SECURITIES AND EXCHANGE COMMISSION
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 September 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.
3,958,732
---------
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
September 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Operations for the
nine months ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 5
Unaudited Consolidated Statements of Shareholders' Equity for the
nine months ended September 30, 1999 and 1998 6
Unaudited Consolidated Statements of Comprehensive Income for the
nine months ended September 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 21
PART II. OTHER INFORMATION 22
SIGNATURES 26
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except per share data)
September 30, December 31,
1999 1998
--------------- ---------------
Assets
Cash and due from banks $22,550 $32,339
Federal funds sold 100 -
--------------- ---------------
Cash and cash equivalents 22,650 32,339
Investment securities:
Held to maturity, fair value $79,320 (1999) and $78,772 (1998) 79,419 77,575
Available for sale, amortized cost $134,095 (1999) and $96,240 (1998) 133,333 97,096
Loans receivable, net of allowance for loan losses
of $10,886 (1999) and $10,401 (1998) 792,275 782,918
Accrued interest receivable 10,204 8,658
Premises and equipment, net 20,690 19,204
Other assets 11,341 10,075
--------------- ---------------
Total assets $1,069,912 $1,027,865
=============== ===============
Liabilities & shareholders' equity
Deposits:
Noninterest-bearing demand $ 110,014 $ 120,099
Interest-bearing demand 43,113 43,079
Money market accounts 95,437 97,102
Savings accounts 3,866 3,416
Time deposits 573,677 579,365
--------------- ---------------
Total deposits 826,107 843,061
--------------- ---------------
Income taxes payable 166 151
Accrued interest payable 4,987 5,584
Other liabilities 3,023 1,683
Short-term borrowings 144,016 94,572
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
--------------- ---------------
Total liabilities 1,003,312 970,064
--------------- ---------------
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 14,868 9,369
Retained earnings 50,111 44,120
Accumulated other comprehensive income (loss) (412) 513
Treasury stock, at cost; 90,924 shares at September 30, 1999 (2,048) -
--------------- ---------------
Total shareholders' equity 66,600 57,801
--------------- ---------------
Total liabilities & shareholders' equity $1,069,912 $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 nine months
ended September 30, ended September 30,
1999 1998 1999 1998
------------ ----------- ------------ ------------
Interest income:
Interest and fees on loans $17,085 $17,499 $51,457 $51,886
Investment securities:
U.S. Government and agency obligations 1,720 2,174 5,299 6,980
State and political subdivisions 249 160 592 427
Mortgage-backed securities 828 325 1,722 836
Other securities 151 121 400 345
Federal funds sold 5 22 28 56
------------ ----------- ------------ ------------
Total interest income 20,038 20,301 59,498 60,530
Interest expense:
Interest-bearing demand 219 272 638 769
Money market accounts 909 825 2,635 2,507
Savings accounts 19 20 54 58
Time deposits 7,166 8,037 21,976 24,733
Short-term borrowings 1,639 849 4,009 2,045
Long-term debt 582 581 1,745 1,744
------------ ----------- ------------ ------------
Total interest expense 10,534 10,584 31,057 31,856
------------ ----------- ------------ ------------
Net interest income 9,504 9,717 28,441 28,674
Provision for loan losses 600 930 1,700 2,705
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 8,904 8,787 26,741 25,969
Other income:
Service charges and fees 1,198 874 3,323 2,610
Other noninterest income 553 82 1,201 386
Gain (loss) on sales of loans receivable 742 913 1,746 1,959
Gain (loss) on sales of investment securities 1 165 86 185
------------ ----------- ------------ ------------
Total other income 2,494 2,034 6,356 5,140
Other expenses:
Salaries and employee benefits 3,369 3,738 10,225 10,510
Occupancy 1,503 1,273 4,296 3,673
FDIC and other insurance 59 62 180 190
General and administrative 2,374 1,977 7,188 5,569
------------ ----------- ------------ ------------
Total other expenses 7,305 7,050 21,889 19,942
------------ ----------- ------------ ------------
Income before taxes 4,093 3,771 11,208 11,167
Taxes on income 1,453 1,351 4,003 4,004
------------ ----------- ------------ ------------
Net income $2,640 $2,420 $7,205 $7,163
============ =========== ============ ============
Net income available to common shareholders $2,640 $1,228 $7,205 $5,177
============ =========== ============ ============
Basic earnings per common share $ 0.66 $ 0.32 $ 1.81 $ 1.36
============ =========== ============ ============
Diluted earnings per common share $ 0.64 $ 0.31 $ 1.77 $ 1.32
============ =========== ============ ============
See notes to unaudited consolidated financial statements.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the nine months
ended September 30,
1999 1998
--------------- --------------
Operating activities:
Net income $ 7,205 $ 7,163
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 1,700 2,705
Depreciation and amortization expense 1,685 1,384
Amortization of premiums and accretion of
discount on securities, net 235 117
Amortization of intangibles 205 186
(Gain) Loss on sales of securities (86) (185)
(Gain) Loss on sales of loans receivable (1,746) (1,959)
(Gain) Loss on sales of premises and equipment (849) 17
(Gain) Loss on other real estate owned, net 650 60
Proceeds from sales of residential mortgage loans 71,818 95,464
Residential mortgage loans originated for resale (70,668) (94,453)
Changes in assets and liabilities:
Accrued interest receivable (1,546) (219)
Other assets (1,475) (831)
Income taxes payable 15 (413)
Accrued interest payable (597) (996)
Other liabilities 1,282 1,491
--------------- --------------
Net cash (used in) provided from operating activities 7,828 9,531
--------------- --------------
Investing activities:
Proceeds from sales/calls of available for sale securities 16,415 13,968
Proceeds from principal repayments and maturities:
Held to maturity securities 15,408 24,521
Available for sale securities 7,300 25,112
Purchases of held to maturity securities (19,916) (19,105)
Purchases of available for sale securities (58,979) (26,519)
Loans originated and principal repayments, net (29,193) (65,332)
Proceeds from sales of guaranteed student loans 18,703 25,186
Purchases of premises and equipment (3,434) (5,806)
Proceeds from sales of premises and equipment 1,112 82
Proceeds from sales of other real estate owned - 387
--------------- --------------
Net cash (used in) provided from investing activities (52,584) (27,506)
--------------- --------------
Financing activities:
Net increase (decrease) in deposits (16,954) (10,614)
Net increase (decrease) in short-term borrowings 49,444 36,566
Net proceeds from issuance of common stock 5,781 209
Redemption of preferred stock - (17,250)
Reissuance of treasury stock 25 -
Purchases of treasury stock (2,073) -
Common stock dividends paid (1,156) (985)
Preferred stock dividends paid - (1,190)
--------------- --------------
Net cash (used in) provided from financing activities 35,067 6,736
--------------- --------------
Net increase (decrease) in cash and cash equivalents (9,689) (11,239)
Cash and cash equivalents,
Beginning of period 32,339 36,259
--------------- --------------
End of period $ 22,650 $ 25,020
=============== ==============
See notes to unaudited consolidated financial statements.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Preferred Stock Common Stock Capital Retained
Shares Amount Shares Amount Surplus Earnings
-----------------------------------------------------------------------
Balance, January 1, 1998 690,000 $690 3,787,839 $3,788 $24,764 $38,226
Cash dividends paid:
Preferred, $1.15 per share - - - - - (1,190)
Common, $0.18 per share - - - - - (683)
Cash dividends declared:
Preferred, $0.575 per share - - - - - -
Common, $0.09 per share - - - - - (341)
Common stock issued:
Employee Stock Option Plan - - 4,000 4 55 -
Employee Stock Purchase Plan - - 1,913 2 52 -
Dividend Reinvestment Plan - - 3,355 3 93 -
Preferred Stock Redeemed (690,000) (690) - - (15,632) (928)
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - -
Net income - - - - - 7,163
-----------------------------------------------------------------------
Balance, September 30, 1998 - - 3,797,107 $3,797 $9,332 $42,247
=======================================================================
Balance, January 1, 1999 - - 3,799,065 $3,799 $9,369 $44,120
Cash dividends paid:
Common, $0.20 per share - - - - - (814)
Cash dividends declared:
Common, $0.10 per share - - - - - (400)
Common stock issued:
Employee Stock Option Plan - - 30,000 30 353 -
Employee Stock Purchase Plan - - 2,345 1 29 -
Dividend Reinvestment Plan - - 722 1 16 -
Public Offering - - 250,000 250 5,101 -
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - -
Treasury shares purchased - - (92,000) - - -
Net income - - - - - 7,205
-----------------------------------------------------------------------
Balance, September 30, 1999 - - 3,990,132 $4,081 $14,868 $50,111
=======================================================================
Accumulated Total
Other Share-
Comprehensive Treasury holders'
Income (Loss) Stock Equity
----------------------------------------
Balance, January 1, 1998 $580 - $68,048
Cash dividends paid:
Preferred, $1.15 per share - - (1,190)
Common, $0.18 per share - - (683)
Cash dividends declared:
Preferred, $0.575 per share - - -
Common, $0.09 per share - - (341)
Common stock issued:
Employee Stock Option Plan - - 59
Employee Stock Purchase Plan - - 54
Dividend Reinvestment Plan - - 96
Preferred Stock Redeemed - - (17,250)
Change in unrealized gain
(loss) on available for sale
securities, net of tax 520 - 520
Net income - - 7,163
----------------------------------------
Balance, September 30, 1998 $1,100 - $56,476
========================================
Balance, January 1, 1999 $513 - $57,801
Cash dividends paid:
Common, $0.20 per share - - (814)
Cash dividends declared:
Common, $0.10 per share - - (400)
Common stock issued:
Employee Stock Option Plan - - 383
Employee Stock Purchase Plan - 16 46
Dividend Reinvestment Plan - 9 26
Public Offering - - 5,351
Change in unrealized gain
(loss) on available for sale
securities, net of tax (925) - (925)
Treasury shares purchased - (2,073) (2,073)
Net income - - 7,205
----------------------------------------
Balance, September 30, 1999 $(412) $(2,048) $66,600
========================================
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 nine months
ended September 30, ended September 30,
1999 1998 1999 1998
------------ ----------- ------------ ------------
Net income $2,640 $2,420 $7,205 $7,163
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available
for sale securities 250 945 (1,532) 1,051
Reclassification adjustment for (gains) losses
arising during the period (1) (165) (86) (185)
------------ ----------- ------------ ------------
Other comprehensive income (loss), before tax 2,889 3,200 5,587 8,029
Tax (expense) benefit related to items
of other comprehensive income (loss) (55) (312) 693 (346)
------------ ----------- ------------ ------------
Other comprehensive income (loss), net of tax $2,834 $2,888 $6,280 $7,683
============ =========== ============ ============
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 nine months ended September 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 Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 nine For the
months ended year ended
September 30, 1999 December 31, 1998
-------------------- --------------------
(Dollars in thousands)
Balance at beginning of period $10,401 $8,282
Loans charged-off:
Real estate mortgage 208 460
Real estate construction 10 -
Commercial 823 1,320
Installment and consumer 661 594
-------------------- --------------------
Total charge-offs 1,702 2,374
Recoveries:
Real estate mortgage 19 105
Commercial 316 582
Installment and consumer 152 426
-------------------- --------------------
Total recoveries 487 1,113
-------------------- --------------------
Net loans charged-off 1,215 1,261
Provision for loan losses 1,700 3,380
-------------------- --------------------
Balance at end of period $10,886 $10,401
==================== ====================
Loans outstanding:
Average $804,170 $756,611
End of period 803,161 793,319
Net charge-offs to total average loans (annualized) 0.20% 0.17%
Allowance for loan losses to total loans 1.36% 1.31%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
At At
September 30, 1999 December 31, 1998
-------------------- --------------------
(Dollars in thousands)
Nonaccrual loans (1) $5,741 $872
Past due 90 days or more 14 451
Restructured terms - -
-------------------- --------------------
Total nonperforming loans 5,755 1,323
Other real estate owned 3,029 3,650
-------------------- --------------------
Total nonperforming assets $8,784 $4,973
==================== ====================
Nonperforming loans to loans receivable 0.72% 0.17%
Allowance for loan losses to nonperforming loans 189.16% 786.17%
Nonperforming assets to loans receivable and
other real estate owned 1.09% 0.62%
(1) The government-guaranteed portion of loans included in these totals was $810
(1999) and $177 (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
9
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 1.36% of
total loans, at September 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 September 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
growth in 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 September 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 September 30, 1999, total nonperforming loans were $5.8 million, or 0.72% 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 in future
periods.
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
State of Oklahoma, but its commercial lending operations are concentrated in the
Stillwater, Tulsa, and Oklahoma City areas of the state. As a result, the
collectibility of Southwest's loan portfolio can be affected by changes in the
general economic conditions in the state and in those metropolitan areas. At
September 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 September 30, 1999, loans to individuals and businesses in the healthcare
industry totaled approximately $84.3 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% or more of total loans.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $5.7 million at September 30, 1999. During
the first nine months of 1999, $170,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, total interest
income of $455,000 would have been recorded.
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, 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.
10
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 September
30, 1999, there were 180,000 antidilutive options to purchase common shares. At
September 30, 1998, there were no antidilutive options to purchase common
shares.
The following is a reconciliation of net income available to common shareholders
and the common shares used in the calculations of basic and diluted earnings per
common share:
For the three months For the nine months
ended September 30, ended September 30,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(Dollars in thousands) (Dollars in thousands)
Net income $2,640 $2,420 $7,205 $7,163
Less: preferred stock dividend requirement - (264) - (1,058)
Redemption of preferred stock in excess of
the carrying amount - (928) - (928)
-------------- ------------- ------------- -------------
Net income available to common shareholders $2,640 $1,228 $7,205 $5,177
============== ============= ============= =============
Weighted average common shares outstanding:
Basic earnings per share 4,036,097 3,796,886 3,986,286 3,794,043
Effect of dilutive securities:
Stock options 78,067 116,997 84,016 122,701
-------------- ------------- ------------- -------------
Weighted average common shares outstanding:
Diluted earnings per share 4,114,164 3,913,883 4,070,302 3,916,744
============== ============= ============= =============
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 September 30,
1999, 92,000 shares had been repurchased at a total cost of $2.1 million.
11
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 nine months ended September 30,
1999 1998
----------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------------------------------------
Assets:
Loans receivable $804,170 8.56% $752,785 9.22%
Investment securities 180,978 5.90 185,500 6.17
Other interest-earning assets 1,495 4.92 1,883 5.47
-------------- --------------
Total interest-earning assets 986,643 8.06 940,168 8.61
Noninterest-earning assets 50,133 43,273
-------------- --------------
Total assets $1,036,776 $983,441
============== ==============
Liabilities and shareholders' equity:
Interest-bearing demand $45,797 1.86% $43,927 2.34%
Money market accounts 96,364 3.66 88,542 3.79
Savings accounts 3,642 1.98 3,454 2.25
Time deposits 578,111 5.08 599,219 5.52
-------------- --------------
Total interest-bearing deposits 723,914 4.67 735,142 5.10
Short-term borrowings 109,998 4.87 51,826 5.28
Long-term debt 25,013 9.30 25,013 9.30
-------------- --------------
Total interest-bearing liabilities 858,925 4.83 811,981 5.25
Noninterest-bearing demand 100,179 88,416
Other noninterest-bearing liabilities 14,092 14,740
Shareholders' equity 63,580 68,304
-------------- --------------
Total liabilities and shareholders' equity $1,036,776 $983,441
============== ==============
Interest rate spread 3.23% 3.36%
=============== ===============
Net interest margin (1) 3.85% 4.08%
=============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.87% 115.79%
============== ==============
(1) 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
$1.070 billion at September 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
Total Assets
Southwest's total assets were $1.070 billion at September 30, 1999, a 4%
increase from $1.028 billion at December 31, 1998.
Loans Receivable
Loans were $803.2 million at September 30, 1999, a slight increase ($9.8
million) from December 31, 1998. Southwest experienced increases in the
categories of residential mortgages ($11.0 million, or 13%), commercial loans
($9.7 million, or 4%), and real estate construction loans ($6.6 million, or 9%).
These increases were offset by reductions in commercial mortgages ($13.5
million, or 5%), student loans ($2.6 million, or 4%) and consumer loans ($1.4
million, or 3%). The allowance for loan losses increased by $485,000, or 5%,
from December 31, 1998 to September 30, 1999. At September 30, 1999, the
allowance for loan losses was $10.9 million, or 1.36% of total loans, compared
to $10.4 million, or 1.31% of total loans, at December 31, 1998. The increase in
total loans from year-end 1998 to September 30, 1999 is the net result of growth
from new loans and payoffs of old credits.
14
Investment Securities
Investment securities were $212.3 at September 30, 1999, an increase of $38.1
million, or 22%, compared to December 31, 1998. A Managed Investment Program
(MIP) was implemented during the third quarter to enhance shareholder value by
maximizing Southwest's use of capital and returns on common equity. Under this
program Southwest's investment securities have increased by approximately $34.4
million with funding from various wholesale funding sources. Generally,
securities acquired had lower capital requirements than the basic 8% Risk Based
Capital guidelines, and were classified as available for sale. Only securities
with very high credit quality standards were considered as acceptable
investments under the MIP. Management expects that this program will have
somewhat higher interest rate risk and less credit risk or liquidity risk than
commercial loans. All risk ratios will continue to be maintained within current
policy guidelines.
Premises and Equipment
Premises and equipment increased by $1.5 million, as compared to December 31,
1998, primarily due to the construction of the new Tulsa Banking Center at 15th
and Utica that opened in January 1999.
Deposits
Southwest's deposits decreased by $17.0 million, or 2%, from $843.1 million at
December 31, 1998 to $826.1 million at September 30, 1999. Slight increases
occurred in savings accounts and NOW accounts. These increases were offset by
decreases in demand deposits ($10.1 million, or 8%), money market accounts ($1.7
million, or 2%), and time deposits ($5.7 million, or 1%) as compared to December
31, 1998. The reduction in deposits can be attributed to a decreasing rate
environment during the current year.
Shareholders' Equity
Shareholders' equity increased by $8.8 million, or 15%, due primarily to
earnings, net of common stock dividends, for the first nine 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 $455,000 increase due to
proceeds of common stock issued through the employee stock purchase plan, the
employee stock option plan and the dividend reinvestment plan. These increases
were offset by a $925,000 decrease attributable to a change in the net
unrealized gains on investment securities available for sale (net of tax) and a
$2.1 million decrease attributable to the purchase of treasury stock. On
September 30, 1999, Southwest and Stillwater National continued to exceed all
applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net income available to common shareholders was $7.2 million for the first nine
months of 1999, up 39% over the $5.2 million recorded in the first nine months
of 1998. Southwest redeemed its Series A Preferred Stock on September 1, 1998.
For the first nine months of 1999, net income of $7.2 million was approximately
the same as the $7.2 million recorded in the first nine months of 1998 before
deduction of dividends on preferred stock and the adjustment for $928,000 of
original issue costs on the redeemed preferred stock. Average common shares
outstanding were 3,986,286 and 3,794,043 for the nine months ended September 30,
1999 and 1998. Basic and diluted earnings per common share increased to $1.81
and $1.77 per share for the first nine months of 1999 from $1.36 and $1.32 per
share for the same period in 1998, respectively.
Net interest income remained substantially the same during the first nine months
of 1999 compared to the first nine months of 1998. A $1.2 million, or 24%,
increase in other income, a $1.0 million, or 37%, reduction in the provision for
loan losses, and a $1,000 reduction in tax expense were offset by a $1.9
million, or 10%, increase in other expenses. For the first nine months of 1999,
the return on average total equity and average common equity was 15.15% compared
to a 14.02% return on average total equity and a 13.07% return on average common
equity for the first nine months of 1998.
15
Net Interest Income
Net interest income remained substantially the same at $28.4 million for the
first nine months of 1999 from $28.7 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 55 basis points, and the
rates paid on Southwest's interest-bearing liabilities declined by 42 basis
points, resulting in a decrease in the interest rate spread to 3.23% for the
first nine months of 1999 from 3.36% for the first nine months of 1998. The
ratio of average interest-earning assets to average interest-bearing liabilities
declined to 114.87% for the first nine months of 1999 from 115.79% for the first
nine months of 1998, primarily due to the increase in short-term borrowings.
Total interest income for the first nine months of 1999 was $59.5 million, down
2% from $60.5 million during the same period in 1998. The principal cause of the
lower interest income was a 66 basis point decline in the yield on loans, which
was partially offset by a $51.4 million, or 7%, increase in the volume of
average loans outstanding. During the same period, Southwest's average
investment securities decreased $4.5 million, or 2%, and the related yield
decreased to 5.90% from 6.17%.
Total interest expense for the first nine months of 1999 was $31.1 million, a
decrease of 3% from $31.9 million for the same period in 1998. The decrease in
total interest expense can be attributed to a 42 basis point drop in the rates
paid on average interest-bearing liabilities, partially offset by an increase in
average interest-bearing liabilities of $46.9 million, or 6%. Rates paid on
deposits decreased for all categories.
Other Income
Other income increased by $1.2 million for the first nine months of 1999
compared to the first nine months of 1998 primarily as a result of $840,000 in
gains on the sales of three former branch locations which were no longer
occupied by Stillwater National. Other increases were $713,000 in service
charges and fees. These increases were offset by a $213,000 reduction in gains
on sales of loans and a $99,000 reduction in gains on sales of securities. 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 $1.9 million for the first nine months of
1999 compared to the first nine months of 1998. This increase was primarily the
result of increases in general and administrative expense ($1.6 million) and
occupancy expense ($623,000). These increases were offset by reductions in
personnel expense ($285,000) and FDIC and other insurance ($10,000). 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 $650,000 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 SEPTEMBER 30, 1999 AND 1998
Net Income
For the third quarter of 1999, Southwest recorded net income and net income
available to common shareholders of $2.6 million. This was $220,000 more than
the $2.4 million in net income and $1.4 million more than the $1.2 million in
net income available to common shareholders (after deduction of dividends on
preferred stock and the adjustment for redeeming the preferred stock) recorded
for the third 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
$330,000 reduction in the provision for loan losses. Average common shares
outstanding were 4,036,097 for the third quarter of 1999 and 3,796,886 for the
third quarter of 1998. Basic and diluted earnings per common share increased to
$0.66 and $0.64 per share for the third quarter of 1999 from $0.32 and $0.31 per
share for the same period in 1998, respectively.
Net interest income decreased $213,000, or 2%, for the third quarter of 1999
compared to the same period in 1998. This decrease in net interest income, as
well as a $255,000, or 4%, increase in other expense, and a $102,000, or 8%,
increase in
16
tax expense, was offset by a $330,000, or 35%, decrease in the provision for
loan losses and a $460,000, or 23%, increase in other income. For the third
quarter of 1999, the return on average total equity and average common equity
was 15.90% compared to a 14.49% return on average total equity and a 8.90%
return on average common equity for the third quarter of 1998.
Net Interest Income
Net interest income decreased to $9.5 million for the third quarter of 1999 from
$9.7 million for the same period in 1998 as the $263,000, or 1%, reduction in
interest income was only partially offset by a $50,000, or less than 1%,
reduction in interest expense. Yields on Southwest's interest-earning assets
declined by 58 basis points, and the rates paid on Southwest's interest-bearing
liabilities declined by 35 basis points, resulting in a reduction in the
interest rate spread to 3.16% for the third quarter of 1999 from 3.39% for the
second quarter of 1998. Net interest margin also declined from 4.10% to 3.79%.
The ratio of average interest-earning assets to average interest-bearing
liabilities declined to 114.88% for the third quarter of 1999 from 115.93% for
the third quarter of 1998, primarily due to the increase in short-term
borrowings.
Total interest income for the third quarter of 1999 was $20.0 million, a 1%
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 8.52%
for the third quarter of 1999 from 9.18% in 1998. During the same period,
average investment securities increased $17.0 million, or 9%, and the related
yield declined to 5.89% from 6.07%. The reduction caused by lower yields was
partially offset by the $39.3 million, or 5%, increase in the volume of average
loans outstanding.
Total interest expense for the third quarter of 1999 was $10.5 million, a
decrease of less than 1% 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 4.83% from
5.18%. During the same period, average interest-bearing liabilities increased
$55.2 million, or 7%. Rates paid on deposits decreased for all categories.
Other Income
Other income increased by $471,000 for the third quarter of 1999 compared to the
same period of 1998 primarily as a result of $429,000 in gains on the sale of
two former branch locations in Oklahoma City and Chickasha. Service charges and
fees also increased $324,000. These increases were offset by a $171,000
reduction in gains on sales of loans and a $164,000 reduction in gains on sales
of securities. 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 $255,000 for the third quarter of 1999
compared to the same period in 1998. This increase was primarily the result of
increases in general and administrative expense ($410,000) and occupancy expense
($230,000). These increases were offset by reductions in personnel expense
($369,000) and FDIC and other insurance ($3,000). The increase in general and
administrative expense was due primarily to the $500,000 write-down on 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.
* * * * * * *
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.
17
Taxes on Income
Southwest's income tax expense was $4.0 million for the first nine months of
1999 and 1998. Southwest's income tax expense for the third quarters of 1999 and
1998 was $1.5 and $1.4 million, 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 73% and 79% of total deposits at September 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 $195.6 million line of credit from the FHLB. Borrowings under the
SLMA line would be secured by student loans. Borrowings under the FHLB line
would be secured by all unpledged securities and other loans. During the first
nine 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.
September 30, 1999 September 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 $40,516 $100,000 $33,170 $20,000
Weighted average rate paid at end of period 4.61% 5.33% 4.97% 5.45%
Average Balance:
For the three months ended $34,629 $86,242 $29,472 $26,945
For the nine months ended $37,037 $66,460 $24,603 $20,282
Average Rate Paid:
For the three months ended 4.50% 5.26% 4.97% 5.56%
For the nine months ended 4.41% 5.11% 4.95% 5.53%
Maximum amount outstanding at any month end $41,238 $111,600 $33,170 $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.
During the first nine months of 1999, cash and cash equivalents decreased by
$9.7 million. This decline was the net result of cash used in investing
activities of $52.6 million offset in part by cash provided from financing
activities of $35.1 million (primarily from the increase in short-term
borrowings) and cash provided from operating activities of $7.8 million.
18
During the first nine months of 1998, cash and cash equivalents decreased by
$11.2 million. This decline was the net result of cash used in investing
activities of $27.5 million offset in part by cash provided from financing
activities of $6.8 million (primarily increased short-term borrowings) and cash
provided from operating activities of $9.5 million.
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, Shareholders'
Equity, in the Notes to the Unaudited Consolidated Financial Statements for
additional information.
In the first nine months of 1999, total shareholders' equity increased $8.8
million, or 15%, 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 $6.0 million to
shareholders' equity during this nine month period. The sale or issuance of
common stock through the dividend reinvestment plan, the employee stock purchase
plan and the employee stock option plan contributed an additional $455,000 to
shareholders' equity in the first nine months of 1999. Net unrealized gains
(losses) on investment securities available for sale (net of tax) decreased to
$(412,000) at September 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 September 30, 1999,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 11.77%, a Tier I risk-based capital ratio of 10.20%,
and a leverage ratio of 8.52%. As of September 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 of the bank as a "well-capitalized" institution under
these regulations does not constitute a recommendation or endorsement of
Stillwater National by Federal bank regulators.
Southwest declared a dividend of $.10 per common share payable on October 1,
1999 to shareholders of record as
of September 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 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 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
19
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.
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 last examined
Southwest's Y2K compliance plan and its implementation progress in March 1999.
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 involved 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 tested systems
and software for Y2K compliance in an effort to identify and
correct any errors that may have been 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 have totaled less than $500,000,
excluding costs of employees involved in Y2K
20
compliance activities. Southwest has funded Y2K expenditures through continuing
operations; no further costs are anticipated, other than employment costs.
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;
. 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.
21
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
None
Item 5. Other information
DESCRIPTION OF COMMON STOCK
The following material is provided for the purpose of updating
descriptions of Southwest Bancorp, Inc. common stock previously filed with the
United States Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended.
Authorized Capital Stock
Southwest's Amended and Restated Certificate of Incorporation
authorizes the issuance of up to: 20,000,000 shares of commons stock, $1.00 par
value per share; 1,000,000 shares of serial preferred stock, $1.00 par value per
share; and 1,000,000 shares of Class B serial preferred stock, par value $1.00
per share. As of September 30, 1999, Southwest had outstanding 3,990,132 shares
of Common Stock. No shares of serial preferred stock or Class B serial preferred
stock were outstanding at that date.
Common Stock
Each share of Common Stock is entitled to one vote on all matters
submitted to shareholders, except that in the election of directors, cumulative
voting is permitted, which means that each holder has the right to cast as many
votes in the aggregate as equal the total number of shares held by the
shareholder multiplied by the number of directors to be elected, and may cast
the whole number of votes to which the shareholder is entitled for any one or
more candidates in his or her discretion.
Holders of shares of Common Stock do not have preemptive rights to
subscribe for shares of Common Stock or any other class of stock that may be
issued in the future. The shares of Common Stock are not subject to redemption
and, upon receipt by Southwest of the full purchase price therefor, will be
fully paid and nonassessable.
Each share of Common Stock participates equally in dividends which are
payable when, as and if declared by Southwest's Board of Directors out of funds
legally available for such purpose, and is entitled to share equally in the
assets of Southwest available for distribution to shareholders in the event of
liquidation of Southwest. If any shares of serial preferred stock or Class B
serial preferred stock are issued, such shares may have priority in dividends or
liquidation over shares of common stock.
Restrictions on Changes in Control
Southwest's Amended and Restated Certificate of Incorporation requires
the affirmative vote of not less than 80% of the outstanding voting stock of
Southwest to authorize the merger or consolidation of Southwest with or a sale,
exchange or lease of 25% or more of the assets of Southwest to any person or
entity unless approval of the transaction is recommended by at least a majority
of the entire Board of Directors.
Under the Amended and Restated Certificate of Incorporation, the
holders of at least 80% of Southwest's outstanding shares of voting stock and at
least a majority of Southwest's outstanding shares of voting stock not including
shares held by a
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"Related Person," would be required to approve certain "Business Combinations,"
as defined in the Certificate of Incorporation. The increased voting
requirements would apply in connection with Business Combinations involving a
Related Person, except in cases where the proposed transaction was approved in
advance by two-thirds of the members of the Board of Directors who are
unaffiliated with the Related Person and who were directors prior to the time
when the Related Person became a Related Person (the "Continuing Directors").
The term "Related Person" is defined to include any individual, corporation,
partnership, or other entity that owns beneficially or controls, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of
Southwest. A "Business Combination" is defined to include: (i) any merger or
consolidation of Southwest with or into any Related Person; (ii) any sale,
lease, exchange, mortgage, transfer or other disposition of all or a Substantial
Part of the assets of Southwest or a subsidiary to any Related Person (the term
"Substantial Part" is defined to include more than 25% of Southwest's total
assets); (iii) any merger or consolidation of a Related Person with or into
Southwest or a subsidiary of Southwest; (iv) any sale, lease, exchange,
transfer, or other disposition of all or any Substantial Part of the assets of a
Related Person to Southwest or a subsidiary of Southwest; (v) the issuance of
any securities of Southwest or subsidiary of Southwest to a Related Person; (vi)
any reclassification of Southwest's common stock, or any recapitalization
involving Southwest's common stock; (vii) the acquisition by Southwest of any
securities of the Related Person; and (viii) any agreement, contract or other
arrangement providing for any of the above transactions.
Under the Oklahoma General Corporation Act, mergers, consolidations and
sales of substantially all of the assets of an Oklahoma corporation must
generally be approved by a vote of the holders of a majority of the outstanding
shares of stock entitled to vote thereon. Section 1090.3 of the Oklahoma General
Corporation Act, however, restricts certain transactions between an Oklahoma
corporation (or its majority owned subsidiaries), and a holder of 15% or more of
the corporation's outstanding voting stock, together with affiliates or
associates thereof (excluding persons who were 15% shareholders on September 1,
1991, or who become such by action of the corporation alone) (an "Interested
Shareholder"). For a period of three years following the date that a shareholder
became an Interested Shareholder, Section 1090.3 prohibits the following types
of transactions between the corporation and the Interested Shareholder (unless
certain conditions, described below, are met): (i) mergers or consolidations;
(ii) sales, leases, exchanges or other transfers of 10% or more of the aggregate
assets of the corporation; (iii) issuances or transfers by the corporation of
any stock of the corporation that would have the effect of increasing the
Interested Shareholder's proportionate share of the stock of any class or series
of the corporation; (iv) receipt by the Interested Shareholder of the benefit,
except proportionately as a shareholder of the corporation, of loans, advances,
guarantees, pledges or other financial benefits provided by the corporation; and
(v) any other transaction which has the effect of increasing the proportionate
share of the stock of any class or series of the corporation that is owned by
the Interested Shareholder. This restriction does not apply if: (1) before such
person became an Interested Shareholder, the Board of Directors approved the
transaction in which the Interested Shareholder becomes an Interested
Shareholder or approved the business combination; or (2) upon consummation of
the transaction which resulted in the shareholder's becoming an Interested
Shareholder, the Interested Shareholder owned at least 85% of the voting stock
of Southwest outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding, those shares owned by
(i) persons who are directors and also officers, and (ii) employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (3) on or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of shareholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock which is not owned by the
Interested Shareholder. An Oklahoma corporation may exempt itself from the
requirements of the statute by adopting an amendment to its certificate of
incorporation.
The Amended and Restated Certificate of Incorporation and Bylaws of
Southwest provide that the Board of Directors of Southwest shall be divided into
three classes which shall be as nearly equal in number as possible. The
directors of each class hold office following their election for a period of
three years, with only one-third (1/3) of the directors coming up for
re-election each year. Each director serves until his or her successor is
elected and qualified. Although such provisions may have the effect of making it
more difficult and time consuming for a shareholder to gain control of
Southwest, the Board of Directors believes these provisions provide greater
continuity and stability in the management of Southwest and provide the Board
with greater ability to negotiate with respect to any proposal for a business
combination, corporate restructuring or other significant transaction in order
to help assure that any transaction is in the best interests of shareholders.
The classification of directors may reduce or eliminate the ability of
shareholders with less than a majority of votes to elect a representative
director by voting cumulatively.
Under the Amended and Restated Certificate of Incorporation and Bylaws
of Southwest any director or the entire Board may be removed at any time, but
only for cause and only by the affirmative vote of the holders of at least 80%
of the outstanding shares of capital stock of Southwest entitled to vote
generally in the election of directors, cast at a meeting of shareholders called
for that purpose. Additionally, the number of directors may be increased to as
many as 21 (exclusive of directors, if any, to be
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elected by holders of preferred stock of Southwest, voting separately as a
class) or decreased to as few as three by the Board of Directors, but no
decrease shall result in the shortening of the term of any incumbent director.
Vacancies in the Board of Southwest, however caused, and newly created
directorships shall be filled by a vote of two-thirds (2/3) of the directors
then in office, whether or not a quorum.
The Amended and Restated Certificate of Incorporation and Bylaws of
Southwest provide that special meetings of shareholders for any purpose can only
be called by the Board of Directors of Southwest, or by a committee of the Board
of Directors which has been duly designated by the Board. Neither shareholders
nor any other person or persons may call a special meeting.
The Amended and Restated Certificate of Incorporation of Southwest
provides that the affirmative vote of not less than 80% of the outstanding
shares of Southwest is required to amend the Certificate's provisions regarding
election and removal of directors, amendment of the Certificate of Incorporation
and Bylaws, indemnification, directors liability and certain business
combinations and other transactions. The Bylaws may be repealed, altered,
amended or rescinded by a vote of a majority of the Board of Directors or by the
holders of at least 80% of the outstanding shares of capital stock of Southwest
entitled to vote generally in the election of directors at a meeting of the
shareholders called for that purpose.
The Amended and Restated Certificate of Incorporation authorizes
Southwest to issue shares of common stock and shares of serial preferred stock,
from time to time as approved by the Board of Directors of Southwest without the
approval of the shareholders. The ability of Southwest to issue additional
shares could be construed as having an anti-takeover effect because it can
dilute the voting or other rights of the proposed acquiror or create a
substantial voting block in institutional or other hands.
Southwest's Board of Directors adopted a Shareholder Rights Plan
designed to protect Southwest's shareholders against acquisitions that the board
believes are unfair or otherwise not in the best interests of shareholders or
Southwest. 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, in effect, will
entitle the holder (other than the acquiring party) to buy, at the right's then
current exercise price, Southwest 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 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.
The existence of the Shareholder Rights Plan may have the effect of
making it more difficult and time consuming for a shareholder to gain control of
Southwest without the approval of the Board of Directors. The Board of Directors
believes this Shareholder Rights Plan represents a means of protecting the
interests of Southwest's shareholders and providing a more orderly process for
the Board to consider any unsolicited bid for control of Southwest that could
deprive shareholders from realizing the full value of their investment in
Southwest.
The Amended and Restated Certificate of Incorporation of Southwest
provides that nominations for the election of directors and proposals for any
new business to be taken up at an annual or special meeting of shareholders may
be made by the board of directors or by any shareholder of Southwest entitled to
vote generally in the election of directors. However, in order for a shareholder
to make any such nominations or proposals, he or she must give notice in writing
of such nomination or proposal to the Secretary of Southwest not less than 30
nor more than 60 days prior to any such meeting unless less than 40 days' notice
of the meeting has been given to shareholders in which case notice may be given
up to the tenth day following notice to the shareholders.
Southwest's Severance Compensation Plan contains provisions that may
also deter acquisitions of control by requiring payments to participants upon
termination following a change-in-control.
In addition, acquisitions of control of Southwest must also be approved
by the Board of Governors of the Federal Reserve System under the federal Bank
Holding Company Act and the federal Control in Bank Control Act.
Item 6. Exhibits and reports on Form 8-K
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(a) Exhibits.
Exhibit 3.1 Amendment to Restated Certificate of
Incorporation of Southwest Bancorp, Inc.
Exhibit 3.2 Amended and Restated Certificate of
Incorporation of Southwest Bancorp, Inc.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
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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 November 5, 1999
--------------------------------------------- --------------------------
Rick J. Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell November 5, 1999
--------------------------------------------- --------------------------
Kerby E. Crowell Date
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
26