SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
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.
3,797,615
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1 of 23
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, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 5
Unaudited Consolidated Statements of Shareholders' Equity for the
nine months ended September 30, 1998 and 1997 6
Unaudited Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 1998 and 1997 7
Notes to Unaudited Consolidated Financial Statements 8
Average Balances, Yields and Rates 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 22
PART II. OTHER INFORMATION 23
SIGNATURES 24
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share data)
September 30, December 31,
1998 1997
--------------- ---------------
Assets
Cash and due from banks $25,020 $26,259
Federal funds sold - 10,000
--------------- ---------------
Cash and cash equivalents 25,020 36,259
Investment securities:
Held to maturity, fair value $82,918 (1998) and $87,592 (1997) 81,479 86,994
Available for sale, amortized cost $87,385 (1998) and $99,778 (1997) 89,219 100,746
Loans receivable, net of allowance for loan losses
of $9,709 (1998) and $8,282 (1997) 745,347 710,831
Accrued interest receivable 9,102 8,883
Premises and equipment, net 17,894 13,571
Other assets 9,726 6,002
=============== ===============
Total assets $977,787 $963,286
=============== ===============
Liabilities & shareholders' equity
Deposits:
Noninterest-bearing demand $ 38,322 $ 96,560
Interest-bearing demand 9,473 37,447
Money market accounts 189,060 94,496
Savings accounts 3,492 3,655
Time deposits 590,464 609,267
--------------- ---------------
Total deposits 830,811 841,425
--------------- ---------------
Income taxes payable 108 521
Accrued interest payable 5,508 6,504
Other liabilities 2,757 1,227
Short-term borrowings 57,114 20,548
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
--------------- ---------------
Total liabilities 921,311 895,238
--------------- ---------------
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 (1997) - 690
Class B, $1 par value; 1,000,000 shares authorized; none issued - -
Common stock - $1 par value; 10,000,000 shares authorized; issued
and outstanding 3,797,107 (1998) and 3,787,839 (1997) 3,797 3,788
Capital surplus (As restated. See Note 10.) 9,332 24,764
Retained earnings (As restated. See Note 10.) 42,247 38,226
Accumulated other comprehensive income:
Unrealized gain (loss) on investment securities available for sale,
net of tax 1,100 580
--------------- ---------------
Total shareholders' equity 56,476 68,048
=============== ===============
Total liabilities & shareholders' equity $977,787 $963,286
=============== ===============
See notes to unaudited consolidated financial statements.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share data)
As restated. See Note 10.
--------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------------ ----------- ------------ ------------
Interest income:
Interest and fees on loans $17,499 $16,917 $51,886 $48,724
Investment securities:
U.S. Government and agency obligations 2,174 2,410 6,980 6,213
State and political subdivisions 160 121 427 392
Mortgage-backed securities 325 289 836 962
Other securities 121 53 345 83
Federal funds sold 22 172 56 442
------------ ----------- ------------ ------------
Total interest income 20,301 19,962 60,530 56,816
Interest expense:
Interest-bearing demand 19 236 139 664
Money market accounts 1,078 975 3,137 2,832
Savings accounts 20 24 58 74
Time deposits 8,037 9,026 24,733 25,905
Short-term borrowings 849 17 2,045 108
Long-term debt 581 582 1,744 756
------------ ----------- ------------ ------------
Total interest expense 10,584 10,860 31,856 30,339
------------ ----------- ------------ ------------
Net interest income 9,717 9,102 28,674 26,477
Provision for loan losses 930 5,101 2,705 8,903
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 8,787 4,001 25,969 17,574
Other income:
Service charges and fees 874 802 2,610 2,342
Credit cards 9 195 66 568
Other noninterest income 73 114 320 277
Gain (loss) on sales of loans receivable 913 481 1,959 1,381
Gain (loss) on sales of investment securities 165 7 185 7
------------ ----------- ------------ ------------
Total other income 2,034 1,599 5,140 4,575
Other expenses:
Salaries and employee benefits 3,738 3,511 10,510 10,559
Occupancy 1,273 1,170 3,673 3,393
FDIC and other insurance 62 61 190 190
Credit cards 14 89 5 247
General and administrative 1,963 1,566 5,564 4,951
------------ ----------- ------------ ------------
Total other expenses 7,050 6,397 19,942 19,340
------------ ----------- ------------ ------------
Income before taxes 3,771 (797) 11,167 2,809
Taxes on income 1,351 (357) 4,004 886
------------ ----------- ------------ ------------
Net income $ 2,420 $ (440) $ 7,163 $ 1,923
============ =========== ============ ============
Net income available to common shareholders $ 1,228 $ (836) $ 5,177 $ 733
============ =========== ============ ============
Basic earnings per common share $ 0.32 $ (0.22) $ 1.36 $ 0.20
============ =========== ============ ============
Diluted earnings per common share $ 0.31 $ (0.22) $ 1.32 $ 0.19
============ =========== ============ ============
See notes to unaudited consolidated financial statements.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the nine months
ended September 30,
1998 1997
--------------- --------------
Operating activities:
Net income $ 7,163 $ 1,923
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 2,705 8,903
Depreciation and amortization expense 1,384 1,171
Amortization of premiums and accretion of
discount on securities, net 117 101
Amortization of intangibles 186 157
(Gain) Loss on sales of securities (185) (7)
(Gain) Loss on sales of loans receivable (1,959) (1,381)
(Gain) Loss on sales of premises/equipment 17 (28)
(Gain) Loss on other real estate owned, net 60 2
Proceeds from sales of residential mortgage loans 95,464 51,326
Residential mortgage loans originated for resale (94,453) (48,842)
Changes in assets and liabilities:
Accrued interest receivable (219) (3,592)
Other assets (831) (1,285)
Income taxes payable (413) (187)
Accrued interest payable (996) 1,229
Other liabilities 1,491 154
--------------- --------------
Net cash (used in) provided from operating activities 9,531 9,644
--------------- --------------
Investing activities:
Proceeds from sales of held to maturity securities - -
Proceeds from sales of available for sale securities 13,968 -
Proceeds from principal repayments and maturities:
Held to maturity securities 24,521 13,812
Available for sale securities 25,112 13,795
Purchases of held to maturity securities (19,105) (21,245)
Purchases of available for sale securities (26,519) (47,002)
Loans originated and principal repayments, net (65,332) (119,769)
Proceeds from sales of guaranteed student loans 25,186 30,992
Purchases of premises and equipment (5,806) (4,812)
Proceeds from sales of premises and equipment 82 115
Proceeds from sales of other real estate 387 17
--------------- --------------
Net cash (used in) provided from investing activities (27,506) (134,097)
--------------- --------------
Financing activities:
Net increase (decrease) in deposits (10,614) 115,354
Net increase (decrease) in short-term borrowings 36,566 61
Net proceeds from issuance of common stock 209 152
Redemption of preferred stock (17,250) -
Proceeds from issuance of subordinated debentures - 25,013
Common stock dividends paid (985) (866)
Preferred stock dividends paid (1,190) (1,190)
--------------- --------------
Net cash (used in) provided from financing activities 6,736 138,524
--------------- --------------
Net increase (decrease) in cash and cash equivalents (11,239) 14,071
Cash and cash equivalents,
Beginning of period 36,259 22,914
=============== ==============
End of period $25,020 $36,985
=============== ==============
See notes to unaudited consolidated financial statements.
5
SOUTH WEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands except share data)
Accumulated Total
Other Share-
Preferred Stock Common Stock Capital Retained Comprehensive holders'
Shares Amount Shares Amount Surplus Earnings Income Equity
---------------------------------------------------------------------------------------------
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 - - - - - (1,190) - (1,190)
Common, $0.08 per share - - - - - (603) - (603)
Cash dividends declared:
Common, $0.08 per share - - - - - (302) - (302)
Common stock issued:
Employee Stock Option Plan - - - - - - - -
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
=============================================================================================
Balance, January 1, 1998 690,000 $690 3,787,839 $3,788 $24,764 $38,226 $580 $68,048
Cash dividends paid:
Preferred, $1.15 per share - - - - - (1,190) - (1,190)
Common, $0.09 per share - - - - - (683) - (683)
Cash dividends declared:
Preferred, $0.575 per share - - - - - - - -
Common, $0.09 per share - - - - - (341) - (341)
Common stock issued:
Employee Stock Option Plan - - 4,000 4 55 - - 59
Employee Stock Purchase Plan - - 1,913 2 52 - - 54
Dividend Reinvestment Plan - - 3,355 3 93 - - 96
Preferred Stock Redeemed (1) (690,000) (690) - - (15,632) (928) - (17,250)
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 520 520
Net income - - - - - 7,163 - 7,163
---------------------------------------------------------------------------------------------
Balance, September 30, 1998 (1) - - 3,797,107 $3,797 $9,332 $42,247 $1,100 $56,476
=============================================================================================
See notes to unaudited consolidated financial statements.
(1) As restated. See Note 10.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------------ ------------ ----------- ------------
Net income $2,420 $(440) $7,163 $1,923
Other comprehensive income, net of tax:
Unrealized gain (loss) on investment
securities available for sale 780 522 866 692
Less: Tax (expense) benefit (312) (208) (346) (276)
------------ ------------ ----------- ------------
Comprehensive income $2,888 $(126) $7,683 $2,339
============ ============ =========== ============
See notes to unaudited consolidated financial statements.
7
SOUTHWEST BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and 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
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation. The results of operations and cash flows for the nine
months ended September 30, 1998 and 1997 should not be considered indicative of
the results to be expected for the full year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Southwest Bancorp, Inc. Annual
Report on Form 10-K for the year ended December 31, 1997.
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 June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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. 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 adopted SFAS No. 127 on
January 1, 1998 as required; the adoption did not affect the Company's
consolidated position or results of operations.
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 separate financial statement or
as a component of the statement of operations or the statement of shareholders'
equity and display the accumulated balance of other comprehensive income
separately in the shareholders' equity section of the statement of financial
condition. The Company adopted 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 and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. SFAS No.
131 sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company adopted SFAS No. 131
on January 1, 1998 as required; the Company has only one segment, as that term
is defined in SFAS No. 131.
8
NOTE 4: ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement of
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer considered useful. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1998. The Company does not offer
defined benefit plans or other postretirement benefit plans to its employees;
therefore, the adoption of SFAS No. 132 will not affect the Company's financial
statement disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. The Company
will adopt SFAS No. 133 on July 1, 1999, as required. Management of the Company
believes that adoption of SFAS No. 133 will not have a material impact on the
Company's consolidated financial condition or results of operations.
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, 1998 December 31, 1997
-------------------- --------------------
(Dollars in thousands)
Balance at beginning of period $8,282 $7,139
Loans charged-off:
Real estate mortgage 418 1,305
Real estate construction - -
Commercial 1,140 8,691
Installment and consumer 451 1,532
-------------------- --------------------
Total charge-offs 2,009 11,528
Recoveries:
Real estate mortgage 72 85
Real estate construction - -
Commercial 318 300
Installment and consumer 341 182
-------------------- --------------------
Total recoveries 731 567
-------------------- --------------------
Net loans charged-off 1,278 10,961
Provision for loan losses 2,705 12,104
-------------------- --------------------
Balance at end of period $9,709 $8,282
==================== ====================
Loans outstanding:
Average $752,785 $700,129
End of period 755,056 719,113
Net charge-offs to total average loans (annualized) 0.23% 1.57%
Allowance for loan losses to total loans 1.29% 1.15%
9
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates:
At At
September 30, 1998 December 31, 1997
------------------ -----------------
(Dollars in thousands)
Nonaccrual loans (1) $1,055 $5,458
Past due 90 days or more (2) 376 1,677
Restructured terms - -
------------------ -----------------
Total nonperforming loans 1,431 7,135
Other real estate owned 3,788 362
================== =================
Total nonperforming assets $5,219 $7,497
================== =================
Nonperforming loans to loans receivable 0.19% 0.99%
Allowance for loan losses to nonperforming loans 678.48% 116.08%
Nonperforming assets to loans receivable and
other real estate owned 0.69% 1.04%
(1) The government-guaranteed portion of loans included in these totals was $177
(1998) and $541 (1997).
(2) The government-guaranteed portion of loans included in these totals was $0
(1998) and $223 (1997).
In the first and third quarters of 1997, the Company recorded significant
increases in loan charge-offs and provisions for loan losses compared with
corresponding periods in earlier years. The large charge-offs during the first
quarter of 1997 were primarily the result of deterioration in the financial
position of a single commercial borrower. 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 related to the loans that resulted in the larger
than normal provision for loan losses in the first quarter of 1997. As a result
of the unusually large charge-offs recorded in 1997, management revised the
Bank's credit and loan review policies and standards, revised individual and
committee loan authorities, and committed additional resources to the credit
administration and loan review function. Net charge-offs and the provision for
loan losses declined during the first nine months of 1998 to $1.3 million and
$2.7 million, respectively.
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
relation to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may also occur because of changing economic
conditions and their impact on economic prospects and the financial position of
borrowers. Based upon this review, management established an allowance of $9.7
million, or 1.29% of total loans, at September 30, 1998 compared to an allowance
of $8.3 million, or 1.15% of total loans, at December 31, 1997.
In establishing the level of the allowance for September 30, 1998, management
considered a number of factors, including the increased risk inherent in
commercial and commercial real estate loans, which are viewed as entailing
greater risk than certain other categories of loans, charge-off history, and the
rapid expansion of the loan portfolio over the last several years. Management
also considered other factors, including the levels of types of credits, such as
residential mortgage loans, deemed to be of relatively low risk. At September
30, 1998, total nonperforming loans were $1.4 million, or 0.19% of total loans,
compared to $7.1 million, or 0.99% of total loans, at December 31, 1997. The
Company determined the level of the allowance for loan losses at September 30,
1998 was appropriate, after assessing these and other factors it deemed
relevant. Management conducted a similar analysis in order to determine the
appropriate allowance as of December 31, 1997.
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
10
unexpected deterioration of one or a few of such loans may cause a
significant increase in nonperforming assets, and, as occurred in 1997, may lead
to a material increase in charge-offs and the provision for loan losses.
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 the state. At September 30, 1998 and December 31, 1997,
substantially all of the Bank's loans are collateralized with real estate,
inventory, accounts receivable and/or other assets, or are guaranteed by
agencies of the United States Government.
At September 30, 1998, loans to individuals and businesses in the healthcare
industry totaled approximately $81.3 million, or 11% of total loans. Other
notable concentrations of credit within the loan portfolio include $22.2
million, or 3% of total loans, in residential construction loans, $16.7 million,
or 2% of total loans, in hotel/motel loans, and $14.7 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 $1.1 million at September 30, 1998. During
the first nine months of 1998, $92,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, total interest
income of $497,000 would have been recorded.
Those performing loans considered potential nonperforming loans, loans which are
not included in the past due, nonaccrual or restructured categories, but for
which known information about possible credit problems cause management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms over the next six months, amounted to approximately $24.0
million at September 30, 1998, compared to $27.0 million at December 31, 1997.
Loans may be monitored by management and reported as potential nonperforming
loans for an extended period of time during which management continues to be
uncertain as to the ability of certain borrowers to comply with the present loan
repayment terms. These loans are subject to continuing management attention and
are considered by management in determining the level of the allowance for loan
losses.
NOTE 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 were available to the Company to increase capital and for
general corporate purposes, including use in the Bank's lending and investment
activities, and, on September 1, 1998, redemption of all of the Company's 9.20%
Redeemable Cumulative Preferred Stock, Series A (the "Series A Preferred
Stock"). See "Capital Resources" at Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"). 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 31, 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
11
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 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.
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".
NOTE 8: EARNINGS PER SHARE
Basic earnings per common share is computed based upon net income, after
deducting the dividend requirements of preferred stock and the excess of the
redemption price of preferred stock over its carrying value, divided by the
weighted average number of common shares outstanding during each period. Diluted
earnings per common share is computed based upon net income, after deducting the
dividend requirements of preferred stock, divided by the weighted average number
of common shares outstanding during each period adjusted for the effect of
dilutive potential common shares calculated using the treasury stock method. At
September 30, 1998 and 1997, there were no antidilutive options to purchase
common shares. The following is a reconciliation of net income available to
common shareholders and the common shares used in the calculations of basic and
diluted earnings per common share:
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(dollars in thousands)
Net income $2,420 ($440) $7,163 $1,923
Less: preferred stock dividend requirement (264) (396) (1,058) (1,190)
Redemption of preferred stock in excess of
the carrying amount (928) - (928) -
============== ============= ============= =============
Net income available to common shareholders $1,228 ($836) $5,177 $733
============== ============= ============= =============
Weighted average common shares outstanding:
Basic earnings per share 3,796,886 3,771,101 3,794,043 3,768,663
Effect of dilutive securities:
Stock options 117,253 101,537 122,857 95,893
-------------- ------------- ------------- -------------
Weighted average common shares outstanding:
Diluted earnings per share 3,914,139 3,872,638 3,916,900 3,864,556
============== ============= ============= =============
NOTE 9: REDEMPTION OF PREFERRED STOCK
The Company redeemed all of the outstanding shares of its 9.20% Redeemable,
Cumulative Preferred Stock, Series A, on September 1, 1998, at the cash
redemption price of $17.25 million. Substantially all of the funds for this
redemption were obtained from maturities or sales of investment securities
acquired by the Company with proceeds from the 1997 issuance of Preferred
Securities. (See "Capital Resources" at MD&A.)
12
NOTE 10: RESTATEMENT
Subsequent to the issuance of the Company's September 30, 1998 financial
statements, the Company's management determined that its calculation of net
income available to common shareholders was not in accordance with Emerging
Issues Task Force D-42, The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock ("EITF D-42"). The
Company redeemed its Series A, Redeemable, Cumulative Preferred Stock on
September 1, 1998. The redemption price was $928,000 in excess of the carrying
amount of the preferred stock; such excess represents original issue costs
charged to capital surplus. EITF D-42 requires that the excess of the fair value
of the consideration transferred to the preferred shareholders over the carrying
amount of the preferred stock should be subtracted from net income to arrive at
net income available to common shareholders in the calculation of earnings per
share. In addition, this excess should be reclassified to retained earnings. As
a result, the accompanying financial statements for the three month and nine
month periods ended September 30, 1998 have been restated as follows:
Three months ended September 30, 1998
As previously
reported As restated
-------------------- --------------------
(Dollars in thousands except share data)
Net income available to common shareholders $2,156 $1,228
Basic earnings per common share 0.57 0.32
Diluted earnings per common share 0.55 0.31
At September 30, 1998
As previously
reported As restated
-------------------- --------------------
(Dollars in thousands)
Capital surplus $8,404 $9,332
Retained earnings 43,175 42,247
Nine months ended September 30, 1998
As previously
reported As restated
-------------------- --------------------
(Dollars in thousands except share data)
Net income available to common shareholders $6,105 $5,177
Basic earnings per common share 1.61 1.36
Diluted earnings per common share 1.56 1.32
13
SOUTHWEST BANCORP, INC.
AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands except share data)
For the nine months ended September 30,
1998 1997
----------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------------------------------------
Assets:
Loans receivable $752,785 9.22% $692,554 9.41%
Investment securities 185,500 6.17 164,754 6.21
Other interest-earning assets 1,883 5.47 10,763 5.49
-------------- --------------
Total interest-earning assets 940,168 8.61 868,071 8.75
Noninterest-earning assets 43,273 45,266
============== ==============
Total assets $983,441 $913,337
============== ==============
Liabilities and shareholders' equity:
Interest-bearing demand $ 7,915 2.35% $ 37,437 2.37%
Money market accounts 188,810 2.22 91,029 4.16
Savings accounts 3,454 2.25 3,947 2.51
Time deposits 599,219 5.52 604,522 5.73
-------------- --------------
Total interest-bearing deposits 799,398 4.69 736,935 5.35
Short-term borrowings 51,826 5.28 2,571 5.62
Long-term debt 25,013 9.30 10,902 9.30
-------------- --------------
Total interest-bearing liabilities 876,237 4.86 750,408 5.41
Noninterest-bearing demand 24,160 86,776
Other noninterest-bearing liabilities 14,740 10,560
Shareholders' equity 68,304 65,593
============== ==============
Total liabilities and shareholders' equity $983,441 $913,337
============== ==============
Interest rate spread 3.75% 3.34%
=============== ===============
Net interest margin 4.08% 4.08%
=============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 107.30% 115.68%
============== ==============
14
SOUTHWEST BANCORP, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements. This Management's Discussion and Analysis includes
forward-looking statements, such as: statements of the Company's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; and statements of the Company's ability to achieve financial and other
goals. These forward looking statements are subject to significant uncertainties
because they are based upon: future interest rates and other economic
conditions; statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to year 2000 compliance and
costs; future laws and regulations; and a variety of other matters. Because of
these uncertainties, the actual future results may be materially different from
the results indicated by these forward-looking statements. In addition, the
Company's past results do not necessarily indicate its future results.
The following presents Management's discussion and analysis of the Company's
consolidated financial condition and results of operation at the dates and for
the periods indicated. This discussion should be read in conjunction with the
Company's consolidated financial statements and the accompanying notes.
GENERAL
Southwest Bancorp, Inc. (the "Company") is a registered bank holding company
headquartered in Stillwater, Oklahoma. The Company and its subsidiary, the
Stillwater National Bank and Trust Company, are independent, Oklahoma
institutions, and are not controlled by out of state organizations or
individuals.
The Company offers a broad range of commercial and consumer banking and other
financial services through full service offices in Stillwater, Oklahoma City,
Tulsa and Chickasha, Oklahoma. The Company devotes substantial efforts to
marketing and providing services to local businesses, their primary employees,
and to other managers and professionals living and working in the Company's
Oklahoma market areas. The Company has adapted to state branching limitations by
developing a marketing and delivery system that does not rely on an extensive
branch network.
The Company has established and pursued a strategy of independent operation for
the benefit of all of its shareholders, and has capitalized on its position as
an Oklahoma owned and operated banking organization to increase its banking
business. The Company has grown from $434 million in assets at year-end 1993, to
$978 million at September 30, 1998, without acquiring other financial
institutions. The Company considers acquisitions of other financial
institutions, however, from time to time, although it does not have any specific
agreements or understandings for any such acquisition at present.
As discussed in the notes to the financial statements, the Company restated its
September 30, 1998 financial statements to account for the redemption of its
Series A Redeemable, Cumulative Preferred Stock in accordance with EITF D-42
(see Note 10). As a result, the financial statements and related disclosures
contained in this amended filing reflect, where appropriate, changes to conform
to the restatement.
FINANCIAL CONDITION
The Company's total assets increased by $14.5 million, or 2%, from $963.3
million at December 31, 1997 to $977.8 million at September 30, 1998.
Loans were $755.1 million at September 30, 1998, an increase of $35.9 million,
or 5%, compared to December 31, 1997. The Company experienced increases in the
categories of commercial mortgages ($30.2 million, or 14%), real estate
construction loans ($3.1 million, or 4%), residential mortgages ($3.0 million,
or 4%) and other consumer loans ($1.0 million, or 3%). These increases were
offset by a slight reductions in commercial loans ($929,000, or less than 1%)
and government-guaranteed student loans ($416,000, or less than 1%). The
allowance for loan losses increased by $1.4 million, or 17%, from December 31,
1997 to September 30, 1998. At September 30, 1998, the allowance for loan losses
was $9.7 million, or 1.29% of total loans, compared to $8.3 million, or 1.15% of
total loans, at December 31, 1997.
15
Investment securities were $170.7 at September 30, 1998, a reduction of $17.0
million, or 9%, compared to December 31, 1997. This large reduction was due
primarily to the sale of available-for-sale securities in connection with the
redemption of the Company's preferred stock on September 1, 1998.
Premises and equipment increased by $4.3 million primarily due to the
construction costs for the new Tulsa Banking Center at 15th and Utica. The new
Tulsa Banking Center is expected to open in early 1999.
The Company's deposits declined by $10.6 million, or 1%, from $841.4 million at
December 31, 1997 to $830.8 million at September 30, 1998. In February 1998, the
Bank began using a new product that sweeps excess funds in transaction accounts
into money market accounts. At September 30, 1998, $66.7 million and $36.3
million had been swept out of demand and NOW accounts, respectively, and $103.0
million had been swept into money market accounts. Without these
reclassifications, increases occurred in demand deposits ($8.5 million, or 9%)
and NOW accounts ($8.3 million, or 22%) and decreases occurred in time deposits
($18.8 million, or 3%), money market accounts ($8.5 million, or 9%), and savings
deposits ($163,000, or 4%) as compared to December 31, 1997.
Shareholders' equity decreased by $11.6 million, or 17%, due to the planned
redemption of the Company's 9.20% Redeemable, Cumulative Preferred Stock, Series
A, at its liquidation value of $17.25 million, using funds from the sale of
securities that had been purchased with proceeds of the less expensive Trust
Preferred Securities issued in 1997. On September 30, 1998, the Company and the
Bank continued to exceed all applicable regulatory capital requirements. This
decrease in shareholders' equity was partially offset by earnings for the first
nine months of 1998, net of dividends declared on common and preferred stock, a
$209,000 increase due to proceeds of common stock issued through the employee
stock purchase plan, the employee stock option plan and the dividend
reinvestment plan, and a $520,000 increase attributable to a change in the
unrealized gain/loss, net of taxes, on investment securities available for sale.
RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income
For the first nine months of 1998, the Company recorded net income of $7.2
million, 272% more than the $1.9 million recorded for the first nine months of
1997. Net income available to common shareholders, after deduction of dividends
on preferred stock, and after adjustment for $928,000 of original issue costs on
the preferred stock redeemed on September 1, 1998, was $5.2 million, compared
with $733,000 for the first nine months of 1997. The substantial increase in
earnings was primarily the result of the after-tax effect of a $6.2 million
reduction in the provision for loan losses. Average common shares outstanding
were 3,794,043 and 3,768,663, respectively. Basic and diluted earnings per
common share increased to $1.36 and $1.32 per share for the first nine months of
1998 from $0.20 and $0.19 per share for the same period in 1997, respectively.
Without the one-time adjustment required as a result of the redemption of the
preferred stock, basic and diluted earnings per share would be $1.61 and $1.56
for the first nine months of 1998, respectively.
During the first quarter of 1997, the Company received information regarding
events that adversely affected a borrower's ability to 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 $825,000 for the first quarter of 1998. See
"Provision for Loan Losses." For the second quarter of 1998, the provision for
loan losses was $950,000, compared to $801,000 for the second quarter of 1997,
an increase of 19%. For the third quarter of 1998, the provision for loan losses
was $930,000, compared to $5.1 million for the third quarter of 1997, a
reduction of 82%. 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 $2.2 million, or 8%, for the first nine months of
1998 compared to the same period in 1997. This increase in net interest income,
as well as a $6.2 million, or 70%, reduction in the provision for loan losses,
and a $565,000, or 12%, increase in other income, was offset by a $602,000, or
3%, increase in other expenses and a $3.1 million, or 352%, increase in tax
expense. For the first nine months of 1998, the return on average total equity
was 14.02% and the
16
return on average common equity was 13.07% compared to a 3.92% return on average
total equity and a 2.03% return on average common equity for the first nine
months of 1997. Without the one-time accounting adjustment relating to the
redemption of the preferred stock, return on average common equity for the first
nine months of 1998 was 15.41%.
Net Interest Income
Net interest income increased to $28.7 million for the first nine months of 1998
from $26.5 million for the same period in 1997 as continued growth in the loan
portfolio enabled the Company to post a $3.7 million increase in interest income
that exceeded the $1.5 million increase in interest expense during the period.
Yields on the Company's interest-earning assets declined by 14 basis points, and
the rates paid on the Company's interest-bearing liabilities declined by 55
basis points, resulting in an increase in the interest rate spread to 3.75% for
the first nine months of 1998 from 3.34% for the first nine months of 1997. The
net interest margin was unchanged at 4.08% for both periods. The ratio of
average interest-earning assets to average interest-bearing liabilities declined
to 107.30% for the first nine months of 1998 from 115.68% for the first nine
months of 1997, primarily due to the reclassification of noninterest bearing
demand deposits to money market accounts in the sweep process begun in February
1998, the issuance in June 1997 of the Subordinated Debentures, and the increase
in short-term borrowings.
Total interest income for the first nine months of 1998 was $60.5 million, up 7%
from $56.8 million during the same period in 1997. The principal factor
providing greater interest income was the $60.2 million, or 9%, increase in the
volume of average loans outstanding. The Company's average yield on loans
declined to 9.22% for the first nine months of 1998 from 9.41% in 1997. During
the same period, the Company's average investment securities increased $20.7
million, or 13%, and the related yield declined to 6.17% from 6.21%.
Total interest expense for the first nine months of 1998 was $31.8 million, an
increase of 5% from $30.3 million for the same period in 1997. The increase in
total interest expense can be attributed to an increase in average
interest-bearing liabilities of $125.8 million, or 17%. During the same period,
the rates paid on average interest-bearing liabilities declined to 4.86% from
5.41%. Rates paid on deposits decreased or remained substantially the same for
all categories; the largest reduction was a 194 basis point reduction in the
average rate paid on money market accounts due to the reclassification of excess
funds in demand and NOW accounts.
Other Income
Other income increased by $565,000 for the first nine months of 1998 compared to
the first nine months of 1997 primarily as a result of a $578,000 increase in
gains on sales of loans. Other increases were $268,000 in service charges and
fees, $178,000 in gains on sales of securities and $42,000 in other noninterest
income. These increases were offset by a $502,000 reduction in credit card
income. During the fourth quarter of 1997, the Bank completed the sale of
substantially all of its credit card portfolio. The Bank continues to issue
credit cards throughout the state of Oklahoma, but credit card loans and
accounts are owned and serviced by unrelated parties under agreements with the
Company. The gains on sales of securities in 1998 occurred when "available for
sale" securities were called prior to their stated maturity date or were sold to
fund the redemption of the Company's preferred stock.
Other Expenses
The Company's other expenses increased $602,000 for the first nine months of
1998 compared to the first nine months of 1997. This increase was primarily the
result of a $613,000 increase in general and administrative expense. In
addition, occupancy expenses increased $280,000. These increases were offset by
reductions in salaries and employee benefits ($49,000) and credit card expense
($242,000). The increase in occupancy expense was due primarily to increased
data processing, depreciation and equipment costs, as systems, facilities and
equipment continue to be upgraded.
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income
For the third quarter of 1998, the Company recorded net income of $2.4 million,
650% more than the $(440,000) recorded for the third quarter of 1997. Net income
available to common shareholders, after deduction of dividends on preferred
stock, and after adjustment for $928,000 of original issue costs on the
preferred stock redeemed on September 1, 1998, was $1.2
17
million, compared with $(836,000) for the third quarter of 1997. Average common
shares outstanding were 3,796,886 and 3,771,101, respectively. Basic earnings
per common share increased to $0.32 per share for the third quarter of 1998 from
$(0.22) per share for the same period in 1997. Without the one-time adjustment
required as a result of the redemption of the preferred stock, basic and diluted
earnings per share would be $0.57 and $0.55 for the first nine months of 1998.
Diluted earnings per common share increased to $0.31 per share for the third
quarter of 1998 from $(0.22) per share for the same period in 1997.
Net interest income increased $615,000, or 7%, for the third quarter of 1998
compared to the same period in 1997. This increase in net interest income, as
well as a $435,000, or 27%, increase in other income and a $4.2 million, or 82%,
reduction in provision for loan losses were offset by a $653,000, or 10%,
increase in other expense and a $1.7 million, or 478%, increase in tax expense.
For the third quarter of 1998, the return on average total equity was 14.49% and
the return on average common equity was 8.90% compared to a (2.62)% return on
average total equity and a (6.72)% return on average common equity for the third
quarter of 1997. Without the one-time accounting adjustment relating to the
redemption of the preferred stock, return on average common equity for the third
quarter of 1998 was 15.63%.
Net Interest Income
Net interest income increased to $9.7 million for the third quarter of 1998 from
$9.1 million for the same period in 1997 as continued growth in the loan
portfolio enabled the Company to post a $339,000 increase in interest income as
interest expense declined $276,000 during the period. Yields on the Company's
interest-earning assets declined by 16 basis points, and the rates paid on the
Company's interest-bearing liabilities declined by 77 basis points, resulting in
an increase in the interest rate spread to 3.85% for the third quarter of 1998
from 3.24% for the third quarter of 1997. The net interest margin was 4.10% for
the third quarter of 1998, an increase of 12 basis points from the third quarter
of 1997. The ratio of average interest-earning assets to average
interest-bearing liabilities declined to 105.71% for the third quarter of 1998
from 115.51% for the third quarter of 1997, primarily due to the increase in
short-term borrowings.
Total interest income for the third quarter of 1998 was $20.3 million, up 2%
from $20.0 million during the same period in 1997. The principal factor
providing greater interest income was the $44.3 million, or 6%, increase in the
volume of average loans outstanding. The Company's loan yields declined to 9.18%
for the third quarter of 1998 from 9.42% in 1997. During the same period, the
Company's average investment securities declined $1.6 million, or less than 1%,
and the related yield declined to 6.07% from 6.25%.
Total interest expense for the third quarter of 1998 was $10.6 million, a
reduction of 3% from $10.9 million for the same period in 1997. The reduction in
total interest expense can be attributed to an increased usage of lower rate
short-term borrowings, which offset the decline in higher rate time deposits.
Average interest-bearing deposits increased $41.5 million, or 5%, and average
interest-bearing liabilities increased $103.8 million, or 13%, from the third
quarter of 1997 to the third quarter of 1998, however, time deposits declined
$37.5 million, or 6%. During the same period, the rates paid on average
interest-bearing liabilities declined to 4.72% from 5.49%. Rates paid on
deposits decreased for all categories except NOW accounts, which increased 3
basis points; the largest reduction was a 211 basis point reduction in the
average rate paid on money market accounts due to the reclassification of excess
funds in demand and NOW accounts.
Other Income
Other income increased by $435,000 for the third quarter of 1998 compared to the
third quarter of 1997 primarily as a result of a $432,000 increase in gains on
sales of loans, a $158,000 increase in gains on sales of securities, and a
$72,000 increase in service charges and fees. These increases were partially
offset by a $186,000 reduction in credit card income and a $41,000 reduction in
other noninterest income.
Other Expenses
The Company's other expenses increased $653,000 for the third quarter of 1998
compared to the third quarter of 1997. This increase was the result of a
$397,000 increase in general and administrative expense, a $227,000 increase in
salaries and employee benefits, a $103,000 increase in occupancy expense, and a
$1,000 increase in FDIC and other insurance, partially offset by a $75,000
reduction in credit card expense. The increase in salaries and employee benefits
was due primarily to a lower accrual in 1997 of the contribution to be made to
the Bank's profit sharing plan. The increase in occupancy expense was due
primarily to increased data processing, depreciation and equipment costs, as
systems, facilities and equipment have continued to be upgraded.
18
* * * * * * *
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
relation to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may occur because of changing economic
conditions, and economic prospects and the financial position of borrowers.
Based upon this review, management established an allowance of $9.7 million, or
1.29% of total loans, at September 30, 1998 compared to an allowance of $8.3
million, or 1.15% of total loans at December 31, 1997.
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 nonperforming 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, as occurred in 1997, 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 1998 and 1997 was
$4.0 million and $886,000, respectively. The Company's income tax expense for
the third quarters of 1998 and 1997 was $1.4 million and ($357,000),
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 79% and 84% of total deposits at September 30, 1998 and 1997,
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, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank, the Student Loan Marketing Association ("SLMA")
and the Federal Home Loan Bank of Topeka ("FHLB"). 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. The Bank has approved
federal funds purchase lines with three other banks. The Bank has available a
$35.0 million line of credit from the SLMA and a $195.6 million line of credit
from the FHLB. Borrowings under the SLMA line would be secured by student loans.
Borrowings under the FHLB line would be secured by all unpledged securities and
other loans. The Bank also has available unsecured brokered certificate of
deposit lines of credit from Merrill Lynch & Co., Morgan Stanley Dean Witter and
Salomon Smith Barney totaling $75.0 million, $85.0 million, and $100.0 million,
respectively. During the first nine months and third quarter of 1998, the only
categories of short-term borrowings whose averages exceeded 30% of ending
shareholders' equity were repurchase agreements and funds borrowed from the
FHLB.
19
September 30, 1998 September 30, 1997
----------------------------------- -------------------------------------
Repurchase Funds Borrowed Repurchase Funds Borrowed
Agreements from the FHLB Agreements from the FHLB
----------------------------------- -------------------------------------
(Dollars in thousands) (Dollars in thousands)
Amount outstanding at end of period $33,170 $20,000 $1,546 -
Weighted average rate paid at end of period 4.97% 5.45% 4.97% -
Average Balance:
For the three months ended $29,472 $26,945 $302 -
For the nine months ended $24,603 $20,282 $101 -
Average Rate Paid:
For the three months ended 4.97% 5.56% 5.01% -
For the nine months ended 4.95% 5.53% 5.00% -
Maximum amount outstanding at any month end $33,170 $37,000 $1,546 -
During the first nine months of 1998, cash and cash equivalents decreased by
$11.2 million. This decline was the result of cash used in investing activities
of $27.5 million which was not entirely offset by cash generated from financing
activities (primarily increased short-term borrowings) of $6.8 million and $9.5
million in cash provided from operating activities.
Cash and cash equivalents, during the first nine months of 1997, increased by
$14.1 million. The 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.
As described below, the Company redeemed all of the outstanding shares of its
9.20% Redeemable, Cumulative Preferred Stock, Series A (the "Preferred Stock"),
on September 1, 1998, at the cash redemption price of $17.25 million.
Substantially all of the funds for this redemption were obtained from maturities
or sales of investment securities acquired by the Company with proceeds from the
1997 issuance of Preferred Securities. (See "Capital Resources" below.)
Management believes sources of liquidity will continue to be adequate following
this redemption.
CAPITAL RESOURCES
The Company effected its planned redemption of the Company's 9.20% Redeemable,
Cumulative Preferred Stock, Series A (the "Preferred Stock") on September 1,
1998, at the cash redemption price of $17.25 million. Funds for this redemption
came from securities purchased with proceeds from the Preferred Securities
issued in 1997. The Preferred Securities are less expensive to the Company, on
an after tax basis, than the Preferred Stock. The redeemed Preferred Stock
exceeded the amount of preferred securities that may be included in capital for
regulatory purposes, so the redemption did not cause a decrease in regulatory
capital. At September 30, 1998, after the redemption, shareholders' equity was
$56.5 million, compared to $68.0 million at December 31, 1997. In the first nine
months of 1998, earnings, net of common and preferred stock dividend payments,
contributed $4.9 million to shareholders' equity. In addition, net unrealized
gains on investment securities available for sale (net of tax) increased to $1.1
million at September 30, 1998 compared to $580,000 at December 31, 1997. Sale of
common stock through the dividend reinvestment plan, the employee stock purchase
plan and the employee stock option plan contributed an additional $209,000 to
shareholders' equity in the first nine months of 1998.
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. 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. Proceeds from the Preferred Securities
were invested in 9.30% Subordinated Debentures of the Company. For accounting
purposes, the Preferred 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." The net proceeds to the Company from the sale of the Subordinated
Debentures were used for general corporate purposes, including use in investment
activities and the Bank's lending activities, and, on September 1, 1998,
redemption, in whole, of the Company's 9.20% Redeemable Cumulative Preferred
Stock, Series A.
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Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are
commonly known as Risk-Based Capital Guidelines.
On September 30, 1998, the Company exceeded all applicable capital requirements,
having a total risk-based capital ratio of 11.47%, a Tier I risk-based capital
ratio of 9.37%, and a leverage ratio of 7.46%. As of September 30, 1998, the
Bank also met the criteria for classification as a "well-capitalized"
institution under the prompt corrective action rules promulgated under the
Federal Deposit Insurance Act. Designation as a well-capitalized institution
under these regulations does not constitute a recommendation or endorsement of
the Company or the Bank by Federal bank regulators.
In the first quarter of 1998, the Company adopted a policy which prohibits the
declaration of dividends on common stock while the Company is operating at a
loss.
The Company declared a dividend of $.09 per common share payable on October 1,
1998 to shareholders of record as of September 17, 1998.
On July 21, 1998, notices of redemption were mailed to record holders of the
Company's 690,000 outstanding shares of Preferred Stock. The redemption was paid
in cash at the price of $25.00 per share (total, $17.25 million) on the
redemption date of September 1, 1998, following surrender of certificates to the
redemption agent in accordance with procedures specified in the notice. In June
1998, the Company declared a dividend of $.575 per preferred share payable on
September 1, 1998 to holders of record as of August 18, 1998. This dividend was
paid separately from the redemption. No additional dividends will be declared or
paid on the Preferred Stock. The redemption resulted in a one-time accounting
adjustment of $928,000. This adjustment decreased net income available to common
shareholders and basic and diluted income per common share.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles and practices within the banking industry which require
the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
YEAR 2000 ISSUES
Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. This year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips, and may have significant effects on banking customers, bank
regulators, and the general economy.
In 1997, management of the Company created a task force and established a Y2K
Plan to prevent or mitigate adverse effects of the Y2K issue on the Company and
its customers. Goals of the Y2K Plan include identifying risks, testing data
processing and other systems and equipment used by the Company, informing
customers of Y2K issues and risks, establishing a contingency plan for operating
if Y2K issues cause important systems or equipment to fail, implementing changes
necessary to achieve Y2K compliance, and verifying that these changes are
effective. The Board of Directors reviews progress under the plan each month.
Management designed the Y2K Plan to comply with the requirements for Y2K efforts
established by the Comptroller of the Currency, the primary federal regulator of
the Bank. The Comptroller of the Currency also has performed Y2K examinations of
the Bank's Y2K Plan and the Bank's progress in implementing the plan. Federal
regulations prevent banks from disclosing the results of Y2K examinations by
banking regulators. The examinations do not represent approval or certification
of a bank or bank holding company's Y2K plans or efforts.
The Company continues to implement the Y2K Plan. The Company has met its Y2K
goals to date and believes that it will continue to meet the goals of the Y2K
Plan. By September 30, 1998, the Company had performed risk assessments,
assessed
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the Y2K preparedness of suppliers of data processing services to the Company and
of large customers, implemented its customer awareness program, began
development of the Y2K contingency plan, and was in the process of testing and
implementing necessary changes in hardware and software. The Y2K contingency
plan calls for the Company to manually process bank transactions, and to use
other data processing methods, in the event that Y2K efforts of the Company and
its data services providers are not successful. Delays in processing banking
transactions would result if the Company were required to use manual processing
or other methods instead of its normal computer processes. These delays could
disrupt the normal business activities of the Company and its customers. The
Company must assure that the computer systems it uses to process transactions
are Y2K ready in order to avoid these disruptions. Significant additional steps
must be taken to achieve Y2K compliance, including some steps that may not yet
be identified. Elements of the Y2K Plan, such as risk assessments, customer
communications, and testing of systems and equipment, are processes that will
continue into the year 2000.
The Company's primary supplier of data processing services also has adopted a
Y2K plan and timetable to make the changes necessary for it to provide services
in the year 2000, and has provided written assurances to the Company of its
progress. That supplier has been examined for Y2K readiness by federal bank
examiners. The supplier and the Company are in the process of testing the
software changes that have been made to date. The Company is also monitoring the
progress of its other suppliers of data processing services.
Management believes that the cost of resolving Y2K issues related to the
Company's computer programs and those used by its suppliers of significant data
processing services will not be material to the Company's business, operations,
liquidity, capital resources, or financial condition, based on information
developed to date and communications from data processing suppliers. The Company
estimates that its total cash outlays in connection with Y2K compliance will be
less than $500,000, excluding costs of Company employees involved in Y2K
compliance activities. Less than one-half of this amount has been expended
through September 30, 1998. The Company is funding its Y2K expenditures through
continuing operations.
Although the Company has completed an assessment of Y2K effects on its current
commercial lending and other customers, the actual effects on individual,
corporate and governmental customers of the Company and on governmental
authorities that regulate the Company and its subsidiaries, and any resulting
consequences to the Company, cannot be determined with any assurance. The
Company's belief that it, and its primary suppliers of data processing services,
will achieve Y2K compliance, are based on a number of assumptions and on
statements made by third parties, and are subject to uncertainty. The Company
also is not able to predict the effects, if any, on the Company, financial
markets or society in general of the public's reaction to Y2K. Because of this
uncertainty and reliance upon assumptions and statements of third parties, the
Company cannot be assured that the results of its Y2K Plan will be achieved.
Management believes, however, that the Company will be able to accomplish its
Y2K goals and that the Company will be able to continue providing financial
services to its customers into the next Century.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
1997.
22
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.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST BANCORP, INC.
(Registrant)
By: /s/ Rick J. Green February 4, 1999
----------------------------------------- -----------------------------------
Rick J. Green Date
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell February 4, 1999
----------------------------------------- -----------------------------------
Kerby E. Crowell Date
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
24