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
June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
608 South Main Street 74074
Stillwater, Oklahoma (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (405) 372-2230
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
[ x ] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ x ] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
12,081,388
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1 of 30
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
June 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Operations for the
three and six months ended June 30, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 5
Unaudited Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 2004 6
Unaudited Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Unaudited Average Balances, Yields and Rates for the
three and six months ended June 30, 2004 and 2003 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION 24
SIGNATURES 26
2
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
------------ -------------
ASSETS:
Cash and cash equivalents $ 28,614 $ 33,981
Federal funds sold -- --
Investment securities:
Held to maturity, fair value $7,476 (2004) and $16,144 (2003) 7,435 15,916
Available for sale, amortized cost $205,158 (2004) and $176,470 (2003) 202,593 177,074
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 12,153 11,276
Loans held for sale 297,928 218,422
Loans receivable, net of allowance for loan losses
of $17,790 (2004) and $15,848 (2003) 1,183,043 1,074,566
Accrued interest receivable 12,778 11,321
Premises and equipment, net 19,509 19,818
Other assets 23,111 18,351
------------ ------------
Total assets $ 1,787,164 $ 1,580,725
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand $ 179,032 $ 167,332
Interest-bearing demand 59,699 53,955
Money market accounts 440,432 376,016
Savings accounts 7,849 6,903
Time deposits of $100,000 or more 431,314 358,130
Other time deposits 237,574 241,789
------------ ------------
Total deposits 1,355,900 1,204,125
Other borrowings 227,483 183,850
Accrued interest payable 2,668 3,375
Income tax payable 6,788 2,850
Other liabilities 5,393 4,410
Subordinated Debentures 72,180 72,180
------------ ------------
Total liabilities 1,670,412 1,470,790
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Capital surplus 7,819 6,997
Retained earnings 99,775 92,657
Accumulated other comprehensive income (loss) (1,521) 360
Treasury stock, at cost; 163,395 (2004) and 287,410 (2003) shares (1,564) (2,322)
------------ ------------
Total shareholders' equity 116,752 109,935
------------ ------------
Total liabilities & shareholders' equity $ 1,787,164 $ 1,580,725
============ ============
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except earnings per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
------- ------- ------- -------
Interest income:
Interest and fees on loans $22,419 $19,299 $43,223 $37,021
Investment securities:
U.S. Government and agency obligations 1,539 1,348 3,003 2,632
Mortgage-backed securities 155 281 343 652
State and political subdivisions 123 236 281 511
Other securities 185 147 328 290
Other interest-earning assets 2 2 3 6
------- ------- ------- -------
Total interest income 24,423 21,313 47,181 41,112
Interest expense:
Interest-bearing demand 91 115 177 196
Money market accounts 1,450 1,371 2,804 2,547
Savings accounts 4 3 9 7
Time deposits of $100,000 or more 2,054 2,274 4,008 4,517
Other time deposits 1,362 1,679 2,800 3,502
Other borrowings 1,318 1,253 2,540 2,548
Subordinated Debentures 1,079 613 2,160 1,213
------- ------- ------- -------
Total interest expense 7,358 7,308 14,498 14,530
------- ------- ------- -------
Net interest income 17,065 14,005 32,683 26,582
Provision for loan losses 2,551 2,000 4,200 3,722
Other income:
Service charges and fees 2,418 2,225 4,685 4,476
Other noninterest income 159 286 403 578
Gain on sales of loans receivable 707 1,062 1,313 1,999
Gain on sales of investment securities -- 25 1 27
------- ------- ------- -------
Total other income 3,284 3,598 6,402 7,080
Other expenses:
Salaries and employee benefits 5,171 4,921 10,330 9,233
Occupancy 2,265 1,938 4,496 3,860
FDIC and other insurance 96 78 191 156
Other real estate 24 9 41 170
General and administrative 3,046 2,347 6,056 4,768
------- ------- ------- -------
Total other expenses 10,602 9,293 21,114 18,187
------- ------- ------- -------
Income before taxes 7,196 6,310 13,771 11,753
Taxes on income 2,592 2,277 4,965 4,207
------- ------- ------- -------
Net income $ 4,604 $ 4,033 $ 8,806 $ 7,546
======= ======= ======= =======
Basic earnings per share $ 0.38 $ 0.33 $ 0.73 $ 0.63
======= ======= ======= =======
Diluted earnings per share $ 0.36 $ 0.33 $ 0.70 $ 0.62
======= ======= ======= =======
Cash dividends declared per share $ 0.07 $ 0.06 $ 0.14 $ 0.13
======= ======= ======= =======
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE SIX MONTHS
ENDED JUNE 30,
2004 2003
------------ ------------
Operating activities:
Net income $ 8,806 $ 7,546
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 4,200 3,722
Deferred taxes (3,637) (756)
Depreciation and amortization expense 1,301 1,313
Amortization of premiums and accretion of
discounts on securities, net 90 95
Amortization of intangibles 159 236
Tax benefit from exercise of stock options 438 706
(Gain) Loss on sales/calls of securities (1) (27)
(Gain) Loss on sales of loans receivable (1,313) (1,999)
(Gain) Loss on sales of premises/equipment (7) (57)
(Gain) Loss on other real estate owned, net -- 109
Proceeds from sales of residential mortgage loans 42,883 103,473
Residential mortgage loans originated for resale (43,489) (104,041)
Proceeds from sales of government-guaranteed student loans 209,457 107,164
Government-guaranteed student loans originated for resale (288,357) (77,136)
Changes in assets and liabilities:
Accrued interest receivable (1,457) (1,047)
Other assets 394 (1,510)
Income taxes payable 3,938 --
Accrued interest payable (707) (1,811)
Other liabilities 884 1,241
------------ ------------
Net cash (used in) provided from operating activities (66,418) 37,221
------------ ------------
Investing activities:
Proceeds from sales of available for sale securities -- 6,540
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 8,468 8,955
Available for sale securities 43,331 40,969
Purchases of Federal Reserve Bank and Federal Home Loan
Bank stock (877) (1,802)
Purchases of available for sale securities (72,095) (61,311)
Loans originated and principal repayments, net (111,872) (187,828)
Purchases of premises and equipment (1,161) (1,762)
Proceeds from sales of premises and equipment 176 155
Proceeds from sales of other real estate owned 120 518
------------ ------------
Net cash (used in) provided from investing activities (133,910) (195,566)
------------ ------------
Financing activities:
Net increase (decrease) in deposits 151,775 157,015
Net increase (decrease) in other borrowings 43,633 (13,725)
Net proceeds from issuance of common stock 1,142 1,541
Net proceeds from issuance of subordinated debentures -- 20,000
Common stock dividends paid (1,589) (1,369)
------------ ------------
Net cash (used in) provided from financing activities 194,961 163,462
------------ ------------
Net increase (decrease) in cash and cash equivalents (5,367) 5,117
Cash and cash equivalents,
Beginning of period 33,981 34,847
------------ ------------
End of period $ 28,614 $ 39,964
============ ============
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
ACCUMULATED TOTAL
OTHER SHARE-
COMMON STOCK CAPITAL RETAINED COMPREHENSIVE TREASURY HOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY
---------------------------------------------------------------------------------------------
Balance, January 1, 2004 12,243,042 $12,243 $6,997 $92,657 $ 360 $(2,322) $109,935
Cash dividends declared:
Common, $0.14 per share -- -- -- (1,688) -- -- (1,688)
Common stock issued:
Employee Stock Option Plan -- -- 331 -- -- 727 1,058
Employee Stock Purchase Plan -- -- 22 -- -- 13 35
Dividend Reinvestment Plan -- -- 31 -- -- 18 49
Tax benefit related to exercise
of stock options -- -- 438 -- -- -- 438
Other comprehensive income
(loss), net of tax -- -- -- -- (1,881) -- (1,881)
Net income -- -- -- 8,806 -- -- 8,806
---------------------------------------------------------------------------------------------
Balance, June 30, 2004 12,243,042 $12,243 $7,819 $99,775 $(1,521) $(1,564) $116,752
=============================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
------- ------- ------- -------
Net income $ 4,604 $ 4,033 $ 8,806 $ 7,546
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities (4,073) 304 (3,168) (557)
Reclassification adjustment for (gains) losses
arising during the period -- (25) (1) (27)
------- ------- ------- -------
Other comprehensive income (loss), before tax (4,073) 279 (3,169) (584)
Tax (expense) benefit related to items
of other comprehensive income (loss) 1,656 (116) 1,288 31
------- ------- ------- -------
Other comprehensive income (loss), net of tax (2,417) 163 (1,881) (553)
------- ------- ------- -------
Comprehensive income $ 2,187 $ 4,196 $ 6,925 $ 6,993
======= ======= ======= =======
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 six months
ended June 30, 2004 and the cash flows for the six months ended June 30, 2004
should not be considered indicative of the results to be expected for the full
year. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year
ended December 31, 2003.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest") and its wholly owned
subsidiaries, the Stillwater National Bank and Trust Company ("Stillwater
National"), SNB Bank of Wichita ("SNB Wichita"), Healthcare Strategic Support,
Inc. ("HSSI"), and Business Consulting Group, Inc. ("BCG"). All significant
intercompany transactions and balances have been eliminated in consolidation.
NOTE 3: INVESTMENT SECURITIES
At June 30, 2004, Southwest had gross unrealized losses in its securities
portfolio totaling $2.6 million. Eleven securities with a par value of $23.1
million and an unrealized loss of $822,000 had been in an unrealized loss
position for more than twelve months. These gross unrealized losses occurred due
to increases in interest rates and spreads rather than credit impairment.
Southwest has the intent and ability to hold these securities until the
unrealized loss is recovered.
NOTE 4: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Tulsa, and Oklahoma City areas of Oklahoma; in
Wichita, Kansas; and in the Dallas, Texas metropolitan area. As a result, the
collectibility of Southwest's loan portfolio can be affected by changes in the
general economic conditions in these three states and in those metropolitan
areas. At June 30, 2004 and December 31, 2003, substantially all of Southwest's
loans were collateralized with real estate, inventory, accounts receivable,
and/or other assets, or were guaranteed by agencies of the United States
Government.
At June 30, 2004, loans to individuals and businesses in the healthcare industry
totaled approximately $354.9 million, or 24% of total loans. Southwest does not
have any other concentrations of loans to individuals or businesses involved in
a single industry totaling 5% or more of total loans.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $14.3 million at June 30, 2004. During the
first six months of 2004, $64 in interest income was received on nonaccruing
loans. If interest on those loans had been accrued for the six months ended June
30, 2004, additional total interest income of $405,000 would have been recorded.
7
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003
---------------- -----------------
(Dollars in thousands)
Balance at beginning of period $ 15,848 $ 11,888
Loans charged-off:
Real estate mortgage 613 717
Real estate construction -- 3
Commercial 1,766 3,915
Installment and consumer 143 442
---------------- ----------------
Total charge-offs 2,522 5,077
Recoveries:
Real estate mortgage 119 173
Commercial 95 230
Installment and consumer 50 112
---------------- ----------------
Total recoveries 264 515
---------------- ----------------
Net loans charged-off 2,258 4,562
Provision for loan losses 4,200 8,522
---------------- ----------------
Balance at end of period $ 17,790 $ 15,848
================ ================
Loans outstanding:
Average $ 1,426,632 $ 1,269,216
End of period 1,498,761 1,308,836
Net charge-offs to total average loans (annualized) 0.32% 0.36%
Allowance for loan losses to total loans 1.19% 1.21%
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates.
AT AT
JUNE 30, 2004 DECEMBER 31, 2003
---------------- ----------------
(Dollars in thousands)
Nonaccrual loans (1) $ 14,301 $ 14,530
Past due 90 days or more (2) 3,663 1,384
---------------- ----------------
Total nonperforming loans 17,964 15,914
Other real estate owned 2,087 1,699
---------------- ----------------
Total nonperforming assets $ 20,051 $ 17,613
================ ================
Nonperforming loans to loans receivable 1.20% 1.22%
Allowance for loan losses to nonperforming loans 99.03% 99.59%
Nonperforming assets to loans receivable and
other real estate owned 1.34% 1.34%
(1) The government-guaranteed portion of loans included in these totals was
$1.4 million (2004) and $2.5 million (2003).
(2) The government-guaranteed portion of loans included in these totals was
$215,000 (2004) and $146,000 (2003).
8
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and a general allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual. The use of
these loss factors is intended to reduce the differences between estimated
losses inherent in the portfolio and observed losses. Formula allowances also
are established for loans that do not have specific allowances according to the
application of credit risk factors. These factors are set by management to
reflect its assessment of the relative level of risk inherent in each grade.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to individual loans that
management believes indicate the probability that losses may be incurred in an
amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or on the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The general allowance is based upon
management's evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances. These factors may include
general economic and business conditions affecting lending areas, credit quality
trends (including trends in delinquencies and nonperforming loans expected to
result from existing conditions), loan volumes and concentrations, specific
industry conditions within portfolio categories, recent loss experience in
particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. There were no changes in
estimation methods or assumptions that affected the methodology for assessing
the appropriateness of the allowance during the second quarter of 2004.
Southwest determined the level of the allowance for loan losses at June 30,
2004, was appropriate, based on that methodology.
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few such loans may cause a significant increase in nonperforming assets, and may
lead to a material increase in charge-offs and the provision for loan losses in
future periods.
NOTE 6: STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan
(the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on an annual
basis and expire from five to ten years after the date of grant. Southwest
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Stock Plans; accordingly, no compensation expense related
to the grants of stock options has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plans
been determined based upon the fair value of the options at their grant date as
prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
9
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------- -------------
(Dollars in thousands,except per share data)
Net income, as reported $4,604 $4,033 $8,806 $7,546
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (53) (66) (170) (172)
------------ ------------ ------------- -------------
Proforma net income $4,551 $3,967 $8,636 $7,374
============ ============ ============= =============
Earnings per share:
Basic -- as reported $0.38 $0.33 $0.73 $0.63
Basic -- proforma $0.38 $0.33 $0.72 $0.63
Diluted -- as reported $0.36 $0.33 $0.70 $0.62
Diluted -- proforma $0.36 $0.33 $0.69 $0.61
NOTE 7: EARNINGS PER SHARE
Basic earnings per share is computed based upon net income divided by the
weighted average number of shares outstanding during each period. Diluted
earnings per share is computed based upon net income divided by the weighted
average number of shares outstanding during each period adjusted for the effect
of dilutive potential shares calculated using the treasury stock method. At June
30, 2004 and 2003, there were no antidilutive options to purchase common shares.
Per share amounts in this report have been restated to reflect the 2-for-1 stock
split declared on July 24, 2003.
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
---------------- --------------- ---------------- ----------------
Weighted average shares outstanding:
Basic earnings per share 12,074,336 11,792,068 12,034,868 11,723,912
Effect of dilutive securities:
Stock options 472,351 407,032 486,521 437,762
---------------- --------------- ---------------- ----------------
Weighted average shares outstanding:
Diluted earnings per share 12,546,687 12,199,100 12,521,389 12,161,674
================ =============== ================ ================
NOTE 8: SHAREHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
On April 22, 2004, the Board of Directors of Southwest authorized a program for
the repurchase of up to 5% (603,675 shares) of Southwest's outstanding common
stock, par value $1.00 per share, in connection with shares expected to be
issued under Southwest's dividend reinvestment, stock option, and employee
benefit plans and for other corporate purposes. The share repurchases are
expected to be made primarily on the open market from time to time until April
1, 2005, or earlier termination of the repurchase program by the Board of
Directors. Repurchases under the program will be made at the discretion of
management based upon market, business, legal, accounting, and other factors.
This program, which has been publicly announced, replaced a publicly announced
program that expired on March 31, 2004. No shares were repurchased under either
share repurchase program during 2004.
10
SHAREHOLDER RIGHTS PLAN
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board of Directors believes are
unfair or otherwise not in the best interests of Southwest and its shareholders.
Under the Rights Plan, each holder of record of Southwest's common stock, as of
the close of business on April 22, 1999, received one right per common share.
The rights generally become exercisable if an acquiring party accumulates, or
announces an offer to acquire, 10% or more of Southwest's voting stock. The
rights will expire on April 22, 2009. Each right will entitle the holder (other
than the acquiring party) to buy, at the right's then current exercise price,
Southwest's common stock or equivalent securities having a value of twice the
right's exercise price. The exercise price of each right was initially set at
$36.67. In addition, upon the occurrence of certain events, holders of the
rights would be entitled to purchase, at the then current exercise price, common
stock or equivalent securities of an acquiring entity worth twice the exercise
price. Under the Rights Plan, Southwest also may exchange each right, other than
rights owned by an acquiring party, for a share of its common stock or
equivalent securities.
NOTE 9: OPERATING SEGMENTS
Southwest operates four principal segments: Oklahoma banking, Other states
banking, loans originated for sale in the secondary market ("Secondary market"),
and an Other operations segment. The Oklahoma banking segment consists of three
operating units that provide lending and deposit services to customers in the
state of Oklahoma. The Other states banking segment consists of three operating
units that provide lending and deposit services to the customers in the states
of Texas and Kansas. The Secondary market segment consists of two operating
units that provide government-guaranteed student lending services to
post-secondary students in Oklahoma and several other states and residential
mortgage lending services to customers in Oklahoma, Texas, and Kansas.
Southwest's fund management unit is included in Other operations. The primary
purpose of the fund management unit is to manage Southwest's overall liquidity
needs and interest rate risk. Each segment borrows funds from and provides funds
to the funds management unit as needed to support its operations.
Southwest identifies reportable segments by type of service provided and
geographic location. Operating results are adjusted for intercompany loan
participations and borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of
Southwest. Expenses for consolidated back-office operations are allocated to
operating segments based on estimated uses of those services. General overhead
expenses such as executive administration, accounting and internal audit are
allocated based on the direct expense and/or deposit and loan volumes of the
operating segment. Income tax expense for the operating segments is calculated
essentially at statutory rates. The Other operations segment records the tax
expense or benefit necessary to reconcile the consolidated financial statements.
The following table summarizes financial results by operating segment:
For the Six Months Ended June 30, 2004
-----------------------------------------------------------------------------
OKLAHOMA OTHER STATES SECONDARY OTHER TOTAL
BANKING BANKING MARKET OPERATIONS COMPANY
-----------------------------------------------------------------------------
(Dollars in thousands)
Net interest income $ 20,674 $ 6,357 $ 7,735 $ (2,083) $ 32,683
Provision for loan losses 2,699 1,501 -- -- 4,200
Other income 3,516 480 1,152 1,254 6,402
Other expenses 13,510 2,928 2,546 2,130 21,114
- ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 7,981 2,408 6,341 (2,959) 13,771
Taxes on income 2,944 816 2,356 (1,151) 4,965
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 5,037 $ 1,592 $ 3,985 $ (1,808) $ 8,806
===========================================================================================================================
Fixed asset expenditures $ 239 $ 293 $ 2 $ 627 $ 1,161
Total assets at period end $895,387 $316,515 $298,317 $276,945 $1,787,164
11
For the Six Months Ended June 30, 2003
-----------------------------------------------------------------------------
OKLAHOMA OTHER STATES SECONDARY OTHER TOTAL
BANKING BANKING MARKET OPERATIONS COMPANY
-----------------------------------------------------------------------------
(Dollars in thousands)
Net interest income $ 20,405 $ 3,307 $ 4,093 $ (1,223) $ 26,582
Provision for loan losses 2,563 1,218 (59) -- 3,722
Other income 3,396 78 1,830 1,776 7,080
Other expenses 12,409 1,608 2,057 2,113 18,187
- ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 8,829 559 3,925 (1,560) 11,753
Taxes on income 3,306 212 1,483 (794) 4,207
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 5,523 $ 347 $ 2,442 $ (766) $ 7,546
===========================================================================================================================
Fixed asset expenditures $ 285 $ 550 $ 54 $ 873 $ 1,762
Total assets at period end $908,419 $185,711 $183,113 $244,522 $1,521,765
12
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
FOR THE THREE MONTHS ENDED JUNE 30,
2004 2003
------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
------------------------------------------------------------
ASSETS:
Loans receivable $1,473,538 6.12% $1,275,042 6.07%
Investment securities 218,987 3.68 187,307 4.31
Other interest-earning assets 1,436 0.56 969 0.83
------------------------------------------------------------
Total interest-earning assets 1,693,961 5.80 1,463,318 5.84
Noninterest-earning assets 65,489 47,597
---------------- ----------------
Total assets $1,759,450 $1,510,915
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 61,757 0.59% $ 58,660 0.79%
Money market accounts 414,304 1.41 308,994 1.78
Savings accounts 7,629 0.21 6,344 0.19
Time deposits 662,647 2.07 649,070 2.44
------------------------------------------------------------
Total interest-bearing deposits 1,146,337 1.74 1,023,068 2.13
Other borrowings 243,138 2.18 211,267 2.38
Subordinated debentures 72,180 5.98 26,919 9.01
------------------------------------------------------------
Total interest-bearing liabilities 1,461,655 2.02 1,261,254 2.32
Noninterest-bearing demand 171,977 131,899
Other noninterest-bearing liabilities 9,931 16,940
Shareholders' equity 115,887 100,822
---------------- ----------------
Total liabilities and shareholders' equity $1,759,450 $1,510,915
================ ================
Interest rate spread 3.78% 3.52%
============== ==============
Net interest margin (1) 4.05% 3.84%
============== ==============
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.89% 116.02%
================ ================
FOR THE SIX MONTHS ENDED JUNE 30,
2004 2003
-------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
-------------------------------------------------------------
ASSETS:
Loans receivable $1,426,632 6.09% $1,230,262 6.07%
Investment securities 212,910 3.74 184,944 4.45
Other interest-earning assets 1,054 0.57 1,200 1.01
-------------------------------------------------------------
Total interest-earning assets 1,640,596 5.78 1,416,406 5.85
Noninterest-earning assets 64,121 50,923
---------------- ----------------
Total assets $1,704,717 $1,467,329
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 60,686 0.59% $ 56,455 0.70%
Money market accounts 400,096 1.41 290,435 1.77
Savings accounts 7,478 0.24 6,246 0.23
Time deposits 647,182 2.12 631,089 2.56
-------------------------------------------------------------
Total interest-bearing deposits 1,115,442 1.77 984,225 2.21
Other borrowings 227,728 2.24 213,519 2.41
Subordinated debentures 72,180 5.99 26,356 9.15
-------------------------------------------------------------
Total interest-bearing liabilities 1,415,350 2.06 1,224,100 2.39
Noninterest-bearing demand 165,231 128,069
Other noninterest-bearing liabilities 9,835 15,927
Shareholders' equity 114,301 99,233
---------------- ----------------
Total liabilities and shareholders' equity $1,704,717 $1,467,329
================ ================
Interest rate spread 3.72% 3.46%
============== ===============
Net interest margin (1) 4.01% 3.78%
============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.91% 115.71%
================ ================
(1) Net interest margin = annualized net interest income / average
interest-earning assets
13
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This management's discussion and analysis of
financial condition and results of operations and other portions of this report
include forward-looking statements such as: statements of Southwest's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; expectations regarding future financial performance of Southwest and
its operating segments; assessments of loan quality, probable loan losses, and
the amount and timing of loan payoffs; liquidity, contractual obligations,
off-balance sheet risk, and market or interest rate risk; and statements of
Southwest's ability to achieve financial and other goals. These forward-looking
statements are subject to significant uncertainties because they are based upon:
the amount and timing of future changes in interest rates, market behavior, and
other economic conditions; future laws, regulations, and accounting principles;
and a variety of other matters. Because of these uncertainties, the actual
future results may be materially different from the results indicated by these
forward-looking statements. In addition, Southwest's past growth and performance
do not necessarily indicate its future results.
You should read this management's discussion and analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's unaudited consolidated financial statements and the accompanying
notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a financial holding company for the
Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of
Wichita ("SNB Wichita"), Healthcare Strategic Support, Inc., and Business
Consulting Group, Inc. ("BCG"). Southwest is an independent institution.
Southwest offers a broad range of commercial and consumer banking and other
financial services through full service offices in Stillwater, Oklahoma City,
Tulsa and Chickasha, Oklahoma, Wichita, Kansas and metropolitan Dallas, Texas;
loan production offices on the campuses of the University of Oklahoma Health
Sciences Center in Oklahoma City, Oklahoma State University-Tulsa, and in
metropolitan Dallas, Texas; a marketing presence in the Student Union at
Oklahoma State University-Stillwater; and on the Internet, through SNB
DirectBanker(R). Southwest devotes substantial efforts to marketing and
providing services to local businesses, their primary employees, and to other
managers and professionals living and working in Southwest's market areas.
Southwest has received regulatory approval to expand further in Texas by opening
a second branch office in the Dallas metropolitan area. The office is located in
Preston Center at 5950 Berkshire Lane, Dallas, Texas where it is currently
operating as a loan production office. The Preston Center location will begin
operating as a full service branch late in the third quarter of 2004.
Southwest has established and pursued a strategy of independent operation for
the benefit of all of its shareholders. Southwest has grown from $434 million in
assets since becoming a public company at year-end 1993, to nearly $1.8 billion
at June 30, 2004, without acquiring other financial institutions. Southwest
considers acquisitions of other financial institutions and other companies from
time to time, although it does not have any specific agreements or
understandings for any such acquisition at present. Southwest also considers,
from time to time, the establishment of new lending, banking and other offices
in additional geographic markets. Southwest also extends loans to borrowers in
Oklahoma and neighboring states through participations with correspondent banks.
14
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $1.8 billion at June 30, 2004 and $1.6 billion at
December 31, 2003.
LOANS
Total loans, including loans held for sale, were $1.5 billion at June 30, 2004,
a 15% increase ($189.9 million) from December 31, 2003. Southwest experienced
increases in all categories of loans as shown in the following table:
JUNE 30, DECEMBER 31,
2004 2003 $ CHANGE % CHANGE
---------------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage
Commercial $ 461,435 $ 402,596 $ 58,839 14.61 %
One-to-four residential 84,633 83,250 1,383 1.66
Real estate construction 254,982 230,292 24,690 10.72
Commercial 377,322 355,965 21,357 6.00
Installment and consumer
Government-guaranteed student loans 292,858 211,546 81,312 38.44
Other 27,531 25,187 2,344 9.31
--------------- --------------- ------------ --------------
Total loans $1,498,761 $1,308,836 $189,925 14.51 %
=============== =============== ============ ==============
Management determines the appropriate level of the allowance for loan losses
using a systematic methodology. (See Note 4, "Allowance for Loan Losses," in the
Notes to Unaudited Consolidated Financial Statements.) The allowance for loan
losses increased by $1.9 million, or 12%, from December 31, 2003 to June 30,
2004. At June 30, 2004, the allowance for loan losses was $17.8 million, or
1.19% of total loans and 99.03% of nonperforming loans, compared to $15.8
million, or 1.21% of total loans and 99.59% of nonperforming loans, at December
31, 2003. (See "Results of Operations-Provision for Loan Losses.")
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.4 billion at June 30, 2004, an increase of $151.8
million, or 13%, from $1.2 billion at December 31, 2003. Increases occurred in
all categories of deposits other than time deposits less than $100,000 as shown
in the following table:
JUNE 30, DECEMBER 31,
2004 2003 $ CHANGE % CHANGE
---------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing demand $ 179,032 $ 167,332 $ 11,700 6.99 %
Interest-bearing demand 59,699 53,955 5,744 10.65
Money market accounts 440,432 376,016 64,416 17.13
Savings accounts 7,849 6,903 946 13.70
Time deposits of $100,000 or more 431,314 358,130 73,184 20.44
Other time deposits 237,574 241,789 (4,215) (1.74)
--------------- --------------- ------------ --------------
Total deposits $1,355,900 $1,204,125 $151,775 12.60 %
=============== =============== ============ ==============
Stillwater National has unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Morgan Stanley Dean Witter, Citigroup Global Markets, Inc.,
Wachovia Securities LLC, UBS Financial Services, Inc., RBC Dain Rauscher, Inc.
and CountryWide Securities that total $1.2 billion. At June 30, 2004, $289.4
million in these retail certificates of deposit were included in total deposits.
Stillwater National has other brokered certificates of deposit totaling $39.7
million included in total deposits at June 30, 2004.
15
Other borrowings increased $43.6 million, or 24%, during the first six months of
2004.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $6.8 million, or 6%, due primarily to earnings
for the first six months of 2004, and stock option exercises, offset in part by
common stock dividends and a decrease in accumulated other comprehensive income
(net, after tax, unrealized gains on investment securities available for sale).
At June 30, 2004, Southwest, Stillwater National and SNB Wichita continued to
exceed all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2004 and 2003
Net income for the second quarter of 2004 of $4.6 million represented an
increase of $571,000, or 14%, over the $4.0 million earned in the second quarter
of 2003. Diluted earnings per share were $0.36 compared to $0.33, a 9% increase.
The increase in net income was primarily the result of a $2.5 million, or 21%,
increase in net interest income (fueled by substantial loan growth), offset in
part by a $551,000, or 28%, increase in the provision for loan losses, a
$314,000, or 9%, decline in other income (due mainly to lower gains on loans
sold), and a $1.3 million, or 14%, increase in other expense (mainly as a result
of increased salaries and benefits from increased staff and general and
administrative expenses).
On an operating segment basis, the increase in net income was led by an $889,000
increase in net income for the Secondary market segment, due primarily to
increased student lending volume, and a $434,000 increase in the contribution
from Other States banking, offset by a decline in Oklahoma banking and an
increased deficit in Other operations. The decrease in Oklahoma banking was
largely the result of increased operating expenses. Oklahoma banking continues
to provide the largest portion ($2.6 million) of Southwest's net income.
However, in the second quarter, the contribution of Other states banking was
approximately 15%, while the Secondary market segment contributed $2.2 million,
or 48%. 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.
16
NET INTEREST INCOME
FOR THE THREE MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
-----------------------------------------------------------
(Dollars in thousands)
Interest income:
Interest and fees on loans $22,419 $19,299 $3,120 16.17 %
Investment securities:
U.S. Government and agency obligations 1,539 1,348 191 14.17
Mortgage-backed securities 155 281 (126) (44.84)
State and political subdivisions 123 236 (113) (47.88)
Other securities 185 147 38 25.85
Other interest-earning assets 2 2 0 0.00
-----------------------------------------------------------
Total interest income 24,423 21,313 3,110 14.59
Interest expense:
Interest-bearing demand 91 115 (24) (20.87)
Money market accounts 1,450 1,371 79 5.76
Savings accounts 4 3 1 33.33
Time deposits of $100,000 or more 2,054 2,274 (220) (9.67)
Other time deposits 1,362 1,679 (317) (18.88)
Other borrowings 1,318 1,253 65 5.19
Subordinated Debentures 1,079 613 466 76.02
-----------------------------------------------------------
Total interest expense 7,358 7,308 50 0.68
-----------------------------------------------------------
Net interest income $17,065 $14,005 $3,060 21.85 %
===========================================================
Yields on Southwest's interest-earning assets declined by 4 basis points, and
the rates paid on Southwest's interest-bearing liabilities declined by 30 basis
points, resulting in an increase in the interest rate spread to 3.78% for the
second quarter of 2004 from 3.52% for the second quarter of 2003. During the
same periods, annualized net interest margin increased from 3.84% to 4.05%. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 115.89% for the second quarter of 2004 from 116.02% for the second
quarter of 2003.
The principal factor in the increase of interest income was the $230.6 million,
or 16%, increase in average interest-earning assets, which was partially offset
by the 4 basis point reduction in the yield earned on interest-earning assets.
Southwest's average loans increased $198.5 million, or 16%, and the related
yield increased to 6.12% for the second quarter of 2004 from 6.07% in 2003.
During the same period, average investment securities increased $31.7 million,
or 17%, and the related yield was reduced to 3.68% from 4.31%.
The increase in total interest expense can be attributed to the $200.4 million,
or 16%, increase in average interest-bearing liabilities, which was partially
offset by the 30 basis point reduction in the rates paid on interest-bearing
liabilities. The increase in interest expense on subordinated debentures is due
to two new issuances of subordinated debentures that occurred in the third and
fourth quarters of 2003. Rates paid on deposits decreased for all categories
other than savings deposits, which increased two basis points.
17
OTHER INCOME
FOR THE THREE MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other income:
Service charges and fees $2,418 $2,225 $ 193 8.67 %
Other noninterest income 159 286 (127) (44.41)
Gain on sales of loans receivable 707 1,062 (355) (33.43)
Gain on sales of investment securities -- 25 (25) (100.00)
-----------------------------------------------------------
Total other income $3,284 $3,598 $(314) (8.73)%
===========================================================
Gain on sales of loans receivable, the major factor in the reduction of other
income, declined due primarily to a $439,000 reduction in gain on sales of
mortgage loans, which occurred due to the lower refinancing demand created by
higher mortgage interest rates during the second quarter of 2004 as compared to
those prevalent during the second quarter of 2003.
OTHER EXPENSES
FOR THE THREE MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other expenses:
Salaries and employee benefits $ 5,171 $4,921 $ 250 5.08 %
Occupancy 2,265 1,938 327 16.87
FDIC and other insurance 96 78 18 23.08
Other real estate 24 9 15 166.67
General and administrative 3,046 2,347 699 29.78
-----------------------------------------------------------
Total other expenses $10,602 $9,293 $1,309 14.09 %
===========================================================
Salaries and employee benefits increased $250,000 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 to 331 at the end of June
2004 from 326 at the end of June 2003.
The primary factor in the increase of occupancy expense was a $196,000 increase
in data processing charges for government-guaranteed student loans due to a
larger volume of loans being processed.
The increase in general and administrative expenses reflected increased fees
paid in connection with government-guaranteed loans, which increased by $61,000,
expenses related to the development of business relationships in our new and
current market areas, which increased by $114,000, and a $179,000 increase in
expenses related to the collection of past due loans. Losses on deposit accounts
increased $102,000, which is primarily attributable to three deposit account
relationships.
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2004 and 2003
Net income for the first six months of 2004 of $8.8 million represented an
increase of $1.3 million, or 17%, over the $7.5 million earned in the first six
months of 2003. Diluted earnings per share were $0.70 compared to $0.62, a 13%
increase. The increase in net income was primarily the result of a $5.6 million,
or 25%, increase in net interest income (fueled by substantial loan growth),
offset in part by a $478,000, or 13%, increase in the provision for loan losses,
a $678,000, or 10%, decline in other income (due mainly to lower gains on loans
sold), and a $2.9 million, or 16%, increase in other expense (mainly as a result
of increased salaries and benefits from increased staff and a one-time executive
retirement expense, and increased occupancy and general and administrative
expenses).
18
On an operating segment basis, the increase in net income was led by an $1.5
million increase in net income from the Secondary market segment, due primarily
to increased student lending volume, and a $1.2 million increase in the
contribution from Other states banking, offset by a decline in Oklahoma banking
and an increased deficit in Other operations. The decrease in Oklahoma banking
was largely the result of increased operating expenses, which included the
one-time executive retirement charge, as well as increases in other expenses.
Oklahoma banking continues to provide the largest portion ($5.0 million) of
Southwest's net income. However, in the first six months, the contribution of
Other states banking was approximately 18%, while the Secondary market segment
contributed $4.0 million, or 45%. 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 SIX MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
------------------------------------------------------------
(Dollars in thousands)
Interest income:
Interest and fees on loans $43,223 $37,021 $6,202 16.75 %
Investment securities:
U.S. Government and agency obligations 3,003 2,632 371 14.10
Mortgage-backed securities 343 652 (309) (47.39)
State and political subdivisions 281 511 (230) (45.01)
Other securities 328 290 38 13.10
Other interest-earning assets 3 6 (3) (50.00)
------------------------------------------------------------
Total interest income 47,181 41,112 6,069 14.76
Interest expense:
Interest-bearing demand 177 196 (19) (9.69)
Money market accounts 2,804 2,547 257 10.09
Savings accounts 9 7 2 28.57
Time deposits of $100,000 or more 4,008 4,517 (509) (11.27)
Other time deposits 2,800 3,502 (702) (20.05)
Other borrowings 2,540 2,548 (8) (0.31)
Subordinated Debentures 2,160 1,213 947 78.07
------------------------------------------------------------
Total interest expense 14,498 14,530 (32) (0.22)
------------------------------------------------------------
Net interest income $32,683 $26,582 $6,101 22.95 %
===========================================================
Yields on Southwest's interest-earning assets declined by 7 basis points, and
the rates paid on Southwest's interest-bearing liabilities declined by 33 basis
points, resulting in an increase in the interest rate spread to 3.72% for the
first six months of 2004 from 3.46% for the first six months of 2003. During the
same periods, annualized net interest margin increased from 3.78% to 4.01%. The
ratio of average interest-earning assets to average interest-bearing liabilities
increased to 115.91% for the first six months of 2004 from 115.71% for the first
six months of 2003.
The principal factor in the increase of interest income was the $224.2 million,
or 16%, increase in average interest-earning assets, which was partially offset
by the 7 basis point reduction in the yield earned on interest-earning assets.
Southwest's average loans increased $196.4 million, or 16%, and the related
yield increased to 6.09% for the first six months of 2004 from 6.07% in 2003.
During the same period, average investment securities increased $28.0 million,
or 15%, and the related yield was reduced to 3.74% from 4.45%.
19
The decline in total interest expense can be attributed to the 33 basis point
reduction in the rates paid on interest-bearing liabilities, which was partially
offset by the $191.3 million, or 16%, increase in average interest-bearing
liabilities. The increase in interest expense on subordinated debentures is due
to two new issuances of subordinated debentures that occurred in the third and
fourth quarters of 2003. Rates paid on deposits decreased for all categories
other than savings deposits, which increased one basis point.
OTHER INCOME
FOR THE SIX MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other income:
Service charges and fees $4,685 $4,476 $ 209 4.67 %
Other noninterest income 403 578 (175) (30.28)
Gain on sales of loans receivable 1,313 1,999 (686) (34.32)
Gain on sales of investment securities 1 27 (26) (96.30)
-----------------------------------------------------------
Total other income $6,402 $7,080 $(678) (9.58)%
===========================================================
Gain on sales of loans receivable, the major factor in the reduction of other
income, declined due primarily to an $860,000 reduction in gain on sales of
mortgage loans, which occurred due to the lower refinancing demand created by
slightly higher mortgage interest rates during the first six months of 2004 as
compared to those prevalent during the second quarter of 2003.
OTHER EXPENSES
FOR THE SIX MONTHS
ENDED JUNE 30,
2004 2003 $ CHANGE % CHANGE
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other expenses:
Salaries and employee benefits $10,330 $ 9,233 $1,097 11.88 %
Occupancy 4,496 3,860 636 16.48
FDIC and other insurance 191 156 35 22.44
Other real estate 41 170 (129) (75.88)
General and administrative 6,056 4,768 1,288 27.01
-----------------------------------------------------------
Total other expenses $21,114 $18,187 $2,927 16.09 %
===========================================================
Salaries and employee benefits increased $1.1 million primarily as a result of
an increase in the number of employees, a one-time charge relating to executive
retirement in the first quarter of 2004 of approximately $492,000, as well as
normal compensation increases. The number of full-time equivalent employees
increased to 331 at the end of June 2004 from 326 at the end of June 2003.
The primary factor in the increase of occupancy expense was a $417,000 increase
in data processing charges for government-guaranteed student loans due to a
larger volume of loans being processed.
The increase in general and administrative expenses reflected increased fees
paid in connection with government-guaranteed loans, which increased by
$153,000, expenses related to the development of business relationships in our
new and current market areas, which increased by $180,000, and a $282,000
increase in expenses related to the collection of past due loans. Losses on
deposit accounts increased $95,000, which is primarily attributable to three
deposit account relationships.
* * * * * * *
20
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. (See Note 4, "Allowance for Loan Losses," in the
Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $17.8 million increased $1.9 million, or 12%,
from year-end 2003, and represented 1.19% of total loans, compared with 1.21% of
total loans at December 31, 2003. Loans of $1.5 billion at June 30, 2004 grew
$189.9 million, or 15%, from year-end 2003. A provision for loan losses of $4.2
million was recorded in the first six months of 2004, an increase of $478,000,
or 13%, from the first six months of 2003.
Total nonaccrual loans decreased $229,000, or 2%, from December 31, 2003, while
total nonperforming loans increased $2.1 million, or 13%. Total nonperforming
assets of $20.1 million (which includes other real estate owned) increased $2.4
million, or 14%, and equaled 1.34% of total loans and other real estate. As
shown in Note 4, total nonperforming loans at June 30, 2004 represented 1.20% of
total loans, compared to $15.9 million, or 1.22% of total loans, at December 31,
2003.
TAXES ON INCOME
Southwest's income tax expense was $5.0 million and $4.2 million for the first
six months of 2004 and 2003, respectively, an increase of $758,000, or 18%.
Southwest's effective tax rates have been lower than federal and state statutory
rates primarily because of tax-exempt income on municipal obligations and loans
and the organization in July 2001 of a real estate investment trust as well as
tax credits generated by certain lending and investment activities.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments.
Southwest's portfolio of government-guaranteed student loans and SBA loans are
also readily salable. Additional sources of liquidity, including cash flow from
the repayment of loans, are also considered in determining whether liquidity is
satisfactory. Liquidity is also achieved through growth of deposits and liquid
assets and accessibility to the capital and money markets. These funds are used
to meet deposit withdrawals, maintain reserve requirements, fund loans, and
operate the organization.
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("SLMA"), the F&M Bank of Tulsa ("F&M"), and the Federal Home Loan Bank of
Topeka ("FHLB"). Stillwater National also carries interest-bearing demand notes
issued by the U.S. Treasury in connection with the Treasury Tax and Loan note
program; the outstanding balance of those notes was $1.4 million at June 30,
2004. Stillwater National has approved federal funds purchase lines totaling
$166.5 million with two other banks and four institutional brokers; $26.5
million was outstanding on these lines at June 30, 2004. In addition, Stillwater
National has available a $35.0 million line of credit from the SLMA and a $316.1
million line of credit from the FHLB and SNB Wichita has a $7.6 million line of
credit from the FHLB. Borrowings under the SLMA line would be secured by student
loans. Borrowings under the FHLB lines are secured by all unpledged securities
and other loans. The SLMA line expires April 20, 2007; no amount was outstanding
on this line at June 30, 2004. The Stillwater National FHLB line of credit had
an outstanding balance of $162.9 million at June 30, 2004; no amount was
outstanding on the SNB Wichita line of credit at FHLB at June 30, 2004. See also
"Deposits and Other Borrowings" on page 15.
Stillwater National sells securities under agreements to repurchase with
Stillwater National retaining custody of the collateral. Collateral consists of
direct obligations of U.S. Government Agency issues, which are designated as
pledged with Stillwater National's safekeeping agent. These transactions are for
one-to-four day periods.
During the first six months of 2004, the only categories of other borrowings
whose averages exceeded 30% of ending shareholders' equity were repurchase
agreements and funds borrowed from the FHLB.
21
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- -------------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
--------------------------------- -------------------------------
(Dollars in thousands)
Amount outstanding at end of period $36,679 $162,870 $46,941 $123,885
Weighted average rate paid at end of period 0.62% 2.95% 0.75% 3.34%
Average Balance:
For the three months ended $39,204 $166,165 $51,629 $144,107
For the six months ended $39,306 $154,254 $51,205 $149,708
Average Rate Paid:
For the three months ended 0.62% 2.80% 0.73% 3.10%
For the six months ended 0.62% 2.92% 0.81% 3.04%
Maximum amount outstanding at any month end $44,465 $189,788 $62,152 $166,500
During the first six months of 2004, cash and cash equivalents decreased by $5.4
million, or 16%, to $28.6 million. This decrease was the net result of cash used
in net loan origination and other investing activities of $133.9 million and
cash used in operating activities of $66.4 million, primarily to fund an
increase in loans held for sale, offset in part by cash provided from financing
activities of $194.9 million (primarily from an increase in deposits).
During the first six months of 2003, cash and cash equivalents increased by $5.1
million, or 15%, to $40.0 million. This increase was the net result of cash used
in net loan origination and other investing activities of $195.6 million offset
by cash provided from operating activities of $37.2 million, and cash provided
from financing activities of $163.5.
CAPITAL RESOURCES
In the first six months of 2004, total shareholders' equity increased $6.8
million, or 6%, to $116.8 million. Earnings, net of cash dividends declared on
common stock, contributed $7.1 million to shareholders' equity during this six
month period. The sale or issuance of common stock through the dividend
reinvestment plan, the employee stock purchase plan, and the employee stock
option plan contributed an additional $1.6 million to shareholders' equity in
the first six months of 2004, including tax benefits realized by Southwest
relating to option exercises. Accumulated comprehensive income (loss),
consisting of net unrealized gains (losses) on investment securities available
for sale (net of tax), decreased to a loss of $1.5 million at June 30, 2004
compared to income of $360,000 at December 31, 2003.
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 June 30, 2004, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 13.98%, a Tier I risk-based capital ratio of 10.69%, and a leverage
ratio of 8.96%. As of June 30, 2004, Stillwater National also met the criteria
for classification as a "well-capitalized" institution under the prompt
corrective action rules promulgated under the Federal Deposit Insurance Act.
Designation of the bank as a "well-capitalized" institution under these
regulations does not constitute a recommendation or endorsement of Stillwater
National by Federal bank regulators. SNB Wichita began operating in November
2003 and has not yet received notification from the Office of Thrift Supervision
concerning its capital position.
Southwest declared a dividend of $0.07 per common share payable on July 1, 2004
to shareholders of record as of June 18, 2004.
22
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2003.
CONTROLS AND PROCEDURES
Southwest's management, under the supervision and with the participation of its
Chief Executive Officer and the Chief Financial Officer, evaluated, as of the
last day of the period covered by this report, the effectiveness of the design
and operation of Southwest's disclosure controls and procedures, as defined in
Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
Southwest's disclosure controls and procedures were adequate. There were no
significant changes in Southwest's internal controls over financial reporting
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the
six months ended June 30, 2004, that have materially affected, or are reasonably
likely to materially affect, Southwest's internal controls over financial
reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Accordingly, some of the measures used in this report
may not be directly comparable with non-GAAP measures used by some other
financial institutions.
23
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities, use of proceeds, and issuer purchases
of equity securities
There were no purchases of Southwest common stock made by or
on behalf of Southwest or any affiliated purchasers of
Southwest (as defined in Securities and Exchange Commission
Rule 10b-18) during the first six months of 2004. On April 22,
2004, the Board of Directors of Southwest authorized a program
for the repurchase of up to 5% (603,675 shares) of Southwest's
outstanding common stock, par value $1.00 per share, in
connection with shares expected to be issued under Southwest's
dividend reinvestment, stock option, and employee benefit
plans and for other corporate purposes. The share repurchases
are expected to be made primarily on the open market from time
to time until April 1, 2005, or earlier termination of the
repurchase program by the Board. Repurchases under the program
will be made at the discretion of management based upon
market, business, legal, accounting, and other factors. This
program, which has been publicly announced, replaced a
publicly announced program that expired on March 31, 2004.
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
At Southwest's annual shareholders' meeting, held on April 22,
2004, the shareholders of Southwest elected four Directors
with terms expiring at the 2007 annual shareholders' meeting.
The Directors elected and the shareholder vote in the election
of each Director were as follows:
For Withheld
--- --------
Thomas D. Berry 10,129,477 1,101,598
Rick Green 10,132,479 1,098,596
David P. Lambert 10,006,468 1,224,606
Linford R. Pitts 9,857,670 1,373,405
Other Directors continuing in office following the annual
shareholders' meeting were James E. Berry II, Joe Berry
Cannon, J. Berry Harrison, Erd M. Johnson, Betty B. Kerns,
Robert B. Rodgers, and Russell W. Teubner.
Also at Southwest's annual shareholders' meeting, the
shareholders of Southwest approved an amendment to Southwest's
1999 Stock Option Plan to increase the number of shares of
Common Stock reserved for issuance under the plan, and the
number of shares of Common Stock for which options may be
granted, to an aggregate of 1,760,000. The shareholder vote
was 5,236,258 votes for the amendment; 2,731,627 votes against
the amendment; 841,952 votes withheld; and 2,421,239 broker
non-votes.
Item 5. Other information
None
24
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
Exhibit 10 Southwest Bancorp, Inc. 1999 Stock
Option Plan, as amended (Compensatory Plan)
Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32(a(,(b) 18 U.S.C. Section 1350 Certifications
(b) Reports on Form 8-K.
Southwest filed a report on Form 8-K, dated April 16, 2004,
announcing, under item 5 of that form, proposed amendments to
the Registrant's 1999 Stock Option Plan.
Southwest filed a report on Form 8-K, dated April 21, 2004,
announcing, under items 7, 9 and 12 of that form, earnings for
the first quarter of 2004.
Southwest filed a report on Form 8-K, dated April 22, 2004,
announcing, under items 5 and 7 of that form, the
establishment of a share repurchase program.
Southwest filed a report on Form 8-K, dated May 17, 2004,
announcing, under items 5 and 7 of that form, that on May 18th
and 19th a presentation to institutional investors would be
made and included the presentation by exhibit.
Southwest filed a report on Form 8-K, dated July 21, 2004,
announcing, under items 7, 9 and 12 of that form, earnings for
the second quarter of 2004.
25
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 August 3, 2004
------------------------------------- --------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell August 3, 2004
------------------------------------- --------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
26