SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
June 30, 2001.
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.
3,803,107
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1 of 19
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at
June 30, 2001 and December 31, 2000 3
Unaudited Consolidated Statements of Operations for the
six months ended June 30, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 5
Unaudited Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 2001 and 2000 6
Unaudited Consolidated Statements of Comprehensive Income for the
six months ended June 30, 2001 and 2000 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II. OTHER INFORMATION 18
SIGNATURES 19
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
JUNE 30 DECEMBER 31,
2001 2000
--------------- ---------------
ASSETS
Cash and cash equivalents $ 31,777 $ 30,851
Investment securities:
Held to maturity, fair value $56,229 (2001) and $64,615 (2000) 55,169 64,406
Available for sale, amortized cost $164,877 (2001) and $156,316 (2000) 167,728 156,947
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 10,515 8,439
Loans held for sale 11,641 7,888
Loans receivable, net of allowance for loan losses
of $12,687 (2001) and $12,125 (2000) 925,222 892,537
Accrued interest receivable 12,378 12,042
Premises and equipment, net 19,809 20,416
Other assets 8,376 10,040
--------------- ---------------
Total assets $1,242,615 $1,203,566
=============== ===============
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 128,766 $ 119,732
Interest-bearing demand 52,258 51,199
Money market accounts 122,933 103,001
Savings accounts 5,149 4,884
Time deposits of $100,000 or more 271,127 304,814
Other time deposits 330,368 361,472
--------------- ---------------
Total deposits 910,601 945,102
--------------- ---------------
Accrued interest payable 4,749 7,105
Other liabilities 3,624 2,609
Short-term borrowings 219,293 150,498
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
--------------- ---------------
Total liabilities 1,163,280 1,130,327
--------------- ---------------
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
4,081,056 shares issued 4,081 4,081
Capital surplus 14,731 14,788
Retained earnings 64,521 59,912
Accumulated other comprehensive income (loss) 1,711 379
Treasury stock, at cost; 281,561 (2001) and 290,772 (2000) shares (5,709) (5,921)
--------------- ---------------
Total shareholders' equity 79,335 73,239
--------------- ---------------
Total liabilities & shareholders' equity $1,242,615 $1,203,566
=============== ===============
See notes to unaudited consolidated financial statements.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except earnings per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
------------ ----------- ------------ ------------
Interest income:
Interest and fees on loans $20,068 $20,329 $41,196 $39,897
Investment securities:
U.S. Government and agency obligations 1,539 1,673 3,216 3,341
Mortgage-backed securities 1,296 1,161 2,495 2,221
State and political subdivisions 419 366 852 693
Other securities 187 201 377 384
Other interest-earning assets 9 12 18 57
------------ ----------- ------------ ------------
Total interest income 23,518 23,742 48,154 46,593
Interest expense:
Interest-bearing demand 221 316 508 594
Money market accounts 1,122 1,040 2,565 2,084
Savings accounts 26 22 52 44
Time deposits of $100,000 or more 4,168 4,610 8,938 8,860
Other time deposits 4,898 4,829 10,451 9,319
Short-term borrowings 2,126 2,367 4,252 4,558
Long-term debt 581 581 1,163 1,163
------------ ----------- ------------ ------------
Total interest expense 13,142 13,765 27,929 26,622
------------ ----------- ------------ ------------
Net interest income 10,376 9,977 20,225 19,971
Provision for loan losses 1,125 975 1,950 1,800
Other income:
Service charges and fees 1,682 1,539 3,191 2,999
Other noninterest income 186 169 267 252
Gain on sales of loans receivable 636 246 1,175 699
Gain on sales of investment securities
196 - 253 -
------------ ----------- ------------ ------------
Total other income 2,700 1,954 4,886 3,950
Other expenses:
Salaries and employee benefits 4,034 3,566 7,635 7,132
Occupancy 1,591 1,680 3,210 3,259
FDIC and other insurance 70 67 141 133
Other real estate (6) 99 (23) 416
General and administrative 2,083 1,880 4,056 3,784
------------ ----------- ------------ ------------
Total other expenses 7,772 7,292 15,019 14,724
------------ ----------- ------------ ------------
Income before taxes 4,179 3,664 8,142 7,397
Taxes on income 1,287 1,250 2,621 2,537
------------ ----------- ------------ ------------
Net income $2,892 $2,414 $5,521 $4,860
============ =========== ============ ============
Basic earnings per share $ 0.76 $ 0.63 $ 1.45 $ 1.26
============ =========== ============ ============
Diluted earnings per share $ 0.74 $ 0.63 $ 1.42 $ 1.25
============ =========== ============ ============
Cash dividends declared per share $ 0.12 $ 0.11 $ 0.24 $ 0.22
============ =========== ============ ============
See notes to unaudited consolidated financial statements.
4
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
2001 2000
------------- -------------
Operating activities:
Net income $5,521 $4,860
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 1,950 1,800
Depreciation and amortization expense 1,219 1,242
Amortization of premiums and accretion of
discounts on securities, net (5) 4
Amortization of intangibles 80 90
(Gain) Loss on sales/calls of securities (253) --
(Gain) Loss on sales of loans receivable (1,175) (699)
(Gain) Loss on sales of premises/equipment (1) (4)
(Gain) Loss on other real estate owned, net (26) 214
Proceeds from sales of residential mortgage loans 53,829 25,081
Residential mortgage loans originated for resale (55,350) (23,637)
Changes in assets and liabilities:
Accrued interest receivable (336) (1,711)
Other assets 438 (556)
Income taxes payable (119) --
Accrued interest payable (2,356) 1,164
Other liabilities 1,095 946
------------- -------------
Net cash (used in) provided from operating activities 4,511 8,794
------------- -------------
Investing activities:
Proceeds from sales of available for sale securities 2,025 1,046
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 9,225 13,400
Available for sale securities 42,302 4,563
Proceeds from sales of Federal Home Loan Bank stock 111 --
Purchases of held to maturity securities -- (10,705)
Purchases of available for sale securities (52,620) (19,340)
Purchases of Federal Reserve Bank and Federal Home Loan
Bank stock (2,187) (96)
Loans originated and principal repayments, net (84,606) (65,929)
Proceeds from sales of guaranteed student loans 48,794 13,111
Purchases of premises and equipment (633) (1,176)
Proceeds from sales of premises and equipment 22 48
Proceeds from sales of other real estate owned 406 1,542
------------- -------------
Net cash (used in) provided from investing activities (37,161) (63,536)
------------- -------------
Financing activities:
Net increase (decrease) in deposits (34,501) 34,257
Net increase (decrease) in short-term borrowings 68,795 26,030
Net proceeds from issuance of common stock 155 60
Purchases of treasury stock -- (1,317)
Common stock dividends paid (873) (812)
------------- -------------
Net cash (used in) provided from financing activities 33,576 58,218
------------- -------------
Net increase (decrease) in cash and cash equivalents 926 3,476
Cash and cash equivalents,
Beginning of period 30,851 26,340
------------- -------------
End of period $31,777 $29,816
============= =============
See notes to consolidated financial statements.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
ACCUMULATED TOTAL
OTHER SHARE-
COMMON STOCK CAPITAL RETAINED COMPREHENSIVE TREASURY HOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY
----------------------------------------------------------------------------------------
Balance, January 1, 2001 4,081,056 $4,081 $14,788 $59,912 $379 $(5,921) $73,239
Cash dividends declared:
Common, $0.12 per share -- -- -- (912) -- -- (912)
Common stock issued:
Employee Stock Option Plan -- -- (49) -- -- 157 108
Employee Stock Purchase Plan -- -- (2) -- -- 21 19
Dividend Reinvestment Plan -- -- (6) -- -- 34 28
Other comprehensive income
(loss), net of tax -- -- -- -- 1,332 -- 1,332
Treasury shares purchased -- -- -- -- -- -- --
Net income -- -- -- 5,521 -- -- 5,521
----------------------------------------------------------------------------------------
Balance, June 30, 2001 4,081,056 $4,081 $14,731 $64,521 $1,711 $(5,709) $79,335
========================================================================================
See notes to unaudited consolidated financial statements.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
------------ ----------- ------------ ------------
Net income $2,892 $2,414 $5,521 $4,860
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities 780 90 2,473 (435)
Reclassification adjustment for (gains) losses
arising during the period
(196) -- (253) --
------------ ----------- ------------ ------------
Other comprehensive income (loss), before tax 584 90 2,220 (435)
Tax (expense) benefit related to items
of other comprehensive income (loss) (237) (37) (888) 175
------------ ----------- ------------ ------------
Other comprehensive income (loss), net of tax 347 53 1,332 (260)
------------ ----------- ------------ ------------
Comprehensive income $3,239 $2,467 $6,853 $4,600
============ =========== ============ ============
See notes to unaudited consolidated financial statements.
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 notes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, cash flows and
comprehensive income in conformity with accounting principles generally accepted
in the United States of America. However, the unaudited consolidated financial
statements include all adjustments which, in the opinion of management, are
necessary for a fair presentation. Those adjustments consist of normal,
recurring adjustments. The results of operations and cash flows for the six
months ended June 30, 2001 and 2000 should not be considered indicative of the
results to be expected for the full year. These unaudited 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, 2000.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest") and its wholly owned
subsidiaries, the Stillwater National Bank and Trust Company ("Stillwater
National") and SBI Capital Trust ("SBI Capital"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3: RECENTLY ADOPTED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS No. 133 required that Southwest recognize all derivatives at
fair value in the statement of financial condition as an asset or liability,
depending on Southwest's rights or obligations under the applicable derivative
contract. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of adoption of SFAS No. 133 for one year. Southwest adopted SFAS
No. 133 on January 1, 2001, as required. Adoption of the new method of
accounting for derivatives and hedging activities did not have a material impact
on Southwest's consolidated financial condition or results of operations.
7
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
For the six For the
months ended year ended
June 30, 2001 December 31, 2000
-------------------- --------------------
(Dollars in thousands)
Balance at beginning of period $12,125 $11,190
Loans charged-off:
Real estate mortgage 101 563
Real estate construction 78 1,083
Commercial 1,404 1,170
Installment and consumer 402 474
-------------------- --------------------
Total charge-offs 1,985 3,290
Recoveries:
Real estate mortgage 19 155
Real estate construction 22 -
Commercial 402 360
Installment and consumer 154 160
-------------------- --------------------
Total recoveries 597 675
-------------------- --------------------
Net loans charged-off 1,388 2,615
Provision for loan losses 1,950 3,550
-------------------- --------------------
Balance at end of period $12,687 $12,125
==================== ====================
Loans outstanding:
Average $937,098 $900,241
End of period 949,550 912,550
Net charge-offs to total average loans (annualized) 0.30% 0.29%
Allowance for loan losses to total loans 1.34% 1.33%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
At At
June 30, 2001 December 31, 2000
-------------------- --------------------
(Dollars in thousands)
Nonaccrual loans (1) $7,981 $3,138
Past due 90 days or more (2) 2,269 208
Restructured - 8,694
-------------------- --------------------
Total nonperforming loans 10,250 12,040
Other real estate owned 965 1,225
-------------------- --------------------
Total nonperforming assets $11,215 $13,265
==================== ====================
Nonperforming loans to loans receivable 1.08% 1.32%
Allowance for loan losses to nonperforming loans 123.78% 100.71%
Nonperforming assets to loans receivable and
other real estate owned 1.18% 1.45%
(1) The government-guaranteed portion of loans included in these totals was
$208 (2001) and $101 (2000).
(2) The government-guaranteed portion of loans included in these totals was
$232 (2001) and $99 (2000).
8
Total nonperforming assets of $11.2 million were down $2.1 million, or 15.5%,
from year-end 2000. The decrease in nonperforming assets was primarily the
result of the successful resolution of a large problem credit, offset in part by
the classification of $5.1 million in watch list credits as nonaccrual and
other, typical, activity in the portfolio. These nonaccrual credits, originated
in 1996 to a single borrower, are now in the process of collection.
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest deems appropriate. The
allowance is based on careful, continuous review and evaluation of the credit
portfolio and ongoing, quarterly assessments of the probable losses inherent in
the loan and lease portfolio, and to a lesser extent, unused commitments to
provide financing. Southwest's methodology for assessing the appropriateness of
the allowance includes determination of a formula allowance, specific allowances
and an unallocated allowance. The formula allowance is calculated by applying
loss factors to corresponding categories of outstanding loans and leases. Loss
factors are based on Southwest's historical loss experience in the various
portfolio categories over the prior six quarters or four quarters, whichever is
greater. The use of these loss factors is intended to reduce the differences
between estimated losses inherent in the portfolio and observed losses. Specific
allowances are established in cases where management has identified significant
conditions or circumstances related to a credit that management believes
indicate the probability that a loss may be incurred in an amount different from
the amount determined by application of the formula allowance. The allowance for
loan losses related to loans that are identified for evaluation of impairment is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
Allowances are established for credits that do not have specific allowances
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade. The unallocated allowance is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. Management reviews these conditions quarterly.
During the second quarter of 2001, there were no changes in estimation methods
or assumptions that affected Southwest's methodology for assessing the
appropriateness of the allowance.
Management strives to carefully monitor credit quality 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 Southwest, 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
in future periods.
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
State of Oklahoma, but its commercial lending operations are concentrated in the
Stillwater, Tulsa, and Oklahoma City areas of the state. As a result, the
collectibility of Southwest's loan portfolio can be affected by changes in the
general economic conditions in the state and in those metropolitan areas. At
June 30, 2001 and December 31, 2000, substantially all of Southwest's loans are
collateralized with real estate, inventory, accounts receivable and/or other
assets, or are guaranteed by agencies of the United States Government.
At June 30, 2001, loans to individuals and businesses in the healthcare industry
totaled approximately $127.8 million, or 13% of total loans. Southwest does not
have any other concentrations of loans to individuals or businesses involved in
a single industry totaling 5% or more of total loans.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $8.0 million at June 30, 2001. During the
first six months of 2001, $161,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, additional total
interest income of $128,200 would have been recorded.
NOTE 6: LONG-TERM DEBT
The guaranteed preferred beneficial interests in Southwest's subordinated
debentures represent interests in 9.30% subordinated debentures ("Subordinated
Debentures"), due July 31, 2027, issued by Southwest to its subsidiary, SBI
Capital, in connection with SBI Capital's Cumulative Trust Preferred Securities
(the "Preferred Securities"). The Subordinated Debentures and related payments
are SBI Capital's only assets. The Preferred Securities meet the regulatory
criteria for Tier I capital, subject to Federal Reserve guidelines that limit
the amount of the Preferred Securities and cumulative perpetual preferred stock
to an aggregate of 25% of Tier I capital.
9
NOTE 7: EARNINGS PER SHARE
Basic earnings per share is computed based upon net income divided by the
weighted average number of shares outstanding during each period. Diluted
earnings per share is computed based upon net income divided by the weighted
average number of shares outstanding during each period adjusted for the effect
of dilutive potential shares calculated using the treasury stock method. At June
30, 2001, there were 120,000 antidilutive options to purchase common shares. At
June 30, 2000, there were 287,000 antidilutive options to purchase shares.
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
For the three months For the six months
ended June 30, ended June 30,
2001 2000 2001 2000
--------- --------- --------- ----------
Weighted average shares outstanding:
Basic earnings per share 3,798,699 3,837,442 3,796,116 3,851,816
Effect of dilutive securities:
Stock options 91,791 40,262 88,046 50,531
--------- --------- --------- ---------
Weighted average shares outstanding:
Diluted earnings per share 3,890,490 3,877,704 3,884,162 3,902,347
========= ========= ========= =========
NOTE 8: SHAREHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
In December 1999, Southwest implemented a stock repurchase program that
authorized the purchase of up to 5% of its current outstanding common stock in
the period ending April 30, 2001. As of April 30, 2001, Southwest had purchased
102,500 shares under this program at an average price of $17.33 per share. These
repurchases reduced shareholders' equity $1.8 million during 2000. In March
2001, Southwest authorized the repurchase of up to another 5% of its current
outstanding common stock. As of June 30, 2001, Southwest had not made any
purchases under the current program. Repurchases under the current program may
be made primarily on the open market from time to time until March 31, 2002, or
earlier termination of the repurchase program by the Board and are made at the
discretion of management based upon market, business, legal, accounting and
other factors.
SHAREHOLDER RIGHTS PLAN
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board of Directors believes are
unfair or otherwise not in the best interests of Southwest and its shareholders.
Under the Rights Plan, each holder of record of Southwest's common stock, as of
the close of business on April 22, 1999, received one right per common share.
The rights generally become exercisable if an acquiring party accumulates, or
announces an offer to acquire, 10% or more of Southwest's voting stock. The
rights will expire on April 22, 2009. Each right will entitle the holder (other
than the acquiring party) to buy, at the right's then current exercise price,
Southwest's common stock or equivalent securities having a value of twice the
right's exercise price. The exercise price of each right was initially set at
$110.00. In addition, upon the occurrence of certain events, holders of the
rights would be entitled to purchase, at the then current exercise price, common
stock or equivalent securities of an acquiring entity worth twice the exercise
price. Under the Rights Plan, Southwest also may exchange each right, other than
rights owned by an acquiring party, for a share of its common stock or
equivalent securities.
10
SOUTHWEST BANCORP, INC.
AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
For the six months ended June 30,
2001 2000
----------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------------------------------------
Assets:
Loans receivable $937,098 8.87% $886,790 9.05%
Investment securities 234,090 5.98 218,207 6.12
Other interest-earning assets 724 5.01 1,979 5.79
-------------- --------------
Total interest-earning assets 1,171,912 8.29 1,106,976 8.46
Noninterest-earning assets 51,966 52,710
-------------- --------------
Total assets $1,223,878 $1,159,686
============== ==============
Liabilities and shareholders' equity:
Interest-bearing demand $48,264 2.12% $48,070 2.48%
Money market accounts 122,054 4.24 95,194 4.40
Savings accounts 5,292 1.98 4,470 1.98
Time deposits 643,881 6.07 647,456 5.65
-------------- --------------
Total interest-bearing deposits 819,491 5.54 795,190 5.29
Short-term borrowings 181,278 4.73 155,854 5.88
Long-term debt 25,013 9.30 25,013 9.30
-------------- --------------
Total interest-bearing liabilities 1,025,782 5.49 976,057 5.48
Noninterest-bearing demand 106,486 103,037
Other noninterest-bearing liabilities 12,575 14,499
Shareholders' equity 79,035 66,093
-------------- --------------
Total liabilities and shareholders' equity $1,223,878 $1,159,686
============== ==============
Interest rate spread 2.80% 2.98%
=============== ===============
Net interest margin (1) 3.48% 3.63%
=============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.25% 113.41%
============== ==============
(1) Net interest margin = net interest income / total interest-earning assets
The resolution of a large problem credit during the second quarter resulted in
the recovery of accrued interest from prior periods, which increased the yield
on loans and resulting interest rate spread and net interest margin rates for
the second quarter. Without the interest recovery, interest rate spread and net
interest margin rates would have been 2.83%, and 3.48%, respectively.
11
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This Management's Discussion and Analysis of
financial condition and results of operations and other portions of this report
include forward-looking statements such as: statements of Southwest's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; assessments of loan quality and of probable loan losses; assessments
of the effects on Southwest's performance of possible Federal Reserve actions to
decrease interest rates; and statements of Southwest's ability to achieve
financial and other goals. These forward-looking statements are subject to
significant uncertainties because they are based upon: the amount and timing of
future changes in interest rates and other economic conditions; future laws and
regulations; and a variety of other matters. Because of these uncertainties, the
actual future results may be materially different from the results indicated by
these forward-looking statements. In addition, Southwest's past growth and
performance do not necessarily indicate its future results.
You should read this Management's Discussion and Analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's unaudited consolidated financial statements and the accompanying
notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a registered bank holding company
headquartered in Stillwater, Oklahoma. Southwest and its subsidiary, the
Stillwater National Bank and Trust Company ("Stillwater National"), are
independent, Oklahoma institutions, and are not controlled by out of state
organizations or individuals.
Southwest offers a broad range of commercial and consumer banking and other
financial services through full service offices in Stillwater, Oklahoma City,
Tulsa and Chickasha, Oklahoma. Southwest devotes substantial efforts to
marketing and providing services to local businesses, their primary employees,
and to other managers and professionals living and working in Southwest's
Oklahoma market areas. Southwest has developed a marketing and delivery system
that does not rely on an extensive branch network.
Southwest has established and pursued a strategy of independent operation for
the benefit of all of its shareholders, and has capitalized on its position as
an Oklahoma owned and operated banking organization to increase its banking
business. Southwest has grown from $434 million in assets since becoming a
public company at year-end 1993, to $1.24 billion at June 30, 2001, without
acquiring other financial institutions. Southwest considers acquisitions of
other financial institutions and other companies, however, from time to time,
although it does not have any specific agreements or understandings for any such
acquisition at present.
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $1.24 billion at June 30, 2001, a 3% increase from
$1.20 billion at December 31, 2000.
LOANS RECEIVABLE
Loans were $949.6 million at June 30, 2001, a 4% increase ($37.0 million) from
December 31, 2000. Southwest experienced increases in the categories of
commercial real estate mortgages ($30.8 million, or 11%), government-guaranteed
student loans ($12.1 million, or 16%), commercial loans ($7.5 million, or 2%),
and residential mortgages ($3.0 million, or 3%). These increases were offset by
reductions in real estate construction loans ($11.7 million, or 11%) and other
consumer loans ($4.6 million, or 13%). The allowance for loan losses increased
by $562,000, or 5%, from December 31, 2000 to June 30, 2001. At June 30, 2001,
the allowance for loan losses was $12.7 million, or 1.34% of total loans,
compared to $12.1 million, or 1.33% of total loans, at December 31, 2000. The
increase in total loans from year-end 2000 to June 30, 2001 is the net result of
growth from loan originations and payoffs.
12
DEPOSITS
Southwest's deposits were $910.6 million at June 30, 2001, a reduction of $34.5
million, or 4%, from $945.1 million at December 31, 2000. Increases occurred in
money market accounts ($19.9 million, or 19%), demand deposits ($9.0 million, or
8%), NOW accounts ($1.1 million, or 2%) and savings accounts ($265,000, or 5%).
These increases were offset by a decrease in time deposits ($64.8 million, or
10%). The reduction in time deposits can be attributed to a decreasing rate
environment during the current year. Southwest has increased usage of its
borrowing capacity at the Federal Home Loan Bank to take advantage of the lower
rate environment. These increased borrowings offset the decline in time
deposits.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $6.1 million, or 8%, due primarily to
earnings, net of common stock dividends, for the first six months of 2001, as
well as a $1.3 million increase in the net unrealized gains on investment
securities available for sale (net of tax). At June 30, 2001, Southwest and
Stillwater National continued to exceed all applicable regulatory capital
requirements.
RESULTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
NET INCOME
For the first six months of 2001, Southwest recorded net income of $5.5 million.
This was $661,000 more than the $4.9 million in net income recorded for the
first six months of 2000. Average shares outstanding were 3,796,116 for the
first six months of 2001 and 3,851,816 for the first six months of 2000. Basic
and diluted earnings per share increased to $1.45 and $1.42 per share for the
first six months of 2001 from $1.26 and $1.25 per share for the same period in
2000, respectively.
Net interest income increased $254,000, or 1%, for the first six months of 2001
compared to the same period in 2000. This increase in net interest income as
well as a $936,000, or 24%, increase in other income was offset by a $295,000,
or 2%, increase in other expense, a $150,000, or 8%, increase in the provision
for loan losses and an $84,000, or 3%, increase in taxes on income. For the
first six months of 2001, the return on average total equity was 14.09% compared
to a 14.79% return on average total equity for the first six months of 2000.
NET INTEREST INCOME
Net interest income increased to $20.2 million for the first six months of 2001
from $20.0 million for the same period in 2000 as the $1.6 million, or 3%,
increase in interest income was only partially offset by a $1.3 million, or 5%,
increase in interest expense. Yields on Southwest's interest-earning assets
declined by 17 basis points, and the rates paid on Southwest's interest-bearing
liabilities increased by 1 basis point, resulting in a reduction in the interest
rate spread to 2.80% for the first six months of 2001 from 2.98% for the first
six months of 2000. Net interest margin also declined from 3.63% to 3.48%. The
ratio of average interest-earning assets to average interest-bearing liabilities
increased to 114.25% for the first six months of 2001 from 113.41% for the first
six months of 2000, primarily due to the increase in average loans outstanding.
Total interest income for the first six months of 2001 was $48.2 million, a 3%
increase from $46.6 million during the same period in 2000. The principal factor
in the increase of interest income was the $64.9 million increase in average
interest-earning assets. Southwest's average loans increased $50.3 million, or
6%, and the related yield was reduced to 8.87% for the first six months of 2001
from 9.05% in 2000. During the same period, average investment securities
increased $15.9 million, or 7%, and the related yield was reduced to 5.98% from
6.12%.
Total interest expense for the first six months of 2001 was $27.9 million, an
increase of 5% from $26.6 million for the same period in 2000. The increase in
total interest expense can be attributed to a $49.7 million, or 5%, increase in
average interest-bearing liabilities. During the same period, the rates paid on
average interest-bearing liabilities increased to 5.49% from 5.48%. Rates paid
on time deposits increased 42 basis points while the rates paid on NOW accounts
and money market accounts declined 36 and 16 basis points, respectively. There
was no change in the rates paid on savings accounts.
13
The Federal Reserve's actions to decrease interest rates have negatively
affected the net interest margins of many banks, as interest rates on earning
assets have declined more rapidly than rates paid on interest bearing
liabilities. Further decreases in interest rates may further compress interest
margins. Southwest believes that it is likely that its margins will be further
compressed in the second half of the year, particularly if the Federal Reserve
drops interest rates further. This margin compression may have a noticeable,
negative effect on net income for the second half of the year and on the amount
of income growth for the full year. The actual amounts of the effects on margin
and on net income, if any, are not known, and depend upon a number of factors
including the amount and timing of any future decreases in interest rates and
the levels of Southwest's other income and operating expenses.
OTHER INCOME
Other income increased by $936,000 for the first six months of 2001 compared to
the same period of 2000 primarily as a result of a $476,000 increase in gains on
sales of loans, a $253,000 increase in gains on sales/calls of securities and a
$192,000 increase in service charges and fees. The increase in gains on sales of
securities occurred when "available for sale" securities were called prior to
their stated maturity date.
OTHER EXPENSES
Southwest's other expenses increased $295,000 for the first six months of 2001
compared to the same period in 2000. This increase was primarily the result of a
$503,000 increase in salaries and employee benefits, a $272,000 increase in
general and administrative expense and an $8,000 increase in FDIC and other
insurance. These increases in expense were partially offset by a $439,000
reduction in other real estate expense and a $49,000 reduction in occupancy
expense.
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. An appropriate
level of the allowance for loan losses is determined by management. See Note 4,
Allowance for Loan Losses, in the Notes to Unaudited Consolidated Financial
Statements for additional information.
TAXES ON INCOME
Southwest's income tax expense was $2.6 million for the first six months of 2001
and $2.5 million for the same period in 2000. Southwest's effective tax rates
have been lower than federal and state statutory rates primarily because of
tax-exempt income on municipal obligations and loans.
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
NET INCOME
For the second quarter of 2001, Southwest recorded net income of $2.9 million.
This was $478,000 more than the $2.4 million in net income recorded for the
second quarter of 2000. Average shares outstanding were 3,798,699 for the second
quarter of 2001 and 3,837,442 for the second quarter of 2000. Basic and diluted
earnings per share increased to $0.76 and $0.74 per share for the second quarter
of 2001 from $0.63 and $0.63 per share for the same period in 2000,
respectively.
Net interest income increased $399,000, or 4%, for the second quarter of 2001
compared to the same period in 2000. This increase in net interest income, as
well as a $746,000, or 38%, increase in other income, was offset by a $480,000,
or 7%, increase in other expense, a $150,000, or 15%, increase in the provision
for loan losses, and a $37,000, or 3%, increase in taxes on income. For the
second quarter of 2001, the return on average total equity was 14.47% compared
to a 14.34% return on average total equity for the second quarter of 2000.
NET INTEREST INCOME
Net interest income increased to $10.4 million for the second quarter of 2001
from $10.0 million for the same period in 2000 as the $224,000, or 1%, reduction
in interest income was more than offset by a $623,000, or 5%, reduction in
interest expense. Yields on Southwest's interest-earning assets decreased by 55
basis points, and the rates paid on Southwest's
14
interest-bearing liabilities decreased by 50 basis points, resulting in a
reduction in the interest rate spread to 2.88% for the second quarter of 2001
from 2.93% for the second quarter of 2000. Net interest margin also declined
from 3.60% to 3.53%. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 114.57% for the second quarter of 2001
from 113.51% for the second quarter of 2000, primarily due to the increase in
average loans outstanding.
The resolution of a large problem credit during the second quarter resulted in
the recovery of accrued interest from prior periods, which increased the yield
on loans and resulting interest rate spread and net interest margin rates for
the second quarter. Without the interest recovery, the interest rate spread and
net interest margin rates would have been 2.83%, and 3.48%, respectively.
Total interest income for the second quarter of 2001 was $23.5 million, a 1%
decrease from $23.7 million during the same period in 2000. The principal reason
for the decrease in interest income was the 55 basis point reduction in the
yield on interest-earning assets, which was partially offset by the $62.8
million increase in average interest-earning assets. Southwest's average loans
increased $47.6 million, or 5%, and the related yield decreased to 8.55% for the
second quarter of 2001 from 9.15% in 2000. During the same period, average
investment securities increased $15.2 million, or 7%, and the related yield
decreased to 5.85% from 6.20%.
Total interest expense for the second quarter of 2001 was $13.1 million, a
reduction of 5% from $13.8 million for the same period in 2000. The reduction in
total interest expense can be attributed to the 50 basis point reduction in the
rates paid on average interest-bearing liabilities, which decreased to 5.13%
from 5.63%. During the same period, average interest-bearing liabilities
increased $45.7 million, or 5%. Rates paid on deposits decreased for all
categories other than savings.
OTHER INCOME
Other income increased by $746,000 for the second quarter of 2001 compared to
the same period of 2000 primarily as a result of a $390,000 increase in gains on
sales of loans, a $196,000 increase in gains on sales/calls of securities and a
$143,000 increase in service charges and fees. The increase in gains on sales of
securities occurred when "available for sale" securities were called prior to
their stated maturity date.
OTHER EXPENSES
Southwest's other expenses increased $480,000 for the second quarter of 2001
compared to the same period in 2000. This increase was primarily the result of a
$468,000 increase in salaries and employee benefits, a $203,000 increase in
general and administrative expense and a $3,000 increase in FDIC and other
insurance. These increases in expense were partially offset by a $105,000
reduction in other real estate expense and an $89,000 reduction in occupancy
expense. The reduction in occupancy expense was due to lower building rental
expense. During the third quarter 2000, a rental agreement for office space in
Tulsa was canceled after consolidating administrative departments into another
office.
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. An appropriate
level of the allowance for loan losses is determined by management. See Note 4,
Allowance for Loan Losses, in the Notes to Unaudited Consolidated Financial
Statements for additional information.
TAXES ON INCOME
Southwest's income tax expense was $1.3 million for the second quarters of 2001
and 2000. Southwest's effective tax rates have been lower than federal and state
statutory rates primarily because of tax-exempt income on municipal obligations
and loans.
* * * * * * *
15
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments.
Southwest's portfolio of government-guaranteed student loans and SBA loans are
also readily salable. Additional sources of liquidity, including cash flow from
the repayment of loans, are also considered in determining whether liquidity is
satisfactory. Liquidity is also achieved through growth of 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.
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("SLMA"), the F&M Bank of Tulsa ("F&M"), and the Federal Home Loan Bank of
Topeka ("FHLB"). Stillwater National also carries interest-bearing demand notes
issued by the U.S. Treasury in connection with the Treasury Tax and Loan note
program; the outstanding balance of those notes was $2.5 million at June 30,
2001. Stillwater National has approved federal funds purchase lines totaling
$20.0 million with three other banks; no amounts were outstanding on these lines
at June 30, 2001. In addition, Stillwater National has available a $35.0 million
line of credit from the SLMA and a $224.5 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 SLMA line expires April 20, 2007; no amount was outstanding on this
line at June 30, 2001. The FHLB line of credit had an outstanding balance of
$168.6 million at June 30, 2001. Stillwater National also has available
unsecured brokered certificate of deposit lines of credit in connection with its
retail certificate of deposit program from Merrill Lynch & Co., Morgan Stanley
Dean Witter, Salomon Smith Barney, PaineWebber, Inc., and CountryWide Securities
that total $415.0 million. At June 30, 2001, $89.1 million in these retail
certificates of deposit were included in total deposits.
Stillwater National sells securities under agreements to repurchase with
Stillwater National retaining custody of the collateral. Collateral consists of
direct obligations of the U.S. Government or U.S. Government Agency issues,
which are designated as pledged with Stillwater National's safekeeping agent.
These transactions are for one-to-four day periods.
During the first six months of 2001, the only categories of short-term
borrowings whose averages exceeded 30% of ending shareholders' equity were
repurchase agreements and funds borrowed from the FHLB.
June 30, 2001 June 30, 2000
---------------------------------- -----------------------------------
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 $48,003 $168,590 $58,420 $117,575
Weighted average rate paid at end of period 3.83% 4.34% 5.57% 6.52%
Average Balance:
For the three months ended $58,140 $141,814 $53,751 $101,392
For the six months ended $54,687 $124,940 $48,294 $105,699
Average Rate Paid:
For the three months ended 3.83% 4.39% 5.59% 6.31%
For the six months ended 4.43% 4.85% 5.42% 6.10%
Maximum amount outstanding at any month end $58,274 $168,590 $58,420 $127,850
During the first six months of 2001, cash and cash equivalents increased by
$926,000. This increase was the net result of cash provided from financing
activities of $33.6 million (primarily from an increase in short-term
borrowings) and cash provided from operating activities of $4.5 million offset
in part by cash used in net loan origination and other investing activities of
$37.2 million.
During the first six months of 2000, cash and cash equivalents increased by $3.5
million. This increase was the net result of cash provided from financing
activities of $58.2 million (primarily from increases in deposits and short-term
borrowings) and cash provided from operating activities of $8.8 million offset
in part by cash used in net loan origination and other investing activities of
$63.5 million.
16
CAPITAL RESOURCES
In the first six months of 2001, total shareholders' equity increased $6.1
million, or 8%, as a result of earnings, offset in part by dividends and an
increase in net unrealized gains (losses) on investment securities. Earnings,
net of cash dividends declared on common stock, contributed $4.6 million to
shareholders' equity during this six month period. The sale or issuance of
common stock through the dividend reinvestment plan, the employee stock purchase
plan and the employee stock option plan contributed an additional $155,000 to
shareholders' equity in the first six months of 2001. Accumulated comprehensive
income, consisting of net unrealized gains (losses) on investment securities
available for sale (net of tax) increased to $1.7 million at June 30, 2001
compared to $379,000 at December 31, 2000.
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. At June 30, 2001, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 12.00%, a Tier I risk-based capital ratio of 10.75%, and a leverage
ratio of 8.32%. As of June 30, 2001, Stillwater National also met the criteria
for classification as a "well-capitalized" institution under the prompt
corrective action rules promulgated under the Federal Deposit Insurance Act.
Designation of the bank as a "well-capitalized" institution under these
regulations does not constitute a recommendation or endorsement of Stillwater
National by Federal bank regulators.
Southwest declared a dividend of $.12 per common share payable on July 2, 2001
to shareholders of record as of June 18, 2001.
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations 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.
* * * * * * *
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,
2000.
17
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
At Southwest's annual shareholders' meeting, held on April 26,
2001, the shareholders of Southwest elected five Directors
with terms expiring at the 2004 annual shareholders' meeting.
The Directors elected and the shareholder vote in the election
of each Director was as follows:
For Withheld
--- --------
Thomas D. Berry 3,552,110 61,141
Rick Green 3,553,447 59,805
David P. Lambert 3,574,010 39,241
Linford R. Pitts 3,561,002 52,249
Stanley R. White 3,553,479 59,773
Other Directors continuing in office following the annual
shareholders' meeting were James E. Berry II, Joe Berry
Cannon, J. Berry Harrison, Erd M. Johnson, Betty Kerns, Alfred
L. Litchenburg, Robert B. Rodgers and Russell W. Teubner.
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On April 3, 2001, Southwest filed a report of Form
8-K reporting, in Item 5 of that form, that a new
stock repurchase program had been approved by the
Board of Directors.
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/ Rick J. Green July 31, 2001
------------------------------------------- ------------------
Rick J. Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell July 31, 2001
------------------------------------------- ------------------
Kerby E. Crowell Date
Executive Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
19