SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
5,675,168
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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
September 30, 2001 and December 31, 2000 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 5
Unaudited Consolidated Statements of Shareholders' Equity for the
nine months ended September 30, 2001 6
Unaudited Consolidated Statements of Comprehensive Income for the
three and nine months ended September 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 18
PART II. OTHER INFORMATION 18
SIGNATURES 19
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
ASSETS
Cash and cash equivalents $ 29,211 $ 30,851
Investment securities:
Held to maturity, fair value $52,983 (2001) and $64,615 (2000) 51,555 64,406
Available for sale, amortized cost $171,438 (2001) and $156,316 (2000) 176,460 156,947
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 10,515 8,439
Loans held for sale 11,037 7,888
Loans receivable, net of allowance for loan losses
of $11,189 (2001) and $12,125 (2000) 909,859 892,537
Accrued interest receivable 10,682 12,042
Premises and equipment, net 20,435 20,416
Other assets 7,448 10,040
---------- ----------
Total assets $1,227,202 $1,203,566
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 120,627 $ 119,732
Interest-bearing demand 48,862 51,199
Money market accounts 136,224 103,001
Savings accounts 5,499 4,884
Time deposits of $100,000 or more 293,313 304,814
Other time deposits 324,580 361,472
---------- ----------
Total deposits 929,105 945,102
---------- ----------
Accrued interest payable 3,594 7,105
Other liabilities 4,270 2,609
Short-term borrowings 181,956 150,498
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
---------- ----------
Total liabilities 1,143,938 1,130,327
---------- ----------
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
6,121,521 shares issued 6,122 4,081
Capital surplus 12,673 14,788
Retained earnings 67,297 59,912
Accumulated other comprehensive income (loss) 3,314 379
Treasury stock, at cost; 448,060 (2001) and 436,095 (2000) shares (6,142) (5,921)
---------- ----------
Total shareholders' equity 83,264 73,239
---------- ----------
Total liabilities & shareholders' equity $1,227,202 $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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
Interest income:
Interest and fees on loans $18,991 $21,162 $60,187 $61,059
Investment securities:
U.S. Government and agency obligations 1,546 1,688 4,762 5,029
Mortgage-backed securities 1,196 1,152 3,691 3,373
State and political subdivisions 394 400 1,246 1,093
Other securities 224 207 601 591
Other interest-earning assets 17 73 35 130
------- ------- ------- -------
Total interest income 22,368 24,682 70,522 71,275
Interest expense:
Interest-bearing demand 208 340 716 934
Money market accounts 1,009 1,135 3,574 3,219
Savings accounts 18 25 70 69
Time deposits of $100,000 or more 3,682 4,956 12,620 13,816
Other time deposits 4,194 5,409 14,645 14,728
Short-term borrowings 2,135 2,593 6,387 7,151
Long-term debt 582 581 1,745 1,744
------- ------- ------- -------
Total interest expense 11,828 15,039 39,757 41,661
------- ------- ------- -------
Net interest income 10,540 9,643 30,765 29,614
Provision for loan losses 900 925 2,850 2,725
Other income:
Service charges and fees 1,734 1,613 4,925 4,612
Other noninterest income 202 76 469 328
Gain on sales of loans receivable 933 699 2,108 1,398
Gain on sales of investment securities 88 -- 341 --
Total other income 2,957 2,388 7,843 6,338
------- ------- ------- -------
Other expenses:
Salaries and employee benefits 4,040 3,728 11,675 10,860
Occupancy 1,663 1,614 4,873 4,873
FDIC and other insurance 71 70 212 203
Other real estate 37 57 14 473
General and administrative 2,196 1,770 6,252 5,554
------- ------- ------- -------
Total other expenses 8,007 7,239 23,026 21,963
------- ------- ------- -------
Income before taxes 4,590 3,867 12,732 11,264
Taxes on income 1,357 1,292 3,978 3,829
------- ------- ------- -------
Net income 3,233 $ 2,575 $ 8,754 $ 7,435
======= ======= ======= =======
Basic earnings per share $ 0.57 $ 0.45 $ 1.54 $ 1.29
======= ======= ======= =======
Diluted earnings per share $ 0.54 $ 0.45 $ 1.49 $ 1.28
======= ======= ======= =======
Cash dividends declared per share $ 0.08 $ 0.07 $ 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 NINE MONTHS
ENDED SEPTEMBER 30,
2001 2000
--------- ---------
Operating activities:
Net income $ 8,754 $ 7,435
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 2,850 2,725
Depreciation and amortization expense 1,809 1,863
Amortization of premiums and accretion of
discounts on securities, net 13 5
Amortization of intangibles 131 140
(Gain) Loss on sales/calls of securities (341) --
(Gain) Loss on sales of loans receivable (2,108) (1,398)
(Gain) Loss on sales of premises/equipment 87 14
(Gain) Loss on other real estate owned, net (47) 228
Proceeds from sales of residential mortgage loans 82,896 41,597
Residential mortgage loans originated for resale (79,135) (39,793)
Changes in assets and liabilities:
Accrued interest receivable 1,360 (2,399)
Other assets 435 (2,105)
Income taxes payable (365) --
Accrued interest payable (3,511) 1,797
Other liabilities 1,986 1,357
--------- ---------
Net cash (used in) provided from operating activities 14,814 11,466
--------- ---------
Investing activities:
Proceeds from sales of available for sale securities 4,380 1,176
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 12,825 18,000
Available for sale securities 56,246 8,822
Proceeds from sales of Federal Home Loan Bank stock 111 --
Purchases of held to maturity securities -- (12,925)
Purchases of available for sale securities (75,396) (27,385)
Purchases of Federal Home Loan Bank Stock (2,187) (96)
Loans originated and principal repayments, net (86,716) (104,764)
Proceeds from sales of guaranteed student loans 61,528 38,111
Purchases of premises and equipment (1,958) (1,631)
Proceeds from sales of premises and equipment 43 86
Proceeds from sales of other real estate owned 833 1,652
--------- ---------
Net cash (used in) provided from investing activities (30,291) (78,954)
--------- ---------
Financing activities:
Net increase (decrease) in deposits (15,997) 62,924
Net increase (decrease) in short-term borrowings 31,458 12,437
Net proceeds from issuance of common stock 352 84
Purchases of treasury stock (647) (1,777)
Common stock dividends paid (1,329) (1,233)
--------- ---------
Net cash (used in) provided from financing activities 13,837 72,435
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,640) 4,947
Cash and cash equivalents,
Beginning of period 30,851 26,340
--------- ---------
End of period $ 29,211 $ 31,287
========= =========
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, $0.24 per share -- -- -- (1,369) -- -- (1,369)
Common stock issued:
Employee Stock Option Plan -- -- (68) -- -- 352 284
Employee Stock Purchase Plan -- -- (1) -- -- 29 28
Dividend Reinvestment Plan -- -- (5) -- -- 45 40
Stock Split 2,040,465 2,041 (2,041) -- -- -- --
Other comprehensive income
(loss), net of tax -- -- -- -- 2,935 -- 2,935
Treasury shares purchased -- -- -- -- -- (647) (647)
Net income -- -- -- 8,754 -- -- 8,754
------------------------------------------------------------------------------------------
Balance, September 30, 2001 6,121,521 $6,122 $12,673 $67,297 $3,314 $(6,142) $83,264
==========================================================================================
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 3,233 $ 2,575 $ 8,754 $ 7,435
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities 2,259 1,389 4,732 954
Reclassification adjustment for (gains) losses
arising during the period (88) -- (341) --
-------- -------- -------- --------
Other comprehensive income (loss), before tax 2,171 1,389 4,391 954
Tax (expense) benefit related to items
of other comprehensive income (loss) (568) (556) (1,456) (381)
-------- -------- -------- --------
Other comprehensive income (loss), net of tax 1,603 833 2,935 573
-------- -------- -------- --------
Comprehensive income $ 4,836 $ 3,408 $ 11,689 $ 8,008
======== ======== ======== ========
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 nine
months ended September 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.
On August 29, 2001, Southwest effected a 3:2 stock split of its common stock in
the form of a dividend of 2,040,465 shares. Per share amounts in the report have
been retroactively restated to reflect this stock split.
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
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.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Southwest will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. Application of the non-amortization
provisions of the Statements is expected to have an immaterial impact on net
income. During 2002, Southwest will perform the first of the required impairment
tests of goodwill and indefinite-lived intangible assets as of January 1, 2002.
Southwest has not yet determined what the effect of these tests will be on its
earnings and financial position.
7
NOTE 4: 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, 2001 December 31, 2000
------------------ -----------------
(Dollars in thousands)
Balance at beginning of period $ 12,125 $ 11,190
Loans charged-off:
Real estate mortgage 286 563
Real estate construction 78 1,083
Commercial 3,559 1,170
Installment and consumer 544 474
-------- --------
Total charge-offs 4,467 3,290
Recoveries:
Real estate mortgage 37 155
Real estate construction 22 --
Commercial 405 360
Installment and consumer 217 160
-------- --------
Total recoveries 681 675
-------- --------
Net loans charged-off 3,786 2,615
Provision for loan losses 2,850 3,550
-------- --------
Balance at end of period $ 11,189 $ 12,125
======== ========
Loans outstanding:
Average $941,284 $900,241
End of period 932,085 912,550
Net charge-offs to total average loans (annualized) 0.54% 0.29%
Allowance for loan losses to total loans 1.20% 1.33%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
At At
September 30, 2001 December 31, 2000
------------------ -----------------
(Dollars in thousands)
Nonaccrual loans (1) $ 9,049 $ 3,138
Past due 90 days or more (2) 1,727 208
Restructured -- 8,694
-------- --------
Total nonperforming loans 10,776 12,040
Other real estate owned 653 1,225
-------- --------
Total nonperforming assets $ 11,429 $ 13,265
======== ========
Nonperforming loans to loans receivable 1.16% 1.32%
Allowance for loan losses to nonperforming loa 103.83% 100.71%
Nonperforming assets to loans receivable and
other real estate owned 1.23% 1.45%
(1) The government-guaranteed portion of loans included in these totals was $538
(2001) and $101 (2000).
(2) The government-guaranteed portion of loans included in these totals was $89
(2001) and $99 (2000).
8
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 systematic 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 factors that are not directly measured in the
determination of the formula and specific allowances. These factors may include
general economic and business conditions affecting lending areas, credit quality
trends (including trends in delinquencies and nonperforming loans expected to
result from existing conditions), loan volumes and concentrations, specific
industry conditions within portfolio categories, recent loss experience in
particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. During the third 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
September 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 September 30, 2001, loans to individuals and businesses in the healthcare
industry totaled approximately $128.5 million, or 14% 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 $9.0 million at September 30, 2001. During
the first nine months of 2001, $304,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, additional total
interest income of $402,000 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
September 30, 2001, there were 154,500 antidilutive options to purchase common
shares. At September 30, 2000, there were 428,250 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 nine months
ended September 30, ended September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic earnings per share 5,704,012 5,698,184 5,697,489 5,751,017
Effect of dilutive securities:
Stock options 201,116 46,677 166,410 67,056
--------- --------- --------- ---------
Weighted average shares outstanding:
Diluted earnings per share 5,905,128 5,744,861 5,863,899 5,818,073
========= ========= ========= =========
NOTE 8: SHAREHOLDERS' EQUITY
STOCK SPLIT
On August 29, 2001, Southwest effected a 3:2 stock split of its common stock in
the form of a dividend of 2,040,465 shares. Per share amounts in the report have
been retroactively restated to reflect this stock split.
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
153,750 shares under this program, at an average price of $11.55 per share.
These repurchases reduced shareholders' equity by $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 September 30, 2001, Southwest had
purchased 40,000 shares under this program, at an average price of $16.19 per
share. These repurchases reduced shareholders' equity by $647,000. 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
$73.34. 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 nine months ended September 30,
2001 2000
---------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
---------------------------------------------------------------
Assets:
Loans receivable $ 941,284 8.55% $ 894,896 9.11%
Investment securities 234,058 5.88 219,570 6.14
Other interest-earning assets 1,226 3.82 2,829 6.14
---------- ----------
Total interest-earning assets 1,176,568 8.01 1,117,295 8.52
Noninterest-earning assets 52,324 52,891
---------- ----------
Total assets $1,228,892 $1,170,186
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand $ 49,553 1.93% $ 48,288 2.58%
Money market accounts 124,990 3.82 93,011 4.62
Savings accounts 5,306 1.76 4,628 1.99
Time deposits 637,091 5.72 654,250 5.83
---------- ----------
Total interest-bearing deposits 816,940 5.18 800,177 5.47
Short-term borrowings 185,907 4.59 158,685 6.02
Long-term debt 25,013 9.30 25,013 9.30
---------- ----------
Total interest-bearing liabilities 1,027,860 5.17 983,875 5.66
Noninterest-bearing demand 108,232 104,493
Other noninterest-bearing liabilities 12,577 14,520
Shareholders' equity 80,223 67,298
---------- ----------
Total liabilities and shareholders' equity $1,228,892 $1,170,186
========== ==========
Interest rate spread 2.84% 2.86%
==== ====
Net interest margin (1) 3.50% 3.54%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.47% 113.56%
========== ==========
(1) Net interest margin = net interest income / total interest-earning assets
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, problem loan payoffs, and 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.
On August 29, 2001, Southwest effected a 3:2 stock split of its common stock in
the form of a dividend of 2,040,465 shares. Per share amounts in the report have
been retroactively restated to reflect this stock split.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a financial 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 $1.23 billion at September 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 $1.23 billion at September 30, 2001, a 2% increase
from $1.20 billion at December 31, 2000.
LOANS RECEIVABLE
Loans were $932.1 million at September 30, 2001, a 2% increase ($19.5 million)
from December 31, 2000. Southwest experienced increases in the categories of
commercial real estate mortgages ($27.7 million, or 10%) and
government-guaranteed student loans ($12.2 million, or 16%). These increases
were offset by reductions in real estate construction loans ($11.1 million, or
11%), other consumer loans ($6.9 million, or 20%), and residential mortgage
loans ($2.4 million, or 2%). The allowance for loan losses declined by $936,000,
or 8%, from December 31, 2000 to September 30, 2001. At September 30, 2001, the
allowance for loan losses was $11.2 million, or 1.20% of total loans, compared
to $12.1 million, or 1.33% of total loans, at December 31, 2000. (See "Results
of Operations-Provision for Loan Losses.") The increase in total loans from
year-end 2000 to September 30, 2001 is the net result of growth from loan
originations and payoffs.
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DEPOSITS
Southwest's deposits were $929.1 million at September 30, 2001, a reduction of
$16.0 million, or 2%, from $945.1 million at December 31, 2000. Increases
occurred in money market accounts ($33.2 million, or 32%), noninterest-bearing
demand deposits ($895,000, or 1%), and savings accounts ($615,000, or 13%).
These increases were offset by decreases in time deposits ($48.4 million, or 7%)
and interest-bearing demand accounts ($2.3 million, or 5%). The reduction in
time deposits and interest-bearing demand accounts 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 and interest-bearing demand accounts.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $10.0 million, or 14%, due primarily to
earnings, net of common stock dividends, for the first nine months of 2001, as
well as a $2.9 million increase in the net unrealized gains on investment
securities available for sale (net of tax). At September 30, 2001, Southwest and
Stillwater National continued to exceed all applicable regulatory capital
requirements.
RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
NET INCOME
For the first nine months of 2001, Southwest recorded net income of $8.8
million. This was $1.3 million more than the $7.4 million in net income recorded
for the first nine months of 2000. Average shares outstanding were 5,697,489 for
the first nine months of 2001 and 5,751,017 for the first nine months of 2000.
Basic and diluted earnings per share increased to $1.54 and $1.49 per share for
the first nine months of 2001 from $1.29 and $1.28 per share for the same period
in 2000, respectively.
Net interest income increased $1.2 million, or 4%, for the first nine months of
2001 compared to the same period in 2000. This increase in net interest income
as well as a $1.5 million, or 24%, increase in other income was offset by a $1.1
million, or 5%, increase in other expense, a $125,000, or 5%, increase in the
provision for loan losses and a $149,000, or 4%, increase in taxes on income.
For the first nine months of 2001, the return on average total equity was 14.59%
compared to a 14.76% return on average total equity for the first nine months of
2000.
NET INTEREST INCOME
Net interest income increased to $30.8 million for the first nine months of 2001
from $29.6 million for the same period in 2000 as the $753,000, or 1%, decline
in interest income was more than offset by a $1.9 million, or 5%, reduction in
interest expense. Yields on Southwest's interest-earning assets declined by 51
basis points, and the rates paid on Southwest's interest-bearing liabilities
declined by 49 basis points, resulting in a reduction in the interest rate
spread to 2.84% for the first nine months of 2001 from 2.86% for the first nine
months of 2000. Net interest margin also declined from 3.54% to 3.50%. The ratio
of average interest-earning assets to average interest-bearing liabilities
increased to 114.47% for the first nine months of 2001 from 113.56% for the
first nine months of 2000, primarily due to the increase in average loans
outstanding.
Total interest income for the first nine months of 2001 was $70.5 million, a 1%
decline from $71.3 million during the same period in 2000. The principal factor
in the decline of interest income was the 51 basis point reduction in the yield
earned on interest-earning assets, which was partially offset by the $59.3
million increase in average interest-earning assets. Southwest's average loans
increased $46.4 million, or 5%, and the related yield was reduced to 8.55% for
the first nine months of 2001 from 9.11% in 2000. During the same period,
average investment securities increased $14.5 million, or 7%, and the related
yield was reduced to 5.88% from 6.14%.
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Total interest expense for the first nine months of 2001 was $39.8 million, a
decline of 5% from $41.7 million for the same period in 2000. The decline in
total interest expense can be attributed to the 49 basis point reduction in the
rates paid on interest-bearing liabilities. Rates paid on deposits decreased for
all categories.
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 compress interest margins.
Southwest believes that it is likely that its margins will be compressed in the
last quarter 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 fourth quarter 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. On November 6, 2001, the Federal Reserve
lowered interest rates by reducing the benchmark federal funds rate by 50 basis
points. This is the Federal Reserve's tenth rate cut this year.
OTHER INCOME
Other income increased by $1.5 million for the first nine months of 2001
compared to the same period of 2000 primarily as a result of a $710,000 increase
in gains on sales of loans, a $341,000 increase in gains on sales/calls of
securities and a $313,000 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 $1.1 million for the first nine months of
2001 compared to the same period in 2000. This increase was primarily the result
of an $815,000 increase in salaries and employee benefits, and a $698,000
increase in general and administrative expense. These increases in expense were
partially offset by a $459,000 reduction in other real estate 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 using a
systematic methodology. See Note 4, Allowance for Loan Losses, in the Notes to
Unaudited Consolidated Financial Statements for additional information.
The allowance for loan losses of $11.2 million declined $936,000, or 8%, from
year-end 2000, while total nonperforming loans decreased by $1.3 million, or
11%. The decrease in nonperforming loans was primarily the result of the
successful resolution of a large problem credit and charge-offs, offset in part
by the classification of watch list credits as nonperforming and other, typical,
activity in the portfolio. Total nonperforming assets of $11.4 million (which
includes other real estate owned) decreased by $1.8 million, or 14%, and equaled
1.23% of total loans and other real estate, compared to 1.45% at December 31,
2000.
As shown in Note 4, total nonperforming loans at September 30, 2001 represented
1.16% of total loans, compared to $12.0 million, or 1.32% of total loans, at
December 31, 2000. However, nonperforming loans at September 30, 2001 included a
$2.8 million nonaccrual credit that is expected to be repaid in full within the
fourth quarter. At June 30, 2001, this participation was on the Bank's watch
list and represented a significant allowance allocation at that date. No
specific or formula allowance for this credit is included at September 30, 2001.
Without this credit, nonperforming loans would be approximately $8.0 million
(0.86% of total loans, and down $4.1 million, or 34%, from year-end 2000 and
down $2.3 million, or 22%, from June 30, 2001) and the allowance for loan losses
would equal 140.06% of nonperforming loans, compared to 100.71% at December 31,
2000 and 123.78% at June 30, 2001.
TAXES ON INCOME
Southwest's income tax expense was $4.0 million for the first nine months of
2001 and $3.8 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 and the organization in
July 2001 of a real estate investment trust.
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FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
NET INCOME
For the third quarter of 2001, Southwest recorded net income of $3.2 million.
This was $658,000 more than the $2.6 million in net income recorded for the
third quarter of 2000. Average shares outstanding were 5,704,012 for the third
quarter of 2001 and 5,698,184 for the third quarter of 2000. Basic and diluted
earnings per share increased to $0.57 and $0.54 per share for the third quarter
of 2001 from $0.45 and $0.45 per share for the same period in 2000,
respectively.
Net interest income increased $897,000, or 9%, for the third quarter of 2001
compared to the same period in 2000. This increase in net interest income, as
well as a $569,000, or 24%, increase in other income and a $25,000, or 3%,
reduction in the provision for loan losses, was offset by a $768,000, or 11%,
increase in other expense, and a $65,000, or 5%, increase in taxes on income.
For the third quarter of 2001, the return on average total equity was 15.54%
compared to a 14.70% return on average total equity for the third quarter of
2000.
NET INTEREST INCOME
Net interest income increased to $10.5 million for the third quarter of 2001
from $9.6 million for the same period in 2000 as the $2.3 million, or 9%,
reduction in interest income was more than offset by a $3.2 million, or 21%,
reduction in interest expense. Yields on Southwest's interest-earning assets
decreased by 115 basis points, and the rates paid on Southwest's
interest-bearing liabilities decreased by 144 basis points, resulting in an
increase in the interest rate spread to 2.93% for the third quarter of 2001 from
2.64% for the third quarter of 2000. Net interest margin also increased from
3.37% to 3.53%. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 114.90% for the third quarter of 2001
from 113.88% for the third quarter of 2000, primarily due to an increase in
average loans outstanding.
Total interest income for the third quarter of 2001 was $22.4 million, a 9%
decrease from $24.7 million during the same period in 2000. The principal reason
for the decrease in interest income was the 115 basis point reduction in the
yield on interest-earning assets, which was partially offset by the $47.7
million increase in average interest-earning assets. Southwest's average loans
increased $38.6 million, or 4%, and the related yield decreased to 7.94% for the
third quarter of 2001 from 9.24% in 2000. During the same period, average
investment securities increased $11.4 million, or 5%, and the related yield
decreased to 5.70% from 6.16%.
Total interest expense for the third quarter of 2001 was $11.8 million, a
reduction of 21% from $15.0 million for the same period in 2000. The reduction
in total interest expense can be attributed to the 144 basis point reduction in
the rates paid on average interest-bearing liabilities, which decreased to 4.55%
from 5.99%. During the same period, average interest-bearing liabilities
increased $32.6 million, or 3%. Rates paid on deposits decreased for all
categories.
The Federal Reserve's actions to decrease interest rates have negatively
affected the net interest margins of many banks, as noted above.
OTHER INCOME
Other income increased by $569,000 for the third quarter of 2001 compared to the
same period of 2000 primarily as a result of a $234,000 increase in gains on
sales of loans, a $121,000 increase in service charges and fees, and an $88,000
increase in gains on sales/calls of securities. 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 $768,000 for the third quarter of 2001
compared to the same period in 2000. This increase was primarily the result of a
$426,000 increase in general and administrative expense, a $312,000 increase in
salaries and employee benefits, and a $49,000 increase in occupancy expense.
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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 $1.4 million and $1.3 million for the third
quarters of 2001 and 2000, respectively. 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 and the organization in
July 2001 of a real estate investment trust.
* * * * * * *
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 $2.1 million at September
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 September 30, 2001. In addition, Stillwater National has available a $35.0
million line of credit from the SLMA and a $229.1 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 September 30, 2001. The FHLB line of credit had an outstanding
balance of $132.4 million at September 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, Prudential Securities,
Inc., PaineWebber, Inc., and CountryWide Securities that total $545.0 million.
At September 30, 2001, $113.0 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 nine 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.
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September 30, 2001 September 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 $ 46,903 $132,410 $ 59,766 $101,769
Weighted average rate paid at end of 3.00% 3.63% 5.72% 6.52%
Average Balance:
For the three months ended $ 50,086 $143,128 $ 55,558 $106,878
For the nine months ended $ 53,136 $131,069 $ 50,733 $106,094
Average Rate Paid:
For the three months ended 3.03% 4.82% 5.74% 6.55%
For the nine months ended 3.99% 4.84% 5.54% 6.25%
Maximum amount outstanding at any month end $ 58,274 $168,590 $ 59,766 $127,850
During the first nine months of 2001, cash and cash equivalents declined by $1.6
million. This reduction was the net result of cash used in net loan origination
and other investing activities of $30.3 million offset in part by cash provided
from operating activities of $14.8 million and cash provided from financing
activities of $13.8 million (primarily from an increase in short-term
borrowings).
During the first nine months of 2000, cash and cash equivalents increased by
$4.9 million. This increase was the net result of cash provided from financing
activities of $72.4 million (primarily from increases in deposits and short-term
borrowings) and cash provided from operating activities of $11.5 million offset
in part by cash used in net loan origination and other investing activities of
$79.0 million.
CAPITAL RESOURCES
In the first nine months of 2001, total shareholders' equity increased $10.0
million, or 14%, 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 $7.4 million to
shareholders' equity during this nine 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 $352,000 to
shareholders' equity in the first nine months of 2001. Accumulated comprehensive
income, consisting of net unrealized gains (losses) on investment securities
available for sale (net of tax) increased to $3.3 million at September 30, 2001
compared to $379,000 at December 31, 2000. These increases were offset in part
by purchases of treasury shares totaling $647,000.
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 September 30, 2001,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 12.22%, a Tier I risk-based capital ratio of 11.04%,
and a leverage ratio of 8.45%. As of September 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 $.08 per common share payable on October 1,
2001 to shareholders of record as of September 17, 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
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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.
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 November 12, 2001
------------------------------------------- -----------------
Rick J. Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell November 12, 2001
------------------------------------------- -----------------
Kerby E. Crowell Date
Executive Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
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