-----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, Twhe/+ztwkoHGqajUQ35NhXTgS7lEI1Syc02OcjKhpaD25uiZwNeoCNhDizRozoQ kZxtGIWaFSskMFJvIP9yFw== 0001125282-05-005785.txt : 20051109 0001125282-05-005785.hdr.sgml : 20051109 20051109095128 ACCESSION NUMBER: 0001125282-05-005785 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 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: 051188105 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 b409715_10q.txt QUARTERLY REPORT FILED 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, 2005 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 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [ x ] 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. 14,018,646 1 of 35 SOUTHWEST BANCORP, INC. INDEX TO FORM 10-Q - ------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Unaudited Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004................................................3 Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004..................................4 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004.........................................5 Unaudited Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 2005...........................................6 Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2005 and 2004.........................6 Notes to Unaudited Consolidated Financial Statements........................7 Unaudited Average Balances, Yields and Rates...............................14 Unaudited Rate Volume Table.......................,........................16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........27 ITEM 4. CONTROLS AND PROCEDURES..............................................28 PART II. OTHER INFORMATION...................................................29 SIGNATURES....................................................................30 2 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (Dollars in thousands, except per share data) 2005 2004 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 38,881 $ 24,097 Federal funds sold 48,500 - - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 87,381 24,097 Investment securities: Held to maturity, fair value $1,214 (2005) and $2,509 (2004) 1,223 2,495 Available for sale, amortized cost $257,646 (2005) and $205,393 (2004) 253,069 204,092 Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,920 13,464 Loans held for sale 381,597 354,557 Loans receivable, net of allowance for loan losses of $21,920 (2005) and $18,991 (2004) 1,297,302 1,250,327 Accrued interest receivable 14,476 15,091 Premises and equipment, net 20,492 19,860 Other real estate 9,610 4,937 Other assets 28,184 24,867 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $2,107,254 $1,913,787 ================================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 229,462 $ 183,738 Interest-bearing demand 49,927 57,359 Money market accounts 410,789 379,818 Savings accounts 8,789 8,108 Time deposits of $100,000 or more 640,503 609,670 Other time deposits 345,435 261,365 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 1,684,905 1,500,058 Accrued interest payable 8,086 4,911 Income tax payable 1,595 2,266 Other borrowings 190,571 200,065 Other liabilities 7,846 7,370 Reserve for unfunded loan commitments 1,391 953 Subordinated debentures 46,393 72,180 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,940,787 1,787,803 SHAREHOLDERS' EQUITY: Common stock - $1 par value; 20,000,000 shares authorized; 14,658,042 (2005) and 12,243,042 (2004) shares issued and outstanding 14,658 12,243 Paid in capital 45,724 7,993 Retained earnings 121,342 107,905 Accumulated other comprehensive loss (2,803) (797) Treasury stock, at cost; 693,364 (2005) and 138,189 (2004) shares (12,454) (1,360) - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 166,467 125,984 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities & shareholders' equity $2,107,254 $1,913,787 =================================================================================================================================
The accompanying notes are an integral part of this statement. 3 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (Dollars in thousands, except earnings per share data) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $32,429 $25,245 $ 93,457 $68,468 Investment securities: U.S. government and agency obligations 2,119 1,570 5,447 4,573 Mortgage-backed securities 159 159 459 502 State and political subdivisions 31 63 139 344 Other securities 179 168 568 496 Other interest-earning assets 31 4 69 7 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 34,948 27,209 100,139 74,390 INTEREST EXPENSE: Interest-bearing demand 57 63 222 240 Money market accounts 2,914 1,621 7,201 4,425 Savings accounts 6 5 16 14 Time deposits of $100,000 or more 5,235 2,460 14,304 6,468 Other time deposits 2,638 1,311 6,712 4,111 Other borrowings 1,904 1,643 5,026 4,183 Subordinated debentures 801 1,136 3,281 3,296 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 13,555 8,239 36,762 22,737 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 21,393 18,970 63,377 51,653 Provision for loan losses 4,142 3,900 11,437 8,100 OTHER INCOME: Service charges and fees 2,894 2,629 8,157 7,314 Other noninterest income 364 328 1,230 731 Gain on sales of loans 1,333 1,073 3,102 2,386 Gain (loss) on sales of investment securities - (110) - (109) - ----------------------------------------------------------------------------------------------------------------------- Total other income 4,591 3,920 12,489 10,322 OTHER EXPENSE: Salaries and employee benefits 6,173 5,563 18,724 15,893 Occupancy 2,704 2,500 7,388 6,996 FDIC and other insurance 124 110 360 301 Other real estate 230 66 770 107 General and administrative 3,494 2,998 11,411 9,054 - ----------------------------------------------------------------------------------------------------------------------- Total other expense 12,725 11,237 38,653 32,351 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 9,117 7,753 25,776 21,524 Taxes on income 3,310 2,898 9,354 7,863 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 5,807 $ 4,855 $ 16,422 $13,661 ======================================================================================================================= Basic earnings per share $ 0.41 $ 0.40 $ 1.27 $ 1.13 ======================================================================================================================= Diluted earnings per share $ 0.41 $ 0.38 $ 1.24 $ 1.09 ======================================================================================================================= Cash dividends declared per share $ 0.075 $ 0.07 $ 0.225 $ 0.21 =======================================================================================================================
The accompanying notes are an integral part of this statement. 4 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 - ---------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 16,422 $ 13,661 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Provision for loan losses 11,437 8,100 Deferred taxes (808) (1,551) Depreciation and amortization expense 1,967 1,962 Amortization of premiums and accretion of discounts on securities, net 106 132 Amortization of intangibles 284 239 Tax benefit from exercise of stock options 591 459 (Gain) Loss on sales/calls of securities - 109 (Gain) Loss on sales of loans (3,102) (2,386) (Gain) Loss on sales of premises/equipment 20 (9) (Gain) Loss on other real estate owned, net (2) 53 Proceeds from sales of residential mortgage loans 69,066 67,484 Residential mortgage loans originated for resale (68,422) (67,856) Proceeds from sales of student loans 603,790 357,538 Student loans originated for resale (627,911) (486,148) Changes in assets and liabilities: Accrued interest receivable 615 (2,605) Other assets (1,525) 108 Income taxes payable (671) 4,639 Accrued interest payable 3,175 (114) Other liabilities 276 2,188 - ---------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from operating activities 5,308 (103,997) - ---------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sales of available for sale securities - 8,540 Proceeds from principal repayments, calls and maturities: Held to maturity securities 1,785 13,398 Available for sale securities 8,070 61,632 Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (456) (2,066) Purchases of available for sale securities (60,940) (88,311) Loans originated and principal repayments, net (65,688) (171,962) Purchases of premises and equipment (2,694) (2,061) Proceeds from sales of premises and equipment 90 204 Proceeds from sales of other real estate owned 2,567 215 - ---------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from investing activities (117,266) (180,411) - ---------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 184,847 220,830 Net increase (decrease) in other borrowings (9,494) 61,872 Net proceeds from issuance of common stock 40,877 1,178 Repayment of subordinated debentures (25,787) - Purchases of treasury stock (12,416) - Common stock dividends paid (2,785) (2,435) - ---------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from financing activities 175,242 281,445 - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 63,284 (2,963) CASH AND CASH EQUIVALENTS, Beginning of period 24,097 33,981 - ---------------------------------------------------------------------------------------------------------------------- End of period $ 87,381 $ 31,018 ======================================================================================================================
The accompanying notes are an integral part of this statement. 5 SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------- ACCUM- ULATED OTHER TOTAL COMPRE- SHARE- (Dollars in thousands, COMMON STOCK PAID IN RETAINED HENSIVE TREASURY HOLDERS' except per share data) SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2005 12,243,042 $12,243 $7,993 $107,905 $ (797) $(1,360) $125,984 Cash dividends declared: Common, $0.225 per share, and other dividends - - - (2,985) - - (2,985) Common stock issued: Employee Stock Option Plan - - (111) - - 1,168 1,057 Employee Stock Purchase Plan - - 31 - - 25 56 Dividend Reinvestment Plan - - 35 - - 30 65 Restricted Stock - - 97 - - 99 196 Public Offering 2,415,000 2,415 37,088 - - - 39,503 Tax benefit related to exercise of stock options - - 591 - - - 591 Other comprehensive income (loss), net of tax - - - - (2,006) - (2,006) Treasury shares purchased - - - - - (12,416) (12,416) Net income - - - 16,422 - - 16,422 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2005 14,658,042 $14,658 $45,724 $121,342 $(2,803) $(12,454) $166,467 ==================================================================================================================================
The accompanying notes are an integral part of this statement. SOUTHWEST BANCORP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Net income $ 5,807 $ 4,855 $ 16,422 $ 13,661 OTHER COMPREHENSIVE INCOME: Unrealized holding gain (loss) on available for sale securities (2,580) 2,126 (3,276) (1,042) Reclassification adjustment for (gains) losses arising during the period - 110 - 109 - --------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), before tax (2,580) 2,236 (3,276) (933) Tax (expense) benefit related to items of other comprehensive income (loss) 999 (908) 1,270 380 - --------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax (1,581) 1,328 (2,006) (553) - --------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 4,226 $ 6,183 $ 14,416 $ 13,108 =====================================================================================================================
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, 2005 and the cash flows for the nine months ended September 30, 2005 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, 2004. NOTE 2: PRINCIPLES OF CONSOLIDATION The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. ("Southwest"), its wholly owned financial institution subsidiaries, the Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of Wichita ("SNB Wichita"), and its management consulting subsidiaries, Healthcare Strategic Support, Inc. ("HSSI"), and Business Consulting Group, Inc. ("BCG"). All significant intercompany transactions and balances have been eliminated in consolidation. NOTE 3: RECLASSIFICATIONS Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. NOTE 4: INVESTMENT SECURITIES The following table presents securities with gross unrealized losses and fair value by length of time that the individual securities had been in a continuous unrealized loss position at September 30, 2005. Securities whose market values exceed cost are excluded from this table.
Continuous Unrealized Losses Existing for: - ----------------------------------------------------------------------------------------------------- Total Fair Less Than More Than Unrealized (Dollars in thousands) Value 12 Months 12 Months Losses - ----------------------------------------------------------------------------------------------------- Held to Maturity: U.S. government and agency obligations $ 1,003 $ (9) $ - $ (9) - ----------------------------------------------------------------------------------------------------- Total $ 1,003 $ (9) $ - $ (9) ===================================================================================================== Available for Sale: U.S. government and agency obligations $221,883 $(4,365) $(35) $(4,400) Obligations of state and political subdivisions 1,226 (24) - (24) Mortgage-backed securities 16,628 (222) (17) (239) Other debt securities 968 (32) - (32) - ----------------------------------------------------------------------------------------------------- Total $240,705 $(4,643) $(52) $(4,695) =====================================================================================================
7 Southwest has reviewed all these securities on an individual basis. These unrealized losses occurred due to increases in interest rates and not as a result of a decline in credit quality. Southwest has the ability and intent to hold these securities for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment, or to maturity when the full cost will be recovered and, therefore, has determined that none of the losses are other than temporary. 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, Oklahoma City, and Tulsa areas of Oklahoma; in Wichita, Kansas; and in the Dallas, Austin, and San Antonio, Texas metropolitan areas. As a result, the collectibility of Southwest's loan portfolio can be affected by changes in the economic conditions in these three states and in those metropolitan areas. At September 30, 2005 and December 31, 2004, 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 or, in the case of private student loans, insured by a private insurer. At September 30, 2005, loans to individuals and businesses in the healthcare industry totaled approximately $405.1 million, or 24%, of total loans and student loans totaled approximately $375.2 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. Nonperforming assets and other risk elements of the loan portfolio are shown below as of the indicated dates. Total nonaccrual loans increased $911,000, or 4%, from December 31, 2004, and total nonperforming loans increased $4.8 million, or 21%. Total nonperforming assets of $37.6 million (which includes other real estate owned) increased $9.5 million, or 34%, from the same period.
- ----------------------------------------------------------------------------------------------------- AT AT (Dollars in thousands) SEPTEMBER 30, 2005 DECEMBER 31, 2004 - ----------------------------------------------------------------------------------------------------- Nonaccrual loans (1) $23,141 $22,230 Past due 90 days or more (2) 4,812 929 ----------------------- --------------------- Total nonperforming loans 27,953 23,159 Other real estate owned 9,610 4,937 ----------------------- --------------------- Total nonperforming assets $37,563 $28,096 ======================= ===================== Nonperforming loans to loans receivable 1.64% 1.43% Allowance for loan losses to nonperforming loans 78.42% 82.00% Nonperforming assets to loans receivable and other real estate owned 2.20% 1.72%
(1) The government-guaranteed portion of loans included in these totals was $1.5 million (2005) and $1.4 million (2004). (2) The government-guaranteed portion of loans included in these totals was $89,000 (2005) and $38,000 (2004). The principal balance of loans for which accrual of interest has been discontinued totaled approximately $23.1 million at September 30, 2005. All of the nonaccruing assets are subject to regular tests for impairment as part of Southwest's allowance for loan losses methodology (see below). During the first nine months of 2005, $195,000 in interest income was received on nonaccruing loans. If interest on those loans had been accrued for the nine months ended September 30, 2005, additional total interest income of $799,000 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 $33.2 million at September 30, 2005, compared to $25.6 million at December 31, 2004, an increase of 29%. 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 6: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS Activity in the allowance for loan losses is shown below for the indicated periods.
- ------------------------------------------------------------------------------------------------------------------------ FOR THE NINE FOR THE MONTHS ENDED YEAR ENDED (Dollars in thousands) SEPTEMBER 30, 2005 DECEMBER 31, 2004 - ------------------------------------------------------------------------------------------------------------------------ Balance at beginning of period $ 18,991 $ 15,009 Loans charged-off: Real estate mortgage 2,851 812 Real estate construction 155 275 Commercial 5,946 8,382 Installment and consumer 403 565 - ------------------------------------------------------------------------------------------------------------------------ Total charge-offs 9,355 10,034 Recoveries: Real estate mortgage 138 151 Real estate construction 1 - Commercial 661 907 Installment and consumer 47 90 - ------------------------------------------------------------------------------------------------------------------------ Total recoveries 847 1,148 - ------------------------------------------------------------------------------------------------------------------------ Net loans charged-off 8,508 8,886 Provision for loan losses 11,437 12,868 - ------------------------------------------------------------------------------------------------------------------------ Balance at end of period $ 21,920 $ 18,991 ======================================================================================================================== Loans outstanding: Average $1,724,208 $1,527,935 End of period 1,700,819 1,623,875 Net charge-offs to total average loans (annualized) 0.66% 0.58% Allowance for loan losses to total loans (end of period) 1.29% 1.17%
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 an unallocated 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. 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 credit 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 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. There were no changes in estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance during the first nine months of 2005. Southwest determined the level of the allowance for loan losses at September 30, 2005, 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. At the beginning of 2005, Southwest established a reserve for unfunded loan commitments as a liability on Southwest's statement of financial condition. The reserve formerly was presented within the allowance for loan losses; all affected prior periods have been restated. At September 30, 2005, this reserve for unfunded loan commitments was $1.4 million, an increase of $438,000, or 46%, from the amount previously included in the allowance for loan losses at December 31, 2004. The reserve is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. NOTE 7: 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: 10
- --------------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (Dollars in thousands, except per share data) 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------------------------- Net income, as reported $5,807 $4,855 $16,422 $13,661 Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (7) (56) (280) (226) - --------------------------------------------------------------------------------------------------------------------------- Proforma net income $5,800 $4,799 $16,142 $13,435 =========================================================================================================================== Earnings per share: Basic -- as reported $0.41 $0.40 $1.27 $1.13 Basic -- proforma $0.41 $0.39 $1.25 $1.11 Diluted -- as reported $0.41 $0.38 $1.24 $1.09 Diluted -- proforma $0.40 $0.38 $1.21 $1.07
Outside directors of Southwest have been awarded 9,900 shares in restricted common shares at a grant date fair value of $19.75 per share. The restrictions on these outside directors' shares expire after three years. Southwest will recognize compensation expense over the restricted period. During the first nine months of 2005, $38,019 in compensation expense was recorded related to these restricted shares. NOTE 8: 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, 2005 and 2004, there were 2,500 and zero antidilutive options to purchase common shares, respectively. 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, 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------ Weighted average shares outstanding: Basic earnings per share 13,944,877 12,081,379 12,884,058 12,050,485 Effect of dilutive securities: Stock options 414,931 466,583 401,913 455,008 - ------------------------------------------------------------------------------------------------------ Weighted average shares outstanding: Diluted earnings per share 14,359,808 12,547,962 13,285,971 12,505,493 ======================================================================================================
NOTE 9: OPERATING SEGMENTS Southwest operates four principal segments: Oklahoma Banking, Other States Banking, Secondary Market, and Other Operations. 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 fund management unit as needed to support its operations. The Other Operations segment also includes SNB Investor Services and nonbank cash machine operations. 11 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 to the consolidated financial statements. 12 The following table summarizes financial results by operating segment:
For the Nine Months Ended September 30, 2005 - --------------------------------------------------------------------------------------------------------------- Oklahoma Other States Secondary Other Total (Dollars in thousands) Banking Banking Market Operations Company - --------------------------------------------------------------------------------------------------------------- Net interest income $34,298 $ 13,807 $13,899 $ 1,373 $ 63,377 Provision for loan losses 8,160 3,277 - - 11,437 Other income 5,514 677 3,258 3,040 12,489 Other expenses 21,387 8,297 4,485 4,484 38,653 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 10,265 2,910 12,672 (71) 25,776 Taxes on income 3,785 1,054 4,621 (106) 9,354 - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ 6,480 $ 1,856 $ 8,051 $ 35 $ 16,422 ================================================================================================================ Fixed asset expenditures $ 446 $ 1,025 $ - $ 1,223 $ 2,694 Total loans at period end 855,858 463,837 380,970 154 1,700,819 Total assets at period end 867,559 462,469 397,345 379,881 2,107,254
For the Nine Months Ended September 30, 2004 - ---------------------------------------------------------------------------------------------------------------- Oklahoma Other States Secondary Other Total (Dollars in thousands) Banking Banking Market Operations Company - ---------------------------------------------------------------------------------------------------------------- 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 loans at period end 912,211 348,441 346,300 151 1,607,103 Total assets at period end 918,126 344,187 355,952 264,185 1,882,450
NOTE 10. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. On April 14, 2005, the SEC announced it would provide for a phased-in implementation process for this revised statement. Generally, the approach to accounting for share-based payments in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 13 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date, and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. Southwest plans to adopt Statement 123(R) on January 1, 2006 but has not yet determined which method will be used. Management of Southwest believes that adoption of Statement 123(R) will not have a material impact on Southwest's consolidated financial condition or results of operations. SOUTHWEST BANCORP, INC. UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- --------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 - --------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE YIELD/RATE BALANCE YIELD/RATE - --------------------------------------------------------------------------------------------------------------- ASSETS Total loans $1,732,734 7.43% $1,580,974 6.35% Investment securities 263,868 3.74 216,828 3.60 Other interest-earning assets 3,535 3.48 1,222 1.30 ---------------------------------------------------------- Total interest-earning assets 2,000,137 6.93 1,799,024 6.02 Other assets 93,258 66,378 ------------- ----------- Total assets $2,093,395 $1,865,402 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits $ 53,187 0.43% $ 56,137 0.45% Money market accounts 395,668 2.92 433,426 1.49 Savings accounts 8,513 0.28 8,204 0.24 Time deposits 977,272 3.20 704,142 2.13 ---------------------------------------------------------- Total interest-bearing deposits 1,434,640 3.00 1,201,909 1.81 Other borrowings 209,475 3.61 281,549 2.32 Subordinated debentures 46,393 6.76 72,180 6.16 ---------------------------------------------------------- Total interest-bearing liabilities 1,690,508 3.18 1,555,638 2.11 Noninterest-bearing demand deposits 217,812 178,408 Other liabilities 18,239 12,075 Shareholders' equity 166,836 119,281 ------------- ----------- Total liabilities and shareholders' equity $2,093,395 $1,865,402 ============= =========== Interest rate spread 3.75% 3.91% ============= =============== Net interest margin (1) 4.24% 4.19% ============= =============== Ratio of average interest-earning assets to average interest-bearing liabilities 118.32% 115.65% ============= ===========
(1) Net interest margin = annualized net interest income / average interest-earning assets 14 SOUTHWEST BANCORP, INC. UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- ----------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 - ----------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE YIELD/RATE BALANCE YIELD/RATE - ----------------------------------------------------------------------------------------------------------- ASSETS Total loans $1,724,208 7.25% $1,478,443 6.19% Investment securities 237,543 3.72 214,224 3.69 Other interest-earning assets 3,165 2.91 1,111 0.84 -------------------------------------------------------- Total interest-earning assets 1,964,916 6.81 1,693,778 5.87 Other assets 90,535 64,879 ------------ ----------- Total assets $2,055,451 $1,758,657 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits $ 61,334 0.48% $ 59,158 0.54% Money market accounts 384,637 2.50 411,274 1.44 Savings accounts 8,525 0.25 7,721 0.24 Time deposits 973,103 2.89 666,308 2.12 -------------------------------------------------------- Total interest-bearing deposits 1,427,599 2.66 1,144,461 1.78 Other borrowings 201,512 3.33 245,799 2.27 Subordinated debentures 62,828 6.89 72,180 6.00 -------------------------------------------------------- Total interest-bearing liabilities 1,691,939 2.90 1,462,440 2.08 Noninterest-bearing demand deposits 200,875 169,656 Other liabilities 16,516 10,587 Shareholders' equity 146,121 115,974 ------------ ----------- Total liabilities and shareholders' equity $2,055,451 $1,758,657 ============ =========== Interest rate spread 3.91% 3.79% ============== =============== Net interest margin (1) 4.31% 4.07% ============== =============== Ratio of average interest-earning assets to average interest-bearing liabilities 116.13% 115.82% ============ ===========
(1) Net interest margin = annualized net interest income / average interest-earning assets 15 SOUTHWEST BANCORP, INC. The following table analyzes changes in interest income and interest expense of Southwest for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period's rate); and (ii) changes in rates (changes in rate multiplied by the prior period's volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. - ------------------------------------------------------------------------------- FOR THE FIRST NINE MONTHS OF (Dollars in thousands) 2005 VS. 2004 - ------------------------------------------------------------------------------- INCREASE DUE TO CHANGE OR IN AVERAGE: (DECREASE) VOLUME RATE - ------------------------------------------------------------------------------- INTEREST EARNED ON: Loans receivable (1) $24,989 $12,318 $ 12,671 Investment securities 698 612 86 Other interest-earning assets 62 26 36 --------------------------------------- Total interest income 25,749 12,956 12,793 INTEREST PAID ON: Interest-bearing demand (18) 14 (32) Money market accounts 2,776 (471) 3,247 Savings accounts 2 1 1 Time deposits 10,437 5,836 4,601 Other borrowings 843 (1,219) 2,062 Subordinated debentures (15) (607) 592 --------------------------------------- Total interest expense 14,025 3,554 10,471 --------------------------------------- Net interest income $11,724 $ 9,402 $ 2,322 ======================================= (1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material. Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material. 16 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. ("HSSI"), and Business Consulting Group, Inc. ("BCG"). Through its subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services, and specialized cash management, consulting and other financial services from offices in Oklahoma City, Stillwater, Tulsa, and Chickasha, Oklahoma; Austin, Dallas and San Antonio, Texas; and Kansas City and Wichita, Kansas and on the Internet, through SNB DirectBanker(R). Southwest's banking philosophy is to provide a high level of customer service, a wide range of financial services, and products responsive to customer needs with a focus on serving healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. This philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customer needs for speed, efficiency, and information, and complement more traditional banking products. Such specialized financial 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: HSSI, which serves physicians, hospitals, and healthcare groups, and BCG, which serves small and large commercial enterprises. Information regarding Southwest is available on line at www.oksb.com. Information regarding the products and services of Southwest's subsidiaries is available on line at www.banksnb.com and www.snbwichita.com. The information on these websites is not a part of this report on form 10-Q. Southwest's strategic focus includes expansion in carefully selected geographic markets based upon a tested business model developed in connection with its expansion into Oklahoma City in 1982 and into Tulsa in 1985. 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 use of traditional and specialized financial services. Beginning in 2002, Southwest has expanded operations into the states of Kansas and Texas. At September 30, 2005, these offices accounted for $463.8 million in loans (35% of portfolio loans and 27% of total loans, which include loans held for sale). During the first nine months of 2005, these offices produced $1.9 million in net income (11% of the consolidated total), and $76.4 million in asset growth. Southwest has received regulatory approval to open two branch offices in Austin, Texas and one branch office in San Antonio, Texas to replace existing loan production offices; of these, only one of the Austin branches is currently accepting deposits. 17 Southwest currently plans to open two to four additional offices in Texas, including one or more in the Houston area. The timing of new office openings in these targeted markets depends primarily on executive staffing, and to a lesser extent on premises selection. The Oklahoma Banking segment accounted for $6.5 million, or 39%, of year-to-date net income, and experienced a $21.6 million reduction in total assets during the first nine months of 2005. Southwest has a long history of student and residential mortgage lending. These operations comprise the Secondary Market business segment. In 2004, Southwest was one of the top 40 student lenders in the nation by dollar volume. During the first nine months of 2005, this segment produced $8.1 million in net income, and $28.8 million in asset growth since December 31, 2004. This growth was the result of expanded student lending, with residential mortgage lending increasing only slightly from year-end 2004. Loan volumes in the Secondary Market segment may vary significantly from period to period. Southwest conducts general consumer banking operations, and may establish or acquire additional community banking offices in selected markets. For additional information on Southwest's operating segments, please see Note 9, Operating Segments, in the Notes to Unaudited Consolidated Financial Statements. The total of net income of the segments discussed above does not equal consolidated net income for the first nine months of 2005 due to income and expenses allocated to the Other Operations segment, which provides funding and liquidity services to the rest of the organization. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. 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 over $2.1 billion at September 30, 2005, 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 AND INVESTMENT SECURITIES Southwest's total assets were $2.1 billion at September 30, 2005 and $1.9 billion at December 31, 2004. Southwest's investment security portfolio increased $48.1 million, or 22%, from $220.1 million at December 31, 2004 to $268.2 million at September 30, 2005. The increase occurred primarily in U.S. government and agency obligations, which increased $49.9 million, or 28%, during the first nine months of 2005. The funds used to purchase these additional investment securities were provided by the common stock offering that was completed during the second quarter of 2005. LOANS Total loans, including loans held for sale, were $1.7 billion at September 30, 2005, a 5% increase from December 31, 2004. Southwest experienced increases in all categories of loans, except other commercial loans, as shown in the following table: 18
- ----------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ----------------------------------------------------------------------------------------------------- Real estate mortgage Commercial $ 543,937 $ 523,358 $20,579 3.93 % One-to-four family residential 93,860 87,858 6,002 6.83 Real estate construction 277,722 248,278 29,444 11.86 Commercial 381,584 390,272 (8,688) (2.23) Installment and consumer Student loans 375,178 348,970 26,208 7.51 Other 28,538 25,139 3,399 13.52 - ----------------------------------------------------------------------------------------------------- Total loans $1,700,819 $1,623,875 $76,944 4.74 % =====================================================================================================
The composition of loans held for sale included in total loans is shown in the following table.
- ---------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ---------------------------------------------------------------------------------------------------- Student loans $375,178 $348,970 $26,208 7.51 % One-to-four family residential 3,521 3,115 406 13.03 Other loans held for sale 2,898 2,472 426 17.23 - ---------------------------------------------------------------------------------------------------- Total loans held for sale $381,597 $354,557 $27,040 7.63 % ====================================================================================================
Management determines the appropriate level of the allowance for loan losses using a systematic methodology. (See Note 6, "Allowance for Loan Losses and Reserve for Unfunded Loan Commitments," in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses increased by $2.9 million, or 15%, from December 31, 2004 to September 30, 2005. The increase in the allowance was the result of increases in loss factors for performing commercial mortgage and other commercial loans, greater allowances relating to nonperforming loans, and an increase in the unallocated allowance. At September 30, 2005, the allowance for loan losses was $21.9 million, or 1.29% of total loans and 78.42% of nonperforming loans, compared to $19.0 million, or 1.17% of total loans and 82.00% of nonperforming loans, at December 31, 2004. (See "Results of Operations-Provision for Loan Losses.") At the beginning of 2005, Southwest established a reserve for unfunded loan commitments as a liability on Southwest's statement of financial condition. The reserve formerly was presented within the allowance for loan losses. At September 30, 2005, this reserve for unfunded loan commitments was $1.4 million, a $438,000, or 46%, increase from the amount previously included in the allowance for loan losses at December 31, 2004. The amounts of the allowance for loan losses and other financial information for December 31, 2004 and September 30, 2004 presented in this report also reflect the reclassification of the reserve for unfunded loan commitments from the allowance for loan losses to a separate liability account and the provision for unfunded loan commitments from the provision for loan losses to general and administrative expense. DEPOSITS AND OTHER BORROWINGS Southwest's deposits were $1.7 billion at September 30, 2005, an increase of $184.8 million, or 12%, from $1.5 billion at December 31, 2004. Increases occurred in all categories of deposits other than interest-bearing demand accounts as shown in the following table: 19
- ----------------------------------------------------------------------------------------------------- September 30, December 31, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ----------------------------------------------------------------------------------------------------- Noninterest-bearing demand $ 229,462 $ 183,738 $ 45,724 24.89 % Interest-bearing demand 49,927 57,359 (7,432) (12.96) Money market accounts 410,789 379,818 30,971 8.15 Savings accounts 8,789 8,108 681 8.40 Time deposits of $100,000 or more 640,503 609,670 30,833 5.06 Other time deposits 345,435 261,365 84,070 32.17 -------------- -------------- ---------- ---------- Total deposits $1,684,905 $1,500,058 $184,847 12.32 % ============== ============== ========== ==========
Stillwater National has unsecured brokered certificate of deposit lines of credit in connection with its retail certificate of deposit program from Merrill Lynch & Co., Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS Financial Services, Inc., RBC Dain Rauscher, Morgan Stanley & Co., Inc., and CountryWide Securities that total $1.5 billion. At September 30, 2005, $399.0 million in these retail certificates of deposit were included in time deposits of $100,000 or more, a reduction of $25.7 million, or 6%, from year-end 2004. Stillwater National has other brokered certificates of deposit totaling $695,000 included in total deposits at September 30, 2005. Other borrowings decreased $9.5 million, or 5%, to $190.6 million during the first nine months of 2005. SHAREHOLDERS' EQUITY Shareholders' equity increased $40.5 million, or 32%, due primarily to net proceeds of the common stock offering and other stock issuances, and earnings for the first nine months of 2005 offset in part by the repurchase of common stock, dividends declared and a decrease in accumulated other comprehensive income (net, after tax, unrealized gains on investment securities available for sale). At September 30, 2005, Southwest, Stillwater National and SNB Wichita continued to exceed all applicable regulatory capital requirements. RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 and 2004 Net income for the third quarter of 2005 of $5.8 million represented an increase of $952,000, or 20%, over the $4.9 million earned in the third quarter of 2004. Diluted earnings per share were $0.41 compared to $0.38, an 8% increase. The increase in net income was primarily the result of a $2.4 million, or 13%, increase in net interest income (fueled by loan growth and increased interest margin), and an $671,000, or 17%, increase in other income (due mainly to increased service charges on deposit accounts and gains on sales of loans), offset in part by a $1.5 million, or 13%, increase in other expense (mainly as a result of increased salaries and employee benefits, occupancy, and general and administrative expenses), a $242,000, or 6%, increase in the provision for loan losses and a $412,000, or 14%, increase in taxes on income. On an operating segment basis, the increase in net income was led by a $1.1 million increase and a change from a net deficit to net income from Other Operations, a $421,000 increase in net income from the Oklahoma Banking segment, and a $321,000 increase in net income from the Other States Banking segment partially offset by an $873,000 reduction in net income from the Secondary Market segment. The Oklahoma Banking segment made the largest contribution to net income during the third quarter 2005, with the Secondary Market segment being second. 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 THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $32,429 $25,245 $7,184 28.46 % Investment securities: U.S. government and agency obligations 2,119 1,570 549 34.97 Mortgage-backed securities 159 159 0 0.00 State and political subdivisions 31 63 (32) (50.79) Other securities 179 168 11 6.55 Other interest-earning assets 31 4 27 675.00 ---------------------------------------------------------- Total interest income 34,948 27,209 7,739 28.44 Interest expense: Interest-bearing demand 57 63 (6) (9.52) Money market accounts 2,914 1,621 1,293 79.77 Savings accounts 6 5 1 20.00 Time deposits of $100,000 or more 5,235 2,460 2,775 112.80 Other time deposits 2,638 1,311 1,327 101.22 Other borrowings 1,904 1,643 261 15.89 Subordinated debentures 801 1,136 (335) (29.49) ---------------------------------------------------------- Total interest expense 13,555 8,239 5,316 64.52 ---------------------------------------------------------- Net interest income $21,393 $18,970 $2,423 12.77 % ==========================================================
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 91 basis points, and the rates paid on Southwest's interest-bearing liabilities increased 107 basis points, resulting in a decrease in the interest rate spread to 3.75% for the third quarter of 2005 from 3.91% for the third quarter of 2004. During the same periods, annualized net interest margin increased to 4.24% from 4.19% and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 118.32% from 115.65%. The increase of interest income was the result of the 91 basis point increase in the yield earned on interest-earning assets and the $201.1 million, or 11%, increase in average interest-earning assets. Southwest's average loans increased $151.8 million, or 10%, and the related yield increased to 7.43% for the third quarter of 2005 from 6.35% in 2004. During the same period, average investment securities increased $47.0 million, or 22%, and the related yield increased to 3.74% from 3.60%. The increase in total interest expense can be attributed to the 107 basis point increase in the rates paid on interest-bearing liabilities and the $134.9 million, or 9%, increase in average interest-bearing liabilities. The decrease in interest expense on subordinated debentures is due to the redemption of one issue of subordinated debentures during the second quarter 2005 partially offset by rate increases on the remaining two variable rate issuances of subordinated debentures. Rates paid on deposits decreased for interest-bearing demand and increased for all other types of deposits. 21 OTHER INCOME
- ------------------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ------------------------------------------------------------------------------------------------------------ Other income: ATM Service Charges $ 889 $ 794 $ 95 11.96 % Other service charges 1,610 1,548 62 4.01 Other customer fees 395 287 108 37.63 Other noninterest income 364 328 36 10.98 Gain (loss) on sales of loans receivable: Student loan sales 882 659 223 33.84 Mortgage loan sales 397 338 59 17.46 All other loan sales 54 76 (22) (28.95) Gain (loss) on sales of investment securities - (110) 110 (100.00) ------------------------------------------------------ Total other income $4,591 $3,920 $671 17.12 % ======================================================
The volume of student loan sales during the third quarter 2005 was $226.8 million compared to $148.1 million during the third quarter 2004, which led to the increase in gain on sales of student loans indicated in the table above. The major factor in the increase of other customer fees was a $59,000 increase in letter of credit fees. An increase in surcharge rates at some cash machines, a larger number of cash machines being operated, and the relocation of existing cash machines to higher transaction volume areas all contributed to the increase in ATM service charges. Southwest's multi-state ATM network operated 292 ATM machines in 27 states at September 30, 2005 compared to 286 ATM machines in 25 states at September 30, 2004. OTHER EXPENSE
- ------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits $ 6,173 $ 5,563 $ 610 10.97 % Occupancy 2,704 2,500 204 8.16 FDIC and other insurance 124 110 14 12.73 Other real estate 230 66 164 248.48 General and administrative 3,494 2,998 496 16.54 ---------------------------------------------------------- Total other expense $12,725 $11,237 $1,488 13.24 % ==========================================================
Salaries and employee benefits increased $610,000 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 360 at the end of the third quarter of 2004 to 371 at the end of the third quarter of 2005. The primary factor in the increase of occupancy expense was a $73,000 increase in building rental expenses due to office expansion in Texas and Wichita, Kansas. The increase in other real estate expenses occurred as we continued operations of certain acquired properties and prepared other properties to be sold. 22 FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 and 2004 Net income for the first nine months of 2005 of $16.4 million represented an increase of $2.8 million, or 20%, over the $13.7 million earned in the first nine months of 2004. Diluted earnings per share were $1.24 compared to $1.09, a 14% increase. The increase in net income was primarily the result of a $11.7 million, or 23%, increase in net interest income (fueled by loan growth and increased interest margin), and a $2.2 million, or 21%, increase in other income (due mainly to increased service charges on deposit accounts and gains on sales of loans), offset in part by a $6.3 million, or 19%, increase in other expense (mainly as a result of increased salaries and employee benefits, other real estate, and general and administrative expenses), a $3.3 million, or 41%, increase in the provision for loan losses and a $1.5 million, or 19%, increase in taxes on income. On an operating segment basis, the increase in net income was led by a $2.3 million increase and a shift from a net deficit to net income from Other Operations and a $1.1 million increase in net income from the Secondary Market segment, partially offset by a $501,000 decrease in net income from the Oklahoma Banking segment, and a $131,000 decrease in net income from the Other States Banking segment. The Secondary Market segment contributed the largest portion ($8.1 million) of Southwest's net income in the first nine months 2005. 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. NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ---------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $93,457 $68,468 $24,989 36.50 % Investment securities: U.S. government and agency obligations 5,447 4,573 874 19.11 Mortgage-backed securities 459 502 (43) (8.57) State and political subdivisions 139 344 (205) (59.59) Other securities 568 496 72 14.52 Other interest-earning assets 69 7 62 885.71 ------------------------------------------------------- Total interest income 100,139 74,390 25,749 34.61 Interest expense: Interest-bearing demand 222 240 (18) (7.50) Money market accounts 7,201 4,425 2,776 62.73 Savings accounts 16 14 2 14.29 Time deposits of $100,000 or more 14,304 6,468 7,836 121.15 Other time deposits 6,712 4,111 2,601 63.27 Other borrowings 5,026 4,183 843 20.15 Subordinated debentures 3,281 3,296 (15) (0.46) ------------------------------------------------------- Total interest expense 36,762 22,737 14,025 61.68 ------------------------------------------------------- Net interest income $63,377 $51,653 $11,724 22.70 % =======================================================
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. 23 Yields on Southwest's interest-earning assets increased 94 basis points, and the rates paid on Southwest's interest-bearing liabilities increased 82 basis points, resulting in an increase in the interest rate spread to 3.91% for the first nine months of 2005 from 3.79% for the first nine month of 2004. During the same periods, annualized net interest margin increased to 4.31% from 4.07% and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 116.13% from 115.82%. The principal factors in the increase of interest income was the $271.1 million, or 16%, increase in average interest-earning assets and the 94 basis point increase in the yield earned on interest-earning assets. Southwest's average loans increased $245.8 million, or 17%, and the related yield increased to 7.25% for the first nine months of 2005 from 6.19% in 2004. During the same period, average investment securities increased $23.3 million, or 11%, and the related yield increased to 3.72% from 3.69%. The increase in total interest expense can be attributed to the 82 basis point increase in the rates paid on interest-bearing liabilities and the $229.5 million, or 16%, increase in average interest-bearing liabilities. The decrease in interest expense on subordinated debentures is due to the redemption of one issue of subordinated debentures during the second quarter 2005 partially offset by rate increases on the remaining two variable rate issuances of subordinated debentures. Rates paid on deposits decreased for interest-bearing demand and increased for all other types of deposits. OTHER INCOME
- ----------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ----------------------------------------------------------------------------------------------------------- Other income: ATM Service Charges $2,565 $2,319 $ 246 10.61 % Other service charges 4,455 4,162 293 7.04 Other customer fees 1,137 833 304 36.49 Other noninterest income 1,230 731 499 68.26 Gain (loss) on sales of loans receivable: Student loan sales 2,088 1,178 910 77.25 Mortgage loan sales 934 920 14 1.52 All other loan sales 80 288 (208) (72.22) Gain (loss) on sales of investment securities - (109) 109 (100.00) ------------------------------------------------------ Total other income $12,489 $10,322 $2,167 20.99 % ======================================================
The $499,000 increase in other noninterest income occurred primarily due to a $336,000 increase in consulting fees generated by Southwest's consulting subsidiaries, HSSI and BCG, and a $105,000 increase in fees received due to cash payment delays on student loan sales. The increase in other service charges occurred primarily in overdraft service charges which increased $277,000 due to repricing those service charge rates earlier in the year to be more consistent with other financial institutions in Southwest's markets. An increase in surcharge rates at some cash machines, more cash machines being operated, and the relocation of existing cash machines to higher transaction volume areas all contributed to the increase in ATM service charges. Southwest's multi-state ATM network operated 292 ATM machines in 27 states at September 30, 2005 compared to 286 ATM machines in 25 states at September 30, 2004. 24 OTHER EXPENSE
- ---------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2005 2004 $ CHANGE % CHANGE - ---------------------------------------------------------------------------------------------- Other expenses: Salaries and employee benefits $18,724 $15,893 $2,831 17.81 % Occupancy 7,388 6,996 392 5.60 FDIC and other insurance 360 301 59 19.60 Other real estate 770 107 663 619.63 General and administrative 11,411 9,054 2,357 26.03 ------------------------------------------------------- Total other expenses $38,653 $32,351 $6,302 19.48 % =======================================================
Salaries and employee benefits increased $2.8 million 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 335 at the end of 2003 to 360 at the end of the third quarter of 2004 to 371 at the end of the third quarter of 2005. The primary factor in the increase of occupancy expense was a $202,000 increase in building rental expenses due to office expansion in Texas and Wichita, Kansas. Other increases in line items such as security services, utilities, equipment rental and maintenance contracts also occurred due to these additional offices. The increase in other real estate expenses occurred as we continued operations of certain acquired properties and prepared other properties to be sold. The increase in general and administrative expense was due primarily to the required write-off of $970,000 in unamortized issuance costs related to the SBI Capital trust preferred securities that were redeemed in June 2005, a $438,000 provision for unfunded loan commitments, a $206,000 increase in fees paid in connection with government-guaranteed loans, a $181,000 increase in accounting fees ($142,500 of which was the cost of work performed for Sarbanes-Oxley Section 404 compliance and attestation), and a $179,000 increase in legal fees. * * * * * * * PROVISIONS FOR LOAN LOSSES AND FOR UNFUNDED LOAN COMMITMENTS Southwest makes provisions for loan losses in amounts necessary to maintain the allowance for loan losses and the reserve for unfunded loan commitments at the levels Southwest determines is appropriate based on a systematic methodology. (See Note 6, "Allowance for Loan Losses and Reserve for Unfunded Loan Commitments," in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses of $21.9 million increased $2.9 million, or 15%, from year-end 2004. A provision for loan losses of $11.4 million was recorded in the first nine months of 2005, an increase of $3.3 million, or 41%, from the first nine months of 2004. A provision for loan losses of $4.1 million was recorded for the third quarter of 2005, an increase of $242,000, or 6%, from the third quarter of 2004. (See Note 5, "Loans Receivable," in the Notes to Unaudited Consolidated Financial Statements.) At the beginning of 2005, Southwest established a reserve for unfunded loan commitments as a liability on Southwest's statement of financial condition. The reserve formerly was presented within the allowance for loan losses. At September 30, 2005, this reserve for unfunded loan commitments was $1.4 million, a $438,000, or 46%, increase from the amount previously included in the allowance for loan losses at December 31, 2004. The amounts of the allowance for loan losses and other financial information for December 31, 2004 and September 30, 2004 presented in this report also reflect the reclassification of the reserve for unfunded loan commitments from the allowance for loan losses to a separate liability account. The provision for unfunded loan commitments is a component of general and administrative expense on Southwest's consolidated statements of operations. 25 TAXES ON INCOME Southwest's income tax expense was $9.4 million and $7.9 million for the first nine months of 2005 and 2004, respectively, an increase of $1.5 million, or 19%, and was $3.3 million and $2.9 million for the third quarters of 2005 and 2004, respectively, an increase of $412,000, or 14%. 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 student loans, residential mortgage loans, and SBA loans, and available for sale investments. 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. 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 ("Sallie Mae"), 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 $990,000 at September 30, 2005. Stillwater National has approved federal funds purchase lines totaling $350.5 million with nine banks; $1.5 million was outstanding on these lines at September 30, 2005. In addition, Stillwater National has available a $200.0 million line of credit from Sallie Mae and a $327.7 million line of credit from the FHLB and SNB Wichita has a $10.2 million line of credit from the FHLB. Borrowings under the Sallie Mae line would be secured by student loans. Borrowings under the FHLB lines are secured by investment securities and loans. The Sallie Mae line expires April 30, 2007; no amount was outstanding on this line at September 30, 2005. The Stillwater National FHLB line of credit had an outstanding balance of $146.5 million at September 30, 2005; no amount was outstanding on the SNB Wichita line of credit at the FHLB at September 30, 2005. See also "Deposits and Other Borrowings" on page 18. 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 and agency obligations, 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 2005, 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, 2005 SEPTEMBER 30, 2004 - -------------------------------------------------------------------------------------------------------------------- FUNDS FUNDS REPURCHASE BORROWED REPURCHASE BORROWED (Dollars in thousands) AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB - -------------------------------------------------------------------------------------------------------------------- Amount outstanding at end of period $41,581 $146,500 $36,615 $165,890 Weighted average rate paid at end of period 2.52% 3.97% 0.76% 3.08% Average Balance: For the three months ended $36,264 $129,317 $32,667 $190,696 For the nine months ended $33,861 $124,689 $37,076 $166,491 Average Rate Paid: For the three months ended 2.52% 3.96% 0.76% 2.83% For the nine months ended 2.12% 3.79% 0.66% 2.89% Maximum amount outstanding at any month end $47,717 $146,500 $44,465 $189,788
26 During the first nine months of 2005, cash and cash equivalents increased by $63.3 million, or 263%, to $87.4 million. This increase was the net result of cash provided from financing activities of $175.2 million (primarily from an increase in deposits) and cash provided from operating activities of $5.3 million, offset in part by cash used in net loan origination and other investing activities of $117.2 million. 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 $180.4 million and cash used in operating activities of $104.0 million, offset in part by cash provided from financing activities of $281.4 million. CAPITAL RESOURCES In the first nine months of 2005, total shareholders' equity increased $40.5 million, or 32%, to $166.5 million due primarily to the $39.5 million net proceeds from the common stock offering. Earnings, net of cash dividends declared on common stock, contributed $13.4 million to shareholders' equity during this nine month period. The sale or issuance of common stock through the dividend reinvestment plan, the employee stock purchase plan, and the employee stock option plan and the issuance of restricted stock contributed an additional $2.0 million to shareholders' equity in the first nine months of 2005, 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 $(2.8) million at September 30, 2005 compared to $(797,000) at December 31, 2004. Southwest purchased $12.4 million in shares during the first nine months of 2005. 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, 2005, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 14.06%, a Tier I risk-based capital ratio of 12.80%, and a leverage ratio of 10.24%. As of September 30, 2005, Stillwater National and SNB Wichita also met the criteria for classification as "well-capitalized" institutions under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest, Stillwater National or SNB Wichita by Federal bank or thrift regulators. Southwest declared a dividend of $0.075 per common share payable on October 1, 2005 to shareholders of record as of September 19, 2005. 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, 2004. 27 CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES As required by SEC rules, Southwest's management evaluated the effectiveness of Southwest's disclosure controls and procedures as of September 30, 2005. Southwest's Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwest's Chief Executive Officer and Chief Financial Officer concluded that Southwest's disclosure controls and procedures were effective as of September 30, 2005. FIRST NINE MONTHS 2005 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change occurred during the first nine months of 2005 that has materially affected, or is reasonably likely to materially affect, Southwest's internal control 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. Readers of this report should be aware that non-GAAP ratios and other measures presented by some banking organizations or financial analysts may not be directly comparable to similarly named ratios or other measures used by Southwest or other banking organizations. 28 PART II. OTHER INFORMATION Item 1. Legal proceedings None Item 2. Unregistered sales of equity securities and use of proceeds There were no unregistered sales of equity securities by Southwest during the quarter ended September 30, 2005. The following table provides information on Southwest's purchases of its common stock during the three months ended September 30, 2005.
Issuer Purchases of Equity Securities (1) --------------------------------------------------------------------------------------------------------- (a) Total (c) Total Number of Number of Shares Purchased as (d) Maximum Number Shares Part of Publicly that May Yet Be Purchased (b) Average Price Announced Plans or Purchased Under the Period (3) Paid per Share Programs Plans or Programs (2) --------------------------------------------------------------------------------------------------------- July 2005 17,840 $18.00 17,840 - --------------------------------------------------------------------------------------------------------- August 2005 - - - - --------------------------------------------------------------------------------------------------------- September 2005 - - - - ---------------------------------------------------------------------------------------------------------
(1) Includes purchases of Southwest's stock made by or on behalf of the Company or any affiliated purchasers of the Company as defined in Securities and Exchange Commission Rule 10b-18. (2) In April 2004, Southwest publicly announced a stock repurchase program that permitted the repurchase of up to 5%, or approximately 500,000 shares, of its outstanding common stock. That program replaced a similar plan that expired in 2003. The April 2004 plan expired on March 31, 2005, and has not been replaced. (3) All of the shares shown were purchased pursuant to a Selling Shareholder Agreement (the "Agreement") dated May 13, 2005, with Betty B. Kerns ("BBK"), the Joyce P. Berry Revocable Trust, the Joe M. Berry Trust, the Berry Charitable Remainder Trust, and BKP, L.L.C. (the "Selling Shareholders"). Under the terms of the Agreement, Southwest agreed to repurchase from the Selling Shareholders an aggregate of 689,796 shares of Southwest common stock, par value $1.00 per share, for a price per share of $18.00. Southwest purchased 671,956 shares under this agreement in May 2005. 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 Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications 29 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, 2005 ------------------------------------------- -------------------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) By: /s/ Kerby Crowell November 7, 2005 ------------------------------------------- --------------------------- Kerby Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) 30 EX-31.A 2 b409715_ex31a.txt CERTIFICATION OF RICK GREEN 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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; and 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 registrant's internal control over financial reporting. Date: November 7, 2005 /s/ Rick Green ----------------------- --------------------------------------- Rick Green President and Chief Executive Officer (Principal Executive Officer) EX-31.B 3 b409715_ex31b.txt CERTIFICATION OF KERBY CROWELL 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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; and 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 registrant's internal control over financial reporting. Date: November 7, 2005 /s/ Kerby Crowell ----------------------- ------------------------------------------ Kerby Crowell Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) EX-32.A 4 b409715_ex32a.txt CERTIFICATION OF RICK GREEN, PRESIDENT & CEO 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 and nine month periods ended September 30, 2005, 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 7, 2005 ---------------------------------------- ------------------------------ Rick Green Date President and Chief Executive Officer (Principal Executive Officer) EX-32.B 5 b409715_ex32b.txt CERTIFICATION OF KERBY CROWELL, EVP, CFO & SEC. 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 and nine month periods ended September 30, 2005, 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 7, 2005 ------------------------------------------ ------------------------------ Kerby Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----