-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UHlaX/RvuTTgC+IKcytKAF5sMUd4WFlRFDynUKVPKB6p2rFlhyxGJNQ5CUpKY+yW Mdgmuo6XL9/OOPFRF4ZF8Q== 0001125282-04-005561.txt : 20041105 0001125282-04-005561.hdr.sgml : 20041105 20041105164741 ACCESSION NUMBER: 0001125282-04-005561 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST BANCORP INC CENTRAL INDEX KEY: 0000914374 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 731136584 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23064 FILM NUMBER: 041123292 BUSINESS ADDRESS: STREET 1: 608 SOUTH MAIN STREET CITY: STILLWATER STATE: OK ZIP: 74074 BUSINESS PHONE: 4053722230 MAIL ADDRESS: STREET 1: 608 SOUTH MAIN STREET CITY: STILLWATER STATE: OK ZIP: 74074 10-Q 1 b402093_10q.txt FORM 10-Q 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, 2004 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. 12,092,236 as of 11-01-04 1 of 31 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, 2004 and December 31, 2003 3 Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 4 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 5 Unaudited Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2004 6 Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2004 and 2003 6 Notes to Unaudited Consolidated Financial Statements 7 Unaudited Average Balances, Yields and Rates for the three and nine months ended September 30, 2004 and 2003 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 25 ITEM 4. CONTROLS AND PROCEDURES 25 PART II. OTHER INFORMATION 26 SIGNATURES 27
2 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except per share data)
September 30, 2004 December 31, (unaudited) 2003 ----------------- ----------------- ASSETS: Cash and cash equivalents $ 31,018 $ 33,981 Investment securities: Held to maturity, fair value $2,536 (2004) and $16,144 (2003) 2,501 15,916 Available for sale, amortized cost $194,385 (2004) and $176,470 (2003) 194,056 177,074 Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,342 11,276 Loans held for sale 348,887 218,422 Loans receivable, net of allowance for loan losses of $19,921 (2004) and $15,848 (2003) 1,238,295 1,074,566 Accrued interest receivable 13,926 11,321 Premises and equipment, net 19,722 19,818 Other assets 20,703 18,351 ----------------- ----------------- Total assets $1,882,450 $1,580,725 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Noninterest-bearing demand $ 183,183 $ 167,332 Interest-bearing demand 58,403 53,955 Money market accounts 399,104 376,016 Savings accounts 8,245 6,903 Time deposits of $100,000 or more 533,647 358,130 Other time deposits 242,373 241,789 ----------------- ----------------- Total deposits 1,424,955 1,204,125 Other borrowings 245,722 183,850 Accrued interest payable 3,261 3,375 Income tax payable 7,489 2,850 Other liabilities 6,697 4,410 Subordinated debentures 72,180 72,180 ----------------- ----------------- Total liabilities 1,760,304 1,470,790 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 7,860 6,997 Retained earnings 103,784 92,657 Accumulated other comprehensive income (loss) (193) 360 Treasury stock, at cost; 161,375 (2004) and 287,410 (2003) shares (1,548) (2,322) ----------------- ----------------- Total shareholders' equity 122,146 109,935 ----------------- ----------------- Total liabilities & shareholders' equity $1,882,450 $1,580,725 ================= =================
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, 2004 2003 2004 2003 ------------ ----------- ------------- ------------- Interest income: Interest and fees on loans $25,245 $19,250 $68,468 $56,271 Investment securities: U.S. Government and agency obligations 1,570 1,400 4,573 4,032 Mortgage-backed securities 159 204 502 856 State and political subdivisions 63 179 344 690 Other securities 168 142 496 432 Other interest-earning assets 4 1 7 7 ------------ ----------- ------------- ------------- Total interest income 27,209 21,176 74,390 62,288 Interest expense: Interest-bearing demand 63 86 240 282 Money market accounts 1,621 1,323 4,425 3,870 Savings accounts 5 5 14 12 Time deposits of $100,000 or more 2,460 2,045 6,468 6,562 Other time deposits 1,311 1,524 4,111 5,026 Other borrowings 1,643 1,174 4,183 3,722 Subordinated debentures 1,136 817 3,296 2,030 ------------ ----------- ------------- ------------- Total interest expense 8,239 6,974 22,737 21,504 ------------ ----------- ------------- ------------- Net interest income 18,970 14,202 51,653 40,784 Provision for loan losses 3,900 2,726 8,100 6,448 Other income: Service charges and fees 2,629 2,442 7,314 6,918 Other noninterest income 328 190 731 768 Gain on sales of loans receivable 1,073 1,158 2,386 3,157 Gain (loss) on sales of investment securities (110) 1 (109) 28 ------------ ----------- ------------- ------------- Total other income 3,920 3,791 10,322 10,871 Other expenses: Salaries and employee benefits 5,563 5,200 15,893 14,433 Occupancy 2,500 2,078 6,996 5,938 FDIC and other insurance 110 90 301 246 Other real estate 66 (2) 107 168 General and administrative 2,998 2,535 9,054 7,303 ------------ ----------- ------------- ------------- Total other expenses 11,237 9,901 32,351 28,088 ------------ ----------- ------------- ------------- Income before taxes 7,753 5,366 21,524 17,119 Taxes on income 2,898 1,943 7,863 6,150 ------------ ----------- ------------- ------------- ------------- ------------- Net income $4,855 $3,423 $13,661 $10,969 ============ =========== ============= ============= Basic earnings per share $ 0.40 $ 0.30 $ 1.13 $ 0.93 ============ =========== ============= ============= Diluted earnings per share $ 0.39 $ 0.28 $ 1.09 $ 0.90 ============ =========== ============= ============= Cash dividends declared per share $ 0.07 $ 0.06 $ 0.21 $ 0.19 ============ =========== ============= =============
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, 2004 2003 ------------- --------------- Operating activities: Net income $ 13,661 $ 10,969 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Provision for loan losses 8,100 6,448 Deferred taxes (1,551) (903) Depreciation and amortization expense 1,962 1,991 Amortization of premiums and accretion of discounts on securities, net 132 178 Amortization of intangibles 239 322 Tax benefit from exercise of stock options 459 707 (Gain) Loss on sales/calls of securities 109 (28) (Gain) Loss on sales of loans receivable (2,386) (3,157) (Gain) Loss on sales of premises/equipment (9) (58) (Gain) Loss on other real estate owned, net 53 106 Proceeds from sales of residential mortgage loans 67,484 161,728 Residential mortgage loans originated for resale (67,856) (153,907) Proceeds from sales of student loans 357,538 188,818 Student loans originated for resale (486,148) (272,099) Changes in assets and liabilities: Accrued interest receivable (2,605) (670) Other assets 108 (3,099) Income taxes payable 4,639 169 Accrued interest payable (114) (1,401) Other liabilities 2,188 2,327 ------------- --------------- Net cash (used in) provided from operating activities (103,997) (61,559) ------------- --------------- Investing activities: Proceeds from sales of available for sale securities 8,540 6,540 Proceeds from principal repayments, calls and maturities: Held to maturity securities 13,398 14,675 Available for sale securities 61,632 58,869 Purchases of Federal Reserve Bank and Federal Home Loan Bank stock (2,066) (2,132) Purchases of available for sale securities (88,311) (90,839) Loans originated and principal repayments, net (171,962) (109,431) Purchases of premises and equipment (2,061) (2,168) Proceeds from sales of premises and equipment 204 258 Proceeds from sales of other real estate owned 215 1,440 ------------- --------------- Net cash (used in) provided from investing activities (180,411) (122,788) ------------- --------------- Financing activities: Net increase (decrease) in deposits 220,830 182,620 Net increase (decrease) in other borrowings 61,872 (23,180) Net proceeds from issuance of common stock 1,178 1,608 Net proceeds from issuance of subordinated debentures - 20,000 Common stock dividends paid (2,435) (2,107) ------------- --------------- Net cash (used in) provided from financing activities 281,445 178,941 ------------- --------------- Net increase (decrease) in cash and cash equivalents (2,963) (5,406) Cash and cash equivalents, Beginning of period 33,981 34,847 ------------- --------------- End of period $ 31,018 $ 29,441 ============= ===============
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, 2004 12,243,042 $12,243 $6,997 $ 92,657 $ 360 $(2,322) $109,935 Cash dividends declared: Common, $0.21 per share - - - (2,534) - - (2,534) Common stock issued: Employee Stock Option Plan - - 331 - - 727 1,058 Employee Stock Purchase Plan - - 31 - - 20 51 Dividend Reinvestment Plan - - 42 - - 27 69 Tax benefit related to exercise of stock options - - 459 - - - 459 Other comprehensive income (loss), net of tax - - - - (553) - (553) Net income - - - 13,661 - - 13,661 --------------------------------------------------------------------------------------------- Balance, September 30, 2004 12,243,042 $12,243 $7,860 $103,784 $(193) $(1,548) $122,146 =============================================================================================
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 30, ended September 30, 2004 2003 2004 2003 ------------ ----------- ------------ ------------ Net income $ 4,855 $ 3,423 $13,661 $10,969 Other comprehensive income (loss) Unrealized holding gain (loss) on available for sale securities 2,126 (1,998) (1,042) (2,555) Reclassification adjustment for (gains) losses arising during the period 110 (1) 109 (28) ------------ ----------- ------------ ------------ Other comprehensive income (loss), before tax 2,236 (1,999) (933) (2,583) Tax (expense) benefit related to items of other comprehensive income (loss) (908) 802 380 833 ------------ ----------- ------------ ------------ Other comprehensive income (loss), net of tax 1,328 (1,197) (553) (1,750) ------------ ----------- ------------ ------------ Comprehensive income $ 6,183 $ 2,226 $13,108 $ 9,219 ============ =========== ============ ============
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, 2004 and the cash flows for the nine months ended September 30, 2004 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, 2003. 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"), SNB Bank of Wichita ("SNB Wichita"), Healthcare Strategic Support, Inc. ("HSSI"), and Business Consulting Group, Inc. ("BCG"). All significant intercompany transactions and balances have been eliminated in consolidation. NOTE 3: INVESTMENT SECURITIES At September 30, 2004, Southwest had gross unrealized losses in its available for sale securities portfolio totaling $1.1 million. Fifteen securities with a par value of $22.8 million and an unrealized loss of $387,000 had been in an unrealized loss position for more than twelve months. These gross unrealized losses occurred due to increases in interest rates and spreads rather than credit impairment. Southwest has the intent and ability to hold these securities until the unrealized loss is recovered. NOTE 4: 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 and Austin, Texas metropolitan areas. 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, 2004 and December 31, 2003, substantially all of Southwest's loans were collateralized with real estate, inventory, accounts receivable, and/or other assets, or were guaranteed by agencies of the United States Government. At September 30, 2004, loans to individuals and businesses in the healthcare industry totaled approximately $379.0 million, or 24%, of total loans and student loans totaled approximately $341.3 million, or 21%, 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. Nonperforming assets and other risk elements of the loan portfolio are shown below as of the indicated dates. Total nonaccrual loans increased $13.9 million, or 96%, from December 31, 2003, and total nonperforming loans increased $14.8 million, or 93%. Total nonperforming assets of $33.2 million (which includes other real estate owned) increased $15.6 million, or 89%. 7
At At September 30, 2004 December 31, 2003 --------------------------- ----------------------- (Dollars in thousands) Nonaccrual loans (1) $28,476 $14,530 Past due 90 days or more 2,276 1,384 --------------------------- ----------------------- Total nonperforming loans 30,752 15,914 Other real estate owned 2,467 1,699 --------------------------- ----------------------- Total nonperforming assets $33,219 $17,613 =========================== ======================= Nonperforming loans to loans receivable 1.91% 1.22% Allowance for loan losses to nonperforming loans 64.78% 99.59% Nonperforming assets to loans receivable and other real estate owned 2.06% 1.34%
(1) The government-guaranteed portion of loans included in these totals was $1.4 million (2004) and $2.5 million (2003). The principal balance of loans for which accrual of interest has been discontinued totaled approximately $28.5 million at September 30, 2004. All of the nonaccruing assets are subject to regular tests for impairment as part of Southwest's allowance for loan losses methodology (see below). Five credit relationships accounted for approximately $21.7 million, or 71% of total nonperforming loans at September 30, 2004. All of these credits were identified as problem or potential problem credits in previous quarters. Management continues to actively manage these relationships, and anticipates they will be significantly reduced within the next six months through payoffs from proceeds from the sale of collateral now being actively marketed, proceeds of planned debtor capital increases, payments by guarantors, or by restructuring into earning assets. During the first nine months of 2004, $51,000 in interest income was received on nonaccruing loans. If interest on those loans had been accrued for the nine months ended September 30, 2004, additional total interest income of $872,000 would have been recorded. Performing loans considered potential nonperforming loans (loans that are not included in the past due, nonaccrual or restructured categories but for which known information about possible credit problems cause management to have doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may become nonperforming in the future) amounted to approximately $33.3 million at September 30, 2004, compared to $37.8 million at December 31, 2003, a decrease of 12%. Loans may be monitored by management and reported as potential nonperforming loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. These loans are subject to continuing management attention and are considered by management in determining the level of the allowance for loan losses. 8 NOTE 5: ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is shown below for the indicated periods.
For the nine For the months ended year ended September 30, 2004 December 31, 2003 ------------------------ ---------------------- (Dollars in thousands) Balance at beginning of period $ 15,848 $ 11,888 Loans charged-off: Real estate mortgage 747 717 Real estate construction - 3 Commercial 3,338 3,915 Installment and consumer 356 442 ------------------------ ---------------------- Total charge-offs 4,441 5,077 Recoveries: Real estate mortgage 127 173 Commercial 213 230 Installment and consumer 74 112 ------------------------ ---------------------- Total recoveries 414 515 ------------------------ ---------------------- Net loans charged-off 4,027 4,562 Provision for loan losses 8,100 8,522 ------------------------ ---------------------- Balance at end of period $ 19,921 $ 15,848 ======================== ====================== Loans outstanding: Average $1,478,443 $1,269,216 End of period 1,607,103 1,308,836 Net charge-offs to total average loans (annualized) 0.36% 0.36% Allowance for loan losses to total loans 1.24% 1.21%
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. 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 a general 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 eighteen months or twelve months, but may be adjusted for categories where eighteen and twelve month loss experience is historically unusual and not considered indicative of the losses inherent in specific portfolio categories. 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 losses 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 on the fair value of the collateral for certain collateral dependent loans. All of Southwest's nonaccrual loans are considered to be impaired loans. The general 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. There were no changes in estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance during the third quarter of 2004. Southwest determined the level of the allowance for loan losses at September 30, 2004, was appropriate, based on that methodology. 9 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 6: STOCK OPTION PLAN The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan (the "Stock Plans") provide selected key employees with the opportunity to acquire common stock. The exercise price of all options granted under the Stock Plans is the fair market value on the grant date. Depending upon terms of the stock option agreements, stock options generally become exercisable on an annual basis and expire from five to ten years after the date of grant. Southwest applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Stock Plans; accordingly, no compensation expense related to the grants of stock options has been recorded in the accompanying consolidated statements of operations. Had compensation cost for the Stock Plans been determined based upon the fair value of the options at their grant date as prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma data would have been as follows:
For the three months For the nine months ended September 30, ended September 30, 2004 2003 2004 2003 ------------ ------------ ------------- ------------- (Dollars in thousands,except per share data) Net income, as reported $4,855 $3,423 $13,661 $10,969 Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (56) (62) (226) (234) ------------ ------------ ------------- ------------- Proforma net income $4,799 $3,361 $13,435 $10,735 ============ ============ ============= ============= Earnings per share: Basic -- as reported $0.40 $0.30 $1.13 $0.93 Basic -- proforma $0.39 $0.28 $1.11 $0.91 Diluted -- as reported $0.39 $0.28 $1.09 $0.90 Diluted -- proforma $0.38 $0.27 $1.07 $0.88
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, 2004 and 2003, there were no antidilutive options to purchase common shares. 10 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, 2004 2003 2004 2003 ---------------- --------------- ---------------- ---------------- Weighted average shares outstanding: Basic earnings per share 12,081,379 11,839,891 12,050,485 11,762,996 Effect of dilutive securities: Stock options 512,496 558,109 495,417 484,046 ---------------- --------------- ---------------- ---------------- Weighted average shares outstanding: Diluted earnings per share 12,593,875 12,398,000 12,545,902 12,247,042 ================ =============== ================ ================
NOTE 8: OPERATING SEGMENTS Southwest operates four principal segments: Oklahoma Banking, Other States Banking, loans originated for sale in the secondary market ("Secondary Market"), and an Other Operations segment. The Oklahoma Banking segment consists of three operating units that provide lending and deposit services to customers in the state of Oklahoma. The Other States Banking segment consists of three operating units that provide lending and deposit services to the customers in the states of Texas and Kansas. The Secondary Market segment consists of two operating units that provide student lending services to post-secondary students in Oklahoma and several other states and residential mortgage lending services to customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is included in Other Operations. The primary purpose of the fund management unit is to manage Southwest's overall liquidity needs and interest rate risk. Each segment borrows funds from and provides funds to the funds management unit as needed to support its operations. Southwest identifies reportable segments by type of service provided and geographic location. Operating results are adjusted for intercompany loan participations and borrowings, allocated service costs, and management fees. The accounting policies of each reportable segment are the same as those of Southwest. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting and internal audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated essentially at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile the consolidated financial statements. The following table summarizes financial results by operating segment:
For the Nine Months Ended September 30, 2004 ---------------------------------------------------------------------------- Oklahoma Other States Secondary Other Total Banking Banking Market Operations Company ---------------------------------------------------------------------------- (Dollars in thousands) Net interest income $31,393 $9,991 $13,003 $ (2,734) $ 51,653 Provision for loan losses 5,233 2,867 - - 8,100 Other income 5,389 655 2,211 2,067 10,322 Other expenses 20,423 4,733 4,177 3,018 32,351 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 11,126 3,046 11,037 (3,685) 21,524 Taxes on income 4,145 1,059 4,116 (1,457) 7,863 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 6,981 $ 1,987 $ 6,921 $ (2,228) $ 13,661 ========================================================================================================================== Fixed asset expenditures $ 334 $ 415 $ 2 $ 1,310 $ 2,061 Total assets at period end $918,128 $344,186 $355,952 $264,184 $1,882,450
11
For the Nine Months Ended September 30, 2003 ---------------------------------------------------------------------------- Oklahoma Other States Secondary Other Total Banking Banking Market Operations Company ---------------------------------------------------------------------------- (Dollars in thousands) Net interest income $31,081 $ 5,725 $ 6,633 $ (2,655) $ 40,784 Provision for loan losses 4,768 1,680 - - 6,448 Other income 5,112 153 2,977 2,629 10,871 Other expenses 18,902 2,623 3,428 3,135 28,088 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 12,523 1,575 6,182 (3,161) 17,119 Taxes on income 4,697 594 2,332 (1,473) 6,150 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 7,826 $ 981 $ 3,850 $ (1,688) $ 10,969 ========================================================================================================================== Fixed asset expenditures $ 359 $ 581 $ 85 $ 1,143 $ 2,168 Total assets at period end $899,441 $206,550 $194,281 $240,864 $1,541,136
12 SOUTHWEST BANCORP, INC. UNAUDITED AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
For the three months ended September 30, 2004 2003 ------------------------------------------------------------ Average Average Average Average Balance Yield/Rate Balance Yield/Rate ------------------------------------------------------------ ASSETS: Loans receivable $1,580,974 6.35% $1,296,519 5.89% Investment securities 216,828 3.60 195,266 3.91 Other interest-earning assets 1,222 1.30 671 0.59 ------------------------------------------------------------ Total interest-earning assets 1,799,024 6.02 1,492,456 5.63 Noninterest-earning assets 66,378 50,456 ---------------- ---------------- Total assets $1,865,402 $1,542,912 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing demand $ 56,137 0.45% $ 56,698 0.60% Money market accounts 433,426 1.49 363,918 1.44 Savings accounts 8,204 0.24 6,783 0.29 Time deposits 704,142 2.13 615,945 2.30 ------------------------------------------------------------ Total interest-bearing deposits 1,201,909 1.81 1,043,344 1.89 Other borrowings 281,549 2.32 189,150 2.46 Subordinated debentures 72,180 6.30 46,406 6.89 ------------------------------------------------------------ Total interest-bearing liabilities 1,555,638 2.11 1,278,900 2.16 Noninterest-bearing demand deposits 178,408 146,526 Other noninterest-bearing liabilities 12,075 13,780 Shareholders' equity 119,281 103,706 ---------------- ---------------- Total liabilities and shareholders' equity $1,865,402 $1,542,912 ================ ================ Interest rate spread 3.91% 3.47% ============== ============== Net interest margin (1) 4.19% 3.78% ============== ============== Ratio of average interest-earning assets to average interest-bearing liabilities 115.65% 116.70% ================ ================
For the nine months ended September 30, 2004 2003 ------------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate ------------------------------------------------------------- ASSETS: Loans receivable $1,478,443 6.19% $1,252,591 6.01% Investment securities 214,224 3.69 188,423 4.26 Other interest-earning assets 1,111 0.84 1,022 0.92 ------------------------------------------------------------- Total interest-earning assets 1,693,778 5.87 1,442,036 5.78 Noninterest-earning assets 64,879 50,764 ---------------- ---------------- Total assets $1,758,657 $1,492,800 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing demand $ 59,158 0.54% $ 56,537 0.67% Money market accounts 411,274 1.44 315,199 1.64 Savings accounts 7,721 0.24 6,427 0.25 Time deposits 666,308 2.12 625,985 2.47 ------------------------------------------------------------- Total interest-bearing deposits 1,144,461 1.78 1,004,148 2.10 Other borrowings 245,799 2.27 205,307 2.42 Subordinated debentures 72,180 6.00 33,113 8.08 ------------------------------------------------------------- Total interest-bearing liabilities 1,462,440 2.08 1,242,568 2.31 Noninterest-bearing demand deposits 169,656 134,335 Other noninterest-bearing liabilities 10,587 15,156 Shareholders' equity 115,974 100,741 ---------------- ---------------- Total liabilities and shareholders' equity $1,758,657 $1,492,800 ================ ================ Interest rate spread 3.79% 3.47% ============== =============== Net interest margin (1) 4.07% 3.78% ============== =============== Ratio of average interest-earning assets to average interest-bearing liabilities 115.82% 116.05% ================ ================
(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, the notes to Southwest's unaudited consolidated financial statements, 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; expectations regarding future financial performance of Southwest and its operating segments; assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs; liquidity, contractual obligations, off-balance sheet risk, 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, market behavior, and other economic conditions; future laws, regulations, and accounting principles; 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"), SNB Bank of Wichita ("SNB Wichita"), Healthcare Strategic Support, Inc., and Business Consulting Group, Inc. ("BCG"). 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, Wichita, Kansas and metropolitan Dallas, Texas; loan production offices on the campuses of the University of Oklahoma Health Sciences Center in Oklahoma City, Oklahoma State University-Tulsa, and in metropolitan Dallas and Austin, Texas; a marketing presence in the Student Union at Oklahoma State University-Stillwater; and on the Internet, through SNB DirectBanker(R). 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's strategic focus includes expansion in carefully selected geographic markets based upon a tested business model developed in connection with our expansion into Oklahoma City in 1982. This geographic expansion is based on identification of markets with concentrations of customers in Southwest's traditional areas of expertise: healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate lending, and makes uses of traditional and specialized financial services. Specialized services include integrated document imaging and cash management services designed to help our customers in the healthcare industry and other record-intensive enterprises operate more efficiently, and management consulting services through Southwest's management consulting subsidiaries: Healthcare Strategic Support, Inc., serving physicians, hospitals, and healthcare groups, and Business Consulting Group, Inc., serving small and large commercial enterprises. During 2002, Southwest established offices in Wichita, Kansas and Dallas, Texas. At September 30, 2004, we had five offices in Kansas and Texas. During the first nine months of 2004, these offices produced $2.0 million in net income (15% of the consolidated total), up over 100% from the first nine months of 2003, and $113.2 million in new banking assets. Southwest has received regulatory approval to expand further in Texas by opening a second branch office in the Dallas metropolitan area. The office is located in Preston Center at 5950 Berkshire Lane, Dallas, Texas where it is currently operating as a loan production office. The Preston Center location will begin operating as a full service branch during the last half of December 2004. Southwest has also applied to open an additional branch office in Austin, Texas, where it is currently operating a loan production office. 14 Our Oklahoma Banking segment accounted for $7.0 million, or 51%, of year-to-date net income, and $39.5 million in new banking assets during the first nine months of 2004. Southwest has a long history of student and residential mortgage lending. These operations comprise our Secondary Market business segment. During the first nine months of 2004, this segment produced $6.9 million in net income, up 80% from the same period in 2003, and $135.6 million in additional banking assets. This growth was the result of expanded student lending, which more than offset the effects of the residential mortgage slowdown. Loan volumes in the Secondary Market segment may vary significantly from period to period. For additional information on our operating segments, please see Note 8, Operating Segments, above. The total of net income of the segments discussed above exceeds consolidated net income for the first nine months of 2004 due to losses allocated to the Other Operations segment, which provides funding and liquidity services to the rest of the organization. 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 nearly $1.9 billion at September 30, 2004, 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. FINANCIAL CONDITION TOTAL ASSETS Southwest's total assets were $1.9 billion at September 30, 2004 and $1.6 billion at December 31, 2003. LOANS Total loans, including loans held for sale, were $1.6 billion at September 30, 2004, a 23% increase from December 31, 2003. Southwest experienced increases in all categories of loans as shown in the following table:
September 30, December 31, 2004 2003 $ Change % Change ------------------------------------------------------------------------ ------------------------------------------------------------------------ (Dollars in thousands) Real estate mortgage Commercial $ 522,812 $ 402,596 $120,216 29.86 % One-to-four residential 87,296 83,250 4,046 4.86 Real estate construction 244,023 230,292 13,731 5.96 Commercial 386,325 355,965 30,360 8.53 Installment and consumer Student loans 341,335 211,546 129,789 61.35 Other 25,312 25,187 125 0.50 -------------------- ------------------ ------------- -------------- Total loans $1,607,103 $1,308,836 $298,267 22.79 % ==================== ================== ============= ==============
15 The composition of loans held for sale included in total loans is shown in the following table.
September 30, December 31, 2004 2003 $ Change % Change ------------------------------------------------------------------------ (Dollars in thousands) Student loans $341,335 $211,546 $129,789 61.35 % One-to-four family residential 2,673 2,199 474 21.56 Other loans held for sale 4,879 4,677 202 4.32 -------------------- ------------------ ------------- -------------- Total loans held for sale $348,887 $218,422 $130,465 59.73 % ==================== ================== ============= ==============
Management determines the appropriate level of the allowance for loan losses using a systematic methodology. (See Note 5, "Allowance for Loan Losses," in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses increased by $4.1 million, or 26%, from December 31, 2003 to September 30, 2004, mainly as a result of growth in portfolio loans (loans other than loans held for sale), especially from our Texas and Kansas offices, and amounts required for nonperforming loans. At September 30, 2004, the allowance for loan losses was $19.9 million, or 1.24% of total loans and 64.78% of nonperforming loans, compared to $15.8 million, or 1.21% of total loans and 99.59% of nonperforming loans, at December 31, 2003. Substantially all of the allowance is related to portfolio loans. The allowance allocated to portfolio loans was 1.58% of portfolio loans at September 30, 2004, compared to 1.45% at December 31, 2003. (See "Results of Operations-Provision for Loan Losses.") DEPOSITS AND OTHER BORROWINGS Southwest's deposits were $1.4 billion at September 30, 2004, an increase of $220.8 million, or 18%, from $1.2 billion at December 31, 2003. Increases occurred in all categories of deposits as shown in the following table:
September 30, December 31, 2004 2003 $ Change % Change ------------------------------------------------------------------------ (Dollars in thousands) Noninterest-bearing demand $ 183,183 $ 167,332 $15,851 9.47 % Interest-bearing demand 58,403 53,955 4,448 8.24 Money market accounts 399,104 376,016 23,088 6.14 Savings accounts 8,245 6,903 1,342 19.44 Time deposits of $100,000 or more 533,647 358,130 175,517 49.01 Other time deposits 242,373 241,789 584 0.24 -------------------- ------------------ ------------- -------------- Total deposits $1,424,955 $1,204,125 $220,830 18.34 % ==================== ================== ============= ==============
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 & Co., Inc., Dean Witter, Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS Financial Services, Inc., RBC Capital Markets Corp. and CountryWide Securities that total $1.2 billion. At September 30, 2004, $374.6 million in these retail certificates of deposit were included in total deposits, an increase of $149.0 million, or 66%, from year-end 2003. Stillwater National has other brokered certificates of deposit totaling $31.4 million included in total deposits at September 30, 2004. Other borrowings increased $61.9 million, or 34%, to $245.7 million during the first nine months of 2004. SHAREHOLDERS' EQUITY Shareholders' equity increased by $12.2 million, or 11%, due primarily to earnings for the first nine months of 2004, 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, 2004, Southwest, Stillwater National and SNB Wichita continued to exceed all applicable regulatory capital requirements. 16 RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 and 2003 Net income for the third quarter of 2004 of $4.9 million represented an increase of $1.4 million, or 42%, over the $3.4 million earned in the third quarter of 2003. Diluted earnings per share were $0.39 compared to $0.28, a 39% increase. The increase in net income was primarily the result of a $4.8 million, or 34%, increase in net interest income (fueled by substantial loan growth and increased interest margin), and a $129,000, or 3%, increase in other income (due mainly to increased service charges on deposit accounts), offset in part by a $1.2 million, or 43%, increase in the provision for loan losses, a $1.3 million, or 13%, increase in other expense (mainly as a result of increased occupancy and general and administrative expenses), and a $955,000, or 49%, increase in taxes on income. On an operating segment basis, the increase in net income was led by an $1.4 million increase in net income for the Secondary Market segment, due primarily to increased student lending volume, and a $502,000 reduction in the deficit from Other Operations, offset by declines in Oklahoma and Other States Banking. The decreases in Oklahoma and Other States Banking were largely the result of increased provision for loan losses and noninterest expense. The Secondary Market segment contributed the largest portion ($2.8 million) of Southwest's net income in the third quarter 2004. The contribution from the Secondary Market segment may vary significantly from period to period as a result of changes in loan volume, interest rates and market behavior; the number of schools participating in Southwest's student lending programs, the sizes of their enrollment, and the graduation status of student borrowers; and other factors. 17 NET INTEREST INCOME
For the three months ended September 30, 2004 2003 $ Change % Change ----------------------------------------------------------- (Dollars in thousands, except share data) Interest income: Interest and fees on loans $25,245 $19,250 $5,995 31.14 % Investment securities: U.S. Government and agency obligations 1,570 1,400 170 12.14 Mortgage-backed securities 159 204 (45) (22.06) State and political subdivisions 63 179 (116) (64.80) Other securities 168 142 26 18.31 Other interest-earning assets 4 1 3 300.00 ----------------------------------------------------------- Total interest income 27,209 21,176 6,033 28.49 Interest expense: Interest-bearing demand 63 86 (23) (26.74) Money market accounts 1,621 1,323 298 22.52 Savings accounts 5 5 - - Time deposits of $100,000 or more 2,460 2,045 415 20.29 Other time deposits 1,311 1,524 (213) (13.98) Other borrowings 1,643 1,174 469 39.95 Subordinated Debentures 1,136 817 319 39.05 ----------------------------------------------------------- Total interest expense 8,239 6,974 1,265 18.14 ----------------------------------------------------------- Net interest income $18,970 $14,202 $4,768 33.57 %
Net interest income is the difference between the interest income Southwest earns on its loans, investments and other interest-earning assets, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities owned by Southwest may react differently, and at different times, to changes in market interest rates, net interest income is affected by changes in market interest rates. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Yields on Southwest's interest-earning assets increased 39 basis points, and the rates paid on Southwest's interest-bearing liabilities declined by 5 basis points, resulting in an increase in the interest rate spread to 3.91% for the third quarter of 2004 from 3.47% for the third quarter of 2003. During the same periods, annualized net interest margin increased from 3.78% to 4.19%. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 115.65% for the third quarter of 2004 from 116.70% for the third quarter of 2003. The principal factor in the increase of interest income was the $306.6 million, or 21%, increase in average interest-earning assets. Interest income also benefited from the 39 basis point increase in the yield earned on interest-earning assets. Southwest's average loans increased $284.5 million, or 22%, and the related yield increased to 6.35% for the third quarter of 2004 from 5.89% in 2003. During the same period, average investment securities increased $21.6 million, or 11%, and the related yield was reduced to 3.60% from 3.91%. The increase in total interest expense can be attributed to the $276.7 million, or 22%, increase in average interest-bearing liabilities, which was partially offset by the 5 basis point reduction in the rates paid on interest-bearing liabilities. The increase in interest expense on subordinated debentures is due to two new issuances of subordinated debentures that occurred in the third and fourth quarters of 2003. Rates paid on deposits decreased for all categories other than money market accounts, which increased 5 basis points. 18 OTHER INCOME
For the three months ended September 30, 2004 2003 $ Change % Change ----------------------------------------------------------- (Dollars in thousands, except share data) Other income: ATM Service Charges $ 794 $ 879 $ (85) (9.67)% Other service charges 1,570 1,323 247 18.67 Other customer fees 265 240 25 10.42 Other noninterest income 328 190 138 72.63 Gain on sales of loans receivable: Student loan sales 659 460 199 43.26 Mortgage loan sales 338 671 (333) (49.63) All other loan sales 76 27 49 181.48 Gain (loss) on sales of investment securities (110) 1 (111) (100.00) ----------------------------------------------------------- Total other income $3,920 $3,791 $129 3.40 % ===========================================================
Other income increased $129,000, or 3%, due primarily to the $247,000 increase in other service charges. This increase occurred due to the repricing of service charges on deposit accounts to be more consistent with other financial institutions in our markets. Another contributing factor was the $138,000, or 73%, increase in other noninterest income. The increase in other noninterest income occurred primarily due to a $128,000 increase in consulting fees generated by Southwest's subsidiaries, Healthcare Strategic Services, Inc. and Business Consulting Group, Inc. Gain on sales of loans receivable declined due primarily to a $333,000, or 50%, reduction in gain on sales of mortgage loans, which occurred due to the lower refinancing demand created by higher mortgage interest rates during the third quarter of 2004 as compared to those prevalent during the third quarter of 2003. During the same period, gain on sales of student loans increased $199,000 and gain on sales of other loans increased $49,000. The loss on sales of investment securities, which were all classified as available for sale, occurred when four securities that had passed their call dates were sold. Southwest has the intent and ability to hold all remaining investment securities with an unrealized loss until the fair value exceeds amortized cost. Southwest's multi-state ATM network operated 286 ATM machines in 25 states at September 30, 2004 compared to 334 ATM machines in 22 states at September 30, 2003. The number of machines operated has stayed fairly constant during 2004 following a decrease during the fourth quarter of 2003 when a contract with a convenience store chain was not renewed. This fourth quarter 2003 reduction in ATM machines being operated is the primary reason for the decrease in ATM service charges from $879,000 in the third quarter 2003 to $794,000 in the third quarter 2004. OTHER EXPENSES
For the three months ended September 30, 2004 2003 $ Change % Change ----------------------------------------------------------- (Dollars in thousands, except share data) Other expenses: Salaries and employee benefits $5,563 $5,200 $ 363 6.98 % Occupancy 2,500 2,078 422 20.31 FDIC and other insurance 110 90 20 22.22 Other real estate 66 (2) 68 (100.00) General and administrative 2,998 2,535 463 18.26 ----------------------------------------------------------- Total other expenses $11,237 $9,901 $1,336 13.49 % ===========================================================
Salaries and employee benefits increased $363,000 primarily as a result of an increase in the number of employees as well as normal compensation increases. The number of full-time equivalent employees increased from 331 to 360 during the third quarter of 2004 and from 326 to 340 during the third quarter of 2003. 19 The primary factor in the increase of occupancy expense was a $376,000 increase in data processing charges for student loans due to a larger volume of loans being processed. The increase in general and administrative expenses reflected increased fees paid in connection with government-guaranteed loans, which increased $122,000, a $95,000 increase in legal fees, primarily related to the collection of past due loans, and expenses related to the development of business relationships in our new and current market areas, which increased by $54,000. FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 and 2003 Net income for the first nine months of 2004 of $13.7 million represented an increase of $2.7 million, or 25%, over the $11.0 million earned in the first nine months of 2003. Diluted earnings per share were $1.09 compared to $0.90, a 21% increase. The increase in net income was primarily the result of a $10.9 million, or 27%, increase in net interest income (fueled by substantial loan growth and increased interest margin), offset in part by a $1.7 million, or 26%, increase in the provision for loan losses, a $549,000, or 5%, decline in other income (due mainly to lower gains on loans sold), and a $4.3 million, or 15%, increase in other expense (mainly as a result of increased salaries and benefits from increased staff and executive retirement expense, and increased occupancy and general and administrative expenses). On an operating segment basis, the increase in net income was led by a $3.1 million increase in net income from the Secondary Market segment, due primarily to increased student lending volume, and a $1.0 million increase in the contribution from Other States Banking, offset by a decline in Oklahoma Banking and an increased deficit in Other Operations. The decrease in Oklahoma Banking was largely the result of increased noninterest expense, which included an executive retirement charge. Oklahoma Banking continues to provide the largest portion ($7.0 million) of Southwest's net income. However, in the first nine months, the contribution of Other States Banking was approximately 15%, while the Secondary Market segment contributed $6.9 million, or 51%. The contribution from the Secondary Market segment may vary significantly from period to period as a result of changes in loan volume, interest rates and market behavior; the number of schools participating in Southwest's student lending programs, the sizes of their enrollment, and the graduation status of student borrowers; and other factors. 20 NET INTEREST INCOME
For the nine months ended September 30, 2004 2003 $ Change % Change ---------------------------------------------------------- (Dollars in thousands, except share data) Interest income: Interest and fees on loans $68,468 $56,271 $12,197 21.68 % Investment securities: U.S. Government and agency obligations 4,573 4,032 541 13.42 Mortgage-backed securities 502 856 (354) (41.36) State and political subdivisions 344 690 (346) (50.14) Other securities 496 432 64 14.81 Other interest-earning assets 7 7 - - ---------------------------------------------------------- Total interest income 74,390 62,288 12,102 19.43 Interest expense: Interest-bearing demand 240 282 (42) (14.89) Money market accounts 4,425 3,870 555 14.34 Savings accounts 14 12 2 16.67 Time deposits of $100,000 or more 6,468 6,562 (94) (1.43) Other time deposits 4,111 5,026 (915) (18.21) Other borrowings 4,183 3,722 461 12.39 Subordinated Debentures 3,296 2,030 1,266 62.36 ---------------------------------------------------------- Total interest expense 22,737 21,504 1,233 5.73 ---------------------------------------------------------- Net interest income $51,653 $40,784 $10,869 26.65 % ==========================================================
Net interest income is the difference between the interest income Southwest earns on its loans, investments and other interest-earning assets, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities owned by Southwest may react differently, and at different times, to changes in market interest rates, net interest income is affected by changes in market interest rates. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Yields on Southwest's interest-earning assets increased 9 basis points, and the rates paid on Southwest's interest-bearing liabilities declined 23 basis points, resulting in an increase in the interest rate spread to 3.79% for the first nine months of 2004 from 3.47% for the first nine months of 2003. During the same periods, annualized net interest margin increased from 3.78% to 4.07%. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 115.82% for the first nine months of 2004 from 116.05% for the first nine months of 2003. The principal factor in the increase of interest income was the $251.7 million, or 17%, increase in average interest-earning assets. Interest income also benefited from the 9 basis point increase in the yield earned on interest-earning assets. Southwest's average loans increased $225.9 million, or 18%, and the related yield increased to 6.19% for the first nine months of 2004 from 6.01% in 2003. During the same period, average investment securities increased $25.8 million, or 14%, and the related yield was reduced to 3.69% from 4.26%. The decline in total interest expense can be attributed to the 23 basis point reduction in the rates paid on interest-bearing liabilities, which was partially offset by the $219.9 million, or 18%, increase in average interest-bearing liabilities. The increase in interest expense on subordinated debentures is due to two new issuances of subordinated debentures that occurred in the third and fourth quarters of 2003. Rates paid on deposits decreased for all categories. 21 OTHER INCOME
For the nine months ended September 30, 2004 2003 $ Change % Change ---------------------------------------------------------- (Dollars in thousands, except share data) Other income: ATM Service Charges $2,319 $2,619 $(300) (11.45)% Other service charges 4,229 3,769 460 12.20 Other customer fees 766 530 236 44.53 Other noninterest income 731 768 (37) (4.82) Gain on sales of loans receivable: Student loan sales 1,178 905 273 30.17 Mortgage loan sales 920 2,113 (1,193) (56.46) All other loan sales 288 139 149 107.19 Gain (loss) on sales of investment securities (109) 28 (137) (489.29) ---------------------------------------------------------- Total other income $10,322 $10,871 $(549) (5.05)% ==========================================================
Gain on sales of loans receivable, the major factor in the reduction of other income, declined due primarily to an $1.2 million reduction in gain on sales of mortgage loans, which occurred due to the lower refinancing demand created by slightly higher mortgage interest rates during the first nine months of 2004 as compared to those prevalent during the same period in 2003. The loss on sales of investment securities, which were all classified as available for sale, occurred when four securities that had passed their call dates were sold during the third quarter. Southwest has the intent and ability to hold all remaining investment securities with an unrealized loss until the fair value exceeds amortized cost. These reductions in other income were partially offset by the $396,000 increase in service charges and fees. The increase in service charges and fees occurred due to repricing of service charges on deposit accounts to be more consistent with other financial institutions in the markets we serve. Southwest's multi-state ATM network operated 286 ATM machines in 25 states at September 30, 2004 compared to 334 ATM machines in 22 states at September 30, 2003. The number of machines operated has stayed fairly constant during 2004 following a decrease during the fourth quarter of 2003 when a contract with a convenience store chain was not renewed. This fourth quarter 2003 reduction in ATM machines being operated is the primary reason for the decrease in ATM service charges from $2.6 million in 2003 to $2.3 million in 2004. 22 OTHER EXPENSES
For the nine months ended September 30, 2004 2003 $ Change % Change ---------------------------------------------------------- (Dollars in thousands, except share data) Other expenses: Salaries and employee benefits $15,893 $14,433 $1,460 10.12 % Occupancy 6,996 5,938 1,058 17.82 FDIC and other insurance 301 246 55 22.36 Other real estate 107 168 (61) (36.31) General and administrative 9,054 7,303 1,751 23.98 ---------------------------------------------------------- Total other expenses $32,351 $28,088 $4,263 15.18 % ==========================================================
Salaries and employee benefits increased $1.5 million primarily as a result of an increase in the number of employees, a charge relating to executive retirement in the first quarter of 2004 of approximately $492,000, as well as normal compensation increases. The number of full-time equivalent employees increased to 360 at the end of September 2004 from 340 at the end of September 2003. The primary factor in the increase of occupancy expense was a $794,000 increase in data processing charges for student loans due to a larger volume of loans being processed. The increase in general and administrative expenses reflected increased fees paid in connection with government-guaranteed loans, which increased by $275,000, expenses related to the development of business relationships in our new and current market areas, which increased by $234,000, and a $208,000 increase in legal fees, primarily related to the collection of past due loans. Losses on deposit accounts increased $91,000, which is primarily attributable to three deposit account relationships. * * * * * * * 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 5, "Allowance for Loan Losses," in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses of $19.9 million increased $4.1 million, or 26%, from year-end 2003. A provision for loan losses of $8.1 million was recorded in the first nine months of 2004, an increase of $1.7 million, or 26%, from the first nine months of 2003. (See Note 4, "Loans Receivable," in the Notes to Unaudited Consolidated Financial Statements.) TAXES ON INCOME Southwest's income tax expense was $7.9 million and $6.2 million for the first nine months of 2004 and 2003, respectively, an increase of $1.7 million, or 28%. 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, the organization in July 2001 of a real estate investment trust and tax credits generated by certain lending and investment activities. 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 student loans and SBA loans are also readily salable. Additional sources of liquidity, including cash flow from the repayment of loans and the sale of participations in outstanding 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. 23 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 $1.7 million at September 30, 2004. Stillwater National has approved federal funds purchase lines totaling $216.5 million with two other banks and four institutional brokers; $44.1 million was outstanding on these lines at September 30, 2004. In addition, Stillwater National has available a $35.0 million line of credit from the SLMA and a $318.0 million line of credit from the FHLB and SNB Wichita has a $8.9 million line of credit from the FHLB. Borrowings under the SLMA line would be secured by student loans. Borrowings under the FHLB lines are secured by investment securities and loans. The SLMA line expires April 20, 2007; no amount was outstanding on this line at September 30, 2004. The Stillwater National FHLB line of credit had an outstanding balance of $165.9 million at September 30, 2004; no amount was outstanding on the SNB Wichita line of credit at the FHLB at September 30, 2004. See also "Deposits and Other Borrowings" on page 16. 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 2004, the only categories of other borrowings whose averages exceeded 30% of ending shareholders' equity were repurchase agreements and funds borrowed from the FHLB.
September 30, 2004 September 30, 2003 --------------------------------- ------------------------------- Funds Funds Repurchase Borrowed Repurchase Borrowed Agreements from the FHLB Agreements from the FHLB --------------------------------- ------------------------------- (Dollars in thousands) Amount outstanding at end of period $36,615 $165,890 $47,393 $117,965 Weighted average rate paid at end of period 0.76% 3.08% 0.60% 3.43% Average Balance: For the three months ended $32,667 $190,696 $43,308 $121,108 For the nine months ended $37,076 $166,491 $48,544 $140,069 Average Rate Paid: For the three months ended 0.76% 2.83% 0.60% 3.41% For the nine months ended 0.66% 2.89% 0.75% 3.15% Maximum amount outstanding at any month end $44,465 $189,788 $62,152 $166,500
During the first nine months of 2004, cash and cash equivalents decreased by $3.0 million, or 9%, to $31.0 million. This decrease was the net result of cash used in net loan origination and other investing activities of $160.1 million and cash used in operating activities of $124.3 million, primarily to fund an increase in loans held for sale, offset in part by cash provided from financing activities of $281.4 million (primarily from an increase in deposits). During the first nine months of 2003, cash and cash equivalents decreased by $5.4 million, or 16%, to $29.4 million. This decrease was the net result of cash used in net loan origination and other investing activities of $122.8 million and cash used in operating activities of $61.5 million, offset in part by cash provided from financing activities of $178.9. CAPITAL RESOURCES In the first nine months of 2004, total shareholders' equity increased $12.2 million, or 11%, to $122.1 million. Earnings, net of cash dividends declared on common stock, contributed $11.1 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 $1.6 million to shareholders' equity in the first nine months of 2004, including tax benefits realized by Southwest relating to option exercises. Accumulated comprehensive income (loss), consisting of net unrealized gains (losses) on investment securities available for sale (net of tax), was $(193,000) at September 30, 2004 compared to $360,000 at December 31, 2003. 24 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, 2004, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 13.85%, a Tier I risk-based capital ratio of 10.68%, and a leverage ratio of 8.75%. As of September 30, 2004, 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. SNB Wichita began operating in November 2003 and has not yet received notification from the Office of Thrift Supervision concerning its capital position. Southwest declared a dividend of $0.07 per common share payable on October 1, 2004 to shareholders of record as of September 17, 2004. 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 do 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, 2003. 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 nine months ended September 30, 2004, 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. 25 PART II. OTHER INFORMATION Item 1. Legal proceedings None Item 2. Unregistered sales of equity securities and use of proceeds 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(a),(b) Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications (b) Reports on Form 8-K. Southwest filed a report on Form 8-K, dated July 21, 2004, announcing, under items 7, 9 and 12 of that form, earnings for the second quarter of 2004. Southwest filed a report on Form 8-K, dated August 26, 2004, announcing, under items 1 and 9 of that form, entry into an amended and restated severance compensation plan. Southwest filed a report on Form 8-K, dated October 21, 2004, announcing, under items 2, 7 and 9 of that form, earnings for the third quarter of 2004. 26 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 5, 2004 ---------------------------------------------------------------- ----------------------------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) By: /s/ Kerby Crowell November 5, 2004 --------------------------------------------------------------- ----------------------------------- Kerby Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
27 EX-31.A 2 b402093_ex31a.txt CERTIFICATION Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification I, Rick Green, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Southwest Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) N/A; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ Rick Green ------------------ ------------------------------------- Rick Green President and Chief Executive Officer (Principal Executive Officer) 28 EX-31.B 3 b402093_ex31b.txt CERTIFICATION Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification I, Kerby Crowell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Southwest Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) N/A; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ Kerby Crowell ------------------ ------------------------------------------ Kerby Crowell Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) 29 EX-32.A 4 b402093_ex32a.txt CERTIFICATION Exhibit 32(a) 18 U.S.C. Section 1350 Certification I hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2003, to the best of my knowledge and belief, that the accompanying Form 10-Q of Southwest Bancorp, Inc. ("Southwest") for the quarterly period ended September 30, 2004, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Southwest. By: /s/ Rick Green November 5, 2004 --------------------------------------- -------------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) EX-32.B 5 b402093_ex32b.txt CERTIFICATION Exhibit 32(b) 18 U.S.C. Section 1350 Certification I hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2003, to the best of my knowledge and belief, that the accompanying Form 10-Q of Southwest Bancorp, Inc. ("Southwest") for the quarterly period ended September 30, 2004, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Southwest. By: /s/ Kerby Crowell November 5, 2004 ------------------------------------------- ------------------ Kerby Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) 31 -----END PRIVACY-ENHANCED MESSAGE-----