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 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 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands except share data) SEPTEMBER 30, DECEMBER 31, 1997 1996 -------------- -------------- 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 ======== ======== 3 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except share data) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- 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 ========== ========== ========== ========== 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, $1.725 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 ======= ====== ========= ====== ======= ======= ============ ======= 5 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 --------- --------- 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 ========= ========= 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 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 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. For the nine For the months ended year ended September 30, 1997 December 31, 1996 ------------------ ----------------- (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% 8 Nonperforming assets and other risk elements of the loan portfolio are shown below as of the indicated dates. As of As of September 30, 1997 December 31, 1996 ------------------ ------------------ (Dollars in thousands) 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% (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 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 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 nine months ended September 30, 1997 1996 ------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate ------------------------------------------------------- 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% ======== ======== 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 $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 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 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 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 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 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 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 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