - - (396) - - (396)
Common, $0.09 per share - - - - - (341) - - (341)
Common stock issued:
Employee Stock Option Plan - - 4,000 4 55 - - - 59
Employee Stock Purchase Plan - - 1,287 1 36 - - - 37
Dividend Reinvestment Plan - - 2,353 2 64 - - - 66
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 52 - 52
Net income - - - - - 4,743 - - 4,743
------------------------------------------------------------------------------------------
Balance, June 30, 1998 690,000 $690 3,795,479 $3,795 $24,919 $41,097 $632 - $71,133
========== ====== ============ ======== ========= ========= ============ ======= =========
Balance, January 1, 1999 - - 3,799,065 $3,799 $9,369 $44,120 $513 - $57,801
Cash dividends paid:
Common, $0.10 per share - - - - - (408) - - (408)
Cash dividends declared:
Common, $0.10 per share - - - - - (406) - - (406)
Common stock issued:
Employee Stock Option Plan - - 30,000 30 353 - - - 383
Employee Stock Purchase Plan - - 1,269 1 29 - - - 30
Dividend Reinvestment Plan - - 722 1 16 - - - 17
Public Offering - - 250,000 250 5,164 - - - 5,414
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - (1,119) - (1,119)
Treasury shares purchased - - (15,000) - - - - (337) (337)
Net income - - - - - 4,565 - - 4,565
------------------------------------------------------------------------------------------
Balance, June 30, 1999 - - 4,066,056 $4,081 $14,931 $47,871 $(606) $(337) $65,940
========= ====== ============ ======== ========= ========= ============ ======= =========
See notes to unaudited consolidated financial statements.
6
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
------- ------- ------- --------
Net income $ 2,455 $ 2,410 $ 4,565 $ 4,743
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on investment
securities available for sale arising during
the period (1,477) (34) (1,782) 106
Reclassification adjustment for (gains) losses
arising during the period (4) (3) (85) (20)
------- ------- ------- --------
Other comprehensive income (loss), before tax 974 2,373 2,698 4,829
Tax (expense) benefit related to items
of other comprehensive income (loss) 592 15 748 (34)
------- ------- ------- --------
Other comprehensive income (loss), net of tax $ 1,566 $ 2,388 $ 3,446 $ 4,795
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
7
SOUTHWEST BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and notes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, cash flows and
comprehensive income in conformity with generally accepted accounting
principles. However, the consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation. The results of operations
and cash flows for the six months ended June 30, 1999 and 1998 should not be
considered indicative of the results to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Southwest
Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest") and its wholly owned
subsidiaries, the Stillwater National Bank and Trust Company ("Stillwater
National") and SBI Capital Trust ("SBI Capital"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3: ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that Southwest recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. Southwest
will adopt SFAS No. 133 on January 1, 2001, as required. Management believes
that adoption of SFAS No. 133 will not have a material impact on Southwest's
consolidated financial condition or results of operations.
8
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
For the six For the
months ended year ended
30-Jun-99 31-Dec-98
-------------- --------------
(Dollars in thousands)
Balance at beginning of period $ 10,401 $ 8,282
Loans charged-off:
Real estate mortgage 80 460
Real estate construction 9 -
Commercial 628 1,320
Installment and consumer 207 594
--------- ---------
Total charge-offs 924 2,374
Recoveries:
Real estate mortgage 17 105
Commercial 258 582
Installment and consumer 89 426
--------- ---------
Total recoveries 364 1,113
--------- ---------
Net loans charged-off 560 1,261
Provision for loan losses 1,100 3,380
--------- ---------
Balance at end of period $ 10,941 $ 10,401
========= =========
Loans outstanding:
Average $ 808,417 $ 756,611
End of period 787,134 793,319
Net charge-offs to total average loans (annualized) 0.14% 0.17%
Allowance for loan losses to total loans 1.39% 1.31%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates:
9
At At
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
Nonaccrual loans (1) $3,933 $ 872
Past due 90 days or more 174 451
Restructured terms - -
------ ------
Total nonperforming loans 4,107 1,323
Other real estate owned 3,500 3,650
------ ------
Total nonperforming assets $7,607 $4,973
====== ======
Nonperforming loans to loans receivable 0.52% 0.17%
Allowance for loan losses to nonperforming loans 266.40% 786.17%
Nonperforming assets to loans receivable and
other real estate owned 0.96% 0.62%
(1) The government-guaranteed portion of loans included in these totals was
$684 (1999) and $254 (1998).
Southwest makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The adequacy of
the allowance for loan losses is determined by management based upon a number of
factors including, among others, analytical reviews of loan loss experience in
relation to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may also occur because of changing economic
conditions and their impact on economic prospects and the financial position of
borrowers. Based upon this review, management established an allowance of $10.9
million, or 1.39% of total loans, at June 30, 1999 compared to an allowance of
$10.4 million, or 1.31% of total loans, at December 31, 1998.
In establishing the level of the allowance for June 30, 1999, management
considered a number of factors, including the increased risk inherent in
commercial and commercial real estate loans, which are viewed as entailing
greater risk than certain other categories of loans, charge-off history, and the
rapid expansion of the loan portfolio over the last several years. Management
also considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk. Southwest
determined the level of the allowance for loan losses at June 30, 1999 was
appropriate, after assessing these and other factors it deemed relevant.
Management conducted a similar analysis in order to determine the appropriate
allowance as of December 31, 1998.
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 June 30, 1999, total nonperforming loans were $4.1 million, or 0.52% of total
loans, compared to $1.3 million, or 0.17% of total loans, at December 31, 1998.
At any time, however, there are loans included in the portfolio that will result
in losses to Southwest, but currently have not been identified as nonperforming
or potential problem loans. Because the loan portfolio contains a significant
number of commercial and commercial real estate loans with relatively large
balances, the unexpected deterioration of one or a few of such loans may cause a
significant increase in nonperforming assets, and may lead to a material
increase in charge-offs and the provision for loan losses.
10
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
State of Oklahoma, which subjects the loan portfolio to the general economic
conditions within the state. At June 30, 1999 and December 31, 1998,
substantially all of Southwest's loans are collateralized with real estate,
inventory, accounts receivable and/or other assets, or are guaranteed by
agencies of the United States Government.
At June 30, 1999, loans to individuals and businesses in the healthcare industry
totaled approximately $81.8 million, or 10% of total loans. Southwest does not
have any other concentrations of loans to individuals or businesses involved in
a single industry totaling 5% of total loans.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $3.9 million at June 30, 1999. During the
first six months of 1999, $64,000 in interest income was received on nonaccruing
loans. If interest on those loans had been accrued, total interest income of
$227,000 would have been recorded.
Those performing loans considered potential nonperforming loans, loans which are
not included in the past due, nonaccrual or restructured categories, but for
which known information about possible credit problems causes management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms, amounted to approximately $31.6 million at June 30, 1999.
Loans may be monitored by management and reported as potential nonperforming
loans for an extended period of time during which management continues to be
uncertain as to the ability of certain borrowers to comply with the present loan
repayment terms. These loans are subject to continuing management attention and
are considered by management in determining the level of the allowance for loan
losses.
NOTE 6: LONG-TERM DEBT
The guaranteed preferred beneficial interests in Southwest's subordinated
debentures represent interests in 9.30% subordinated debentures ("Subordinated
Debentures"), due July 31, 2027, issued by Southwest to its subsidiary, SBI
Capital Trust, in connection with SBI Capital's Cumulative Trust Preferred
Securities (the "Preferred Securities"). The Subordinated Debentures and
related payments are SBI Capital's only assets.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital.
NOTE 7: 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
dividend requirements of preferred stock, divided by the weighted average number
of common shares outstanding during each period adjusted for the effect of
dilutive potential common shares calculated using the treasury stock method. At
June 30, 1999, there were 180,000 antidilutive options to purchase common
shares. At June 30, 1998, there were no antidilutive options to purchase common
shares.
11
The following is a reconciliation of net income available to common shareholders
and the common shares used in the calculations of basic and diluted earnings per
common share:
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ----- ---- ----
(Dollars in thousands) (Dollars in thousands)
Net income $ 2,455 $ 2,410 $ 4,565 $ 4,743
Less: preferred stock dividend requirement - (397) - (794)
---------- ---------- --------- ----------
Net income available to common shareholders $ 2,455 $ 2,013 $ 4,565 $ 3,949
========== ========== ========= ==========
Weighted average common shares outstanding:
Basic earnings per share 4,077,420 3,794,839 3,960,968 3,792,598
Effect of dilutive securities:
Stock options 76,305 132,149 87,066 125,450
---------- ---------- ---------- ----------
Weighted average common shares outstanding:
Diluted earnings per share 4,153,725 3,926,988 4,048,034 3,918,048
========== ========== =========== ==========
NOTE 8: SHAREHOLDERS' EQUITY
Issuance of Common Stock
On March 19, 1999, Southwest completed its public offering of 1,061,231 shares
of its 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 $5.5 million, after offering expenses
and underwriting discount. The net proceeds were invested in Stillwater
National, where the funds will be available for general corporate purposes and
for use in lending and investment activities. Southwest recorded $303,000 in
offering expenses paid on behalf of the selling shareholders.
Share Repurchase Program
Southwest announced in April 1999 that its 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. 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. At June 30, 1999,
15,000 shares had been repurchased at a total cost of $337,000.
Shareholder Rights Plan
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.
12
SOUTHWEST BANCORP, INC.
AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
For the six months ended June 30,
1999 1998
------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
------------------------------------------------------
Assets:
Loans receivable $ 808,417 8.57% $ 750,882 9.23%
Investment securities 172,359 5.90 187,839 6.22
Other interest-earning assets 1,767 4.68 1,624 5.46
----------- ---------
Total interest-earning assets 982,543 8.10 940,345 8.63
Noninterest-earning assets 49,766 41,986
----------- ---------
Total assets $ 1,032,309 $ 982,331
=========== =========
Liabilities and shareholders' equity:
Interest-bearing demand $ 45,445 1.86% $ 43,201 2.32%
Money market accounts 96,652 3.60 89,181 3.80
Savings accounts 3,577 1.97 3,463 2.21
Time deposits 584,349 5.11 604,883 5.57
----------- ---------
Total interest-bearing deposits 730,023 4.69 740,728 5.15
Short-term borrowings (1) 100,587 4.75 45,816 5.26
Long-term debt 25,013 9.30 25,013 9.30
----------- ---------
Total interest-bearing liabilities 855,623 4.84 811,557 5.29
Noninterest-bearing demand 99,766 92,401
Other noninterest-bearing liabilities 14,514 9,041
Shareholders' equity 62,406 69,332
----------- ---------
Total liabilities and shareholders' equity $ 1,032,309 $ 982,331
=========== =========
Interest rate spread 3.26% 3.34%
======== ========
Net interest margin (2) 3.89% 4.07%
======== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.83% 115.87%
=========== =========
(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
13
SOUTHWEST BANCORP, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward Looking Statements. This Management's Discussion and Analysis includes
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, government agencies, and other third parties as to year 2000
compliance and costs; future laws and regulations; and a variety of other
matters. Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, Southwest's past results do not necessarily indicate
its future results.
You should read this management's discussion and analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's consolidated financial statements and the accompanying notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a registered bank holding company
headquartered in Stillwater, Oklahoma. Southwest and its subsidiary, the
Stillwater National Bank and Trust Company ("Stillwater National"), are
independent, Oklahoma institutions, and are not controlled by out of state
organizations or individuals.
Southwest offers a broad range of commercial and consumer banking and other
financial services through full service offices in Stillwater, Oklahoma City,
Tulsa and Chickasha, Oklahoma. Southwest devotes substantial efforts to
marketing and providing services to local businesses, their primary employees,
and to other managers and professionals living and working in Southwest's
Oklahoma market areas. Southwest has adapted to historical state branching
limitations by developing a marketing and delivery system that does not rely on
an extensive branch network.
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. Southwest has grown from $434 million in assets at year-end 1993, to
$1.020 billion at June 30, 1999, without acquiring other financial institutions.
Southwest considers acquisitions of other financial institutions, however, from
time to time, although it does not have any specific agreements or
understandings for any such acquisition at present.
FINANCIAL CONDITION
14
Total Assets
Southwest's total assets were $1.020 billion at June 30, 1999, down slightly
from $1.028 billion at December 31, 1998.
Loans Receivable
Loans were $787.1 million at June 30, 1999, a slight decrease ($6.2 million)
from December 31, 1998. Southwest experienced increases in the categories of
residential mortgages ($11.3 million, or 14%), commercial loans ($8.2 million,
or 3%), consumer loans ($155,000, or less than 1%) and student loans ($950,000,
or 1%). These increases were offset by reductions in commercial mortgages
($25.0 million, or 9%), and real estate construction loans ($1.8 million, or
2%). The allowance for loan losses increased by $540,000, or 5%, from December
31, 1998 to June 30, 1999. At June 30, 1999, the allowance for loan losses was
$10.9 million, or 1.39% of total loans, compared to $10.4 million, or 1.31% of
total loans, at December 31, 1998. The reduction in total loans from year-end
1998 to June 30, 1999 is the net result of growth from new loans and payoffs of
old credits. Management expects loans for 1999 to increase, but at levels that
are less dramatic than those achieved in recent years.
Investment Securities
Investment securities were $171.7 at June 30, 1999, a reduction of $2.9 million,
or 2%, compared to December 31, 1998. A Managed Investment Program (MIP) is
being implemented to enhance shareholder value by maximizing Southwest's use of
capital and returns on common equity. This will be accomplished by
significantly increasing Southwest's investment securities and funding that
increase through various wholesale funding sources. Generally, securities
acquired will have lower capital requirements than the basic 8% Risk Based
Capital guidelines, and will be classified as available for sale. Only
securities with very high credit quality standards will be considered as
acceptable investments under the MIP. This program could have higher interest
rate risk and less credit risk or liquidity risk than commercial loans. All
risk ratios will be maintained within current policy guidelines. The new
"Wholesale Division" is expected to contribute to increases in investment
securities and related net income in the third quarter of 1999 with full
implementation expected in 2000.
Premises and Equipment
Premises and equipment increased by $1.3 million primarily due to the
construction of the new Tulsa Banking Center at 15th and Utica which opened in
January 1999.
Deposits
Southwest's deposits decreased by $20.0 million, or 2%, from $843.1 million at
December 31, 1998 to $823.1 million at June 30, 1999. Increases occurred in NOW
accounts ($6.6 million, or 15%) and savings accounts ($343,000, or 10%). These
increases were offset by decreases in demand deposits ($8.9 million, or 7%),
money market accounts ($2.3 million, or 2%), and time deposits ($15.8 million,
or 3%) as compared to December 31, 1998.
Shareholders' Equity
Shareholders' equity increased by $8.1 million, or 14%, due primarily to
earnings, net of common stock dividends, for the first six months of 1999 and
the net proceeds of the recent public offering of 250,000 shares of common
stock. Shareholders' equity also benefited from a $430,000 increase due to
proceeds of common stock issued through the employee stock purchase plan, the
employee stock option plan and the dividend reinvestment plan.
15
These increases were offset by a $1.1 million decrease attributable to a change
in the net unrealized gains on investment securities available for sale (net of
tax) and a $337,000 decrease attributable to the purchase of treasury stock. On
June 30, 1999, Southwest and Stillwater National continued to exceed all
applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Net income available to common shareholders was $4.6 million for the first six
months of 1999, up 16% over the $3.9 million recorded in the first six months of
1998. Southwest redeemed its Series A Preferred Stock on September 1, 1998.
For the first six months of 1999, net income of $4.6 million was 4% less than
the $4.7 million recorded, before deduction of dividends on preferred stock, in
the first six months of 1998. Average common shares outstanding were 3,960,968
and 3,792,598 for the six months ended June 30, 1999 and 1998. Basic and
diluted earnings per common share increased to $1.15 and $1.13 per share for the
first six months of 1999 from $1.04 and $1.01 per share for the same period in
1998, respectively.
Net interest income remained substantially the same during the first six months
of 1999 as for the first six months of 1998. A $756,000, or 24%, increase in
other income, a $675,000, or 38%, reduction in the provision for loan losses,
and a $103,000 reduction in tax expense were offset by a $1.7 million, or 13%,
increase in other expenses. For the first six months of 1999, the return on
average total equity and average common equity was 14.75% compared to a 13.80%
return on average total equity and a 15.3% return on average common equity for
the first six months of 1998.
Net Interest Income
Net interest income remained substantially the same at $18.9 million for the
first six months of 1999 from $19.0 million for the same period in 1998 as
interest income and interest expense decreased by nearly equal amounts. Yields
on Southwest's interest-earning assets declined by 53 basis points, and the
rates paid on Southwest's interest-bearing liabilities declined by 45 basis
points, resulting in a decrease in the interest rate spread to 3.26% for the
first six months of 1999 from 3.34% for the first six months of 1998. The ratio
of average interest-earning assets to average interest-bearing liabilities
declined to 114.83% for the first six months of 1999 from 115.87% for the first
six months of 1998, primarily due to the increase in short-term borrowings and a
larger decrease in interest-bearing deposits as compared to the decrease in
outstanding loans.
Total interest income for the first six months of 1999 was $39.5 million, down
2% from $40.2 million during the same period in 1998. The principal cause of
the lower interest income was a 69 basis point decline in the yield on loans,
which was partially offset by a $57.5 million, or 8%, increase in the volume of
average loans outstanding. During the same period, Southwest's average
investment securities decreased $15.5 million, or 8%, and the related yield
decreased to 5.90% from 6.22%.
Total interest expense for the first six months of 1999 was $20.5 million, a
decrease of 4% from $21.3 million for the same period in 1998. The decrease in
total interest expense can be attributed to a 45 basis point drop in the rates
paid on average interest-bearing liabilities, partially offset by an increase in
average interest-bearing liabilities of $44.1 million, or 5%. Rates paid on
deposits decreased for all categories; the largest reduction was a 46 basis
point reduction in the average rate paid on time deposits.
Other Income
16
Other income increased by $756,000 for the first six months of 1999 compared to
the first six months of 1998 primarily as a result of a $411,000 gain on the
sale of a former branch location in Tulsa that was closed upon the opening of
the new Tulsa building at 15th and Utica. Other increases were $389,000 in
service charges and fees and $65,000 in gains on sales of securities. These
increases were offset by a $42,000 reduction in gains on sales of loans. The
gains on sales of securities in 1999 and 1998 occurred when "available for sale"
securities were called prior to their stated maturity date.
Other Expenses
Southwest's other expenses increased $1.7 million for the first six months of
1999 compared to the first six months of 1998. This increase was primarily the
result of increases in general and administrative expense ($1.2 million),
occupancy expense ($393,000) and personnel expense ($84,000). These increases
were offset by a slight reduction in FDIC and other insurance ($7,000). The
increase in general and administrative expense was due primarily to a $600,000
payment early in the second quarter of 1999 to settle pending litigation,
$303,000 in offering expenses paid on behalf of the selling shareholders in
Southwest's recent public offering and a $150,000 write-down of the carrying
value of an other real estate property. The increase in occupancy expense was
due primarily to increased data processing, depreciation and equipment costs, as
systems, facilities and equipment continue to be upgraded, and other expenses
related to opening the new Tulsa Utica building.
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Net Income
For the second quarter of 1999, Southwest recorded net income and net income
available to common shareholders of $2.5 million. This was $45,000 more than
the $2.4 million in net income and $442,000 more than the $2.0 million in net
income available to common shareholders (after deduction of dividends on
preferred stock) recorded for the second quarter of 1998. Southwest redeemed
its Series A Preferred Stock on September 1, 1998. The increase in net income
was primarily the result of a $525,000 reduction in the provision for loan
losses. Average common shares outstanding were 4,077,420 for the second quarter
of 1999 and 3,794,839 for the second quarter of 1998. Basic and diluted
earnings per common share increased to $0.60 and $0.59 per share for the second
quarter of 1999 from $0.53 and $0.51 per share for the same period in 1998,
respectively.
Net interest income decreased $151,000, or 2%, for the second quarter of 1999
compared to the same period in 1998. This decrease in net interest income, as
well as a $898,000, or 14%, increase in other expense, and a $31,000, or 2%,
increase in tax expense, was offset by a $525,000 decrease in the provision for
loan losses and a $600,000, or 40%, increase in other income. For the second
quarter of 1999, the return on average total equity and average common equity
was 15.03% compared to a 13.79% return on average total equity and a 15.28%
return on average common equity for the second quarter of 1998.
Net Interest Income
Net interest income decreased to $9.5 million for the second quarter of 1999
from $9.6 million for the same period in 1998 as the $638,000, or 3%, reduction
in interest income was only partially offset by a $487,000, or 5%, reduction in
interest expense. Yields on Southwest's interest-earning assets declined by 54
basis points, and the rates paid on Southwest's interest-bearing liabilities
declined by 45 basis points, resulting in a reduction in the interest rate
spread to 3.27% for the second quarter of 1999 from 3.36% for the second quarter
of 1998. Net interest margin also declined from 4.09% to 3.90%. The ratio of
average interest-earning assets to average interest-bearing
17
liabilities declined to 115.04% for the second quarter of 1999 from 116.09% for
the second quarter of 1998, primarily due to the increase in short-term
borrowings.
Total interest income for the second quarter of 1999 was $19.6 million, a 3%
reduction from $20.3 million during the same period in 1998. The principal
factor in the reduction of interest income was lower yields earned on interest-
earning assets. Southwest's average yield on loans declined to 8.55% for the
second quarter of 1999 from 9.21% in 1998. During the same period, average
investment securities decreased $15.5 million, or 8%, and the related yield
declined to 5.84% from 6.18%. The reduction caused by lower yields was
partially offset by the $45.4 million, or 6%, increase in the volume of average
loans outstanding.
Total interest expense for the second quarter of 1999 was $10.1 million, a
decrease of 5% from $10.6 million for the same period in 1998. The decrease in
total interest expense can be attributed to a decrease in the rates paid on
average interest-bearing liabilities, which declined to 4.79% from 5.24%.
During the same period, average interest-bearing liabilities increased $35.1
million, or 4%. Rates paid on deposits decreased for all categories; the
largest reduction was a 57 basis point reduction in the average rate paid on NOW
accounts.
Other Income
Other income increased by $600,000 for the second quarter of 1999 compared to
the same period of 1998 primarily as a result of a $411,000 gain on the sale of
a former branch location in Tulsa that was closed upon the opening of the new
Tulsa building at 15th and Utica. This gain caused other noninterest income to
increase by $463,000. Service charges and fees also increased $215,000. These
increases were offset by a $79,000 reduction in gains on sales of loans. The
gains on sales of securities in 1999 and 1998 occurred when "available for sale"
securities were called prior to their stated maturity date.
Other Expenses
Southwest's other expenses increased $898,000 for the second quarter of 1999
compared to the same period in 1998. This increase was primarily the result of
a increases in general and administrative expense ($727,000), occupancy expense
($107,000) and personnel expense ($67,000). These increases were offset by a
slight reduction in FDIC and other insurance ($3,000). The increase in general
and administrative expense was due primarily to the $600,000 payment to settle
pending litigation. The increase in occupancy expense was due primarily to
increased data processing, depreciation and equipment costs, as systems,
facilities and equipment continue to be upgraded.
* * * * * * *
Provision for Loan Losses
Southwest makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The adequacy of
the allowance for loan losses is determined by management. See Note 4,
Allowance for Loan Losses, in the Notes to Unaudited Consolidated Financial
Statements for additional information.
Taxes on Income
Southwest's income tax expense for the first six months of 1999 and 1998 was
$2.6 million and $2.7 million, respectively. Southwest's income tax expense for
the second quarters of 1999 and 1998 was $1.4 and $1.3 million,
18
respectively. Southwest's effective tax rates have been lower than the 34%
Federal and 6% State statutory rates primarily because of tax-exempt income on
municipal obligations and loans.
* * * * * * *
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and investment securities.
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 core deposits and
liquid assets, and accessibility to the capital and money markets. These funds
are used to meet deposit withdrawals, maintain reserve requirements, fund loans,
and operate the organization. Core deposits, defined as demand deposits,
interest-bearing transaction accounts, savings deposits and certificates of
deposit less than $100,000 were 77% and 81% of total deposits at June 30, 1999
and 1998, respectively.
Southwest uses various forms of short-term borrowings for cash management and
liquidity purposes on a limited basis. These forms of borrowings include
federal funds purchases, securities sold under agreements to repurchase, and
borrowings from the Federal Reserve Bank, the Student Loan Marketing Association
("SLMA") and the Federal Home Loan Bank of Topeka ("FHLB"). Stillwater National
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 with three other banks, a $35.0 million line of
credit from the SLMA and a $55.4 million line of credit from the FHLB.
Borrowings under the SLMA line would be secured by student loans. Borrowings
under the FHLB line would be secured by all unpledged securities and other
loans. During the first six months of 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.
June 30, 1999 June 30, 1998
----------------------------- -----------------------------
Repurchase Funds Borrowed Repurchase Funds Borrowed
Agreements from the FHLB Agreements from the FHLB
----------------------------- -----------------------------
(Dollars in thousands) (Dollars in thousands)
Amount outstanding at end of period $41,238 $55,000 $25,292 $30,000
Weighted average rate paid at end of period 4.36% 4.89% 4.95% 5.49%
Average Balance:
For the three months ended $37,622 $56,730 $23,426 $26,944
For the six months ended $38,261 $56,405 $22,128 $16,088
Average Rate Paid:
For the three months ended 4.36% 5.07% 4.95% 5.54%
For the six months ended 4.37% 4.99% 4.94% 5.51%
Maximum amount outstanding at any month end $41,238 $73,000 $26,540 $37,000
Stillwater National also has available unsecured brokered certificate of deposit
lines of credit from Merrill Lynch & Co., Morgan Stanley Dean Witter and Salomon
Smith Barney that total $260.0 million.
19
During the first six months of 1999, cash and cash equivalents decreased by $1.1
million. This decline was the result of cash used in financing activities of
$11.6 million (primarily from decrease in total deposits) which was not entirely
offset by cash generated from investing activities of $8.2 million and $2.3
million in cash provided from operating activities.
Cash and cash equivalents, during the first six months of 1998, decreased by
$14.0 million. The decrease was the result of cash used in investing activities
of $41.4 million which was not entirely offset by cash generated from financing
activities (primarily increased short-term borrowings) of $26.6 million and
$743,000 in cash provided from operating activities.
CAPITAL RESOURCES
On March 19, 1999, Southwest completed its public offering of 1,061,231 shares
of common stock. In April 1999, Southwest authorized the repurchase of up to
5%, or 204,000 shares, of outstanding common stock. See Note 8 to the Unaudited
Consolidated Financial Statements.
In the first six months of 1999, total shareholders' equity increased $8.1
million, or 14%, as a result of the common stock offering, other share
issuances, and earnings, offset in part by dividends, a decrease in net
unrealized gains (losses) on investment securities and the purchase of treasury
stock. Earnings, net of common stock dividends, contributed $3.8 million to
shareholders' equity during this six month period. The sale of common stock
through the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $430,000 to shareholders'
equity in the first six months of 1999. Net unrealized gains (losses) on
investment securities available for sale (net of tax) decreased to $(606,000) at
June 30, 1999 compared to $513,000 at December 31, 1998.
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines
are commonly known as Risk-Based Capital Guidelines. On June 30, 1999,
Southwest exceeded all applicable capital requirements, having a total risk-
based capital ratio of 12.15%, a Tier I risk-based capital ratio of 10.56%, and
a leverage ratio of 8.65%. As of June 30, 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.
Southwest declared a dividend of $.10 per common share payable on July 1, 1999
to shareholders of record as of June 17, 1999.
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 which require
the measurement of financial position and operating results in terms of
historical dollars without considering the
20
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation.
YEAR 2000 ISSUES
Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. This Year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips. This problem is not limited to computer systems. Y2K issues
may affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom Southwest
does business such as vendors, suppliers, utility companies, and customers.
The Y2K issue poses certain risks to Southwest and its operations. Some of
these risks are present because Southwest purchases technology and information
system applications from other parties who also face Y2K challenges. Other
risks are specific to the banking industry.
Commercial banks may experience a deposit base reduction if customers withdraw
significant amounts of cash in anticipation of Y2K. Such a deposit contraction
could cause an increase in interest rates, require Southwest to locate
alternative sources of funding or sell investment securities or other liquid
assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about Southwest's Y2K compliance efforts.
Southwest lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems,
they may not be able to repay their loans in a timely manner. This increased
credit risk could adversely affect Southwest's financial performance. In an
effort to identify any potential loan loss risk because of borrower Y2K
noncompliance, all loan customers with loans or commitments exceeding $500,000
were asked to complete a Y2K questionnaire. Where the customer did not reply,
the loan officer personally contacted the customer. Southwest purchased
software to assist it in interpreting the responses, and has analyzed the
results and any risks identified. Southwest has also modified its loan
underwriting controls to ensure that potential borrowers are carefully evaluated
for Y2K compliance before any new loan is approved.
Southwest's operations, like those of many other companies, can be adversely
affected by Y2K triggered failures which may be experienced by third parties
upon whom Southwest relies for processing transactions. Southwest has
identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. Southwest's primary supplier of data
processing services has adopted a Y2K compliance plan, which includes a
timetable for making changes necessary to be able to provide services in the
year 2000. That supplier has provided written assurances to Southwest regarding
its progress toward Y2K compliance and has been examined for Y2K readiness by
federal bank examiners.
Southwest's operations may also be adversely affected by Y2K related failures of
third party providers of electricity, telecommunications services and other
utility services. Although Southwest's contingency plan includes backup power
generation, failures in these areas could impact Southwest's ability to conduct
business. The Y2K compliance of these providers is largely beyond the control
of Southwest.
21
Southwest has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of the Y2K issue on Southwest and its customers.
Goals of the Y2K plan include identifying Y2K risks related to information
systems and equipment used by Southwest, informing customers of Y2K issues and
risks they may encounter personally, implementing changes in systems and
equipment necessary to achieve Y2K compliance, verifying that these changes are
effective, and establishing a contingency plan for operations in 2000 if
problems do arise. Federal bank examiners are examining all banking
organizations for Y2K compliance. The Comptroller of the Currency has examined
Southwest's Y2K compliance plan and its implementation progress. In addition,
the Board is carefully monitoring progress under the plan on a monthly basis.
Southwest's plan to address the Y2K issue involves several phases, described
below:
. Awareness - In this phase, Southwest's Y2K plan and project team were
established, the overall Y2K approach was identified, compliance
standards were defined, and responsibility for corrective action was
assigned. This phase has been completed.
. Assessment - During this phase, Southwest gathered and analyzed
information to determine the size and the impact of the Y2K problem
and then made decisions to modify, re-engineer, or replace existing
systems and programs. This phase has been completed.
. Renovation - This phase involves obtaining and implementing upgraded
software applications provided by Southwest's vendors, modifying
system codes, reengineering Y2K vulnerable systems and programs,
developing bridges for systems which cannot be reengineered, and
changing files and databases as necessary. This phase has been
completed.
. Validation - During the validation phase, Southwest is testing systems
and software for Y2K compliance in an effort to identify and correct
any errors that may be identified in the renovation phase. This phase
has been completed.
. Implementation - In this phase, all new and revised systems will be
implemented, data exchange issues will be resolved, and backup and
recovery plans will be developed. This phase is in process and will be
fully executed by December 31, 1999.
Based on information developed to date, management believes that the cost of
remediation will not be material to Southwest's business, operations, liquidity,
capital resources, or financial condition. Southwest estimates that total cash
outlays in connection with Y2K compliance will be less than $500,000, excluding
costs of employees involved in Y2K compliance activities. Southwest is funding
Y2K expenditures through continuing operations.
Designated personnel will report to work on January 1 and 2, 2000, (Saturday and
Sunday) to assess the proper functioning of critical and non-critical systems.
In the event that some or all systems experience failure, Southwest has
developed a detailed contingency plan. This plan calls for manual processing of
bank transactions at a designated location supported by a backup power system.
Delays in processing transactions would result in the event that Southwest is
forced to process transactions manually. These delays could disrupt normal
business activities of Southwest and its customers.
The discussion above regarding issues associated with Y2K includes certain
forward looking statements. Southwest's ability to predict results or effects
of issues related to the Y2K issue is inherently uncertain and is subject to
factors that may cause actual results to differ materially from those projected.
Factors that could affect the actual results include the following:
. The possibility that protection procedures, contingency plans, and
remediation efforts will not operate as intended;
. Southwest's failure to timely or completely identify all software or
hardware applications requiring remediation;
22
. Unexpected costs;
. The uncertainty associated with the impact of Y2K issues on the
banking industry and Southwest's customers, vendors, and others with
whom it conducts business; and
. The general economy.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
1998.
23
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
At Southwest's annual shareholders' meeting, held on May 27, 1999, the
shareholders of Southwest approved three proposals:
Proposal 1: Elected three Directors with terms expiring at the 2002
----------
annual shareholders' meting. The Directors elected and the
shareholder vote in the election of each Director was as follows:
For Withheld
--- --------
J. Berry Harrison 3,297,237 76,610
Erd M. Johnson 3,341,952 31,895
Robert L. McCormick 3,341,950 31,897
Other Directors continuing in office following the annual
shareholders' meeting were James E. Berry II, Joyce P. Berry, Joe
Berry Cannon, Thomas D. Berry, Rick J. Green, David P. Lambert, Alfred
L. Litchenburg, Linford R. Pitts, Robert R. Rodgers, and Stanley R.
White.
Proposal 2: Approved an amendment to Southwest's certificate of
----------
incorporation to increase the authorized common stock from 10,000,000
shares to 20,000,000 shares and to increase total authorized capital
stock to 22,000,000 shares; 2,929,086 votes for, 429,034 votes against
and 15,727 votes abstaining.
Proposal 3: Approved Southwest's 1999 Stock Option Plan; 2,104,784
----------
votes for, 397,681 votes against and 162,484 votes abstaining.
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
Exhibit 3.1 Amendment to Restated Certificate of
Incorporation of Southwest Bancorp, Inc.
Exhibit 3.2 Restated Certificate of Incorporation of
Southwest Bancorp, Inc.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
24
On April 23, 1999, Southwest filed a Form 8-K reporting, in Item 5, that its
Board of Directors had approved a share repurchase program and a shareholders'
rights plan and that Southwest anticipated a $600,000 payment to settle pending
litigation.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
By: /s/ Rick J. Green August 6, 1999
-------------------------------------------- ---------------------
Rick J. Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell August 6, 1999
-------------------------------------------- ---------------------
Kerby E. Crowell Date
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
25