SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
608 South Main Street 74074
Stillwater, Oklahoma (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (405) 372-2230
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
[ x ] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ x ] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
12,092,236 as of 11-01-04
1 of 31
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
September 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 5
Unaudited Consolidated Statements of Shareholders' Equity for the
nine months ended September 30, 2004 6
Unaudited Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Unaudited Average Balances, Yields and Rates for the
three and nine months ended September 30, 2004 and 2003 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 25
ITEM 4. CONTROLS AND PROCEDURES 25
PART II. OTHER INFORMATION 26
SIGNATURES 27
2
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
September 30,
2004 December 31,
(unaudited) 2003
----------------- -----------------
ASSETS:
Cash and cash equivalents $ 31,018 $ 33,981
Investment securities:
Held to maturity, fair value $2,536 (2004) and $16,144 (2003) 2,501 15,916
Available for sale, amortized cost $194,385 (2004) and $176,470 (2003) 194,056 177,074
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,342 11,276
Loans held for sale 348,887 218,422
Loans receivable, net of allowance for loan losses
of $19,921 (2004) and $15,848 (2003) 1,238,295 1,074,566
Accrued interest receivable 13,926 11,321
Premises and equipment, net 19,722 19,818
Other assets 20,703 18,351
----------------- -----------------
Total assets $1,882,450 $1,580,725
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand $ 183,183 $ 167,332
Interest-bearing demand 58,403 53,955
Money market accounts 399,104 376,016
Savings accounts 8,245 6,903
Time deposits of $100,000 or more 533,647 358,130
Other time deposits 242,373 241,789
----------------- -----------------
Total deposits 1,424,955 1,204,125
Other borrowings 245,722 183,850
Accrued interest payable 3,261 3,375
Income tax payable 7,489 2,850
Other liabilities 6,697 4,410
Subordinated debentures 72,180 72,180
----------------- -----------------
Total liabilities 1,760,304 1,470,790
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Capital surplus 7,860 6,997
Retained earnings 103,784 92,657
Accumulated other comprehensive income (loss) (193) 360
Treasury stock, at cost; 161,375 (2004) and 287,410 (2003) shares (1,548) (2,322)
----------------- -----------------
Total shareholders' equity 122,146 109,935
----------------- -----------------
Total liabilities & shareholders' equity $1,882,450 $1,580,725
================= =================
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except earnings per share data)
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
------------ ----------- ------------- -------------
Interest income:
Interest and fees on loans $25,245 $19,250 $68,468 $56,271
Investment securities:
U.S. Government and agency obligations 1,570 1,400 4,573 4,032
Mortgage-backed securities 159 204 502 856
State and political subdivisions 63 179 344 690
Other securities 168 142 496 432
Other interest-earning assets 4 1 7 7
------------ ----------- ------------- -------------
Total interest income 27,209 21,176 74,390 62,288
Interest expense:
Interest-bearing demand 63 86 240 282
Money market accounts 1,621 1,323 4,425 3,870
Savings accounts 5 5 14 12
Time deposits of $100,000 or more 2,460 2,045 6,468 6,562
Other time deposits 1,311 1,524 4,111 5,026
Other borrowings 1,643 1,174 4,183 3,722
Subordinated debentures 1,136 817 3,296 2,030
------------ ----------- ------------- -------------
Total interest expense 8,239 6,974 22,737 21,504
------------ ----------- ------------- -------------
Net interest income 18,970 14,202 51,653 40,784
Provision for loan losses 3,900 2,726 8,100 6,448
Other income:
Service charges and fees 2,629 2,442 7,314 6,918
Other noninterest income 328 190 731 768
Gain on sales of loans receivable 1,073 1,158 2,386 3,157
Gain (loss) on sales of investment securities (110) 1 (109) 28
------------ ----------- ------------- -------------
Total other income 3,920 3,791 10,322 10,871
Other expenses:
Salaries and employee benefits 5,563 5,200 15,893 14,433
Occupancy 2,500 2,078 6,996 5,938
FDIC and other insurance 110 90 301 246
Other real estate 66 (2) 107 168
General and administrative 2,998 2,535 9,054 7,303
------------ ----------- ------------- -------------
Total other expenses 11,237 9,901 32,351 28,088
------------ ----------- ------------- -------------
Income before taxes 7,753 5,366 21,524 17,119
Taxes on income 2,898 1,943 7,863 6,150
------------ ----------- ------------- -------------
------------- -------------
Net income $4,855 $3,423 $13,661 $10,969
============ =========== ============= =============
Basic earnings per share $ 0.40 $ 0.30 $ 1.13 $ 0.93
============ =========== ============= =============
Diluted earnings per share $ 0.39 $ 0.28 $ 1.09 $ 0.90
============ =========== ============= =============
Cash dividends declared per share $ 0.07 $ 0.06 $ 0.21 $ 0.19
============ =========== ============= =============
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the nine months
ended September 30,
2004 2003
------------- ---------------
Operating activities:
Net income $ 13,661 $ 10,969
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 8,100 6,448
Deferred taxes (1,551) (903)
Depreciation and amortization expense 1,962 1,991
Amortization of premiums and accretion of
discounts on securities, net 132 178
Amortization of intangibles 239 322
Tax benefit from exercise of stock options 459 707
(Gain) Loss on sales/calls of securities 109 (28)
(Gain) Loss on sales of loans receivable (2,386) (3,157)
(Gain) Loss on sales of premises/equipment (9) (58)
(Gain) Loss on other real estate owned, net 53 106
Proceeds from sales of residential mortgage loans 67,484 161,728
Residential mortgage loans originated for resale (67,856) (153,907)
Proceeds from sales of student loans 357,538 188,818
Student loans originated for resale (486,148) (272,099)
Changes in assets and liabilities:
Accrued interest receivable (2,605) (670)
Other assets 108 (3,099)
Income taxes payable 4,639 169
Accrued interest payable (114) (1,401)
Other liabilities 2,188 2,327
------------- ---------------
Net cash (used in) provided from operating activities (103,997) (61,559)
------------- ---------------
Investing activities:
Proceeds from sales of available for sale securities 8,540 6,540
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 13,398 14,675
Available for sale securities 61,632 58,869
Purchases of Federal Reserve Bank and Federal Home Loan
Bank stock (2,066) (2,132)
Purchases of available for sale securities (88,311) (90,839)
Loans originated and principal repayments, net (171,962) (109,431)
Purchases of premises and equipment (2,061) (2,168)
Proceeds from sales of premises and equipment 204 258
Proceeds from sales of other real estate owned 215 1,440
------------- ---------------
Net cash (used in) provided from investing activities (180,411) (122,788)
------------- ---------------
Financing activities:
Net increase (decrease) in deposits 220,830 182,620
Net increase (decrease) in other borrowings 61,872 (23,180)
Net proceeds from issuance of common stock 1,178 1,608
Net proceeds from issuance of subordinated debentures - 20,000
Common stock dividends paid (2,435) (2,107)
------------- ---------------
Net cash (used in) provided from financing activities 281,445 178,941
------------- ---------------
Net increase (decrease) in cash and cash equivalents (2,963) (5,406)
Cash and cash equivalents,
Beginning of period 33,981 34,847
------------- ---------------
End of period $ 31,018 $ 29,441
============= ===============
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Accumulated Total
Other Share-
Common Stock Capital Retained Comprehensive Treasury holders'
Shares Amount Surplus Earnings Income (Loss) Stock Equity
---------------------------------------------------------------------------------------------
Balance, January 1, 2004 12,243,042 $12,243 $6,997 $ 92,657 $ 360 $(2,322) $109,935
Cash dividends declared:
Common, $0.21 per share - - - (2,534) - - (2,534)
Common stock issued:
Employee Stock Option Plan - - 331 - - 727 1,058
Employee Stock Purchase Plan - - 31 - - 20 51
Dividend Reinvestment Plan - - 42 - - 27 69
Tax benefit related to exercise
of stock options - - 459 - - - 459
Other comprehensive income
(loss), net of tax - - - - (553) - (553)
Net income - - - 13,661 - - 13,661
---------------------------------------------------------------------------------------------
Balance, September 30, 2004 12,243,042 $12,243 $7,860 $103,784 $(193) $(1,548) $122,146
=============================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
------------ ----------- ------------ ------------
Net income $ 4,855 $ 3,423 $13,661 $10,969
Other comprehensive income (loss)
Unrealized holding gain (loss) on available
for sale securities 2,126 (1,998) (1,042) (2,555)
Reclassification adjustment for (gains) losses
arising during the period 110 (1) 109 (28)
------------ ----------- ------------ ------------
Other comprehensive income (loss), before tax 2,236 (1,999) (933) (2,583)
Tax (expense) benefit related to items
of other comprehensive income (loss) (908) 802 380 833
------------ ----------- ------------ ------------
Other comprehensive income (loss), net of tax 1,328 (1,197) (553) (1,750)
------------ ----------- ------------ ------------
Comprehensive income $ 6,183 $ 2,226 $13,108 $ 9,219
============ =========== ============ ============
The accompanying notes are an integral part of this statement.
6
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and notes necessary for a complete presentation of financial
position, results of operations, shareholders' equity, cash flows and
comprehensive income in conformity with accounting principles generally accepted
in the United States of America. However, the unaudited consolidated financial
statements include all adjustments which, in the opinion of management, are
necessary for a fair presentation. Those adjustments consist of normal,
recurring adjustments. The results of operations for the three and nine months
ended September 30, 2004 and the cash flows for the nine months ended September
30, 2004 should not be considered indicative of the results to be expected for
the full year. These unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year
ended December 31, 2003.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest") and its wholly owned
subsidiaries, the Stillwater National Bank and Trust Company ("Stillwater
National"), SNB Bank of Wichita ("SNB Wichita"), Healthcare Strategic Support,
Inc. ("HSSI"), and Business Consulting Group, Inc. ("BCG"). All significant
intercompany transactions and balances have been eliminated in consolidation.
NOTE 3: INVESTMENT SECURITIES
At September 30, 2004, Southwest had gross unrealized losses in its available
for sale securities portfolio totaling $1.1 million. Fifteen securities with a
par value of $22.8 million and an unrealized loss of $387,000 had been in an
unrealized loss position for more than twelve months. These gross unrealized
losses occurred due to increases in interest rates and spreads rather than
credit impairment. Southwest has the intent and ability to hold these securities
until the unrealized loss is recovered.
NOTE 4: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Tulsa, and Oklahoma City areas of Oklahoma; in
Wichita, Kansas; and in the Dallas and Austin, Texas metropolitan areas. As a
result, the collectibility of Southwest's loan portfolio can be affected by
changes in the general economic conditions in these three states and in those
metropolitan areas. At September 30, 2004 and December 31, 2003, substantially
all of Southwest's loans were collateralized with real estate, inventory,
accounts receivable, and/or other assets, or were guaranteed by agencies of the
United States Government.
At September 30, 2004, loans to individuals and businesses in the healthcare
industry totaled approximately $379.0 million, or 24%, of total loans and
student loans totaled approximately $341.3 million, or 21%, of total loans.
Southwest does not have any other concentrations of loans to individuals or
businesses involved in a single industry totaling 5% or more of total loans.
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates. Total nonaccrual loans increased $13.9 million,
or 96%, from December 31, 2003, and total nonperforming loans increased $14.8
million, or 93%. Total nonperforming assets of $33.2 million (which includes
other real estate owned) increased $15.6 million, or 89%.
7
At At
September 30, 2004 December 31, 2003
--------------------------- -----------------------
(Dollars in thousands)
Nonaccrual loans (1) $28,476 $14,530
Past due 90 days or more 2,276 1,384
--------------------------- -----------------------
Total nonperforming loans 30,752 15,914
Other real estate owned 2,467 1,699
--------------------------- -----------------------
Total nonperforming assets $33,219 $17,613
=========================== =======================
Nonperforming loans to loans receivable 1.91% 1.22%
Allowance for loan losses to nonperforming loans 64.78% 99.59%
Nonperforming assets to loans receivable and
other real estate owned 2.06% 1.34%
(1) The government-guaranteed portion of loans included in these totals was $1.4
million (2004) and $2.5 million (2003).
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $28.5 million at September 30, 2004. All of
the nonaccruing assets are subject to regular tests for impairment as part of
Southwest's allowance for loan losses methodology (see below). Five credit
relationships accounted for approximately $21.7 million, or 71% of total
nonperforming loans at September 30, 2004. All of these credits were identified
as problem or potential problem credits in previous quarters. Management
continues to actively manage these relationships, and anticipates they will be
significantly reduced within the next six months through payoffs from proceeds
from the sale of collateral now being actively marketed, proceeds of planned
debtor capital increases, payments by guarantors, or by restructuring into
earning assets.
During the first nine months of 2004, $51,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued for the nine
months ended September 30, 2004, additional total interest income of $872,000
would have been recorded.
Performing loans considered potential nonperforming loans (loans that are not
included in the past due, nonaccrual or restructured categories but for which
known information about possible credit problems cause management to have doubts
as to the ability of the borrowers to comply with the present loan repayment
terms and which may become nonperforming in the future) amounted to
approximately $33.3 million at September 30, 2004, compared to $37.8 million at
December 31, 2003, a decrease of 12%. Loans may be monitored by management and
reported as potential nonperforming loans for an extended period of time during
which management continues to be uncertain as to the ability of certain
borrowers to comply with the present loan repayment terms. These loans are
subject to continuing management attention and are considered by management in
determining the level of the allowance for loan losses.
8
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below for the indicated
periods.
For the nine For the
months ended year ended
September 30, 2004 December 31, 2003
------------------------ ----------------------
(Dollars in thousands)
Balance at beginning of period $ 15,848 $ 11,888
Loans charged-off:
Real estate mortgage 747 717
Real estate construction - 3
Commercial 3,338 3,915
Installment and consumer 356 442
------------------------ ----------------------
Total charge-offs 4,441 5,077
Recoveries:
Real estate mortgage 127 173
Commercial 213 230
Installment and consumer 74 112
------------------------ ----------------------
Total recoveries 414 515
------------------------ ----------------------
Net loans charged-off 4,027 4,562
Provision for loan losses 8,100 8,522
------------------------ ----------------------
Balance at end of period $ 19,921 $ 15,848
======================== ======================
Loans outstanding:
Average $1,478,443 $1,269,216
End of period 1,607,103 1,308,836
Net charge-offs to total average loans (annualized) 0.36% 0.36%
Allowance for loan losses to total loans 1.24% 1.21%
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and a general allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual and not
considered indicative of the losses inherent in specific portfolio categories.
The use of these loss factors is intended to reduce the differences between
estimated losses inherent in the portfolio and observed losses. Formula
allowances also are established for loans that do not have specific allowances
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade. Specific allowances are established in cases where management has
identified significant conditions or circumstances related to individual loans
that management believes indicate the probability that losses may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or on the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The general allowance is based upon
management's evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances. These factors may include
general economic and business conditions affecting lending areas, credit quality
trends (including trends in delinquencies and nonperforming loans expected to
result from existing conditions), loan volumes and concentrations, specific
industry conditions within portfolio categories, recent loss experience in
particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. There were no changes in
estimation methods or assumptions that affected the methodology for assessing
the appropriateness of the allowance during the third quarter of 2004. Southwest
determined the level of the allowance for loan losses at September 30, 2004, was
appropriate, based on that methodology.
9
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few such loans may cause a significant increase in nonperforming assets, and may
lead to a material increase in charge-offs and the provision for loan losses in
future periods.
NOTE 6: STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan
(the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on an annual
basis and expire from five to ten years after the date of grant. Southwest
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Stock Plans; accordingly, no compensation expense related
to the grants of stock options has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plans
been determined based upon the fair value of the options at their grant date as
prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
------------ ------------ ------------- -------------
(Dollars in thousands,except per share data)
Net income, as reported $4,855 $3,423 $13,661 $10,969
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (56) (62) (226) (234)
------------ ------------ ------------- -------------
Proforma net income $4,799 $3,361 $13,435 $10,735
============ ============ ============= =============
Earnings per share:
Basic -- as reported $0.40 $0.30 $1.13 $0.93
Basic -- proforma $0.39 $0.28 $1.11 $0.91
Diluted -- as reported $0.39 $0.28 $1.09 $0.90
Diluted -- proforma $0.38 $0.27 $1.07 $0.88
NOTE 7: EARNINGS PER SHARE
Basic earnings per share is computed based upon net income divided by the
weighted average number of shares outstanding during each period. Diluted
earnings per share is computed based upon net income divided by the weighted
average number of shares outstanding during each period adjusted for the effect
of dilutive potential shares calculated using the treasury stock method. At
September 30, 2004 and 2003, there were no antidilutive options to purchase
common shares.
10
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
---------------- --------------- ---------------- ----------------
Weighted average shares outstanding:
Basic earnings per share 12,081,379 11,839,891 12,050,485 11,762,996
Effect of dilutive securities:
Stock options 512,496 558,109 495,417 484,046
---------------- --------------- ---------------- ----------------
Weighted average shares outstanding:
Diluted earnings per share 12,593,875 12,398,000 12,545,902 12,247,042
================ =============== ================ ================
NOTE 8: OPERATING SEGMENTS
Southwest operates four principal segments: Oklahoma Banking, Other States
Banking, loans originated for sale in the secondary market ("Secondary Market"),
and an Other Operations segment. The Oklahoma Banking segment consists of three
operating units that provide lending and deposit services to customers in the
state of Oklahoma. The Other States Banking segment consists of three operating
units that provide lending and deposit services to the customers in the states
of Texas and Kansas. The Secondary Market segment consists of two operating
units that provide student lending services to post-secondary students in
Oklahoma and several other states and residential mortgage lending services to
customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is
included in Other Operations. The primary purpose of the fund management unit is
to manage Southwest's overall liquidity needs and interest rate risk. Each
segment borrows funds from and provides funds to the funds management unit as
needed to support its operations.
Southwest identifies reportable segments by type of service provided and
geographic location. Operating results are adjusted for intercompany loan
participations and borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of
Southwest. Expenses for consolidated back-office operations are allocated to
operating segments based on estimated uses of those services. General overhead
expenses such as executive administration, accounting and internal audit are
allocated based on the direct expense and/or deposit and loan volumes of the
operating segment. Income tax expense for the operating segments is calculated
essentially at statutory rates. The Other Operations segment records the tax
expense or benefit necessary to reconcile the consolidated financial statements.
The following table summarizes financial results by operating segment:
For the Nine Months Ended September 30, 2004
----------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
Banking Banking Market Operations Company
----------------------------------------------------------------------------
(Dollars in thousands)
Net interest income $31,393 $9,991 $13,003 $ (2,734) $ 51,653
Provision for loan losses 5,233 2,867 - - 8,100
Other income 5,389 655 2,211 2,067 10,322
Other expenses 20,423 4,733 4,177 3,018 32,351
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 11,126 3,046 11,037 (3,685) 21,524
Taxes on income 4,145 1,059 4,116 (1,457) 7,863
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 6,981 $ 1,987 $ 6,921 $ (2,228) $ 13,661
==========================================================================================================================
Fixed asset expenditures $ 334 $ 415 $ 2 $ 1,310 $ 2,061
Total assets at period end $918,128 $344,186 $355,952 $264,184 $1,882,450
11
For the Nine Months Ended September 30, 2003
----------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
Banking Banking Market Operations Company
----------------------------------------------------------------------------
(Dollars in thousands)
Net interest income $31,081 $ 5,725 $ 6,633 $ (2,655) $ 40,784
Provision for loan losses 4,768 1,680 - - 6,448
Other income 5,112 153 2,977 2,629 10,871
Other expenses 18,902 2,623 3,428 3,135 28,088
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 12,523 1,575 6,182 (3,161) 17,119
Taxes on income 4,697 594 2,332 (1,473) 6,150
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 7,826 $ 981 $ 3,850 $ (1,688) $ 10,969
==========================================================================================================================
Fixed asset expenditures $ 359 $ 581 $ 85 $ 1,143 $ 2,168
Total assets at period end $899,441 $206,550 $194,281 $240,864 $1,541,136
12
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
For the three months ended September 30,
2004 2003
------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
------------------------------------------------------------
ASSETS:
Loans receivable $1,580,974 6.35% $1,296,519 5.89%
Investment securities 216,828 3.60 195,266 3.91
Other interest-earning assets 1,222 1.30 671 0.59
------------------------------------------------------------
Total interest-earning assets 1,799,024 6.02 1,492,456 5.63
Noninterest-earning assets 66,378 50,456
---------------- ----------------
Total assets $1,865,402 $1,542,912
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 56,137 0.45% $ 56,698 0.60%
Money market accounts 433,426 1.49 363,918 1.44
Savings accounts 8,204 0.24 6,783 0.29
Time deposits 704,142 2.13 615,945 2.30
------------------------------------------------------------
Total interest-bearing deposits 1,201,909 1.81 1,043,344 1.89
Other borrowings 281,549 2.32 189,150 2.46
Subordinated debentures 72,180 6.30 46,406 6.89
------------------------------------------------------------
Total interest-bearing liabilities 1,555,638 2.11 1,278,900 2.16
Noninterest-bearing demand deposits 178,408 146,526
Other noninterest-bearing liabilities 12,075 13,780
Shareholders' equity 119,281 103,706
---------------- ----------------
Total liabilities and shareholders' equity $1,865,402 $1,542,912
================ ================
Interest rate spread 3.91% 3.47%
============== ==============
Net interest margin (1) 4.19% 3.78%
============== ==============
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.65% 116.70%
================ ================
For the nine months ended September 30,
2004 2003
-------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
-------------------------------------------------------------
ASSETS:
Loans receivable $1,478,443 6.19% $1,252,591 6.01%
Investment securities 214,224 3.69 188,423 4.26
Other interest-earning assets 1,111 0.84 1,022 0.92
-------------------------------------------------------------
Total interest-earning assets 1,693,778 5.87 1,442,036 5.78
Noninterest-earning assets 64,879 50,764
---------------- ----------------
Total assets $1,758,657 $1,492,800
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing demand $ 59,158 0.54% $ 56,537 0.67%
Money market accounts 411,274 1.44 315,199 1.64
Savings accounts 7,721 0.24 6,427 0.25
Time deposits 666,308 2.12 625,985 2.47
-------------------------------------------------------------
Total interest-bearing deposits 1,144,461 1.78 1,004,148 2.10
Other borrowings 245,799 2.27 205,307 2.42
Subordinated debentures 72,180 6.00 33,113 8.08
-------------------------------------------------------------
Total interest-bearing liabilities 1,462,440 2.08 1,242,568 2.31
Noninterest-bearing demand deposits 169,656 134,335
Other noninterest-bearing liabilities 10,587 15,156
Shareholders' equity 115,974 100,741
---------------- ----------------
Total liabilities and shareholders' equity $1,758,657 $1,492,800
================ ================
Interest rate spread 3.79% 3.47%
============== ===============
Net interest margin (1) 4.07% 3.78%
============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.82% 116.05%
================ ================
(1) Net interest margin = annualized net interest income / average
interest-earning assets
13
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This management's discussion and analysis of
financial condition and results of operations, the notes to Southwest's
unaudited consolidated financial statements, and other portions of this report
include forward-looking statements such as: statements of Southwest's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; expectations regarding future financial performance of Southwest and
its operating segments; assessments of loan quality, probable loan losses, and
the amount and timing of loan payoffs; liquidity, contractual obligations,
off-balance sheet risk, and market or interest rate risk; and statements of
Southwest's ability to achieve financial and other goals. These forward-looking
statements are subject to significant uncertainties because they are based upon:
the amount and timing of future changes in interest rates, market behavior, and
other economic conditions; future laws, regulations, and accounting principles;
and a variety of other matters. Because of these uncertainties, the actual
future results may be materially different from the results indicated by these
forward-looking statements. In addition, Southwest's past growth and performance
do not necessarily indicate its future results.
You should read this management's discussion and analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's unaudited consolidated financial statements and the accompanying
notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a financial holding company for the
Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of
Wichita ("SNB Wichita"), Healthcare Strategic Support, Inc., and Business
Consulting Group, Inc. ("BCG"). Southwest is an independent institution.
Southwest offers a broad range of commercial and consumer banking and other
financial services through full service offices in Stillwater, Oklahoma City,
Tulsa and Chickasha, Oklahoma, Wichita, Kansas and metropolitan Dallas, Texas;
loan production offices on the campuses of the University of Oklahoma Health
Sciences Center in Oklahoma City, Oklahoma State University-Tulsa, and in
metropolitan Dallas and Austin, Texas; a marketing presence in the Student Union
at Oklahoma State University-Stillwater; and on the Internet, through SNB
DirectBanker(R). Southwest devotes substantial efforts to marketing and
providing services to local businesses, their primary employees, and to other
managers and professionals living and working in Southwest's market areas.
Southwest's strategic focus includes expansion in carefully selected geographic
markets based upon a tested business model developed in connection with our
expansion into Oklahoma City in 1982. This geographic expansion is based on
identification of markets with concentrations of customers in Southwest's
traditional areas of expertise: healthcare and health professionals, businesses
and their managers and owners, and commercial and commercial real estate
lending, and makes uses of traditional and specialized financial services.
Specialized services include integrated document imaging and cash management
services designed to help our customers in the healthcare industry and other
record-intensive enterprises operate more efficiently, and management consulting
services through Southwest's management consulting subsidiaries: Healthcare
Strategic Support, Inc., serving physicians, hospitals, and healthcare groups,
and Business Consulting Group, Inc., serving small and large commercial
enterprises.
During 2002, Southwest established offices in Wichita, Kansas and Dallas, Texas.
At September 30, 2004, we had five offices in Kansas and Texas. During the first
nine months of 2004, these offices produced $2.0 million in net income (15% of
the consolidated total), up over 100% from the first nine months of 2003, and
$113.2 million in new banking assets. Southwest has received regulatory approval
to expand further in Texas by opening a second branch office in the Dallas
metropolitan area. The office is located in Preston Center at 5950 Berkshire
Lane, Dallas, Texas where it is currently operating as a loan production office.
The Preston Center location will begin operating as a full service branch during
the last half of December 2004. Southwest has also applied to open an additional
branch office in Austin, Texas, where it is currently operating a loan
production office.
14
Our Oklahoma Banking segment accounted for $7.0 million, or 51%, of year-to-date
net income, and $39.5 million in new banking assets during the first nine months
of 2004.
Southwest has a long history of student and residential mortgage lending. These
operations comprise our Secondary Market business segment. During the first nine
months of 2004, this segment produced $6.9 million in net income, up 80% from
the same period in 2003, and $135.6 million in additional banking assets. This
growth was the result of expanded student lending, which more than offset the
effects of the residential mortgage slowdown. Loan volumes in the Secondary
Market segment may vary significantly from period to period.
For additional information on our operating segments, please see Note 8,
Operating Segments, above. The total of net income of the segments discussed
above exceeds consolidated net income for the first nine months of 2004 due to
losses allocated to the Other Operations segment, which provides funding and
liquidity services to the rest of the organization.
Southwest has established and pursued a strategy of independent operation for
the benefit of all of its shareholders. Southwest has grown from $434 million in
assets since becoming a public company at year-end 1993, to nearly $1.9 billion
at September 30, 2004, without acquiring other financial institutions. Southwest
considers acquisitions of other financial institutions and other companies from
time to time, although it does not have any specific agreements or
understandings for any such acquisition at present. Southwest also considers,
from time to time, the establishment of new lending, banking and other offices
in additional geographic markets. Southwest also extends loans to borrowers in
Oklahoma and neighboring states through participations with correspondent banks.
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $1.9 billion at September 30, 2004 and $1.6
billion at December 31, 2003.
LOANS
Total loans, including loans held for sale, were $1.6 billion at September 30,
2004, a 23% increase from December 31, 2003. Southwest experienced increases in
all categories of loans as shown in the following table:
September 30, December 31,
2004 2003 $ Change % Change
------------------------------------------------------------------------
------------------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage
Commercial $ 522,812 $ 402,596 $120,216 29.86 %
One-to-four residential 87,296 83,250 4,046 4.86
Real estate construction 244,023 230,292 13,731 5.96
Commercial 386,325 355,965 30,360 8.53
Installment and consumer
Student loans 341,335 211,546 129,789 61.35
Other 25,312 25,187 125 0.50
-------------------- ------------------ ------------- --------------
Total loans $1,607,103 $1,308,836 $298,267 22.79 %
==================== ================== ============= ==============
15
The composition of loans held for sale included in total loans is shown in the
following table.
September 30, December 31,
2004 2003 $ Change % Change
------------------------------------------------------------------------
(Dollars in thousands)
Student loans $341,335 $211,546 $129,789 61.35 %
One-to-four family residential 2,673 2,199 474 21.56
Other loans held for sale 4,879 4,677 202 4.32
-------------------- ------------------ ------------- --------------
Total loans held for sale $348,887 $218,422 $130,465 59.73 %
==================== ================== ============= ==============
Management determines the appropriate level of the allowance for loan losses
using a systematic methodology. (See Note 5, "Allowance for Loan Losses," in the
Notes to Unaudited Consolidated Financial Statements.) The allowance for loan
losses increased by $4.1 million, or 26%, from December 31, 2003 to September
30, 2004, mainly as a result of growth in portfolio loans (loans other than
loans held for sale), especially from our Texas and Kansas offices, and amounts
required for nonperforming loans. At September 30, 2004, the allowance for loan
losses was $19.9 million, or 1.24% of total loans and 64.78% of nonperforming
loans, compared to $15.8 million, or 1.21% of total loans and 99.59% of
nonperforming loans, at December 31, 2003. Substantially all of the allowance is
related to portfolio loans. The allowance allocated to portfolio loans was 1.58%
of portfolio loans at September 30, 2004, compared to 1.45% at December 31,
2003. (See "Results of Operations-Provision for Loan Losses.")
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.4 billion at September 30, 2004, an increase of
$220.8 million, or 18%, from $1.2 billion at December 31, 2003. Increases
occurred in all categories of deposits as shown in the following table:
September 30, December 31,
2004 2003 $ Change % Change
------------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing demand $ 183,183 $ 167,332 $15,851 9.47 %
Interest-bearing demand 58,403 53,955 4,448 8.24
Money market accounts 399,104 376,016 23,088 6.14
Savings accounts 8,245 6,903 1,342 19.44
Time deposits of $100,000 or more 533,647 358,130 175,517 49.01
Other time deposits 242,373 241,789 584 0.24
-------------------- ------------------ ------------- --------------
Total deposits $1,424,955 $1,204,125 $220,830 18.34 %
==================== ================== ============= ==============
Stillwater National has unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Morgan Stanley & Co., Inc., Dean Witter, Citigroup Global Markets,
Inc., Wachovia Securities LLC, UBS Financial Services, Inc., RBC Capital Markets
Corp. and CountryWide Securities that total $1.2 billion. At September 30, 2004,
$374.6 million in these retail certificates of deposit were included in total
deposits, an increase of $149.0 million, or 66%, from year-end 2003. Stillwater
National has other brokered certificates of deposit totaling $31.4 million
included in total deposits at September 30, 2004.
Other borrowings increased $61.9 million, or 34%, to $245.7 million during the
first nine months of 2004.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $12.2 million, or 11%, due primarily to
earnings for the first nine months of 2004, and stock option exercises, offset
in part by common stock dividends and a decrease in accumulated other
comprehensive income (net, after tax, unrealized gains on investment securities
available for sale). At September 30, 2004, Southwest, Stillwater National and
SNB Wichita continued to exceed all applicable regulatory capital requirements.
16
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 and 2003
Net income for the third quarter of 2004 of $4.9 million represented an increase
of $1.4 million, or 42%, over the $3.4 million earned in the third quarter of
2003. Diluted earnings per share were $0.39 compared to $0.28, a 39% increase.
The increase in net income was primarily the result of a $4.8 million, or 34%,
increase in net interest income (fueled by substantial loan growth and increased
interest margin), and a $129,000, or 3%, increase in other income (due mainly to
increased service charges on deposit accounts), offset in part by a $1.2
million, or 43%, increase in the provision for loan losses, a $1.3 million, or
13%, increase in other expense (mainly as a result of increased occupancy and
general and administrative expenses), and a $955,000, or 49%, increase in taxes
on income.
On an operating segment basis, the increase in net income was led by an $1.4
million increase in net income for the Secondary Market segment, due primarily
to increased student lending volume, and a $502,000 reduction in the deficit
from Other Operations, offset by declines in Oklahoma and Other States Banking.
The decreases in Oklahoma and Other States Banking were largely the result of
increased provision for loan losses and noninterest expense. The Secondary
Market segment contributed the largest portion ($2.8 million) of Southwest's net
income in the third quarter 2004. The contribution from the Secondary Market
segment may vary significantly from period to period as a result of changes in
loan volume, interest rates and market behavior; the number of schools
participating in Southwest's student lending programs, the sizes of their
enrollment, and the graduation status of student borrowers; and other factors.
17
NET INTEREST INCOME
For the three months
ended September 30,
2004 2003 $ Change % Change
-----------------------------------------------------------
(Dollars in thousands, except share data)
Interest income:
Interest and fees on loans $25,245 $19,250 $5,995 31.14 %
Investment securities:
U.S. Government and agency obligations 1,570 1,400 170 12.14
Mortgage-backed securities 159 204 (45) (22.06)
State and political subdivisions 63 179 (116) (64.80)
Other securities 168 142 26 18.31
Other interest-earning assets 4 1 3 300.00
-----------------------------------------------------------
Total interest income 27,209 21,176 6,033 28.49
Interest expense:
Interest-bearing demand 63 86 (23) (26.74)
Money market accounts 1,621 1,323 298 22.52
Savings accounts 5 5 - -
Time deposits of $100,000 or more 2,460 2,045 415 20.29
Other time deposits 1,311 1,524 (213) (13.98)
Other borrowings 1,643 1,174 469 39.95
Subordinated Debentures 1,136 817 319 39.05
-----------------------------------------------------------
Total interest expense 8,239 6,974 1,265 18.14
-----------------------------------------------------------
Net interest income $18,970 $14,202 $4,768 33.57 %
Net interest income is the difference between the interest income Southwest
earns on its loans, investments and other interest-earning assets, and the
interest paid on interest-bearing liabilities, such as deposits and borrowings.
Because different types of assets and liabilities owned by Southwest may react
differently, and at different times, to changes in market interest rates, net
interest income is affected by changes in market interest rates. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest
could reduce net interest income. Similarly, when interest-earning assets mature
or reprice more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income.
Yields on Southwest's interest-earning assets increased 39 basis points, and the
rates paid on Southwest's interest-bearing liabilities declined by 5 basis
points, resulting in an increase in the interest rate spread to 3.91% for the
third quarter of 2004 from 3.47% for the third quarter of 2003. During the same
periods, annualized net interest margin increased from 3.78% to 4.19%. The ratio
of average interest-earning assets to average interest-bearing liabilities
decreased to 115.65% for the third quarter of 2004 from 116.70% for the third
quarter of 2003.
The principal factor in the increase of interest income was the $306.6 million,
or 21%, increase in average interest-earning assets. Interest income also
benefited from the 39 basis point increase in the yield earned on
interest-earning assets. Southwest's average loans increased $284.5 million, or
22%, and the related yield increased to 6.35% for the third quarter of 2004 from
5.89% in 2003. During the same period, average investment securities increased
$21.6 million, or 11%, and the related yield was reduced to 3.60% from 3.91%.
The increase in total interest expense can be attributed to the $276.7 million,
or 22%, increase in average interest-bearing liabilities, which was partially
offset by the 5 basis point reduction in the rates paid on interest-bearing
liabilities. The increase in interest expense on subordinated debentures is due
to two new issuances of subordinated debentures that occurred in the third and
fourth quarters of 2003. Rates paid on deposits decreased for all categories
other than money market accounts, which increased 5 basis points.
18
OTHER INCOME
For the three months
ended September 30,
2004 2003 $ Change % Change
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other income:
ATM Service Charges $ 794 $ 879 $ (85) (9.67)%
Other service charges 1,570 1,323 247 18.67
Other customer fees 265 240 25 10.42
Other noninterest income 328 190 138 72.63
Gain on sales of loans receivable:
Student loan sales 659 460 199 43.26
Mortgage loan sales 338 671 (333) (49.63)
All other loan sales 76 27 49 181.48
Gain (loss) on sales of investment securities (110) 1 (111) (100.00)
-----------------------------------------------------------
Total other income $3,920 $3,791 $129 3.40 %
===========================================================
Other income increased $129,000, or 3%, due primarily to the $247,000 increase
in other service charges. This increase occurred due to the repricing of service
charges on deposit accounts to be more consistent with other financial
institutions in our markets. Another contributing factor was the $138,000, or
73%, increase in other noninterest income. The increase in other noninterest
income occurred primarily due to a $128,000 increase in consulting fees
generated by Southwest's subsidiaries, Healthcare Strategic Services, Inc. and
Business Consulting Group, Inc.
Gain on sales of loans receivable declined due primarily to a $333,000, or 50%,
reduction in gain on sales of mortgage loans, which occurred due to the lower
refinancing demand created by higher mortgage interest rates during the third
quarter of 2004 as compared to those prevalent during the third quarter of 2003.
During the same period, gain on sales of student loans increased $199,000 and
gain on sales of other loans increased $49,000. The loss on sales of investment
securities, which were all classified as available for sale, occurred when four
securities that had passed their call dates were sold. Southwest has the intent
and ability to hold all remaining investment securities with an unrealized loss
until the fair value exceeds amortized cost.
Southwest's multi-state ATM network operated 286 ATM machines in 25 states at
September 30, 2004 compared to 334 ATM machines in 22 states at September 30,
2003. The number of machines operated has stayed fairly constant during 2004
following a decrease during the fourth quarter of 2003 when a contract with a
convenience store chain was not renewed. This fourth quarter 2003 reduction in
ATM machines being operated is the primary reason for the decrease in ATM
service charges from $879,000 in the third quarter 2003 to $794,000 in the third
quarter 2004.
OTHER EXPENSES
For the three months
ended September 30,
2004 2003 $ Change % Change
-----------------------------------------------------------
(Dollars in thousands, except share data)
Other expenses:
Salaries and employee benefits $5,563 $5,200 $ 363 6.98 %
Occupancy 2,500 2,078 422 20.31
FDIC and other insurance 110 90 20 22.22
Other real estate 66 (2) 68 (100.00)
General and administrative 2,998 2,535 463 18.26
-----------------------------------------------------------
Total other expenses $11,237 $9,901 $1,336 13.49 %
===========================================================
Salaries and employee benefits increased $363,000 primarily as a result of an
increase in the number of employees as well as normal compensation increases.
The number of full-time equivalent employees increased from 331 to 360 during
the third quarter of 2004 and from 326 to 340 during the third quarter of 2003.
19
The primary factor in the increase of occupancy expense was a $376,000 increase
in data processing charges for student loans due to a larger volume of loans
being processed.
The increase in general and administrative expenses reflected increased fees
paid in connection with government-guaranteed loans, which increased $122,000, a
$95,000 increase in legal fees, primarily related to the collection of past due
loans, and expenses related to the development of business relationships in our
new and current market areas, which increased by $54,000.
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 and 2003
Net income for the first nine months of 2004 of $13.7 million represented an
increase of $2.7 million, or 25%, over the $11.0 million earned in the first
nine months of 2003. Diluted earnings per share were $1.09 compared to $0.90, a
21% increase. The increase in net income was primarily the result of a $10.9
million, or 27%, increase in net interest income (fueled by substantial loan
growth and increased interest margin), offset in part by a $1.7 million, or 26%,
increase in the provision for loan losses, a $549,000, or 5%, decline in other
income (due mainly to lower gains on loans sold), and a $4.3 million, or 15%,
increase in other expense (mainly as a result of increased salaries and benefits
from increased staff and executive retirement expense, and increased occupancy
and general and administrative expenses).
On an operating segment basis, the increase in net income was led by a $3.1
million increase in net income from the Secondary Market segment, due primarily
to increased student lending volume, and a $1.0 million increase in the
contribution from Other States Banking, offset by a decline in Oklahoma Banking
and an increased deficit in Other Operations. The decrease in Oklahoma Banking
was largely the result of increased noninterest expense, which included an
executive retirement charge. Oklahoma Banking continues to provide the largest
portion ($7.0 million) of Southwest's net income. However, in the first nine
months, the contribution of Other States Banking was approximately 15%, while
the Secondary Market segment contributed $6.9 million, or 51%. The contribution
from the Secondary Market segment may vary significantly from period to period
as a result of changes in loan volume, interest rates and market behavior; the
number of schools participating in Southwest's student lending programs, the
sizes of their enrollment, and the graduation status of student borrowers; and
other factors.
20
NET INTEREST INCOME
For the nine months
ended September 30,
2004 2003 $ Change % Change
----------------------------------------------------------
(Dollars in thousands, except share data)
Interest income:
Interest and fees on loans $68,468 $56,271 $12,197 21.68 %
Investment securities:
U.S. Government and agency obligations 4,573 4,032 541 13.42
Mortgage-backed securities 502 856 (354) (41.36)
State and political subdivisions 344 690 (346) (50.14)
Other securities 496 432 64 14.81
Other interest-earning assets 7 7 - -
----------------------------------------------------------
Total interest income 74,390 62,288 12,102 19.43
Interest expense:
Interest-bearing demand 240 282 (42) (14.89)
Money market accounts 4,425 3,870 555 14.34
Savings accounts 14 12 2 16.67
Time deposits of $100,000 or more 6,468 6,562 (94) (1.43)
Other time deposits 4,111 5,026 (915) (18.21)
Other borrowings 4,183 3,722 461 12.39
Subordinated Debentures 3,296 2,030 1,266 62.36
----------------------------------------------------------
Total interest expense 22,737 21,504 1,233 5.73
----------------------------------------------------------
Net interest income $51,653 $40,784 $10,869 26.65 %
==========================================================
Net interest income is the difference between the interest income Southwest
earns on its loans, investments and other interest-earning assets, and the
interest paid on interest-bearing liabilities, such as deposits and borrowings.
Because different types of assets and liabilities owned by Southwest may react
differently, and at different times, to changes in market interest rates, net
interest income is affected by changes in market interest rates. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest
could reduce net interest income. Similarly, when interest-earning assets mature
or reprice more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income.
Yields on Southwest's interest-earning assets increased 9 basis points, and the
rates paid on Southwest's interest-bearing liabilities declined 23 basis points,
resulting in an increase in the interest rate spread to 3.79% for the first nine
months of 2004 from 3.47% for the first nine months of 2003. During the same
periods, annualized net interest margin increased from 3.78% to 4.07%. The ratio
of average interest-earning assets to average interest-bearing liabilities
decreased to 115.82% for the first nine months of 2004 from 116.05% for the
first nine months of 2003.
The principal factor in the increase of interest income was the $251.7 million,
or 17%, increase in average interest-earning assets. Interest income also
benefited from the 9 basis point increase in the yield earned on
interest-earning assets. Southwest's average loans increased $225.9 million, or
18%, and the related yield increased to 6.19% for the first nine months of 2004
from 6.01% in 2003. During the same period, average investment securities
increased $25.8 million, or 14%, and the related yield was reduced to 3.69% from
4.26%.
The decline in total interest expense can be attributed to the 23 basis point
reduction in the rates paid on interest-bearing liabilities, which was partially
offset by the $219.9 million, or 18%, increase in average interest-bearing
liabilities. The increase in interest expense on subordinated debentures is due
to two new issuances of subordinated debentures that occurred in the third and
fourth quarters of 2003. Rates paid on deposits decreased for all categories.
21
OTHER INCOME
For the nine months
ended September 30,
2004 2003 $ Change % Change
----------------------------------------------------------
(Dollars in thousands, except share data)
Other income:
ATM Service Charges $2,319 $2,619 $(300) (11.45)%
Other service charges 4,229 3,769 460 12.20
Other customer fees 766 530 236 44.53
Other noninterest income 731 768 (37) (4.82)
Gain on sales of loans receivable:
Student loan sales 1,178 905 273 30.17
Mortgage loan sales 920 2,113 (1,193) (56.46)
All other loan sales 288 139 149 107.19
Gain (loss) on sales of investment securities (109) 28 (137) (489.29)
----------------------------------------------------------
Total other income $10,322 $10,871 $(549) (5.05)%
==========================================================
Gain on sales of loans receivable, the major factor in the reduction of other
income, declined due primarily to an $1.2 million reduction in gain on sales of
mortgage loans, which occurred due to the lower refinancing demand created by
slightly higher mortgage interest rates during the first nine months of 2004 as
compared to those prevalent during the same period in 2003. The loss on sales of
investment securities, which were all classified as available for sale, occurred
when four securities that had passed their call dates were sold during the third
quarter. Southwest has the intent and ability to hold all remaining investment
securities with an unrealized loss until the fair value exceeds amortized cost.
These reductions in other income were partially offset by the $396,000 increase
in service charges and fees. The increase in service charges and fees occurred
due to repricing of service charges on deposit accounts to be more consistent
with other financial institutions in the markets we serve.
Southwest's multi-state ATM network operated 286 ATM machines in 25 states at
September 30, 2004 compared to 334 ATM machines in 22 states at September 30,
2003. The number of machines operated has stayed fairly constant during 2004
following a decrease during the fourth quarter of 2003 when a contract with a
convenience store chain was not renewed. This fourth quarter 2003 reduction in
ATM machines being operated is the primary reason for the decrease in ATM
service charges from $2.6 million in 2003 to $2.3 million in 2004.
22
OTHER EXPENSES
For the nine months
ended September 30,
2004 2003 $ Change % Change
----------------------------------------------------------
(Dollars in thousands, except share data)
Other expenses:
Salaries and employee benefits $15,893 $14,433 $1,460 10.12 %
Occupancy 6,996 5,938 1,058 17.82
FDIC and other insurance 301 246 55 22.36
Other real estate 107 168 (61) (36.31)
General and administrative 9,054 7,303 1,751 23.98
----------------------------------------------------------
Total other expenses $32,351 $28,088 $4,263 15.18 %
==========================================================
Salaries and employee benefits increased $1.5 million primarily as a result of
an increase in the number of employees, a charge relating to executive
retirement in the first quarter of 2004 of approximately $492,000, as well as
normal compensation increases. The number of full-time equivalent employees
increased to 360 at the end of September 2004 from 340 at the end of September
2003.
The primary factor in the increase of occupancy expense was a $794,000 increase
in data processing charges for student loans due to a larger volume of loans
being processed.
The increase in general and administrative expenses reflected increased fees
paid in connection with government-guaranteed loans, which increased by
$275,000, expenses related to the development of business relationships in our
new and current market areas, which increased by $234,000, and a $208,000
increase in legal fees, primarily related to the collection of past due loans.
Losses on deposit accounts increased $91,000, which is primarily attributable to
three deposit account relationships.
* * * * * * *
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. (See Note 5, "Allowance for Loan Losses," in the
Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $19.9 million increased $4.1 million, or 26%,
from year-end 2003. A provision for loan losses of $8.1 million was recorded in
the first nine months of 2004, an increase of $1.7 million, or 26%, from the
first nine months of 2003. (See Note 4, "Loans Receivable," in the Notes to
Unaudited Consolidated Financial Statements.)
TAXES ON INCOME
Southwest's income tax expense was $7.9 million and $6.2 million for the first
nine months of 2004 and 2003, respectively, an increase of $1.7 million, or 28%.
Southwest's effective tax rates have been lower than federal and state statutory
rates primarily because of tax-exempt income on municipal obligations and loans,
the organization in July 2001 of a real estate investment trust and tax credits
generated by certain lending and investment activities.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments.
Southwest's portfolio of student loans and SBA loans are also readily salable.
Additional sources of liquidity, including cash flow from the repayment of loans
and the sale of participations in outstanding loans, are also considered in
determining whether liquidity is satisfactory. Liquidity is also achieved
through growth of deposits and liquid assets and accessibility to the capital
and money markets. These funds are used to meet deposit withdrawals, maintain
reserve requirements, fund loans, and operate the organization.
23
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("SLMA"), the F&M Bank of Tulsa ("F&M"), and the Federal Home Loan Bank of
Topeka ("FHLB"). Stillwater National also carries interest-bearing demand notes
issued by the U.S. Treasury in connection with the Treasury Tax and Loan note
program; the outstanding balance of those notes was $1.7 million at September
30, 2004. Stillwater National has approved federal funds purchase lines totaling
$216.5 million with two other banks and four institutional brokers; $44.1
million was outstanding on these lines at September 30, 2004. In addition,
Stillwater National has available a $35.0 million line of credit from the SLMA
and a $318.0 million line of credit from the FHLB and SNB Wichita has a $8.9
million line of credit from the FHLB. Borrowings under the SLMA line would be
secured by student loans. Borrowings under the FHLB lines are secured by
investment securities and loans. The SLMA line expires April 20, 2007; no amount
was outstanding on this line at September 30, 2004. The Stillwater National FHLB
line of credit had an outstanding balance of $165.9 million at September 30,
2004; no amount was outstanding on the SNB Wichita line of credit at the FHLB at
September 30, 2004. See also "Deposits and Other Borrowings" on page 16.
Stillwater National sells securities under agreements to repurchase with
Stillwater National retaining custody of the collateral. Collateral consists of
direct obligations of U.S. Government Agency issues, which are designated as
pledged with Stillwater National's safekeeping agent. These transactions are for
one-to-four day periods.
During the first nine months of 2004, the only categories of other borrowings
whose averages exceeded 30% of ending shareholders' equity were repurchase
agreements and funds borrowed from the FHLB.
September 30, 2004 September 30, 2003
--------------------------------- -------------------------------
Funds Funds
Repurchase Borrowed Repurchase Borrowed
Agreements from the FHLB Agreements from the FHLB
--------------------------------- -------------------------------
(Dollars in thousands)
Amount outstanding at end of period $36,615 $165,890 $47,393 $117,965
Weighted average rate paid at end of period 0.76% 3.08% 0.60% 3.43%
Average Balance:
For the three months ended $32,667 $190,696 $43,308 $121,108
For the nine months ended $37,076 $166,491 $48,544 $140,069
Average Rate Paid:
For the three months ended 0.76% 2.83% 0.60% 3.41%
For the nine months ended 0.66% 2.89% 0.75% 3.15%
Maximum amount outstanding at any month end $44,465 $189,788 $62,152 $166,500
During the first nine months of 2004, cash and cash equivalents decreased by
$3.0 million, or 9%, to $31.0 million. This decrease was the net result of cash
used in net loan origination and other investing activities of $160.1 million
and cash used in operating activities of $124.3 million, primarily to fund an
increase in loans held for sale, offset in part by cash provided from financing
activities of $281.4 million (primarily from an increase in deposits).
During the first nine months of 2003, cash and cash equivalents decreased by
$5.4 million, or 16%, to $29.4 million. This decrease was the net result of cash
used in net loan origination and other investing activities of $122.8 million
and cash used in operating activities of $61.5 million, offset in part by cash
provided from financing activities of $178.9.
CAPITAL RESOURCES
In the first nine months of 2004, total shareholders' equity increased $12.2
million, or 11%, to $122.1 million. Earnings, net of cash dividends declared on
common stock, contributed $11.1 million to shareholders' equity during this nine
month period. The sale or issuance of common stock through the dividend
reinvestment plan, the employee stock purchase plan, and the employee stock
option plan contributed an additional $1.6 million to shareholders' equity in
the first nine months of 2004, including tax benefits realized by Southwest
relating to option exercises. Accumulated comprehensive income (loss),
consisting of net unrealized gains (losses) on investment securities available
for sale (net of tax), was $(193,000) at September 30, 2004 compared to $360,000
at December 31, 2003.
24
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are
commonly known as Risk-Based Capital Guidelines. At September 30, 2004,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 13.85%, a Tier I risk-based capital ratio of 10.68%,
and a leverage ratio of 8.75%. As of September 30, 2004, Stillwater National
also met the criteria for classification as a "well-capitalized" institution
under the prompt corrective action rules promulgated under the Federal Deposit
Insurance Act. Designation of the bank as a "well-capitalized" institution under
these regulations does not constitute a recommendation or endorsement of
Stillwater National by Federal bank regulators. SNB Wichita began operating in
November 2003 and has not yet received notification from the Office of Thrift
Supervision concerning its capital position.
Southwest declared a dividend of $0.07 per common share payable on October 1,
2004 to shareholders of record as of September 17, 2004.
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2003.
CONTROLS AND PROCEDURES
Southwest's management, under the supervision and with the participation of its
Chief Executive Officer and the Chief Financial Officer, evaluated, as of the
last day of the period covered by this report, the effectiveness of the design
and operation of Southwest's disclosure controls and procedures, as defined in
Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
Southwest's disclosure controls and procedures were adequate. There were no
significant changes in Southwest's internal controls over financial reporting
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the
nine months ended September 30, 2004, that have materially affected, or are
reasonably likely to materially affect, Southwest's internal controls over
financial reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Accordingly, some of the measures used in this report
may not be directly comparable with non-GAAP measures used by some other
financial institutions.
25
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Unregistered sales of equity securities and use of proceeds
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications
(b) Reports on Form 8-K.
Southwest filed a report on Form 8-K, dated July 21, 2004,
announcing, under items 7, 9 and 12 of that form, earnings for
the second quarter of 2004.
Southwest filed a report on Form 8-K, dated August 26, 2004,
announcing, under items 1 and 9 of that form, entry into an
amended and restated severance compensation plan.
Southwest filed a report on Form 8-K, dated October 21, 2004,
announcing, under items 2, 7 and 9 of that form, earnings for
the third quarter of 2004.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST BANCORP, INC.
(Registrant)
By: /s/ Rick Green November 5, 2004
---------------------------------------------------------------- -----------------------------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell November 5, 2004
--------------------------------------------------------------- -----------------------------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
27