<PAGE>
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, 1997.
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
Stillwater, Oklahoma 74074
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
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.
3,785,796
---------
1 of 19
<PAGE>
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, 1997 and December 31, 1996 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1996 4
Unaudited Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 1997 and 1996 5
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 6
Notes to Unaudited Consolidated Financial Statements 7
Average Balances, Yields and Rates 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION 18
SIGNATURES 19
2
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,285 $ 22,914
Federal funds sold 4,700 -
-------- --------
Cash and cash equivalents 36,985 22,914
Investment securities:
Held to maturity, approximate fair value of
$91,434 (1997) and $83,963 (1996) 90,905 83,589
Available for sale, approximate amortized cost of
$96,651 (1997) and $63,419 (1996) 97,686 63,762
Loans receivable, net of allowance for loan losses
of $8,142 (1997) and $7,139 (1996) 715,829 637,507
Accrued interest receivable 10,992 7,400
Premises and equipment, net 13,203 9,649
Other assets 5,576 4,296
-------- --------
Total assets $971,176 $829,117
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $107,410 $ 83,729
Interest-bearing demand 37,165 34,309
Money market accounts 96,432 86,910
Savings accounts 3,757 4,086
Time deposits 624,535 544,911
-------- --------
Total deposits 869,299 753,945
-------- --------
Income taxes payable - 187
Accrued interest payable 6,290 5,061
Other liabilities 5,146 4,892
Long-term debt:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures 25,013 -
-------- --------
Total liabilities 905,748 764,085
-------- --------
Commitments and contingencies - -
Shareholders' equity:
Serial preferred stock -
Series A, 9.20% Redeemable, Cumulative Preferred
Stock; $1 par value; 1,000,000 shares authorized;
liquidation value $17,250,000; 690,000 shares
issued and outstanding 690 690
Series B, $1 par value; 1,000,000 shares authorized;
none issued - -
Common stock - $1 par value; 10,000,000 shares
authorized; issued and outstanding 3,771,458 (1997)
and 3,764,216 (1996) 3,771 3,764
Capital surplus 24,477 24,332
Retained earnings 35,869 36,041
Unrealized gain/(loss) on investment securities
available for sale, net of tax 621 205
-------- --------
Total shareholders' equity 65,428 65,032
-------- --------
Total liabilities & shareholders' equity $971,176 $829,117
======== ========
</TABLE>
3
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 16,917 $ 14,240 $ 48,724 $ 40,343
Investment securities:
U.S. Government and agency obligations 2,410 1,735 6,213 5,026
State and political subdivisions 121 146 392 432
Mortgage-backed securities 289 376 962 1,157
Other securities 53 29 83 61
Federal funds sold 172 170 442 388
---------- ---------- ---------- ----------
Total interest income 19,962 16,696 56,816 47,407
Interest expense:
Interest-bearing demand 236 218 664 627
Money market accounts 975 807 2,832 2,225
Savings accounts 24 28 74 88
Time deposits 9,026 7,492 25,905 20,889
Short-term borrowings 17 16 108 87
Long-term debt 582 - 756 -
---------- ---------- ---------- ----------
Total interest expense 10,860 8,561 30,339 23,916
---------- ---------- ---------- ----------
Net interest income 9,102 8,135 26,477 23,491
Provision for loan losses 5,101 775 8,903 2,425
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,001 7,360 17,574 21,066
Other income:
Service charges and fees 802 685 2,342 2,113
Credit cards 195 215 568 655
Other noninterest income 114 91 277 289
Gain on sales of loans receivable 481 600 1,381 1,443
Gain/(loss) on sales of investment securities 7 1 7 172
---------- ---------- ---------- ----------
Total other income 1,599 1,592 4,575 4,672
Other expenses:
Salaries and employee benefits 3,511 3,174 10,559 9,008
Occupancy 1,170 981 3,393 2,606
FDIC and other insurance 61 534 190 819
Credit cards 89 81 247 245
General and administrative 1,566 1,683 4,951 4,459
---------- ---------- ---------- ----------
Total other expenses 6,397 6,453 19,340 17,137
---------- ---------- ---------- ----------
Income before taxes (797) 2,499 2,809 8,601
Taxes on income (357) 898 886 3,092
---------- ---------- ---------- ----------
Net income $ (440) $ 1,601 $ 1,923 $ 5,509
========== ========== ========== ==========
Net income available to common shareholders $ (836) $ 1,205 $ 733 $ 4,319
========== ========== ========== ==========
Earnings per common share $(0.22) $0.32 $0.20 $1.15
========== ========== ========== ==========
Weighted average common shares outstanding 3,771,101 3,761,502 3,768,663 3,759,195
========== ========== ========== ==========
</TABLE>
4
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) TOTAL
ON AVAILABLE SHARE-
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED FOR SALE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS SECURITIES EQUITY
------- ------ ------ ------ ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 690,000 $690 3,755,228 $3,755 $24,171 $31,129 $ 612 $60,357
Cash dividends paid:
Preferred, $1.725 per share - - - - - (1,190) - (1,190)
Common, $0.14 per share - - - - - (525) - (525)
Cash dividends declared:
Common, $0.07 per share - - - - - (265) - (265)
Common stock issued:
Employee Stock Purchase
Plan - - 2,549 3 45 - - 48
Dividend Reinvestment Plan - - 4,051 4 71 - - 75
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - (793) (793)
Net income - - - - - 5,509 - 5,509
------- ------ --------- ------ ------- -------- ------------ --------
Balance, September 30, 1996 690,000 $ 690 3,761,828 $3,762 $24,287 $ 34,658 $ (181) $ 63,216
======= ====== ========= ====== ======= ======== ============ ========
Balance, January 1, 1997 690,000 $ 690 3,764,216 $3,764 $24,332 $36,041 $ 205 $ 65,032
Cash dividends paid:
Preferred, $1.725 per share - - - - - (1,190) - (1,190)
Common, $0.16 per share - - - - - (603) - (603)
Cash dividends declared:
Common, $0.08 per share - - - - - (302) - (302)
Common stock issued:
Employee Stock Purchase
Plan - - 2,886 3 58 - - 61
Dividend Reinvestment Plan - - 4,356 4 87 - - 91
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - 416 416
Net income - - - - - 1,923 - 1,923
------- ------ --------- ------ ------- ------- ------------ -------
Balance, September 30, 1997 690,000 $ 690 3,771,458 $3,771 $24,477 $35,869 $ 621 $65,428
======= ====== ========= ====== ======= ======= ============ =======
</TABLE>
5
<PAGE>
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 1,923 $ 5,509
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 8,903 2,425
Depreciation and amortization expense 1,171 931
Amortization of premiums and accretion of
discount on securities, net 101 190
Amortization of intangibles 157 90
(Gain) Loss on sales of securities (7) (172)
(Gain) Loss on sales of loans receivable (1,381) (1,407)
(Gain) Loss on sales of premises/equipment (28) (10)
(Gain) Loss on other real estate owned, net 2 (2)
Proceeds from sales of residential mortgage loans 51,326 31,772
Residential mortgage loans originated for resale (48,842) (41,363)
Changes in assets and liabilities:
Accrued interest receivable (3,592) (194)
Other assets (1,285) (1,491)
Income taxes payable (187) (271)
Accrued interest payable 1,229 340
Other liabilities 215 (7,633)
--------- ---------
Net cash (used in) provided from operating activities 9,705 (11,286)
--------- ---------
Investing activities:
Proceeds from principal repayments and maturities:
Held to maturity securities 13,812 19,132
Available for sale securities 13,795 22,637
Purchases of held to maturity securities (21,245) (33,045)
Purchases of available for sale securities (47,002) (16,849)
Loans originated and principal repayments, net (119,769) (104,040)
Proceeds from sales of guaranteed student loans 30,992 31,591
Purchases of premises and equipment (4,812) (3,464)
Proceeds from sales of premises and equipment 115 24
Proceeds from sales of other real estate 17 79
--------- ---------
Net cash (used in) provided from investing activities (134,097) (83,935)
--------- ---------
Financing activities:
Net increase in deposits 115,354 115,325
Net proceeds from issuance of common stock 152 123
Proceeds from issuance of subordinated debentures 25,013 -
Common stock dividends paid (866) (752)
Preferred dividends paid (1,190) (1,190)
--------- ---------
Net cash (used in) provided from financing activities 138,463 113,506
--------- ---------
Net increase (decrease) in cash and cash equivalents 14,071 18,285
Cash and cash equivalents,
Beginning of period 22,914 20,789
--------- ---------
End of period $ 36,985 $ 39,074
========= =========
</TABLE>
6
<PAGE>
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, the
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, 1997 should not be considered indicative of the results to
be expected for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Southwest Bancorp, Inc. Annual Report on Form 10-K for the year ended December
31, 1996.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. (the Company) and its wholly owned
subsidiaries, The Stillwater National Bank and Trust Company (the Bank) and SBI
Capital Trust (SBI Capital). All significant intercompany transactions and
balances have been eliminated in consolidation.
NOTE 3: RECENTLY ADOPTED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, Disclosure of
Information About Capital Structure. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The adoption
of SFAS No. 129 did not affect the Company's consolidated financial position or
results of operations.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
requires the Company to recognize the financial and servicing assets it controls
and liabilities it has incurred, derecognize financial assets when control has
been surrendered, and derecognize liabilities when extinguished. The adoption
of SFAS No. 125 did not affect the Company's consolidated financial position or
results of operations.
NOTE 4: ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In December of 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125. The Company will adopt
SFAS No. 127 on January 1, 1998 as required. Management believes the adoption
of SFAS No. 127 will not have a material impact on the Company's consolidated
financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share. SFAS No.
128 is effective for periods ending after December 15, 1997. Management
believes that SFAS No. 128 will not have a significant effect on the Company's
calculation of earnings per share considering its current capital structure.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in
7
<PAGE>
financial statements. In addition, SFAS No. 130 requires the Company to classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments. Operating segments are components of a
company about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and assess performance. The Standard sets criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers. The Company will adopt SFAS No. 131 on January 1, 1998 as
required.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
<TABLE>
<CAPTION>
For the nine For the
months ended year ended
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
(Dollars in thousands)
Balance at beginning of period $ 7,139 $ 5,813
Loans charged-off:
Real estate mortgage 190 148
Real estate construction - -
Commercial 7,016 1,064
Installment and consumer 1,142 1,089
-------- --------
Total charge-offs 8,348 2,301
Recoveries:
Real estate mortgage 81 25
Real estate construction - -
Commercial 248 288
Installment and consumer 119 214
-------- --------
Total recoveries 448 527
-------- --------
Net loans charged-off 7,900 1,774
Provision for loan losses 8,903 3,100
-------- --------
Balance at end of period $ 8,142 $ 7,139
======== ========
Loans outstanding:
Average $692,554 $580,590
End of period 723,971 644,646
Net charge-offs to total average loans (annualized) 1.53% 0.31%
Allowance for loan losses to total loans 1.12% 1.11%
</TABLE>
8
<PAGE>
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
<TABLE>
<CAPTION>
As of As of
September 30, 1997 December 31, 1996
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 752 $ 4,635
Past due 90 days or more (1) 2,665 1,437
Restructured terms 552 577
-------- --------
Total nonperforming loans (1) 3,969 6,649
Other real estate owned 494 64
Total nonperforming assets $ 4,463 $ 6,713
======== ========
Nonperforming loans to loans receivable 0.55% 1.03%
Allowance for loan losses to nonperforming loans 205.14% 107.37%
Nonperforming assets to loans receivable and
other real estate owned 0.62% 1.04%
</TABLE>
(1) The government-guaranteed portion of loans included in these totals was
$966 (1997) and $93 (1996).
The allowance for loan losses is a valuation reserve established by management
in an amount it deems adequate to provide for losses in the loan portfolio.
Management assesses the adequacy of the allowance for loan losses based upon a
number of factors including, among others, analytical reviews of loan loss
experience in relationship to outstanding loans and commitments; unfunded loan
commitments; problem and nonperforming loans and other loans presenting credit
concerns; trends in loan growth, portfolio composition and quality; 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. The allowance for loan losses is increased by
provisions for loan losses charged to expense. Charge-offs of loan amounts
determined by management to be uncollectible or impaired decrease the allowance
and recoveries of previous charge-offs, if any, are added to the allowance.
Management believes that the allowance for loan losses was adequate at September
30, 1997. The amount of the allowance deemed appropriate by management, and the
levels of loan charge-offs and nonperforming loans, are affected by changing
economic conditions and the economic prospects and financial position of
borrowers. At any time, there are loans included in the portfolio that will
result in losses to the Company, but that have not been identified as
nonperforming or potential problem loans. Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the unexpected deterioration of one or a few of such
loans may cause a significant increase in nonperforming assets, and lead to a
material increase in charge-offs and the provision for loan losses. Since
problems with commercial and commercial real estate loans do not necessarily
appear early in their lives, the Company may experience increased levels of
nonperforming loans and loan charge-offs as the relatively large volume of
recently originated loans mature. In addition, the Office of the Comptroller of
the Currency ("OCC"), as an integral part of its examination process,
periodically reviews the Bank's allowance for loan losses, and may require the
Bank to recognize additions to the allowance based upon judgments of OCC
examiners about information available to them at the time of their examination.
NOTE 6: LOANS RECEIVABLE
The Bank extends commercial and consumer credit primarily to customers in the
State of Oklahoma which subjects the loan portfolio to the general economic
conditions within this area. At September 30, 1997 and December 31, 1996,
substantially all of the Bank's loans, except for credit cards, are
collateralized with real estate, inventory, accounts receivable and/or other
assets, or are guaranteed by agencies of the United States Government. At
September 30, 1997, loans to individuals and businesses in the healthcare
industry totaled approximately $73.9 million, or 10% of total loans. The loan
portfolio also includes $19.4 million, or 3% of total loans, in hotel/motel
9
<PAGE>
loans, $22.5 million, or 3% of total loans, in residential construction loans
and $15.9 million, or 2% of total loans, in restaurant loans. In the event of
total nonperformance by the borrowers, the Company's accounting loss would
generally be limited to the recorded investment in the loans receivable reduced
by proceeds received from disposition of the related collateral.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $752,000 at September 30, 1997. During the
first nine months of 1997, $31,000 in interest income was recorded on
nonaccruing loans. If interest on loans in nonaccrual status at the end of the
third quarter of 1997 had been accrued, additional interest income of $81,000
would have been recorded.
Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $21.6 million at September
30, 1997, compared to $23.0 million at December 31, 1996. Although these are
loans where known information about the borrowers' possible credit problems
cause management to have doubts as to their ability to comply with the present
loan repayment terms, most are well collateralized and are not believed to
present significant risk of loss. The Company's loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances. The deterioration of one or a few of such loans may
cause a significant increase in potential problem loans or in nonperforming
loans.
NOTE 7: LONG-TERM DEBT
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of the Company,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the
"Preferred Securities") in an underwritten public offering for an aggregate
price of $25,012,500. Proceeds of the Preferred Securities were invested in the
9.30% Subordinated Debentures (the "Subordinated Debentures") of the Company.
After deducting underwriter's compensation and other expenses of the offering,
the net proceeds are available to the Company to increase capital and for
general corporate purposes, including use in the Bank's lending and investment
activities, and, after September 1, 1998, possible redemption, in whole or in
part, of the Company's 9.20% Redeemable Cumulative Preferred Stock, Series A
(the "Series A Preferred Stock"). Unlike interest payments on the Subordinated
Debentures, dividends paid on the Series A Preferred Stock are not deductible
for federal income tax purposes.
The Preferred Securities and the Subordinated Debentures each mature on July 31,
2027. If certain conditions are met, the maturity dates of the Preferred
Securities and the Subordinated Debentures may be shortened to a date not
earlier than July 21, 2002, or extended to a date not later than July 31, 2036.
The Preferred Securities and the Subordinated Debentures also may be redeemed
prior to maturity if certain events occur. The Preferred Securities are subject
to mandatory redemption, in whole or in part, upon repayment of the Subordinated
Debentures at maturity or their earlier redemption. The Company also has the
right, if certain conditions are met, to defer payment of interest on the
Subordinated Debentures, which would result in a deferral of dividend payments
on the Preferred Securities, at any time or from time to time for a period not
to exceed 20 consecutive quarters in a deferral period.
The Company and SBI Capital believe that, taken together, the obligations of the
Company under the Preferred Securities Guarantee Agreement, the Amended and
Restated Trust Agreement, the Subordinated Debentures, the Indenture and the
Agreement As To Expenses and Liabilities, entered into in connection with the
offering of the Preferred Securities and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by the Company of the
obligations of SBI Capital under the Preferred Securities.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Preferred Securities and purchasing the Subordinated Debentures,
which are its sole assets. The Company owns all of the 30,960 outstanding
common securities, liquidation value $25 per share, (the "Common Securities") of
SBI Capital Trust.
The Company believes that 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
<PAGE>
For accounting purposes, the Preferred Securities and the Common Securities are
presented on the Consolidated Statements of Financial Condition as a separate
category of long-term debt entitled "Guaranteed Preferred Beneficial Interests
in the Company's Subordinated Debentures".
SOUTHWEST BANCORP, INC.
AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1997 1996
-------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
-------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Loans receivable $692,554 9.41% $564,966 9.54%
Investment securities 164,754 6.21 145,781 6.12
Other interest-earning assets 10,763 5.49 9,702 5.34
-------- --------
Total interest-earning assets 868,071 8.75 720,449 8.79
Noninterest-earning assets 45,266 34,357
-------- --------
Total assets $913,337 $754,806
======== ========
Liabilities and shareholders' equity:
NOW accounts $ 37,437 2.37% $ 35,857 2.34%
Money market accounts 91,029 4.16 80,086 3.71
Savings accounts 3,947 2.50 4,708 2.50
Time deposits 604,522 5.73 484,807 5.76
-------- --------
Total interest-bearing deposits 736,935 5.35 605,458 5.26
Short-term borrowings 2,571 5.62 2,139 5.43
Long-term debt 10,902 9.30 - -
-------- --------
Total interest-bearing liabilities 750,408 5.41 607,597 5.26
Demand deposits 86,776 79,436
Other noninterest-bearing liabilities 10,560 6,148
Shareholders' equity 65,593 61,625
-------- --------
Total liabilities and shareholders' equity $913,337 $754,806
======== ========
Interest rate spread 3.34% 3.53%
==== ====
Net interest margin 4.08% 4.36%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.68% 118.57%
======== ========
</TABLE>
11
<PAGE>
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements. Portions of this Management's Discussion and
Analysis contain forward-looking statements, including statements of goals,
intentions, and expectations, regarding or based upon general economic
conditions, interest rates, developments in national and local markets, and
other matters, which, by their nature, are subject to significant uncertainties.
Because of these uncertainties and the assumptions on which statements in this
report are based, the actual future results may differ materially from those
indicated in this report. Past results also are not necessarily indicative of
future performance.
FINANCIAL CONDITION
The Company's total assets increased by $142.1 million, or 17%, from $829.1
million at December 31, 1996 to $971.2 million at September 30, 1997.
Loans were $724.0 million at September 30, 1997, an increase of $79.3 million,
or 12%, compared to December 31, 1996. The Company experienced increases in the
categories of commercial mortgages ($23.7 million, or 12%), commercial loans
($14.4 million, or 7%), real estate construction loans ($15.0 million, or 28%),
other consumer loans ($8.6 million, or 27%), residential mortgages ($18.9
million, or 31%) and government-guaranteed student loans ($1.1 million, or 2%).
These increases were offset by a $2.4 million, or 12% reduction in credit card
loans. (See "Recent Development".) The allowance for loan losses increased by
$1.0 million, or 14%, from December 31, 1996 to September 30, 1997, after the
significant net charge-offs and increased provision for loan losses recorded in
the first nine months of 1997. (See Note 3 and "Provision for Loan Losses".) At
September 30, 1997, the allowance for loan losses was $8.1 million, or 1.12% of
total loans, compared to $7.1 million, or 1.11% of total loans, at December 31,
1996.
Investment securities were $189.0 million at September 30, 1997, an increase of
$41.2 million, or 28%, compared to December 31, 1996.
Premises and equipment increased by $3.6 million primarily due to the
acquisition of land for and beginning construction costs of a new Tulsa Banking
Center at 15th and Utica to be opened in late 1998.
The Company's deposits increased by $115.4 million, or 15%, from $753.9 million
at December 31, 1996 to $869.3 million at September 30, 1997. This increase
occurred primarily in time deposits, which increased by $79.6 million, or 15%.
Increases also occurred in noninterest-bearing demand deposits ($23.7 million,
or 28%), money market accounts ($9.5 million, or 11%) and interest-bearing
demand deposits ($2.9 million, or 8%).
Shareholders' equity increased by $396,000, or less than 1%, as a result of
earnings for the first nine months of 1997, net of dividends declared on common
and preferred stock, and a $416,000 increase attributable to a change in the
unrealized gain/loss, net of taxes, on investment securities available for sale
and proceeds from the issuance of common stock of $152,000. For the nine months
ended September 30, 1997, dividends declared on common and preferred securities
of $2.1 million exceeded net income by $172,000.
12
<PAGE>
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME
For the first nine months of 1997, the Company recorded net income of $1.9
million, 65% less than the $5.5 million recorded for the first nine months of
1996. Net income available to common shareholders, after deduction of dividends
on preferred stock, was $733,000 ($0.20 per share), compared with $4.3 million
($1.15 per share) for the first nine months of 1996. The substantial decrease
in earnings was primarily the result of a $6.5 million increase in the provision
for loan losses. Weighted average common shares outstanding were 3,768,663 and
3,759,195 for the first nine months of 1997 and 1996, respectively.
During the first quarter of 1997, the Company received information regarding
events that adversely affected a borrower's ability to fully repay its
commercial loan, which had a carrying amount of $1.9 million. As a result of
this event, and management's regular evaluation of the adequacy of the allowance
for loan losses relative to other loans in the portfolio, the Company recorded a
provision for loan losses of $3.0 million for the first quarter of 1997,
compared with a provision of $875,000 for the first quarter of 1996. For the
second quarter of 1997, the provision for loan losses was $801,000, compared to
$775,000 for the second quarter of 1996, an increase of 3%. The higher
provision recorded in the third quarter of 1997 was the amount deemed necessary
by management to restore the allowance for loan losses to an appropriate level
after charging-off substantially the entire balance of a group of related loans,
which totaled $4.8 million. These loans were not connected with the loans that
resulted in the larger than normal provision for loan losses in the first
quarter of 1997.
Net interest income increased $3.0 million, or 13%, for the first nine months of
1997 compared to the same period in 1996. This increase in net interest income,
as well as a $2.2 million, or 71%, reduction in taxes, partially offset the $6.5
million, or 267%, increase in provision for loan losses, a $2.2 million, or 13%,
increase in other expenses and a $97,000, or 2% reduction in other income. For
the first nine months of 1997, the return on average total equity was 3.92% and
the return on average common equity was 2.03% compared to an 11.94% return on
average total equity and a 13.01% return on average common equity for the first
nine months of 1996.
NET INTEREST INCOME
Net interest income increased to $26.5 million for the first nine months of 1997
from $23.5 million for the same period in 1996 as continued growth in the loan
portfolio enabled the Company to post a $9.4 million increase in interest income
that exceeded the $6.4 million increase in interest expense during the period.
Yields on the Company's interest-earning assets declined by 4 basis points, and
the rates paid on the Company's interest-bearing liabilities increased by 15
basis points, resulting in an reduction in the interest rate spread to 3.34% for
the first nine months of 1997 from 3.53% for the first nine months of 1996. The
ratio of average interest-earning assets to average interest-bearing liabilities
declined to 115.68% for the first nine months of 1997 from 118.57% for the first
nine months of 1996, due primarily to the issuance of the Subordinated
Debentures.
Total interest income for the first nine months of 1997 was $56.8 million, up
20% from $47.4 million during the same period in 1996. The principal factor
providing greater interest income was the $127.6 million, or 23%, increase in
the volume of average loans outstanding. The Company's loan yields declined to
9.41% for the first nine months of 1997 from 9.54% in 1996. During the same
period, the Company's yield on investment securities increased to 6.21% from
6.12%.
Total interest expense for the first nine months of 1997 was $30.3 million, an
increase of 27% from $23.9 million for the same period in 1996. The increase in
total interest expense is mainly the result of an increase in average interest-
bearing liabilities of $142.8 million, or 24%. During the same period, the
rates paid on average interest-bearing liabilities increased to 5.41% from
5.26%, as a 3 basis point decline in the average rate paid on time deposits (to
5.73%) was more than offset by a 45 basis point increase (to 4.16%) in the
average rate paid on money
13
<PAGE>
market accounts. The issuance of the Subordinated Debentures on June 4, 1997
increased the rates paid on average interest-bearing liabilities by 6 basis
points for the first nine months of the year.
OTHER INCOME
Other income declined by $97,000 for the first nine months of 1997 compared to
the first nine months of 1996 primarily as a result of the $165,000 reduction in
gains on sales of investment securities A gain on sale of investment securities
occurred during the first quarter of 1996 when $4.6 million in Agency securities
classified as "held to maturity" and $7.7 million in Agency securities
classified as "available for sale", originally purchased at a discount, were
called prior to their stated maturity date. During 1997, a gain on sale of
investment securities of $7,000 occurred when $1.0 million in "held to maturity"
Agency securities, originally purchased at a discount, were called prior to
their stated maturity date.
OTHER EXPENSES
The Company's other expenses increased $2.2 million for the first nine months of
1997 compared to the first nine months of 1996. This increase was primarily the
result of an increase in salaries and employee benefits, which increased $1.6
million as a result of a 24% increase in staffing from the beginning of 1996 to
the end of the second quarter of 1997. The increase in staffing was related to
the expansion of the Company's asset and deposit bases. Staffing declined 4%
from the end of the second quarter of 1997 to the end of the third quarter of
1997. In addition, general and administrative expense increased $492,000 and
occupancy expense increased $787,000 compared to 1996. The increase in
occupancy expense was due primarily to the leasing of additional office space
and the depreciation on furniture and equipment purchased to furnish those new
offices. These increases were partially offset by a $629,000 reduction in FDIC
and other insurance. During the third quarter of 1996, the Bank expensed a
$436,000 one-time special assessment to the FDIC with respect to deposits it
acquired from a savings association in 1991.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME
For the third quarter of 1997, the Company recorded a net loss of $440,000,
compared to the $1.6 million in net income recorded for the third quarter of
1996. The net loss allocated to common shareholders, after deduction of
dividends on preferred stock, was $836,000 ($0.22 per share), compared with net
income of $1.2 million ($0.32 per share) for the third quarter of 1996.
Weighted average common shares outstanding were 3,771,101 and 3,761,502 for the
third quarters of 1997 and 1996, respectively.
Net interest income increased $1.0 million, or 12%, for the third quarter of
1997 compared to the same period in 1996. This increase in net interest income,
as well as a $7,000, or less than 1%, increase in other income, a $56,000, or
less than 1%, reduction in other expenses and a $1.3 million, or 140%, reduction
in taxes, partially offset the $4.3 million, or 558%, increase in provision for
loan losses. For the third quarter of 1997, the return on average total equity
was a negative 2.62% and the return on average common equity was a negative
6.72% compared to a positive 10.19% return on average total equity and a
positive 10.60% return on average common equity for the third quarter of 1996.
The higher provision recorded in the third quarter of 1997 was the amount deemed
necessary by management to restore the allowance for loan losses to an
appropriate level after charging-off substantially the entire balance of a group
of related loans, which totaled $4.8 million. (See "Net Income" for the nine
months ended September 30, 1997 and 1996.)
14
<PAGE>
NET INTEREST INCOME
Net interest income increased to $9.1 million for the third quarter of 1997 from
$8.1 million for the same period in 1996 as continued growth in the loan
portfolio enabled the Company to post a $3.3 million increase in interest income
that exceeded the $2.3 million increase in interest expense during the period.
Yields on the Company's interest-earning assets remained the same, and the rates
paid on the Company's interest-bearing liabilities increased by 15 basis points,
resulting in an reduction in the interest rate spread to 3.31% for the third
quarter of 1997 from 3.46% for the third quarter of 1996. The ratio of average
interest-earning assets to average interest-bearing liabilities declined to
114.17% for the third quarter of 1997 from 117.68% for the third quarter of
1996, due primarily to the issuance of the Subordinated Debentures.
Total interest income for the third quarter of 1997 was $20.0 million, up 20%
from $16.7 million during the same period in 1996. The principal factor
providing greater interest income was the $112.1 million, or 19%, increase in
the volume of average loans outstanding. The Company's loan yields declined to
9.42% for the third quarter of 1997 from 9.44% in 1996. During the same period,
the Company's yield on investment securities increased to 6.25% from 6.14%.
Total interest expense for the third quarter of 1997 was $10.9 million, an
increase of 27% from $8.6 million for the same period in 1996. The increase in
total interest expense is mainly the result of an increase in average interest-
bearing liabilities of $147.9 million, or 23%. During the same period, the
rates paid on average interest-bearing liabilities increased to 5.42% from
5.27%, as an 11 basis point decline in the average rate paid on time deposits
(to 5.65%) was more than offset by a 36 basis point increase (to 4.18%) in the
average rate paid on money market accounts. The issuance of the Subordinated
Debentures on June 4, 1997 increased the rates paid on average interest-bearing
liabilities by 12 basis points for the third quarter of 1997.
OTHER INCOME
Other income increased by $7,000 for the third quarter of 1997 compared to the
third quarter of 1996 primarily as a result of a $129,000 increase in mortgage
servicing rights due to the larger volume of loans being originated. In
addition, service charges and fees increased $117,000 compared to 1996. These
increases were offset by a $248,000 reduction in other gains on sales of loans.
OTHER EXPENSES
The Company's other expenses declined $56,000 for the third quarter of 1997
compared to the third quarter of 1996. This reduction was primarily the result
of a $473,000 reduction in FDIC and other insurance and a $117,000 reduction in
general and administrative expense. These reductions were offset by a $337,000
increase in salaries and employee benefits and a $189,000 increase in occupancy
expense.
* * * * * * *
PROVISION FOR LOAN LOSSES
The Company makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The adequacy of
the allowance for loan losses is determined by management based upon a number of
factors including, among others, analytical reviews of loan loss experience in
relationship to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may occur because of changing economic
conditions, and the economic prospects and financial position of borrowers.
Based upon this review, management established an allowance of $8.1 million, or
1.12% of total loans, at September 30, 1997 compared to
15
<PAGE>
an allowance of $7.1 million, or 1.11% of total loans at December 31, 1996.
During the first nine months of 1997 and 1996, the provisions for loan losses
were $8.9 million and $2.4 million, respectively. (See Note 5 and "Net Income"
for the nine months ended September 30, 1997 and 1996.)
In establishing the level of the allowance for September 30, 1997, management
considered a number of factors that tend to indicate a potential need for an
increased allowance level, including the increased risk inherent in the amount
and percentage to total loans attributable to commercial and commercial real
estate loans, which are viewed as entailing greater risk than certain other
categories of loans, charge-off history, and the increased levels of large
loans at September 30, 1997, versus December 31, 1996. Management also
considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk, and the
decreased level of identified nonperforming loans at September 30, 1997, as
compared to December 31, 1996, that tended to indicate the potential need for a
lower allowance. At September 30, 1997, total nonperforming loans were $4.0
million, or 0.55% of total loans, compared to $6.6 million, or 1.03% of total
loans, at December 31, 1996. The Company determined the level of the allowance
for loan losses at September 30, 1997 was appropriate, as a result of balancing
these and other factors it deemed relevant to the adequacy of the allowance.
Management conducted a similar analysis in order to determine the appropriate
allowance as of September 30, 1996 and December 31, 1996.
Management strives to carefully monitor credit quality and the adequacy of the
allowance for loan losses, and to identify loans that may become nonperforming.
At any time, however, there are loans included in the portfolio that will result
in losses to the Company, but that have not been identified as nonperforming or
potential problem loans. Because the loan portfolio contains a significant
number of commercial and commercial real estate loans with relatively large
balances, the unexpected deterioration of one or a few of such loans may cause a
significant increase in nonperforming assets, and may lead to a material
increase in charge-offs and the provision for loan losses.
TAXES ON INCOME
The Company's income tax expense for the first nine months of 1997 and 1996 was
$886,000 and $3.1 million, respectively. The Company's income tax expense for
the third quarters of 1997 and 1996 was $(357,000) and $898,000, respectively.
The Company'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. The Company's portfolio of
government-guaranteed student loans and SBA loans are also readily salable.
Additional sources of liquidity, including cash flow from the repayment of
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets,
and accessibility to the capital and money markets. These funds are used to
meet deposit withdrawals, maintain reserve requirements, fund loans and operate
the organization. Core deposits, defined as demand deposits, interest-bearing
transaction accounts, savings deposits and certificates of deposit less than
$100,000 were 84% of total deposits at both September 30, 1997 and 1996,
respectively.
The Company uses various forms of short-term borrowings for cash management and
liquidity purposes on a limited basis. These forms of borrowings include
federal funds purchases and borrowings from the Federal Reserve Bank. The Bank
has approved federal funds purchase lines with three other banks. The Bank also
carries interest-bearing demand notes issued by the Bank to the U.S. Treasury as
a participant in the Treasury Tax and Loan note program. In addition, the Bank
has available a $35.0 million line of credit from the Student Loan Marketing
Association (SLMA) and a $177.0 million line of credit from the Federal Home
Loan Bank of Topeka (FHLB).
16
<PAGE>
Borrowings under the SLMA line would be secured by student loans. Borrowings
under the FHLB line would be secured by all other unpledged securities and
loans. During the first nine months of 1997 and 1996, no category of borrowings
averaged more than 30% of ending shareholders' equity.
Cash and cash equivalents, during the first nine months of 1997, increased by
$14.1 million. This increase was the result of cash generated from financing
activities (primarily increased deposits and the issuance of Subordinated
Debentures) of $138.5 million and operating activities of $9.7 million offset
by $134.1 million in cash used in investing activities.
During the first nine months of 1996, cash and cash equivalents increased by
$18.3 million. This increase was the result of cash generated from financing
activities (primarily increased deposits) of $113.5 million offset by $11.3
million in cash used in operating activities and $83.9 million in cash used in
investing activities.
CAPITAL RESOURCES
During the second quarter of 1997, SBI Capital Trust (SBI Capital), a statutory
business trust and subsidiary of the Company sold 1,000,500 Preferred
Securities, having a liquidation amount of $25 per security, for a total price
of $25,012,500. The distributions payable on the preferred securities are based
on a 9.30% fixed annual rate. All accounts of SBI Capital are included in the
consolidated financial statements of the Company.
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board (FRB). The Company
believes that the Preferred Securities meet the regulatory criteria for Tier I
capital, subject to Federal Reserve guidelines that limit the amount of the
Preferred Securities and cumulative perpetual preferred stock to an aggregate of
25% of Tier I capital.
At September 30, 1997, the Company exceeded all applicable capital
requirements, having a total risk-based capital ratio of 13.12%, a Tier I risk-
based capital ratio of 8.61%, and a leverage ratio of 6.72%.
The Company declared a dividend of $.08 per common share payable on October 1,
1997 to shareholders of record as of September 17, 1997. In July 1997, the
Company declared a dividend of $.575 per preferred share payable on September 2,
1997 to shareholders of record as of August 18, 1997. (See "Financial
Condition".)
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.
RECENT DEVELOPMENT
On October 31, 1997, the Bank completed the sale of substantially all of its
credit card portfolio at a premium before taxes, but net of other related
expenses, of approximately $3.7 million. The Bank plans to continue offering
credit cards and debit cards to its customers.
17
<PAGE>
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
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
Date Item Reported
---- -------------
July 2, 1997 Item 5. The Company announced the
potential sale of all or a
substantial portion of the
Bank's credit card portfolio.
September 23, 1997 Item 5. The Company announced the
occurrence of significant loan
losses and provision for loan
losses during the third
quarter of 1997.
18
<PAGE>
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/ Robert L. McCormick, Jr. November 10, 1997
------------------------------ -----------------
Robert L. McCormick, Jr. Date
President
(Principal Executive Officer)
By: /s/ Kerby E. Crowell November 10, 1997
------------------------------ -----------------
Kerby E. Crowell Date
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWEST BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 32,285
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,686
<INVESTMENTS-CARRYING> 90,905
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<LOANS> 723,971
<ALLOWANCE> 8,142
<TOTAL-ASSETS> 971,176
<DEPOSITS> 869,299
<SHORT-TERM> 3,046
<LIABILITIES-OTHER> 8,390
<LONG-TERM> 25,013
0
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<COMMON> 3,771
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