Back to GetFilings.com
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, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[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.
11,920,597
----------
1 of 26
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
September 30, 2003 and December 31, 2002 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 2003 and 2002 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 5
Unaudited Consolidated Statements of Shareholders' Equity for the
nine months ended September 30, 2003 6
Unaudited Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Unaudited Average Balances, Yields and Rates 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION 21
SIGNATURES 22
2
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
--------------- --------------
ASSETS:
Cash and cash equivalents $ 29,441 $ 34,847
Investment securities:
Held to maturity, fair value $16,829 (2003) and $32,000 (2002) 16,456 31,154
Available for sale, amortized cost $170,444 (2003) and $145,141 (2002) 171,196 148,476
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 11,191 9,059
Loans held for sale 6,061 10,638
Loans receivable, net of allowance for loan losses
of $14,625 (2003) and $11,888 (2002) 1,263,482 1,078,586
Accrued interest receivable 9,953 9,283
Premises and equipment, net 20,179 20,202
Other assets 11,771 7,523
----------- -----------
Total assets $ 1,539,730 $ 1,349,768
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand $ 160,795 $ 135,945
Interest-bearing demand 53,771 50,162
Money market accounts 363,643 258,712
Savings accounts 7,067 5,700
Time deposits of $100,000 or more 375,541 309,205
Other time deposits 243,560 262,033
----------- -----------
Total deposits 1,204,377 1,021,757
Accrued interest payable 3,085 4,486
Other liabilities 5,459 2,858
Other borrowings 176,102 199,282
Long-term debt 45,013 25,013
----------- -----------
Total liabilities 1,434,036 1,253,396
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Capital surplus 6,460 6,196
Retained earnings 89,481 80,724
Accumulated other comprehensive income (loss) 451 2,201
Treasury stock, at cost; 401,354 (2003) and 696,284 (2002) shares (2,941) (4,992)
----------- -----------
Total shareholders' equity 105,694 96,372
----------- -----------
Total liabilities & shareholders' equity $ 1,539,730 $ 1,349,768
=========== ===========
The accompanying notes are an integral part of this statement.
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,
2003 2002 2003 2002
-------- -------- -------- --------
Interest income:
Interest and fees on loans $ 19,250 $ 16,310 $ 56,271 $ 48,733
Investment securities:
U.S. Government and agency obligations 1,400 1,578 4,032 4,707
Mortgage-backed securities 204 763 856 2,521
State and political subdivisions 179 317 690 1,048
Other securities 142 141 432 423
Other interest-earning assets 1 29 7 40
-------- -------- -------- --------
Total interest income 21,176 19,138 62,288 57,472
Interest expense:
Interest-bearing demand 86 116 282 287
Money market accounts 1,323 1,157 3,870 3,107
Savings accounts 5 6 12 20
Time deposits of $100,000 or more 2,045 2,386 6,562 7,073
Other time deposits 1,524 2,297 5,026 7,379
Other borrowings 1,174 1,133 3,722 3,636
Long-term debt 792 582 1,969 1,745
-------- -------- -------- --------
Total interest expense 6,949 7,677 21,443 23,247
-------- -------- -------- --------
Net interest income 14,227 11,461 40,845 34,225
Provision for loan losses 2,726 1,570 6,448 4,095
Other income:
Service charges and fees 2,442 2,104 6,918 5,881
Other noninterest income 165 249 707 724
Gain on sales of loans receivable 1,158 927 3,157 2,126
Gain on sales of investment securities 1 228 28 231
-------- -------- -------- --------
Total other income 3,766 3,508 10,810 8,962
Other expenses:
Salaries and employee benefits 5,200 4,493 14,433 12,591
Occupancy 2,078 1,779 5,938 5,229
FDIC and other insurance 90 74 246 212
Other real estate (2) 2 168 (19)
General and administrative 2,535 2,041 7,303 6,333
-------- -------- -------- --------
Total other expenses 9,901 8,389 28,088 24,346
-------- -------- -------- --------
Income before taxes 5,366 5,010 17,119 14,746
Taxes on income 1,943 1,561 6,150 4,816
-------- -------- -------- --------
Net income $ 3,423 $ 3,449 $ 10,969 $ 9,930
======== ======== ======== ========
Basic earnings per share $ 0.30 $ 0.30 $ 0.93 $ 0.87
======== ======== ======== ========
Diluted earnings per share $ 0.28 $ 0.28 $ 0.90 $ 0.82
======== ======== ======== ========
Cash dividends declared per share $ 0.06 $ 0.06 $ 0.19 $ 0.17
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2003 2002
--------- ---------
Operating activities:
Net income $ 10,969 $ 9,930
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 6,448 4,095
Depreciation and amortization expense 1,991 1,873
Amortization of premiums and accretion of
discounts on securities, net 178 (96)
Amortization of intangibles 322 139
Tax benefit from exercise of stock options 707 --
(Gain) Loss on sales/calls of securities (28) (231)
(Gain) Loss on sales of loans receivable (3,157) (2,126)
(Gain) Loss on sales of premises/equipment (58) 16
(Gain) Loss on other real estate owned, net 106 (102)
Proceeds from sales of residential mortgage loans 161,728 85,580
Residential mortgage loans originated for resale (153,907) (76,688)
Changes in assets and liabilities:
Accrued interest receivable (670) 485
Other assets (4,002) (664)
Income taxes payable -- (176)
Accrued interest payable (1,401) 240
Other liabilities 2,496 340
--------- ---------
Net cash (used in) provided from operating activities 21,722 22,615
--------- ---------
Investing activities:
Proceeds from sales of available for sale securities 6,540 13,509
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 14,675 15,228
Available for sale securities 58,869 43,588
Proceeds from redemptions of Federal Home Loan Bank stock -- 2,379
Purchases of Federal Reserve Bank and Federal Home Loan
Bank stock (2,132) (12)
Purchases of held to maturity securities -- (1,022)
Purchases of available for sale securities (90,839) (36,902)
Loans originated and principal repayments, net (381,530) (207,018)
Proceeds from sales of guaranteed student loans 188,818 80,987
Purchases of premises and equipment (2,168) (1,753)
Proceeds from sales of premises and equipment 258 41
Proceeds from sales of other real estate owned 1,440 922
--------- ---------
Net cash (used in) provided from investing activities (206,069) (90,053)
--------- ---------
Financing activities:
Net increase (decrease) in deposits 182,620 125,559
Net increase (decrease) in other borrowings (23,180) (52,514)
Net proceeds from issuance of common stock 1,608 1,370
Proceeds from issuance of long-term debt 20,000 --
Purchases of treasury stock -- (918)
Common stock dividends paid (2,107) (1,717)
--------- ---------
Net cash (used in) provided from financing activities 178,941 71,780
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,406) 4,342
Cash and cash equivalents,
Beginning of period 34,847 32,406
--------- ---------
End of period $ 29,441 $ 36,748
========= =========
The accompanying notes are an integral part of this statement.
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, 2003 12,243,042 $ 12,243 $ 6,196 $ 80,724 $ 2,201 $ (4,992) $ 96,372
Cash dividends declared:
Common, $0.19 per share -- -- -- (2,212) -- -- (2,212)
Common stock issued:
Employee Stock Option Plan -- -- (491) -- -- 1,997 1,506
Employee Stock Purchase Plan -- -- 21 -- -- 23 44
Dividend Reinvestment Plan -- -- 27 -- -- 31 58
Tax benefit related to exercise
of stock options -- -- 707 -- -- -- 707
Other comprehensive income
(loss), net of tax -- -- -- -- (1,750) -- (1,750)
Net income -- -- -- 10,969 -- -- 10,969
--------------------------------------------------------------------------------------------
Balance, September 30, 2003 12,243,042 $ 12,243 $ 6,460 $ 89,481 $ 451 $ (2,941) $ 105,694
============================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER, ENDED SEPTEMBER,
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 3,423 $ 3,449 $ 10,969 $ 9,930
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities (1,998) (66) (2,556) (103)
Reclassification adjustment for (gains) losses
arising during the period (1) (228) (27) (3)
-------- -------- -------- --------
Other comprehensive income (loss), before tax (1,999) (294) (2,583) (106)
Tax (expense) benefit related to items
of other comprehensive income (loss) 802 101 833 36
-------- -------- -------- --------
Other comprehensive income (loss), net of tax (1,197) (193) (1,750) (70)
-------- -------- -------- --------
Comprehensive income $ 2,226 $ 3,256 $ 9,219 $ 9,860
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
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, 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 for the three and nine months
ended September 30, 2003 and the cash flows for the nine months ended September
30, 2003 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, 2002.
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"), OKSB Statutory Trust I ("OKSB
Trust I"), Business Consulting Group, Inc. ("BCG"), and Healthcare Strategic
Support, Inc. ("HSSI"). All significant intercompany transactions and balances
have been eliminated in consolidation.
NOTE 3: RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 were effective for
financial statements of interim or annual periods ending after December 15,
2002. Implementation of the provisions of FIN 45 did not have a significant
impact on Southwest's financial statements.
On December 31, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. Statement No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for stock options
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. Statement 148's amendment of the transition and annual disclosure
requirements of Statement 123 were effective for fiscal years ending after
December 15, 2002. Statement 148's amendment of the disclosure requirements of
Opinion 28 was effective for financial reports containing condensed consolidated
financial statements for interim periods beginning after December 15, 2002. As
allowed by Statement 123, Southwest follows the recognition requirements of
Opinion No. 25, which results in no charge to earnings when options are issued
at fair market value. Therefore, the adoption of this statement did not have any
impact on Southwest's financial position or results of operations.
7
The following table illustrates the effect on net income and earnings per share
as if the fair value based method had been applied to all outstanding and
unvested awards in each period:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
--------- --------- ---------- ---------
(Dollars in thousands,except per share data)
Net earnings, as reported $ 3,423 $ 3,449 $ 10,969 $ 9,930
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (62) (97) (234) (359)
--------- --------- ---------- ---------
Proforma net income $ 3,361 $ 3,352 $ 10,735 $ 9,571
========= ========= ========== =========
Earnings per share:
Basic -- as reported $ 0.30 $ 0.30 $ 0.93 $ 0.87
Basic -- proforma $ 0.28 $ 0.29 $ 0.91 $ 0.83
Diluted -- as reported $ 0.28 $ 0.28 $ 0.90 $ 0.82
Diluted -- proforma $ 0.27 $ 0.28 $ 0.88 $ 0.80
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and to
all other instruments that exist as of the beginning of the first interim period
after June 15, 2003. The adoption of Statement 150 did not have a material
impact on Southwest's results of operations or financial position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to provide guidance on how to
identify a variable interest entity ("VIE") and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a majority of
the VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of this interpretation became effective upon issuance for all
subsequent transactions involving variable interest entities, and are required
to be adopted no later than the first interim or annual reporting period
beginning after December 15, 2003 for all VIE transactions that existed as of
the issuance date. Southwest has preliminarily determined that it should
consolidate its investment in OKSB Trust I, the subsidiary that issued the trust
preferred securities on June 26, 2003. However, in its current form, FIN 46 may
require Southwest to de-consolidate its investments in SBI Capital and OKSB
Trust I (the "Trusts") in future financial statements. However, even if
Southwest is ultimately required to de-consolidate the Trusts, it is not
expected that such de-consolidation would have a material impact on the
financial statements. Additionally, in its current form, FIN 46 may require
Southwest to consolidate certain lending and trust relationships in future
statements. The consolidation of these relationships appears to be an unintended
consequence of FIN 46. It is currently unknown if, or when, the FASB will
address this issue. The potential effect of these unintended consequences in
future financial statements has not yet been determined.
8
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, 2003 DECEMBER 31, 2002
------------------ -----------------
(Dollars in thousands)
Balance at beginning of period $ 11,888 $ 11,492
Loans charged-off:
Real estate mortgage 569 777
Real estate construction 3 --
Commercial 3,162 4,248
Installment and consumer 355 371
---------- ----------
Total charge-offs 4,089 5,396
Recoveries:
Real estate mortgage 103 93
Real estate construction -- --
Commercial 193 107
Installment and consumer 82 149
---------- ----------
Total recoveries 378 349
---------- ----------
Net loans charged-off 3,711 5,047
Provision for loan losses 6,448 5,443
---------- ----------
Balance at end of period $ 14,625 $ 11,888
========== ==========
Loans outstanding:
Average $1,252,591 $1,012,487
End of period 1,284,168 1,101,112
Net charge-offs to total average loans (annualized) 0.40% 0.50%
Allowance for loan losses to total loans 1.14% 1.08%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
AT AT
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(Dollars in thousands)
Nonaccrual loans (1) $16,950 $11,455
Past due 90 days or more (2) 2,293 1,452
------- -------
Total nonperforming loans 19,243 12,907
Other real estate owned 482 747
------- -------
Total nonperforming assets $19,725 $13,654
======= =======
Nonperforming loans to loans receivable 1.50% 1.17%
Allowance for loan losses to nonperforming loans 76.00% 92.11%
Nonperforming assets to loans receivable and
other real estate owned 1.54% 1.24%
(1) The government-guaranteed portion of loans included in these totals was $2.6
million (2003) and $988,000 (2002).
(2) The government-guaranteed portion of loans included in these totals was $0
(2003) and $29,000 (2002).
During the third quarter, Stillwater National discovered that certain financial
and collateral information for a single commercial credit appeared to have been
falsified, and promptly took action to mitigate its losses. The outstanding
balance of this credit was $2.3 million, after charge-off, and is classified as
nonaccrual. Approximately $1.6 million of this balance is guaranteed by an
agency of the United States Government. Management anticipates complete
9
resolution of the credit during the next several months. The $6.7 million
increase in nonaccrual loans is primarily the result of the credit described
above and the third quarter classification of a $5.0 million commercial credit
as nonaccrual. This other credit, which has been closely monitored since late
2002, is expected to be resolved during the next several months. In addition,
management anticipates that several other large problem credits that were
classified as nonaccrual at June 30, 2003 and September 30, 2003, will be
resolved during the fourth quarter of 2003 or in early 2004.
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 loan
portfolio and ongoing, quarterly assessments of the probable losses inherent in
the loan and lease portfolio and 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. During the nine months ended September 30, 2003, there
were no changes in estimation methods or assumptions that affected the
methodology for assessing the appropriateness of the allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
six quarters or four quarters, but may be adjusted for categories where six and
four quarter loss experience is historically unusual. Such an adjustment was
made in the first and second quarters of 2003 in order to moderate, but not
eliminate, the effects of losses on two credit relationships that had resulted
in an historically anomalous loss factor for non-classified, secured commercial
loans. 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 loans 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 individual loans
that management believes indicate the probability that a loss may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired 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.
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 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
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Tulsa, and Oklahoma City areas of Oklahoma, in
Wichita, Kansas and in the Dallas, Texas metropolitan area. As a result, the
collectibility of Southwest's loan portfolio can be affected by changes in the
general economic conditions in these three states and in those metropolitan
areas. At September 30, 2003 and December 31, 2002, substantially all of
Southwest's loans were collateralized with real estate, inventory, accounts
receivable and/or other assets, or are guaranteed by agencies of the United
States Government.
At September 30, 2003, loans to individuals and businesses in the healthcare
industry totaled approximately $285.9 million, or 22% 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.
10
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $17.0 million at September 30, 2003. During
the first nine months of 2003, $7,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued for the nine
months ended September 30, 2003, additional total interest income of $709,000
would have been recorded.
NOTE 6: LONG-TERM DEBT
The long-term debt recorded on Southwest's statement of financial condition
represents interests in: (1) 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;
and (2) variable rate subordinated debentures due June 26, 2033, issued by
Southwest to its subsidiary, OKSB Trust I, in connection with a private
placement of pooled Trust Preferred Securities (the "Preferred Securities"). The
Subordinated Debentures and related payments are the only assets of SBI Capital
and OKSB Trust I. 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.
On October 14, 2003, Southwest issued an additional $25.0 million of 30-year
variable rate subordinated debentures in connection with additional trust
preferred securities in a private placement. Proceeds from the October issuance
are expected to be used to retire the $25.0 million in 9.30% fixed rate trust
preferred securities issued in 1997. Whether or not Southwest redeems the 1997
trust preferred securities during 2003 depends upon a number of factors,
including the currently unsettled accounting and regulatory capital rules
relating to trust preferred securities. (See discussion of FIN 46 in Note 3.)
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, 2003 and 2002, there were zero and 10,000 antidilutive options to
purchase common shares, respectively. Per share amounts in this report have been
restated to reflect the 2-for-1 stock split declared on July 24, 2003.
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,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Basic earnings per share 11,839,891 11,548,214 11,762,996 11,473,274
Effect of dilutive securities:
Stock options 558,109 609,502 484,046 564,334
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Diluted earnings per share 12,398,000 12,157,716 12,247,042 12,037,608
========== ========== ========== ==========
NOTE 8: SHAREHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
In March 2002, Southwest authorized the repurchase of up to 5% of its current
outstanding common stock in the period ending June 30, 2003. At June 30, 2003,
Southwest had purchased 30,000 shares under this program at an average price of
$10.90 per share. These repurchases reduced shareholders' equity by $327,000 in
2002.
11
In March 2003, 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, 2004, or earlier termination of the repurchase program by the
Board of Directors. Repurchases under the program will be made at the discretion
of management based upon market, business, legal, accounting and other factors.
As of September 30, 2003, no share repurchases had been made under this program.
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
$36.67. 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.
12
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
FOR THE THREE MONTHS ENDED SEPTEMBER,
2003 2002
----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
-------------- -------------- -------------- --------------
ASSETS:
Loans receivable $1,296,519 5.89% $1,028,000 6.29%
Investment securities 195,266 3.91 207,772 5.34
Other interest-earning assets 671 0.59 7,058 1.63
-------------- --------------
Total interest-earning assets 1,492,456 5.63 1,242,830 6.11
Noninterest-earning assets 49,063 51,110
-------------- --------------
Total assets $1,541,519 $1,293,940
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 56,698 0.60% $ 54,955 0.84%
Money market accounts 363,918 1.44 223,022 2.06
Savings accounts 6,783 0.29 5,707 0.42
Time deposits 615,945 2.30 612,970 3.03
-------------- --------------
Total interest-bearing deposits 1,043,344 1.89 896,654 2.64
Other borrowings 189,150 2.46 144,843 3.10
Long-term debt 45,013 7.04 25,013 9.30
-------------- --------------
Total interest-bearing liabilities 1,277,507 2.16 1,066,510 2.86
Noninterest-bearing demand 146,526 121,676
Other noninterest-bearing liabilities 13,780 13,934
Shareholders' equity 103,706 91,820
-------------- --------------
Total liabilities and shareholders' equity $1,541,519 $1,293,940
============== ==============
Interest rate spread 3.47% 3.25%
============== ==============
Net interest margin (1) 3.78% 3.66%
============== ==============
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.83% 116.53%
============== ==============
FOR THE NINE MONTHS ENDED SEPTEMBER,
2003 2002
----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
--------------- ------------- -------------- --------------
ASSETS:
Loans receivable $1,252,591 6.01% $ 989,625 6.58%
Investment securities 188,423 4.26 214,102 5.43
Other interest-earning assets 1,022 0.92 3,210 1.67
--------------- --------------
Total interest-earning assets 1,442,036 5.78 1,206,937 6.37
Noninterest-earning assets 49,770 51,941
--------------- --------------
Total assets $1,491,806 $1,258,878
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 56,537 0.67% $ 52,496 0.73%
Money market accounts 315,199 1.64 197,871 2.10
Savings accounts 6,427 0.25 5,631 0.47
Time deposits 625,985 2.47 594,357 3.25
--------------- --------------
Total interest-bearing deposits 1,004,148 2.10 850,355 2.81
Other borrowings 205,307 2.42 165,436 2.94
Long-term debt 32,119 8.17 25,013 9.30
--------------- --------------
Total interest-bearing liabilities 1,241,574 2.31 1,040,804 2.99
Noninterest-bearing demand 134,335 116,262
Other noninterest-bearing liabilities 15,156 13,407
Shareholders' equity 100,741 88,405
--------------- --------------
Total liabilities and shareholders' equity $1,491,806 $1,258,878
=============== ==============
Interest rate spread 3.47% 3.38%
============= ==============
Net interest margin (1) 3.79% 3.79%
============= ==============
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.15% 115.96%
=============== ==============
(1) Net interest margin = annualized net interest income / average
interest-earning assets
13
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This management's discussion and analysis of
financial condition and results of operations and other portions of this report
include forward-looking statements such as: statements of Southwest's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; assessments of loan quality, and probable loan losses, liquidity, and
market or interest rate risk; and statements of Southwest's ability to achieve
financial and other goals. These forward-looking statements are subject to
significant uncertainties because they are based upon: the amount and timing of
future changes in interest rates and other economic conditions; future laws and
regulations; and a variety of other matters. Because of these uncertainties, the
actual future results may be materially different from the results indicated by
these forward-looking statements. In addition, Southwest's past growth and
performance do not necessarily indicate its future results.
You should read this management's discussion and analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's unaudited consolidated financial statements and the accompanying
notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a financial holding company for the
Stillwater National Bank and Trust Company ("Stillwater National"), SBI Capital
Trust ("SBI Capital"), OKSB Statutory Trust I ("OKSB Trust I"), Business
Consulting Group, Inc. ("BCG"), and Healthcare Strategic Support, Inc. ("HSSI").
Southwest is an independent institution.
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 and Frisco, Texas; loan production offices in
Wichita, Kansas and on the campuses of the University of Oklahoma Health
Sciences Center and Oklahoma State University-Tulsa; a marketing presence in the
Student Union at Oklahoma State University-Stillwater; and on the Internet,
through SNB DirectBanker(R). Southwest was recently notified by the Office of
Thrift Supervision that its application to create a federal savings bank in
Wichita, Kansas has been approved. The federal savings bank, SNB Bank of
Wichita, is expected to be opened on the site of the Wichita loan production
office in November 2003. 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 market areas
Southwest has established and pursued a strategy of independent operation for
the benefit of all of its shareholders. Southwest has grown from $434 million in
assets since becoming a public company at year-end 1993, to more than $1.5
billion at September 30, 2003, without acquiring other financial institutions.
Southwest considers acquisitions of other financial institutions and other
companies 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. Southwest also extends loans to borrowers in
Oklahoma and neighboring states through participations with correspondent banks.
14
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $1.5 billion at September 30, 2003 and $1.3
billion at December 31, 2002.
LOANS
Total loans, including loans held for sale, were $1.3 billion at September 30,
2003, a 17% increase ($183.1 million) from December 31, 2002. Southwest
experienced increases in the categories of real estate construction loans ($82.9
million, or 64%); government-guaranteed student loans ($67.7 million, or 57%);
commercial and industrial loans ($26.9 million, or 8%); and commercial real
estate mortgages ($25.9 million, or 7%). These increases in loans were offset by
reductions in residential mortgage loans ($19.1 million, or 19%) and other
consumer loans ($1.1 million, or 4%). Loans held for sale, consisting of certain
residential mortgages and business loans, decreased $4.5 million, or 43%, while
portfolio loans increased $187.6 million, or 17%.
Southwest sold participations in loans of approximately $20.1 million during the
third quarter of 2003.
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 increased by $2.7 million, or 23%, from December 31, 2002 to September
30, 2003. At September 30, 2003, the allowance for loan losses was $14.6
million, or 1.14% of total loans and 76.00% of nonperforming loans, compared to
$11.9 million, or 1.08% of total loans and 92.11% of nonperforming loans, at
December 31, 2002. (See "Results of Operations-Provision for Loan Losses.")
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.2 billion at September 30, 2003, an increase of
$182.6 million, or 18%, from $1.0 billion at December 31, 2002. Increases
occurred in all categories of deposits: money market accounts increased $104.9
million, or 41%; time deposits increased $47.9 million, or 8%;
noninterest-bearing demand accounts increased $24.8 million, or 18%;
interest-bearing demand accounts increased $3.6 million, or 7%; and savings
accounts increased $1.4 million, or 24%.
Stillwater National has 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., UBS Financial Services, Inc., RBC Dain Rauscher Inc., and
CountryWide Securities that total $675.0 million. At September 30, 2003, $240.3
million in these retail certificates of deposit were included in total deposits.
Stillwater National has other brokered certificates of deposit totaling $38.8
million included in total deposits at September 30, 2003.
Other borrowings were reduced $23.2 million, or 12%, during the first nine
months of 2003.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $9.3 million, or 10%, due primarily to
earnings for the first nine months of 2003 and stock option exercises, offset in
part by common stock dividends and a decrease in accumulated other comprehensive
income (net, after tax, unrealized gains on investment securities available for
sale). At September 30, 2003, Southwest and Stillwater National continued to
exceed all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 and 2002
NET INCOME
For the third quarter of 2003, Southwest recorded net income of $3.4 million
which was $26,000, or 1%, less than the $3.4 million in net income recorded for
the third quarter of 2002. Average shares outstanding were 11,839,891 for the
third quarter of 2003 and 11,548,214 for the same period in 2002. Basic and
diluted earnings per share remained the same at $0.30 and $0.28 per share for
the third quarters of 2003 and 2002, respectively.
15
Net interest income increased $2.8 million, or 24%, for the third quarter of
2003 compared to the same period in 2002. This increase in net interest income
as well as a $258,000, or 7%, increase in other income was not enough to cover a
$1.2 million, or 74%, increase in the provision for loan losses; a $1.5 million,
or 18%, increase in other expense; and a $382,000, or 24%, increase in taxes on
income. For the third quarter of 2003, the return on average total equity was
13.10% compared to a 14.90% return on average total equity for the third quarter
of 2002.
NET INTEREST INCOME
Net interest income increased to $14.2 million for the third quarter of 2003
from $11.5 million for the same period in 2002 due to a $2.0 million, or 11%,
increase in interest income combined with a $728,000, or 9%, reduction in
interest expense. Yields on Southwest's interest-earning assets declined by 48
basis points, and the rates paid on Southwest's interest-bearing liabilities
declined by 70 basis points, resulting in an increase in the interest rate
spread to 3.47% for the third quarter of 2003 from 3.25% for the third quarter
of 2002. During the same periods, annualized net interest margin increased from
3.66% to 3.78%. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 116.83% for the third quarter of 2003
from 116.53% for the third quarter of 2002.
Total interest income for the third quarter of 2003 was $21.2 million, an 11%
increase from $19.1 million during the same period in 2002. The principal factor
in the increase of interest income was the $249.6 million, or 20%, increase in
average interest-earning assets, which was partially offset by the 48 basis
point reduction in the yield earned on interest-earning assets. Southwest's
average loans increased $268.5 million, or 26%, and the related yield was
reduced to 5.89% for the third quarter of 2003 from 6.29% in 2002. During the
same period, average investment securities declined $12.5 million, or 6%, and
the related yield was reduced to 3.91% from 5.34%.
Total interest expense for the third quarter of 2003 was $6.9 million, a decline
of 9% from $7.7 million for the same period in 2002. The decline in total
interest expense can be attributed to the 70 basis point reduction in the rates
paid on interest-bearing liabilities, which was partially offset by the $211.0
million, or 20%, increase in average interest-bearing liabilities. Rates paid on
deposits decreased for all categories.
OTHER INCOME
Other income increased $258,000, or 7%, for the third quarter of 2003 compared
to the same period of 2002 primarily as a result of a $338,000, or 16%, increase
in service charges on deposit accounts and a $231,000, or 25%, increase in gains
on sales of loans which were partially offset by a $227,000, or 100%, reduction
in gains on sales of securities and an $84,000, or 34%, reduction in other
noninterest income.
OTHER EXPENSES
Southwest's other expenses increased $1.5 million, or 18%, for the third quarter
of 2003 compared to the same period in 2002. This increase was primarily the
result of a $707,000, or 16%, increase in salaries and employee benefits; a
$494,000, or 24%, increase in general and administrative expenses; a $299,000,
or 17%, increase in occupancy expense; and a $16,000, or 22%, increase in FDIC
and other insurance; partially offset by a $4,000, or 200%, reduction in other
real estate expense
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 and 2002
NET INCOME
For the first nine months of 2003, Southwest recorded net income of $11.0
million. This was $1.0 million or 10%, more than the $9.9 million in net income
recorded for the first nine months of 2002. Average shares outstanding were
11,762,996 for the first nine months of 2003 and 11,473,274 for the same period
in 2002. Basic and diluted earnings per share increased to $0.93 and $0.90 per
share for the first nine months of 2003 from $0.87 and $0.82 per share for the
same period in 2002, respectively.
16
Net interest income increased $6.6 million, or 19%, for the first nine months of
2003 compared to the same period in 2002. This increase in net interest income
as well as a $1.8 million, or 21%, increase in other income was offset by a $2.4
million, or 57%, increase in the provision for loan losses; a $3.7 million, or
15%, increase in other expense; and a $1.3 million, or 28%, increase in taxes on
income. For the first nine months of 2003, the return on average total equity
was 14.56% compared to a 15.02% return on average total equity for the first
nine months of 2002.
NET INTEREST INCOME
Net interest income increased to $40.8 million for the first nine months of 2003
from $34.2 million for the same period in 2002 due to a $4.8 million, or 8%,
increase in interest income combined with a $1.8 million, or 8%, reduction in
interest expense. Yields on Southwest's interest-earning assets declined by 59
basis points, and the rates paid on Southwest's interest-bearing liabilities
declined by 68 basis points, resulting in an increase in the interest rate
spread to 3.47% for the first nine months of 2003 from 3.38% for the first nine
months of 2002. During the same periods, annualized net interest margin remained
the same at 3.79%. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 116.15% for the first nine months of
2003 from 115.96% for the first nine months of 2002.
Total interest income for the first nine months of 2003 was $62.3 million, an 8%
increase from $57.5 million during the same period in 2002. The principal factor
in the increase in interest income was the $235.1 million, or 19%, increase in
average interest-earning assets, which was partially offset by the 59 basis
point reduction in the yield earned on interest-earning assets. Southwest's
average loans increased $263.0 million, or 27%, and the related yield was
reduced to 6.01% for the first nine months of 2003 from 6.58% in 2002. During
the same period, average investment securities declined $25.7 million, or 12%,
and the related yield was reduced to 4.26% from 5.43%.
Total interest expense for the first nine months of 2003 was $21.4 million, a
decline of 8% from $23.2 million for the same period in 2002. The decline in
total interest expense can be attributed to the 68 basis point reduction in the
rates paid on interest-bearing liabilities, which was partially offset by the
$200.8 million, or 19%, increase in average interest-bearing liabilities. Rates
paid on deposits decreased for all categories.
OTHER INCOME
Other income increased by $1.8 million, or 21%, for the first nine months of
2003 compared to the same period of 2002 primarily as a result of a $1.0
million, or 18%, increase in service charges and a $1.0 million, or 48%,
increase in gains on sales of loans partially offset by a $203,000, or 88%,
reduction in gains on sales of investment securities and a $17,000, or 2%,
reduction in other noninterest income.
OTHER EXPENSES
Southwest's other expenses increased $3.7 million, or 15%, for the first nine
months of 2003 compared to the same period in 2002. This increase was primarily
the result of a $1.8 million, or 15%, increase in salaries and employee
benefits; a $970,000, or 15%, increase in general and administrative expenses; a
$709,000, or 14%, increase in occupancy expense; a $187,000, or 984%, increase
in other real estate expense; and a $34,000, or 16%, increase in FDIC and other
insurance.
* * * * * * *
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. (See Note 4, "Allowance for Loan Losses," in the
Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $14.6 million increased $2.7 million, or 23%,
from year-end 2002, and represented 1.14% of total loans, compared with 1.08% of
total loans at December 31, 2002. Loans of $1.3 billion at September 30, 2003
grew $183.1 million, or 17%, from year-end 2002. A provision for loan losses of
$6.4 million was recorded in the first nine months of 2003, an increase of $2.4
million, or 57%, from the first nine months of 2002. The primary cause of the
increase in the allowance was growth in loans, particularly in real estate
construction and commercial loans.
17
Total nonaccrual loans increased $5.5 million, or 48%, from December 31, 2002,
while total nonperforming loans increased $6.3 million, or 49%. Total
nonperforming assets of $19.7 million (which includes other real estate owned)
increased $6.1 million, or 44%, and equaled 1.54% of total loans and other real
estate. As shown in Note 4, total nonperforming loans at September 30, 2003
represented 1.50% of total loans, compared to $12.9 million, or 1.17% of total
loans, at December 31, 2002.
TAXES ON INCOME
Southwest's income tax expense was $6.2 million and $4.8 million for the first
nine months of 2003 and 2002, 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 $2.2 million at September
30, 2003. Stillwater National has approved federal funds purchase lines totaling
$171.5 million with three other banks and four institutional brokers; $8.5
million was outstanding on these lines at September 30, 2003. In addition,
Stillwater National has available a $35.0 million line of credit from the SLMA
and a $313.3 million line of credit from the FHLB. Borrowings under the SLMA
line would be secured by student loans. Borrowings under the FHLB line are
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, 2003. The FHLB
line of credit had an outstanding balance of $118.0 million at September 30,
2003. 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., UBS Financial Services, Inc., RBC Dain
Rauscher Inc., and CountryWide Securities that total $675.0 million. At
September 30, 2003, $240.3 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 nine months of 2003, the only categories of other borrowings
whose averages exceeded 30% of ending shareholders' equity were repurchase
agreements and funds borrowed from the FHLB.
18
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------------------- ------------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
-------------- ---------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
Amount outstanding at end of period $ 47,393 $117,965 $ 53,853 $ 86,500
Weighted average rate paid at end of period 0.60% 3.43% 1.21% 4.15%
Average Balance:
For the three months ended $ 43,308 $121,108 $ 42,347 $100,990
For the nine months ended $ 48,544 $140,069 $ 47,301 $116,651
Average Rate Paid:
For the three months ended 0.60% 3.41% 1.21% 3.92%
For the nine months ended 0.75% 3.15% 1.21% 3.65%
Maximum amount outstanding at any month end $ 62,152 $166,500 $ 57,994 $141,500
During the first nine months of 2003, cash and cash equivalents decreased by
$5.4 million. This decrease was the net result of cash used in net loan
origination and other investing activities of $206.0 million offset in part by
cash provided from financing activities of $178.9 million (primarily from an
increase in deposits) and cash provided from operating activities of $21.7
million.
During the first nine months of 2002, cash and cash equivalents increased by
$4.3 million. This increase was the net result of cash used in net loan
origination and other investing activities of $90.1 million offset in part by
cash provided from financing activities of $71.8 million and cash provided from
operating activities of $22.6 million.
CAPITAL RESOURCES
In the first nine months of 2003, total shareholders' equity increased $9.3
million, or 10%. Earnings, net of cash dividends declared on common stock,
contributed $8.8 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 $2.3 million to shareholders' equity in the first nine months of
2003, including tax benefits realized by Southwest relating to option exercises.
Accumulated comprehensive income, consisting of net unrealized gains on
investment securities available for sale (net of tax), declined to $451,000 at
September 30, 2003 compared to $2.2 million at December 31, 2002.
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, 2003,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 13.01%, a Tier I risk-based capital ratio of 11.07%,
and a leverage ratio of 9.27%. As of September 30, 2003, 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 $0.0625 per common share payable on October 1,
2003 to shareholders of record as of September 17, 2003.
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.
* * * * * * *
19
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,
2002.
CONTROLS AND PROCEDURES
Southwest's management, under the supervision and with the participation of its
Chief Executive Officer and the Chief Financial Officer, evaluated, as of the
last day of the period covered by this report, the effectiveness of the design
and operation of Southwest's disclosure controls and procedures, as defined in
Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
Southwest's disclosure controls and procedures were adequate. There were no
significant changes in Southwest's internal controls over financial reporting
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the
quarter ended September 30, 2003, that have materially affected, or are
reasonably likely to materially affect, Southwest's internal controls over
financial reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Accordingly, some of the measures used in this report
may not be directly comparable with non-GAAP measures used by some other
financial institutions.
20
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.
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 18 U.S.C. Section 1350 Certifications
(b) Reports on Form 8-K.
Southwest filed a report on Form 8-K, dated July 21, 2003,
announcing, under items 5, 9 and 12 of that form, earnings for
the second quarter of 2003.
Southwest filed a report on Form 8-K, dated July 30, 2003,
announcing, under item 5 of that form, a stock split in the
form of a 2-for-1 stock dividend payable on August 29, 2003,
to shareholders of record on August 15, 2003.
Southwest filed a report on Form 8-K, dated October 16, 2003,
announcing, under items 9 and 12 of that form, earnings for
the third quarter of 2003.
21
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 November 7, 2003
------------------------------------------ --------------------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell November 7, 2003
------------------------------------------ ----------------------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
22