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 June 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 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.
3,770,764
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1 of 19
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at
June 30, 1997 and December 31, 1996 3
Unaudited Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1996 4
Unaudited Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 1997 and 1996 5
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 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
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share data)
JUNE 30, DECEMBER 31,
1997 1996
----------------- -----------------
ASSETS
Cash and due from banks $ 31,271 $ 22,914
Federal funds sold 4,000 -
-------- --------
Cash and cash equivalents 35,271 22,914
Investment securities:
Held to maturity, approximate fair value
of $87,105 (1997) and $83,963 (1996) 86,780 83,589
Available for sale, approximate amortized
cost of $91,390 (1997) and $63,419 (1996) 91,903 63,762
Loans receivable, net of allowance for loan losses
of $8,669 (1997) and $7,139 (1996) 703,225 637,507
Accrued interest receivable 9,052 7,400
Premises and equipment, net 12,993 9,649
Other assets 8,748 4,296
-------- --------
Total assets $947,972 $829,117
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 94,046 $ 83,729
Interest-bearing demand 42,232 34,309
Money market accounts 89,149 86,910
Savings accounts 4,013 4,086
Time deposits 617,852 544,911
-------- --------
Total deposits 847,292 753,945
-------- --------
Income taxes payable - 187
Accrued interest payable 6,111 5,061
Other liabilities 3,357 4,892
Long-term debt:
Guaranteed preferred beneficial interests
in the Company's subordinated debentures 25,013 -
-------- --------
Total liabilities 881,773 764,085
-------- --------
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 3,768,969 (1997)
and 3,764,216 (1996) 3,769 3,764
Capital surplus 24,426 24,332
Retained earnings 37,007 36,041
Unrealized gain/(loss) on investment securities
available for sale, net of tax 307 205
-------- --------
Total shareholders' equity 66,199 65,032
-------- --------
Total liabilities & shareholders' equity $947,972 $829,117
======== ========
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 16,291 $ 13,271 $ 31,807 $ 26,103
Investment securities:
U.S. Government and agency obligations 2,061 1,651 3,803 3,291
State and political subdivisions 135 146 271 286
Mortgage-backed securities 312 391 673 781
Other securities 15 19 30 32
Federal funds sold 189 144 270 218
---------- ---------- ---------- ----------
Total interest income 19,003 15,622 36,854 30,711
Interest expense:
Interest-bearing demand 219 206 428 409
Money market accounts 938 745 1,857 1,418
Savings accounts 25 30 50 60
Time deposits 8,843 6,775 16,879 13,397
Short-term borrowings 21 13 91 71
Long-term debt 174 - 174 -
---------- ---------- ---------- ----------
Total interest expense 10,220 7,769 19,479 15,355
---------- ---------- ---------- ----------
Net interest income 8,783 7,853 17,375 15,356
Provision for loan losses 801 775 3,802 1,650
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 7,982 7,078 13,573 13,706
Other Income:
Service charges and fees 788 720 1,540 1,428
Credit cards 180 233 373 440
Other noninterest income 215 101 358 218
Gain on sales of loans receivable 379 375 705 823
Gain/(loss) on sales of investment securities - 49 - 171
---------- ---------- ---------- ----------
Total other income 1,562 1,478 2,976 3,080
Other expenses:
Salaries and employee benefits 3,561 3,006 7,048 5,834
Occupancy 1,180 866 2,223 1,625
FDIC and other insurance 66 153 129 285
Credit cards 82 60 158 164
General and administrative 1,695 1,380 3,385 2,776
---------- ---------- ---------- ----------
Total other expenses 6,584 5,465 12,943 10,684
---------- ---------- ---------- ----------
Income before taxes 2,960 3,091 3,606 6,102
Taxes on income 1,057 1,115 1,243 2,194
---------- ---------- ---------- ----------
Net income $ 1,903 $ 1,976 $ 2,363 $ 3,908
========== ========== ========== ==========
Net income available to common shareholders $ 1,506 $ 1,579 $ 1,569 $ 3,114
========== ========== ========== ==========
Earnings per common share $ 0.40 $ 0.42 $ 0.42 $ 0.83
========== ========== ========== ==========
Weighted average common shares outstanding 3,768,662 3,759,198 3,767,423 3,758,029
========== ========== ========== ==========
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except share data)
UNREALIZED
GAIN (LOSS) TOTAL
ON AVAILABLE SHARE-
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED FOR SALE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS SECURITIES EQUITY
------- ------ --------- ------- -------- -------- ---------- --------
Balance, January 1, 1996 690,000 $ 690 3,755,228 $ 3,755 $ 24,171 $ 31,129 $ 612 $ 60,357
Cash dividends paid:
Preferred, $1.15 per share - - - - - (794) - (794)
Common, $0.07 per share - - - - - (263) - (263)
Cash dividends declared:
Common, $0.07 per share - - - - - (262) - (262)
Common stock issued:
Employee Stock Purchase
Plan - - 1,633 2 29 - - 31
Dividend Reinvestment Plan - - 2,631 2 45 - - 47
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - (862) (862)
Net income - - - - - 3,908 - 3,908
------- ----- --------- ------- -------- -------- ------ --------
Balance, June 30, 1996 690,000 $ 690 3,759,492 $ 3,759 $ 24,245 $ 33,718 $ (250) $ 62,162
======= ===== ========= ======= ======== ======== ====== ========
Balance, January 1, 1997 690,000 $ 690 3,764,216 $ 3,764 $ 24,332 $ 36,041 $ 205 $ 65,032
Cash dividends paid:
Preferred, $1.15 per share - - - - - (794) - (794)
Common, $0.08 per share - - - - - (301) - (301)
Cash dividends declared:
Common, $0.08 per share - - - - - (302) - (302)
Common stock issued:
Employee Stock Purchase
Plan - - 1,877 2 38 - - 40
Dividend Reinvestment Plan - - 2,876 3 56 - - 59
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - 102 102
Net income - - - - - 2,363 - 2,363
------- ----- --------- ------- -------- -------- ------ --------
Balance, June 30, 1997 690,000 $ 690 3,768,969 $ 3,769 $ 24,426 $ 37,007 $ 307 $ 66,199
======= ===== ========= ======= ======== ======== ====== ========
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
1997 1996
--------- ----------
Operating activities:
Net income $ 2,363 $ 3,908
Adjustments to reconcile net income to net
cash provided from operating activities:
Provision for loan losses 3,802 1,650
Depreciation and amortization expense 768 584
Amortization of premiums and accretion of
discount on securities, net 85 122
Amortization of intangibles 97 64
(Gain) Loss on sales of securities - (171)
(Gain) Loss on sales of loans receivable (705) (823)
(Gain) Loss on sales of premises/equipment (22) (10)
(Gain) Loss on other real estate owned, net 2 (2)
Proceeds from sales of residential mortgage loans 32,734 26,837
Residential mortgage loans originated for resale (30,513) (36,045)
Changes in assets and liabilities:
Accrued interest receivable (1,652) (287)
Other assets (4,063) (734)
Income taxes payable (187) (168)
Accrued interest payable 1,050 (50)
Other liabilities (1,779) (8,705)
------- --------
Net cash (used in) provided from operating activities 1,980 (13,830)
------- --------
Investing activities:
Proceeds from principal repayments and maturities:
Held to maturity securities 7,860 14,824
Available for sale securities 7,382 17,377
Purchases of held to maturity securities (11,150) (21,848)
Purchases of available for sale securities (35,339) (6,303)
Loans originated and principal repayments, net (92,926) (54,968)
Proceeds from sales of guaranteed student loans 21,522 17,235
Purchases of premises and equipment (4,180) (2,191)
Proceeds from sales of premises and equipment 90 24
Proceeds from sales of other real estate 17 79
------- --------
Net cash (used in) provided from investing activities (106,724) (35,771)
------- --------
Financing activities:
Net increase in deposits 93,347 69,307
Net proceeds from issuance of common stock 99 78
Proceeds from issuance of subordinated debentures 25,013 -
Common stock dividends paid (564) (488)
Preferred stock dividends paid (794) (794)
Net cash provided from financing activities 117,101 68,103
------- --------
Net increase (decrease) in cash and cash equivalents 12,357 18,502
------- --------
Cash and cash equivalents,
Beginning of period 22,914 20,789
------- --------
End of period $ 35,271 $ 39,291
========= ========
6
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 six months
ended June 30, 1997 and 1996 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.
NOTE 4: ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
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 Company
will adopt SFAS No. 125 for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997 as required.
Management believes that adoption of SFAS No. 125 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 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
7
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.
For the six For the
months ended year ended
June 30, 1997 December 31, 1996
-------------- -----------------
(Dollars in thousands)
Balance at beginning of period $ 7,139 $ 5,813
Loans charged-off:
Real estate mortgage 123 148
Real estate construction - -
Commercial 1,821 1,064
Installment and consumer 591 1,089
-------------- -----------------
Total charge-offs 2,535 2,301
Recoveries:
Real estate mortgage 56 25
Real estate construction - -
Commercial 126 288
Installment and consumer 81 214
-------------- -----------------
Total recoveries 263 527
-------------- -----------------
Net loans charged-off 2,272 1,774
Provision for loan losses 3,802 3,100
-------------- -----------------
Balance at end of period $ 8,669 $ 7,139
============== =================
Loans outstanding:
Average $682,539 $ 580,590
End of period 711,894 644,646
Net charge-offs to total average loans (annualized) 0.67% 0.31%
Allowance for loan losses to total loans 1.22% 1.11%
8
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
As of As of
June 30, 1997 December 31, 1996
------------- -----------------
(Dollars in thousands)
Nonaccrual loans (1) $ 5,942 $ 4,635
Past due 90 days or more (2) 3,960 1,437
Restructured terms 560 577
-------- --------
Total nonperforming loans 10,462 6,649
Other real estate owned 413 64
-------- --------
Total nonperforming assets $ 10,875 $ 6,713
======== ========
Nonperforming loans to loans receivable 1.47% 1.03%
Allowance for loan losses to nonperforming loans 82.86% 107.37%
Nonperforming assets to loans receivable and
other real estate owned 1.53% 1.04%
- ------------
(1) The government-guaranteed portion of loans included in these totals was $0
(1997) and $344 (1996).
(2) The government-guaranteed portion of loans included in these totals was $657
(1997) and $0 (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 December
31, 1996 and June 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 economic prospects and the
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 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 June 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.
9
At June 30, 1997, loans to individuals and businesses in the healthcare industry
totaled approximately $81.9 million, or 12% of total loans. The loan portfolio
also includes $23.7 million, or 3% of total loans, in hotel/motel loans, $24.0
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 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 $5.9 million at June 30, 1997. During the
first six months of 1997, $20,000 in interest income was received on nonaccruing
loans. If interest on those loans had been accrued, total interest income of
$228,000 would have been recorded.
Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $19.7 million at June 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, (the "Common Securities") of SBI
Capital Trust.
10
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.
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)
For the six months ended June 30,
1997 1996
-------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
-------------------------------------------------
Assets:
Loans receivable $682,539 9.40% $547,156 9.59%
Investment securities 155,734 6.19 144,555 6.11
Other interest-earning assets 9,974 5.46 8,239 5.32
--------- ---------
Total interest-earning assets 848,247 8.76 699,950 8.82
Noninterest-earning assets 44,933 33,699
--------- ---------
Total assets $893,180 $733,649
========= =========
Liabilities and shareholders' equity:
NOW accounts $ 37,177 2.32% $ 35,171 2.34%
Money market accounts 90,297 4.15 78,045 3.65
Savings accounts 4,017 2.51 4,825 2.50
Time deposits 595,690 5.71 467,217 5.77
--------- ---------
Total interest-bearing deposits 727,181 5.33 585,258 5.25
Short-term borrowings 3,166 5.80 2,592 5.51
Long-term debt 3,731 9.30 - -
--------- ---------
Total interest-bearing liabilities 734,078 5.35 587,850 5.25
Demand deposits 84,581 78,984
Other noninterest-bearing liabilities 9,462 5,636
Shareholders' equity 65,059 61,179
--------- ---------
Total liabilities and shareholders' equity $893,180 $733,649
========= ==========
Interest rate spread 3.41% 3.57%
========= =========
Net interest margin 4.13% 4.41%
========= =========
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.55% 119.07%
========= ========
11
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 $118.9 million, or 14%, from $829.1
million at December 31, 1996 to $948.0 million at June 30, 1997.
Loans were $711.9 million at June 30, 1997, an increase of $67.3 million, or
10%, compared to December 31, 1996. The Company experienced increases in the
categories of commercial mortgages ($24.0 million, or 12%), commercial loans
($20.7 million, or 9%), real estate construction loans ($11.0 million, or 20%),
other consumer loans ($5.1 million, or 16%), and residential mortgages ($9.5
million, or 16%). These increases were offset by a reduction in government-
guaranteed student loans ($1.3 million, or 2%), and a $1.7 million, or 8%
reduction in credit card loans, which ended the quarter with total outstandings
of $19.1 million. See "Recent Development". The allowance for loan losses
increased by $1.5 million, or 21%, from December 31, 1996 to June 30, 1997. At
June 30, 1997, the allowance for loan losses was $8.7 million, or 1.22% of total
loans, compared to $7.1 million, or 1.11% of total loans, at December 31, 1996.
Investment securities were $178.7 at June 30, 1997, an increase of $31.3
million, or 21%, compared to December 31, 1996.
Premises and equipment increased by $3.3 million primarily due to the
acquisition of land for a new Tulsa Banking Center at 15th and Utica to be
opened in late 1998.
The Company's deposits increased by $93.4 million, or 12%, from $753.9 million
at December 31, 1996 to $847.3 million at June 30, 1997. This increase occurred
primarily in time deposits, which increased by $72.9 million, or 13%. Interest-
bearing demand deposits and money market accounts increased by $7.9 million, or
23%, and $2.2 million, or 3%, respectively, from December 31, 1996 to June 30,
1997.
Shareholders' equity increased by $1.2 million, or 2%, due primarily to earnings
for the first six months of 1997, net of dividends declared on common and
preferred stock, and a $102,000 increase attributable to a change in the
unrealized gain/loss, net of taxes, on investment securities available for sale.
RESULTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
NET INCOME
For the first six months of 1997, the Company recorded net income of $2.4
million, 40% less than the $3.9 million recorded for the first six months of
1996. Net income available to common shareholders, after deduction of dividends
on preferred stock, was $1.6 million ($0.42 per share), compared with $3.1
million ($0.83 per share) for
12
the first six months of 1996. The substantial decrease in quarterly earnings was
primarily the result of a $2.1 million increase in the provision for loan
losses. Average common shares outstanding were 3,767,423 and 3,758,029,
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. See
"Provision for loan losses". 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%.
Net interest income increased $2.1 million, or 13%, for the first six months of
1997 compared to the same period in 1996. This increase in net interest income,
as well as a $951,000, or 43%, reduction in taxes, partially offset the $2.1
million, or 130%, increase in provision for loan losses, a $2.3 million, or 21%,
increase in other expenses and a $104,000, or 3% reduction in other income. For
the first six months of 1997, the return on average total equity was 7.32% and
the return on average common equity was 6.62% compared to a 12.85% return on
average total equity and a 14.27% return on average common equity for the first
six months of 1996.
NET INTEREST INCOME
Net interest income increased to $17.4 million for the first six months of 1997
from $15.3 million for the same period in 1996 as continued growth in the loan
portfolio enabled the Company to post a $6.2 million increase in interest income
that exceeded the $4.1 million increase in interest expense during the period.
Yields on the Company's interest-earning assets declined by 6 basis point, and
the rates paid on the Company's interest-bearing liabilities increased by 10
basis point, resulting in an reduction in the interest rate spread to 3.41% for
the first six months of 1997 from 3.57% for the first six months of 1996. The
ratio of average interest-earning assets to average interest-bearing liabilities
declined to 115.55% for the first six months of 1997 from 119.07% for the first
six months of 1996, as a substantial portion of the increase in loans was funded
by time deposits.
Total interest income for the first six months of 1997 was $36.9 million, up 20%
from $30.7 million during the same period in 1996. The principal factor
providing greater interest income was the $135.4 million, or 25%, increase in
the volume of average loans outstanding. The Company's loan yields declined to
9.40% for the first six months of 1997 from 9.59% in 1996. During the same
period, the Company's yield on investment securities increased to 6.19% from
6.11%.
Total interest expense for the first six months of 1997 was $19.5 million, an
increase of 27% from $15.4 million for the same period in 1996. The increase in
total interest expense can be attributed to an increase in average interest-
bearing liabilities of $146.2 million, or 25%. During the same period, the
rates paid on average interest-bearing liabilities increased to 5.35% from
5.25%, as a 6 basis point decline in the average rate paid on time deposits (to
5.71%) was more than offset by a 50 basis point increase (to 4.15%) in the
average rate paid on money market accounts. The issuance of the Subordinated
Debentures on June 4, 1997 had a minimal effect on interest expense for the
first half of the year.
OTHER INCOME
Other income declined by $104,000 for the first six months of 1997 compared to
the first six months of 1996 primarily as a result of the $171,000 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. No securities were sold or called
during the first six months of 1997.
13
OTHER EXPENSES
The Company's other expenses increased $2.3 million for the first six months of
1997 compared to the first six months of 1996. This increase was primarily the
result of an increase in salaries and employee benefits, which increased $1.2
million as a result of a 16% increase in staffing. The increase in staffing is
related to the expansion of the Company's asset and deposit bases. In addition,
general and administrative expense increased $609,000 and occupancy expense
increased $598,000 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 reductions in both FDIC and other insurance and credit
card expenses.
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
NET INCOME
For the second quarter of 1997, the Company recorded net income of $1.9 million,
4% less than the $2.0 million recorded for the second quarter of 1996. Net
income available to common shareholders, after deduction of dividends on
preferred stock, was $1.5 million ($0.40 per share), compared with $1.6 million
($0.42 per share) for the second quarter of 1996. Average common shares
outstanding were 3,768,662 and 3,759,198, respectively.
Net interest income increased $930,000, or 12%, for the second quarter of 1997
compared to the same period in 1996. This increase in net interest income, as
well as an $84,000, or 6%, increase in other income and a $58,000, or 5%,
reduction in taxes, partially offset the $26,000, or 3%, increase in provision
for loan losses, and a $1.1 million, or 20%, increase in other expenses. For
the second quarter of 1997, the return on average total equity was 11.76% and
the return on average common equity was 12.69% compared to a 12.92% return on
average total equity and a 14.36% return on average common equity for the second
quarter of 1996.
NET INTEREST INCOME
Net interest income increased to $8.8 million for the second quarter of 1997
from $7.9 million for the same period in 1996 as continued growth in the loan
portfolio enabled the Company to post a $3.4 million increase in interest income
that exceeded the $2.4 million increase in interest expense during the period.
Yields on the Company's interest-earning assets declined by 11 basis points, and
the rates paid on the Company's interest-bearing liabilities increased by 18
basis points, resulting in an reduction in the interest rate spread to 3.34% for
the second quarter of 1997 from 3.63% for the second quarter of 1996. The ratio
of average interest-earning assets to average interest-bearing liabilities
declined to 114.72% for the second quarter of 1997 from 118.39% for the second
quarter of 1996, as a substantial portion of the increase in loans was funded by
time deposits.
Total interest income for the second quarter of 1997 was $19.0 million, up 22%
from $15.6 million during the same period in 1996. The principal factor
providing greater interest income was the $141.8 million, or 26%, increase in
the volume of average loans outstanding. The Company's loan yields declined to
9.39% for the second quarter of 1997 from 9.64% in 1996. During the same
period, the Company's yield on investment securities increased to 6.18% from
6.09%.
Total interest expense for the second quarter of 1997 was $10.2 million, an
increase of 32% from $7.8 million for the same period in 1996. The increase in
total interest expense can be attributed to an increase in average interest-
bearing liabilities of $160.9 million, or 27%. During the same period, the
rates paid on average interest-bearing liabilities increased to 5.39% from
5.21%, as a 5 basis point decline in the average rate paid on time deposits (to
5.72%) was more than offset by a 35 basis point increase (to 4.15%) in the
average rate paid on money market accounts.
14
OTHER INCOME
Other income increased by $84,000 for the second quarter of 1997 compared to the
second quarter of 1996 primarily as a result of a $109,000 increase in
originated mortgage servicing rights.
OTHER EXPENSES
The Company's other expenses increased $1.1 million for the second quarter of
1997 compared to the second quarter of 1996. This increase was primarily the
result of an increase in salaries and employee benefits, which increased
$555,000 as a result of a 16% increase in staffing. The increase in staffing is
related to the expansion of the Company's asset and deposit bases. In addition,
general and administrative expense increased $316,000 and occupancy expense
increased $314,000 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 offset by a reduction in FDIC and other insurance.
* * * * * * *
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 economic prospects or the financial position of borrowers.
Based upon this review, management established an allowance of $8.7 million, or
1.22% of total loans, at June 30, 1997 compared to an allowance of $7.1 million,
or 1.11% of total loans at December 31, 1996. During the first six months of
1997 and 1996, the provisions for loan losses were $3.8 million and $1.7
million, respectively.
In establishing the level of the allowance for June 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, recent charge-off history, and the increased levels of
large loans and of identified nonperforming loans at June 30, 1997, versus
December 31, 1996. At June 30, 1997, total nonperforming loans were $10.5
million, or 1.47% of total loans, compared to $6.6 million, or 1.03% of total
loans, at 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, that tended to indicate the potential need
for a lower allowance. The Company determined the level of the allowance for
loan losses at June 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 June 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 lead to a material increase in
charge-offs and the provision for loan losses.
15
TAXES ON INCOME
The Company's income tax expense for the first six months of 1997 and 1996 was
$1.2 million and $2.2 million, respectively. The Company's income tax expense
for the second quarters of 1997 and 1996 was $1.1 million. 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 83% and 84% of total deposits at June 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). Borrowings under the SLMA line would be secured by student
loans. During the first quarters of 1997 and 1996, no category of borrowings
averaged more than 30% of ending shareholders' equity.
Cash and cash equivalents, during the first six months of 1997, increased by
$12.4 million. The increase was the result of cash generated from financing
activities (primarily increased deposits and the issuance of Subordinated
Debentures) of $117.1 million and operating activities of $2.0 million offset
by $106.7 million in cash used in investing activities.
During the first six months of 1996, cash and cash equivalents increased by
$18.5 million. This increase was the result of cash generated from financing
activities (primarily increased deposits) of $68.1 million offset by $13.8
million in cash used in operating activities and $35.8 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.
16
On June 30, 1997, the Company exceeded all applicable capital requirements,
having a total risk-based capital ratio of 13.79%, a Tier I risk-based capital
ratio of 9.10%, and a leverage ratio of 7.09%.. As of June 30, 1997, the Bank
also met the criteria for classification as a "well-capitalized" institution
under the prompt corrective action provisions of the Federal Deposit Insurance
Act. Designation as a well-capitalized institution under these regulations does
not constitute a recommendation or endorsement of the Company or the Bank by
Federal bank regulators.
The Company declared a dividend of $.08 per common share payable on July 1, 1997
to shareholders of record as of June 17, 1997. In April 1997, the Company
declared a dividend of $.575 per preferred share payable on June 2, 1997 to
shareholders of record as of May 19, 1997.
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
During the third quarter of 1997, the Company announced that the Bank is
negotiating the terms of a possible sale of all or a substantial portion of its
existing credit card portfolio at a premium before taxes, but net of other,
related expenses, that is preliminarily estimated to range from $3.0 million to
$4.5 million. Any such sale is subject to negotiation of a definitive agreement
and the completion of a due diligence review by the potential acquirer, among
other things. The Company anticipates that, subject to satisfaction of those
conditions, such a sale would be completed during 1997. It is expected that any
agreement for sale would allow the Bank to maintain relationships with its
credit card customers.
17
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
At the Company's annual shareholders' meeting, held on April 24, 1997,
the shareholders of the Company elected five Directors with terms
expiring at the 2000 annual shareholders' meeting. The Directors
elected and the shareholder vote in the election of each director was
as follows:
For Withheld
--------- --------
George M. Berry 3,150,568 500
Joyce P. Berry 3,150,368 700
Joe Berry Cannon 3,114,318 500
Robert B. Rodgers 3,127,935 500
Paul C. Wise 3,150,056 700
Other Directors continuing in office are Thomas D. Berry, W. Haskell
Cudd, David P. Lambert, Linford R. Pitts, J. Berry Harrison, Erd M.
Johnson, Robert L. McCormick, Jr., Lee A. Wise, and James B. Wise, MD.
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
4.2 Form of Debenture
4.3 Agreement As To Expenses and Liabilities
4.4 Preferred Securities Guarantee Agreement
4.5 Indenture
4.6 Amended and Restated Trust Agreement
27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K.
Date Item Reported
---- -------------
April 2, 1997 Item 5. The Company confirmed its
previously announced, expected
decline in earnings for the
first quarter of 1997.
July 2, 1997 Item 5. The Company announced the
potential sale of all or a
substantial portion of the
Bank's credit card portfolio.
18
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. August 5, 1997
------------------------------ --------------
Robert L. McCormick, Jr. Date
President
(Principal Executive Officer)
By: /s/ Kerby E. Crowell August 5, 1997
------------------------------ --------------
Kerby E. Crowell Date
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
19