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 March 31, 2002.
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.
5,725,099
---------
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
March 31, 2002 and December 31, 2001 3
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001 4
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 5
Unaudited Consolidated Statements of Shareholders' Equity for the
three months ended March 31, 2002 6
Unaudited Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2002 and 2001 7
Notes to Unaudited Consolidated Financial Statements 8
Average Balances, Yields and Rates 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
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)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
ASSETS:
Cash and cash equivalents $ 26,593 $ 32,406
Investment securities:
Held to maturity, fair value $47,474 (2002) and $51,030 (2001) 46,499 49,893
Available for sale, amortized cost $152,917 (2002) and $163,924 (2001) 155,202 167,545
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 9,346 9,908
Loans held for sale 8,780 12,740
Loans receivable, net of allowance for loan losses
of $11,227 (2002) and $11,492 (2001) 935,308 906,814
Accrued interest receivable 9,820 10,157
Premises and equipment, net 20,382 20,418
Other assets 7,187 6,614
----------- -----------
Total assets $ 1,219,117 $ 1,216,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand $ 115,111 $ 127,196
Interest-bearing demand 50,201 49,051
Money market accounts 182,777 157,266
Savings accounts 5,879 5,372
Time deposits of $100,000 or more 294,084 260,071
Other time deposits 287,562 305,840
----------- -----------
Total deposits 935,614 904,796
Accrued interest payable 3,133 3,470
Other liabilities 4,444 2,724
Short-term borrowings 164,532 195,367
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
----------- -----------
Total liabilities 1,132,736 1,131,370
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
6,121,521 shares issued and outstanding 6,122 6,122
Capital surplus 12,098 12,508
Retained earnings 72,287 69,838
Accumulated other comprehensive income (loss) 1,509 2,389
Treasury stock, at cost; 399,668 (2002) and 420,764 (2001) shares (5,635) (5,732)
----------- -----------
Total shareholders' equity 86,381 85,125
----------- -----------
Total liabilities & shareholders' equity $ 1,219,117 $ 1,216,495
=========== ===========
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
ENDED MARCH 31,
2002 2001
---- ----
Interest income:
Interest and fees on loans $ 15,980 $ 21,128
Investment securities:
U.S. Government and agency obligations 1,513 1,677
Mortgage-backed securities 932 1,199
State and political subdivisions 388 433
Other securities 143 190
Other interest-earning assets 7 9
-------- --------
Total interest income 18,963 24,636
Interest expense:
Interest-bearing demand 82 287
Money market accounts 872 1,443
Savings accounts 6 26
Time deposits of $100,000 or more 2,374 4,770
Other time deposits 2,710 5,553
Short-term borrowings 1,275 2,126
Long-term debt 582 582
-------- --------
Total interest expense 7,901 14,787
-------- --------
Net interest income 11,062 9,849
Provision for loan losses 1,250 825
Other income:
Service charges and fees 1,774 1,509
Other noninterest income 228 81
Gain on sales of loans receivable 644 539
Gain on sales of investment securities 2 57
-------- --------
Total other income 2,648 2,186
Other expenses:
Salaries and employee benefits 3,802 3,601
Occupancy 1,717 1,619
FDIC and other insurance 72 71
Other real estate 22 (17)
General and administrative 2,198 1,973
-------- --------
Total other expenses 7,811 7,247
-------- --------
Income before taxes 4,649 3,963
Taxes on income 1,571 1,334
-------- --------
Net income $ 3,078 $ 2,629
======== ========
Basic earnings per share $ 0.54 $ 0.46
======== ========
Diluted earnings per share $ 0.52 $ 0.45
======== ========
Cash dividends declared per share $ 0.11 $ 0.08
======== ========
See notes to unaudited consolidated financial statements.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
2002 2001
---- ----
Operating activities:
Net income $ 3,078 $ 2,629
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 1,250 825
Depreciation and amortization expense 634 620
Amortization of premiums and accretion of
discounts on securities, net 915 (9)
Amortization of intangibles 46 41
(Gain) Loss on sales/calls of securities (2) (57)
(Gain) Loss on sales of loans receivable (644) (539)
(Gain) Loss on sales of premises/equipment 6 (4)
(Gain) Loss on other real estate owned, net (2) (18)
Proceeds from sales of residential mortgage loans 22,718 21,447
Residential mortgage loans originated for resale (18,555) (20,702)
Changes in assets and liabilities:
Accrued interest receivable 337 (54)
Other assets (35) 659
Income taxes payable 1,151 763
Accrued interest payable (337) (578)
Other liabilities 396 344
-------- --------
Net cash (used in) provided from operating activities 10,956 5,367
-------- --------
Investing activities:
Proceeds from sales of available for sale securities -- 2,114
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 4,400 3,000
Available for sale securities 16,210 14,296
Proceeds from redemptions of Federal Home Loan Bank stock 562 111
Purchases of held to maturity securities (1,022) --
Purchases of available for sale securities (6,100) (23,170)
Loans originated and principal repayments, net (60,148) (38,623)
Proceeds from sales of guaranteed student loans 30,460 18,510
Purchases of premises and equipment (638) (329)
Proceeds from sales of premises and equipment 34 15
Proceeds from sales of other real estate owned 259 278
-------- --------
Net cash (used in) provided from investing activities (15,983) (23,798)
-------- --------
Net increase (decrease) in deposits 30,818 3,921
Net increase (decrease) in short-term borrowings (30,835) 9,481
Net proceeds from issuance of common stock 605 85
Purchases of treasury stock (918) --
Common stock dividends paid (456) (417)
-------- --------
Net cash (used in) provided from financing activities (786) 13,070
-------- --------
Net increase (decrease) in cash and cash equivalents (5,813) (5,361)
Cash and cash equivalents,
Beginning of period 32,406 30,851
-------- --------
End of period $ 26,593 $ 25,490
======== ========
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, 2002 6,121,521 $ 6,122 $ 12,508 $ 69,838 $ 2,389 $ (5,732) $ 85,125
Cash dividends declared:
Common, $0.11 per share -- -- -- (629) -- -- (629)
Common stock issued:
Employee Stock Option Plan -- -- (413) -- -- 997 584
Employee Stock Purchase Plan -- -- 1 -- -- 6 7
Dividend Reinvestment Plan -- -- 2 -- -- 12 14
Other comprehensive income
(loss), net of tax -- -- -- -- (880) -- (880)
Treasury shares purchased -- -- -- -- -- (918) (918)
Net income -- -- -- 3,078 -- -- 3,078
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2002 6,121,521 $ 6,122 $ 12,098 $ 72,287 $ 1,509 $ (5,635) $ 86,381
========= ========= ========= ========= ========= ========= =========
See notes to unaudited consolidated financial statements.
6
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
2002 2001
---- ----
Net income $3,078 $2,629
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities (1,334) 1,693
Reclassification adjustment for (gains) losses
arising during the period (2) (57)
------ ------
Other comprehensive income (loss), before tax (1,336) 1,636
Tax (expense) benefit related to items
of other comprehensive income (loss) 456 (651)
------ ------
Other comprehensive income (loss), net of tax (880) 985
------ ------
Comprehensive income $2,198 $3,614
====== ======
See notes to unaudited consolidated financial statements.
7
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and 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 three months ended March 31, 2002 and 2001 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, 2001.
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.
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"), SBI Capital Trust ("SBI Capital") and Business Consulting Group,
Inc. ("BCG"). All significant intercompany transactions and balances have been
eliminated in consolidation.
NOTE 3: RECENTLY ADOPTED ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 required that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. SFAS
No. 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. Additionally, SFAS No. 142
requires that goodwill included in the carrying value of equity method
investments no longer be amortized. Southwest adopted SFAS No. 141 and SFAS No.
142 on January 1, 2002 as required. Southwest will complete the first of the
required impairment tests of goodwill and indefinite-lived intangible assets by
the end of the second quarter of 2002. Adoption of SFAS No. 141 and SFAS No. 142
is not expected to have a material impact on Southwest's results of operations
or financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of; however, it retains the fundamental provisions of the Statement
related to the recognition and measurement of the impairment of long-lived
assets to be "held and used." In addition, SFAS No. 144 provides more guidance
on estimating cash flows when performing a recoverability test, required that a
long-lived asset to be disposed of other than by sale (e.g. abandoned) be
classified as "held and used" until it is disposed of, and established more
restrictive criteria to classify an asset as "held for sale." Southwest adopted
SFAS No. 144 on January 1, 2002. Adoption of SFAS No. 144 did not have a
material impact on Southwest's results of operations or financial position.
8
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the
indicated periods.
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
(Dollars in thousands)
Balance at beginning of period $ 11,492 $ 12,125
Loans charged-off:
Real estate mortgage 211 445
Real estate construction - 99
Commercial 1,197 4,364
Installment and consumer 196 621
-------- --------
Total charge-offs 1,604 5,529
Recoveries:
Real estate mortgage 48 54
Real estate construction - 22
Commercial 14 574
Installment and consumer 27 246
-------- --------
Total recoveries 89 896
-------- --------
Net loans charged-off 1,515 4,633
Provision for loan losses 1,250 4,000
-------- --------
Balance at end of period $ 11,227 $ 11,492
======== ========
Loans outstanding:
Average $952,909 $938,278
End of period 955,315 931,046
Net charge-offs to total average loans (annualized) 0.64% 0.49%
Allowance for loan losses to total loans 1.18% 1.23%
Nonperforming assets and other risk elements of the loan portfolio are
shown below as of the indicated dates.
AT AT
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
(Dollars in thousands)
Nonaccrual loans (1) $5,517 $7,291
Past due 90 days or more (2) 1,748 1,935
------ ------
Total nonperforming loans 7,265 9,226
Other real estate owned 768 640
------ ------
Total nonperforming assets $8,033 $9,866
====== ======
Nonperforming loans to loans receivable 0.76% 0.99%
Allowance for loan losses to nonperforming loans 154.54% 124.56%
Nonperforming assets to loans receivable and
other real estate owned 0.84% 1.06%
(1) The government-guaranteed portion of loans included in these totals was $986
(2002) and $573 (2001).
(2) The government-guaranteed portion of loans included in these totals was $179
(2002) and $332 (2001).
9
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 reserve. 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. Formula allowances also 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. 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. 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 first quarter of 2002, 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
March 31, 2002 and December 31, 2001, 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 March 31, 2002, loans to individuals and businesses in the
healthcare industry totaled approximately $166.6 million, or 17% 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 $5.5 million at March 31, 2002. During the
first three months of 2002, $63,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued, additional total
interest income of $135,000 would have been recorded.
10
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.
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
March 31, 2002, there were 5,000 antidilutive options to purchase common shares.
At March 31, 2001, there were 182,250 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
ENDED MARCH 31,
2002 2001
---------- -----------
Weighted average shares outstanding:
Basic earnings per share 5,702,426 5,690,258
Effect of dilutive securities:
Stock options 230,088 130,019
--------- ---------
Weighted average shares outstanding:
Diluted earnings per share 5,932,514 5,820,277
========= =========
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 March 2001, Southwest authorized the repurchase of up to 5% of its
current outstanding common stock in the period ending March 31, 2002. As of
March 31, 2002, Southwest had purchased 86,870 shares under this program, at an
average price of $18.02 per share. These repurchases reduced shareholders'
equity by $1.6 million.
In March 2002, Southwest authorized the repurchase of up to an
additional 5% of its current outstanding common stock. Share repurchases under
the current program are expected to be made primarily on the open market, from
time to time, until March 31, 2003, or earlier termination of the repurchase
program by the Board. Repurchases under the program will be 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.
11
SOUTHWEST BANCORP, INC.
AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
FOR THE THREE MONTHS ENDED MARCH 31,
2002 2001
------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
------- ---------- ------- ----------
ASSETS:
Loans receivable $ 952,909 6.80% $ 932,636 9.19%
Investment securities 219,125 5.51 231,655 6.13
Other interest-earning assets 1,748 1.62 720 5.07
---------- -------------
Total interest-earning assets 1,173,782 6.55 1,165,011 8.58
Noninterest-earning assets 53,384 51,990
---------- -------------
Total assets $1,227,166 $ 1,217,001
========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 50,710 0.66% $ 48,914 2.38%
Money market accounts 169,851 2.08 122,786 4.77
Savings accounts 5,659 0.43 5,296 1.99
Time deposits 580,236 3.55 660,432 6.34
---------- -------------
Total interest-bearing deposits 806,456 3.04 837,428 5.85
Short-term borrowings 183,596 2.82 160,741 5.36
Long-term debt 25,013 9.30 25,013 9.30
---------- -------------
Total interest-bearing liabilities 1,015,065 3.16 1,023,182 5.86
Noninterest-bearing demand 113,211 103,999
Other noninterest-bearing liabilities 12,937 15,545
Shareholders' equity 85,953 74,275
---------- -------------
Total liabilities and shareholders' equity $1,227,166 $ 1,217,001
========== =============
Interest rate spread 3.39% 2.72%
======== ======
Net interest margin (1) 3.82% 3.43%
======== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.64% 113.86%
========= =============
(1) Net interest margin = net interest income / total interest-earning assets.
12
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 change 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 $1.22 billion at March 31, 2002, 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. Southwest also considers, from time to time, the
establishment of new lending, banking and other offices in additional geographic
markets.
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $1.22 billion at March 31, 2002 and
December 31, 2001.
LOANS
Loans were $955.3 million at March 31, 2002, a 3% increase ($24.3
million) from December 31, 2001. Southwest experienced increases in the
categories of commercial real estate mortgages ($25.8 million, or 9%), real
estate construction loans ($7.0 million, or 8%) and government-guaranteed
student loans ($3.3 million, or 4%). These increases were offset by reductions
in commercial and industrial loans ($7.0 million, or 2%), residential mortgage
loans ($3.7 million, or 3%) and other consumer loans ($1.0 million, or 4%).
13
Management determines the appropriate level of the allowance for loan
losses using a systematic methodology. See Note 4, Allowance for Loan Losses, in
the Notes to Unaudited Consolidated Financial Statements. The allowance for loan
losses declined by $265,000, or 2%, from December 31, 2001 to March 31, 2002.
This decrease reflects the decrease in nonperforming loans, which were 0.76% of
total loans at March 31, 2002, compared to 0.99% of total loans at year-end
2001. At March 31, 2002, the allowance for loan losses was $11.2 million, or
1.18% of total loans and 154.54% of nonperforming loans, compared to $11.5
million, or 1.23% of total loans and 124.56% of nonperforming loans, at December
31, 2001. (See "Results of Operations-Provision for Loan Losses.")
DEPOSITS AND SHORT-TERM BORROWINGS
Southwest's deposits were $935.6 million at March 31, 2002, an increase
of $30.8 million, or 3%, from $904.8 million at December 31, 2001. Increases
occurred in money market accounts ($25.5 million, or 16%), time deposits ($15.7
million, or 3%), interest-bearing demand accounts ($1.2 million, or 2%), and
savings accounts ($507,000, or 9%). These increases were offset by a decrease in
non-interest-bearing demand accounts ($12.1 million, or 10%). A $30.8 million,
or 16%, decrease in short-term borrowings during the first quarter of 2002
offset the quarterly increase in deposit funding.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $1.3 million, or 1%, due primarily to
earnings for the first three months of 2002, net of common stock dividends,
treasury share purchases and a decrease in the net unrealized gains on
investment securities available for sale (net of tax). At March 31, 2002,
Southwest and Stillwater National continued to exceed all applicable regulatory
capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 and 2001
NET INCOME
For the first three months of 2002, Southwest recorded net income of
$3.1 million. This was $449,000, or 17%, more than the $2.6 million in net
income recorded for the first three months of 2001. Average shares outstanding
were 5,702,426 for the first three months of 2002 and 5,690,258 for the first
three months of 2001. Basic and diluted earnings per share increased to $0.54
and $0.52 per share for the first three months of 2002 from $0.46 and $0.45 per
share for the same period in 2001, respectively.
Net interest income increased $1.2 million, or 12%, for the first three
months of 2002 compared to the same period in 2001. This increase in net
interest income as well as a $462,000, or 21%, increase in other income was
offset by a $564,000, or 8%, increase in other expense, a $425,000, or 52%,
increase in the provision for loan losses and a $237,000, or 18%, increase in
taxes on income. For the first three months of 2002, the return on average total
equity was 14.52% compared to a 14.35% return on average total equity for the
first three months of 2001.
NET INTEREST INCOME
Net interest income increased to $11.1 million for the first three
months of 2002 from $9.8 million for the same period in 2001 as the $5.7
million, or 23%, decline in interest income was more than offset by a $6.9
million, or 47%, reduction in interest expense. Yields on Southwest's
interest-earning assets declined by 203 basis points, and the rates paid on
Southwest's interest-bearing liabilities declined by 270 basis points, resulting
in an increase in the interest rate spread to 3.39% for the first three months
of 2002 from 2.72% for the first three months of 2001. Net interest margin also
increased from 3.43% to 3.82%. The ratio of average interest-earning assets to
average interest-bearing liabilities increased to 115.64% for the first three
months of 2002 from 113.86% for the first three months of 2001, primarily due to
the increase in average loans outstanding.
Total interest income for the first three months of 2002 was $19.0
million, a 23% decline from $24.6 million during the same period in 2001. The
principal factor in the decline of interest income was the 203 basis
14
point reduction in the yield earned on interest-earning assets, which was
partially offset by the $8.8 million increase in average interest-earning
assets. Southwest's average loans increased $20.3 million, or 2%, and the
related yield was reduced to 6.80% for the first three months of 2002 from 9.19%
in 2001. During the same period, average investment securities declined $12.5
million, or 5%, and the related yield was reduced to 5.51% from 6.13%.
Total interest expense for the first three months of 2002 was $7.9
million, a decline of 47% from $14.8 million for the same period in 2001. The
decline in total interest expense can be attributed to the 270 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 during 2001
negatively affected the net interest margins of many banks, as interest rates on
earning assets declined more rapidly than rates paid on interest-bearing
liabilities. The Federal Reserve has not changed the benchmark federal funds
rate since December 12, 2001, however, and rates slightly increased over the
first quarter of 2002. The current rate environment may create improved bank net
interest margins in subsequent quarters, as interest rates on earning assets
reprice more rapidly than rates paid on interest-bearing liabilities. 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
changes in interest rates and the levels of Southwest's other income and
operating expenses.
OTHER INCOME
Other income increased by $462,000, or 21%, for the first three months
of 2002 compared to the same period of 2001 primarily as a result of a $265,000,
or 18%, increase in service charges and a $105,000, or 19%, increase in gains on
sales of loans.
OTHER EXPENSES
Southwest's other expenses increased $564,000, or 8%, for the first
three months of 2002 compared to the same period in 2001. This increase was
primarily the result of a $225,000, or 11%, increase in general and
administrative expense, a $201,000, or 6%, increase in salaries and employee
benefits and a $98,000, or 6%, increase 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
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 $265,000, or
2%, from year-end 2001, while total nonperforming loans decreased by $2.0
million, or 21%. The decrease in nonperforming loans was primarily the result of
net charge-offs, offset by the classification of watch list credits as
nonperforming, the resolution of other nonperforming loans and other, typical,
activity in the portfolio. Total nonperforming assets of $8.0 million (which
includes other real estate owned) decreased by $1.8 million, or 19%, and equaled
0.84% of total loans and other real estate, compared to 1.06% at December 31,
2001.
As shown in Note 4, total nonperforming loans at March 31, 2002
represented 0.76% of total loans, compared to $9.2 million, or 0.99% of total
loans, at December 31, 2001.
TAXES ON INCOME
Southwest's income tax expense was $1.6 million for the first three
months of 2002 and $1.3 million for the same period in 2001. 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.
* * * * * * *
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 $1.0 million at March 31,
2002. Stillwater National has approved federal funds purchase lines totaling
$20.0 million with three other banks; no amounts were outstanding on these lines
at March 31, 2002. In addition, Stillwater National has available a $35.0
million line of credit from the SLMA and a $239.5 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 March 31, 2002. The FHLB line of credit had an outstanding balance
of $105.3 million at March 31, 2002. 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 March 31, 2002,
$135.3 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 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 three months of 2002, the only categories of
short-term borrowings whose averages exceeded 30% of ending shareholders' equity
were repurchase agreements and funds borrowed from the FHLB.
MARCH 31, 2002 MARCH 31, 2001
------------------------------ -----------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
------------------------------ -----------------------------
(Dollars in thousands)
Amount outstanding at end of period $57,994 $105,272 $56,247 $102,644
Weighted average rate paid at end of period 1.22% 3.81% 4.91% 5.58%
Average Balance:
For the three months ended $51,814 $129,844 $51,195 $107,878
Average Rate Paid:
For the three months ended 1.21% 3.47% 5.12% 5.47%
Maximum amount outstanding at any month end $57,994 $141,500 $56,247 $120,635
During the first three months of 2002, cash and cash equivalents
declined by $5.8 million. This reduction was the net result of cash used in net
loan origination and other investing activities of $16.0 million and cash used
in financing activities of $786,000 (primarily from purchases of treasury stock)
offset in part by cash provided from operating activities of $11.0 million.
16
During the first three months of 2001, cash and cash equivalents
declined by $5.4 million. This reduction was the net result of cash used in net
loan origination and other investing activities of $23.8 million offset in part
by cash provided from financing activities of $13.1 million (primarily from an
increase in short-term borrowings) and cash provided from operating activities
of $5.4 million.
CAPITAL RESOURCES
In the first three months of 2002, total shareholders' equity increased
$1.3 million, or 1%, as a result of earnings, offset in part by dividends,
treasury share purchases and a reduction in net unrealized gains (losses) on
investment securities. Earnings, net of cash dividends declared on common stock,
contributed $2.4 million to shareholders' equity during this three-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 $605,000 to shareholders' equity in the first three months of 2002.
These increases were offset in part by purchases of treasury shares totaling
$918,000. Accumulated comprehensive income, consisting of net unrealized gains
(losses) on investment securities available for sale (net of tax) declined to
$1.5 million at March 31, 2002 compared to $2.4 million at December 31, 2001.
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 March 31,
2002, Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 12.26%, a Tier I risk-based capital ratio of 11.12%,
and a leverage ratio of 8.94%. As of March 31, 2002, 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 $0.11 per common share payable on
April 1, 2002 to shareholders of record as of March 18, 2002.
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, 2001.
17
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
Southwest filed a report on Form 8-K dated March 15,
2002, reporting, under Item 5 of that form, delivery
of Southwest's Annual Report to Shareholders.
Southwest filed a report on Form 8-K dated March 29,
2002, reporting, under Item 5 of that form, the
authorization of a new share repurchase program for
up to 5% of Southwest's outstanding common stock.
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 Green May 9, 2002
-------------------------------------------- -----------------------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby E. Crowell May 9, 2002
--------------------------------------------- ----------------------------
Kerby E. Crowell Date
Executive Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
19