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 March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
608 South Main Street 74074
Stillwater, Oklahoma (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (405) 372-2230
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
[x] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[x] YES [ ] NO
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.
12,195,001 (as of 05-02-05)
----------
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
- ---------------------------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at March 31, 2005 and December 31, 2004..........................3
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004........................4
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004........................5
Unaudited Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2005........................6
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004..............6
Notes to Unaudited Consolidated Financial Statements......................................................................7
Unaudited Average Balances, Yields and Rates.............................................................................14
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...............................................................................................................25
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands, except per share data) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 41,437 $ 24,097
Federal funds sold 6,400 -
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 47,837 24,097
Investment securities:
Held to maturity, fair value $2,485 (2005) and $2,509 (2004) 2,489 2,495
Available for sale, amortized cost $203,844 (2005) and $205,393 (2004) 199,418 204,092
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,587 13,464
Loans held for sale 400,179 354,557
Loans receivable, net of allowance for loan losses
of $19,660 (2005) and $18,991 (2004) 1,253,939 1,250,327
Accrued interest receivable 16,614 15,091
Premises and equipment, net 19,876 19,860
Other real estate 11,902 4,937
Other assets 28,728 24,867
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,994,569 $1,913,787
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 198,821 $ 183,738
Interest-bearing demand 65,045 57,359
Money market accounts 365,835 379,818
Savings accounts 8,602 8,108
Time deposits of $100,000 or more 681,927 609,670
Other time deposits 308,704 261,365
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,628,934 1,500,058
Accrued interest payable 6,270 4,911
Income tax payable 2,001 2,266
Other borrowings 147,908 200,065
Other liabilities 6,589 7,370
Reserve for unfunded loan commitments 953 953
Subordinated debentures 72,180 72,180
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,864,835 1,787,803
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Paid in capital 8,347 7,993
Retained earnings 112,377 107,905
Accumulated other comprehensive loss (2,709) (797)
Treasury stock, at cost; 49,915 (2005) and 138,189 (2004) shares (524) (1,360)
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 129,734 125,984
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $1,994,569 $1,913,787
=================================================================================================================================
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands, except earnings per share data) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $29,923 $20,804
Investment securities:
U.S. Government and agency obligations 1,602 1,464
Mortgage-backed securities 143 188
State and political subdivisions 58 158
Other securities 200 143
Other interest-earning assets 20 1
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 31,946 22,758
INTEREST EXPENSE:
Interest-bearing demand 76 86
Money market accounts 1,904 1,354
Savings accounts 5 5
Time deposits of $100,000 or more 4,132 1,954
Other time deposits 1,824 1,438
Other borrowings 1,668 1,222
Subordinated debentures 1,245 1,081
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 10,854 7,140
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 21,092 15,618
Provision for loan losses 4,309 1,649
OTHER INCOME:
Service charges and fees 2,495 2,267
Other noninterest income 372 244
Gain on sales of loans 853 606
Gain on sales of investment securities - 1
- ----------------------------------------------------------------------------------------------------------------------
Total other income 3,720 3,118
OTHER EXPENSE:
Salaries and employee benefits 6,212 5,159
Occupancy 2,346 2,231
FDIC and other insurance 117 95
Other real estate 164 17
General and administrative 3,305 3,010
- ----------------------------------------------------------------------------------------------------------------------
Total other expense 12,144 10,512
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes 8,359 6,575
Taxes on income 2,973 2,373
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 5,386 $4,202
======================================================================================================================
Basic earnings per share $ 0.44 $ 0.35
======================================================================================================================
Diluted earnings per share $ 0.43 $ 0.34
======================================================================================================================
Cash dividends declared per share $ 0.075 $ 0.07
======================================================================================================================
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,386 $ 4,202
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 4,309 1,649
Deferred taxes (209) (2,879)
Depreciation and amortization expense 649 660
Amortization of premiums and accretion of
discounts on securities, net 32 30
Amortization of intangibles 86 79
Tax benefit from exercise of stock options 378 290
(Gain) Loss on sales/calls of securities - (1)
(Gain) Loss on sales of loans (853) (606)
(Gain) Loss on sales of premises/equipment 3 (6)
Proceeds from sales of residential mortgage loans 14,898 16,565
Residential mortgage loans originated for resale (15,879) (15,703)
Proceeds from sales of student loans 179,997 93,033
Student loans originated for resale (220,871) (162,593)
Changes in assets and liabilities:
Accrued interest receivable (1,523) (618)
Other assets (2,527) (21)
Income taxes payable (265) 2,838
Accrued interest payable 1,359 (714)
Other liabilities (848) 213
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from operating activities (35,878) (63,582)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 530 3,175
Available for sale securities 995 26,631
Purchases of Federal Home Loan Bank and Federal Reserve
Bank stock (123) (84)
Purchases of available for sale securities - (35,819)
Loans originated and principal repayments, net (17,805) (42,770)
Purchases of premises and equipment (687) (463)
Proceeds from sales of premises and equipment 24 173
Proceeds from sales of other real estate owned - 120
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from investing activities (17,066) (49,037)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 128,876 87,501
Net increase (decrease) in other borrowings (52,157) 18,828
Net proceeds from issuance of common stock 812 785
Common stock dividends paid (847) (747)
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from financing activities 76,684 106,367
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,740 (6,252)
CASH AND CASH EQUIVALENTS,
Beginning of period 24,097 33,981
- ----------------------------------------------------------------------------------------------------------------------
End of period $ 47,837 $ 27,729
======================================================================================================================
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
OTHER SHARE-
(Dollars in thousands, COMMON STOCK PAID IN RETAINED COMPREHENSIVE TREASURY HOLDERS'
except per share data) SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 12,243,042 $12,243 $7,993 $107,905 $ (797) $(1,360) $125,984
Cash dividends declared:
Common, $0.075 per share,
and other dividends - - - (914) - - (914)
Common stock issued:
Employee Stock Option Plan - - (154) - - 713 559
Employee Stock Purchase Plan - - 11 - - 8 19
Dividend Reinvestment Plan - - 14 - - 7 21
Restricted Stock - - 105 - - 108 213
Tax benefit related to exercise
of stock options - - 378 - - - 378
Other comprehensive income
(loss), net of tax - - - - (1,912) - (1,912)
Treasury shares purchased - - - - - - -
Net income - - - 5,386 - - 5,386
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 12,243,042 $12,243 $8,347 $112,377 $(2,709) $ (524) $129,734
================================================================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands) 2005 2004
- -----------------------------------------------------------------------------------------------
Net income $ 5,386 $ 4,202
OTHER COMPREHENSIVE INCOME:
Unrealized holding gain (loss) on available
for sale securities (3,125) 905
Reclassification adjustment for (gains) losses
arising during the period - (1)
- -----------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (3,125) 904
Tax (expense) benefit related to items
of other comprehensive income (loss) 1,213 (368)
- -----------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (1,912) 536
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 3,474 $ 4,738
===============================================================================================
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 months ended
March 31, 2005 and the cash flows for the three months ended March 31, 2005
should not be considered indicative of the results to be expected for the full
year. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year
ended December 31, 2004.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest"), its wholly owned financial
institution subsidiaries, the Stillwater National Bank and Trust Company
("Stillwater National"), SNB Bank of Wichita ("SNB Wichita"), and its management
consulting subsidiaries, Healthcare Strategic Support, Inc. ("HSSI"), and
Business Consulting Group, Inc. ("BCG"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3: RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
NOTE 4: INVESTMENT SECURITIES
The following table presents securities with gross unrealized losses and fair
value by length of time that the individual securities had been in a continuous
unrealized loss position at March 31, 2005. Securities whose market values
exceed cost are excluded from this table.
Continuous Unrealized Losses
Existing for:
- -----------------------------------------------------------------------------------------------------------------------------
Total
Fair Less Than More Than Unrealized
(Dollars in thousands) Value 12 Months 12 Months Losses
- -----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Government and agency obligations $ 1,011 $ (12) $ - $ (12)
Obligations of state and political subdivisions - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 1,011 $ (12) $ - $ (12)
=============================================================================================================================
Available for Sale:
U.S. Government and agency obligations $174,008 $(1,770) $(2,557) $(4,327)
Obligations of state and political subdivisions - - - -
Mortgage-backed securities 15,115 (174) (49) (223)
Other debt securities 1,250 (12) (17) (29)
- -----------------------------------------------------------------------------------------------------------------------------
Total $190,373 $(1,956) $(2,623) $(4,579)
=============================================================================================================================
7
Southwest has reviewed all these securities on an individual basis. Southwest
has the ability and intent to hold these securities for a period of time
sufficient for a forecasted market price recovery up to (or beyond) the cost of
the investment, or to maturity when the full cost will be recovered and,
therefore, has determined that none of the losses are other than temporary.
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Tulsa, and Oklahoma City areas of Oklahoma; in
Wichita, Kansas; and in the Dallas, Austin, and San Antonio, Texas metropolitan
areas. As a result, the collectibility of Southwest's loan portfolio can be
affected by changes in the economic conditions in these three states and in
those metropolitan areas. At March 31, 2005 and December 31, 2004, substantially
all of Southwest's loans were collateralized with real estate, inventory,
accounts receivable, and/or other assets, or were guaranteed by agencies of the
United States Government or, in the case of private student loans, insured by a
private insurer.
At March 31, 2005, loans to individuals and businesses in the healthcare
industry totaled approximately $370.2 million, or 22%, of total loans and
student loans totaled approximately $390.5 million, or 23%, 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 decreased $9.5 million,
or 43%, from December 31, 2004, and total nonperforming loans decreased $9.3
million, or 40%. Total nonperforming assets of $25.8 million (which includes
other real estate owned) decreased $2.3 million, or 8%.
- ---------------------------------------------------------------------------------------------------------------
At At
(Dollars in thousands) MARCH 31, 2005 DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------
Nonaccrual loans (1) $12,737 $22,230
Past due 90 days or more (2) 1,117 929
----------------------- -----------------------
Total nonperforming loans 13,854 23,159
Other real estate owned 11,902 4,937
----------------------- -----------------------
Total nonperforming assets $25,756 $28,096
======================= =======================
Nonperforming loans to loans receivable 0.83% 1.43%
Allowance for loan losses to nonperforming loans 141.91% 82.00%
Nonperforming assets to loans receivable and
other real estate owned 1.53% 1.72%
(1) The government-guaranteed portion of loans included in these totals was
$2.0 million (2005) and $1.4 million (2004).
(2) The government-guaranteed portion of loans included in these totals was
$27,000 (2005) and $38,000 (2004).
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $12.7 million at March 31, 2005. All of the
nonaccruing assets are subject to regular tests for impairment as part of
Southwest's allowance for loan losses methodology (see below).
During the first three months of 2005, $144,000 in interest income was received
on nonaccruing loans. If interest on those loans had been accrued for the three
months ended March 31, 2005, additional total interest income of $326,000 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 $43.4 million at March 31, 2005, compared to $25.6 million at
December 31, 2004, an increase of 69%. Loans may be monitored by management and
reported as potential nonperforming loans for an extended period of time during
which management continues to be uncertain as to the ability of certain
borrowers to comply with the present loan repayment terms. These loans are
subject to continuing management attention and are considered by management in
determining the level of the allowance for loan losses.
8
NOTE 6: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS
Activity in the allowance for loan losses is shown below for the indicated
periods.
- ------------------------------------------------------------------------------------------------------
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
(Dollars in thousands) MARCH 31, 2005 DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 18,991 $ 15,009
Loans charged-off:
Real estate mortgage 2,537 812
Real estate construction - 275
Commercial 1,265 8,382
Installment and consumer 56 565
- ------------------------------------------------------------------------------------------------------
Total charge-offs 3,858 10,034
Recoveries:
Real estate mortgage 4 151
Commercial 203 907
Installment and consumer 11 90
- ------------------------------------------------------------------------------------------------------
Total recoveries 218 1,148
- ------------------------------------------------------------------------------------------------------
Net loans charged-off 3,640 8,886
Provision for loan losses 4,309 12,868
- ------------------------------------------------------------------------------------------------------
Balance at end of period $ 19,660 $ 18,991
======================================================================================================
Loans outstanding:
Average $1,713,666 $1,527,935
End of period 1,673,778 1,623,875
Net charge-offs to total average loans (annualized) 0.86% 0.58%
Allowance for loan losses to total loans (end of period) 1.17% 1.17%
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and an unallocated allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual. The use of
these loss factors is intended to reduce the differences between estimated
losses inherent in the portfolio and observed losses. Formula allowances also
are established for loans that do not have specific allowances according to the
application of credit risk factors. These factors are set by management to
reflect its assessment of the relative level of risk inherent in each credit
grade. Specific allowances are established in cases where management has
identified significant conditions or circumstances related to individual loans
that management believes indicate the probability that losses may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The unallocated allowance is based
upon management's evaluation of various factors that are not directly measured
in the determination of the formula and specific allowances. These factors may
include general economic and business conditions affecting lending areas, credit
quality trends (including trends in delinquencies and nonperforming loans
expected to result from existing conditions), loan volumes and concentrations,
specific industry conditions within portfolio categories, recent loss experience
in particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. There were no changes in
estimation methods or assumptions that affected the methodology for assessing
the appropriateness of the allowance during the first quarter of 2005. Southwest
determined the level of the allowance for loan losses at March 31, 2005, was
appropriate, based on that methodology.
9
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few such loans may cause a significant increase in nonperforming assets, and may
lead to a material increase in charge-offs and the provision for loan losses in
future periods.
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses; all
affected prior periods have been restated. At March 31, 2005, this reserve for
unfunded loan commitments was $953,000, the same amount previously included in
the allowance for loan losses at December 31, 2004. The reserve is computed
using a methodology similar to that used to determine the allowance for loan
losses, modified to take into account the probability of a drawdown on the
commitment.
NOTE 7: STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan
(the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on an annual
basis and expire from five to ten years after the date of grant. Southwest
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Stock Plans; accordingly, no compensation expense related
to the grants of stock options has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plans
been determined based upon the fair value of the options at their grant date as
prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
- --------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands, except per share data) 2005 2004
- --------------------------------------------------------------------------------------------
Net income, as reported $5,386 $4,202
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (198) (126)
- --------------------------------------------------------------------------------------------
Proforma net income $5,188 $4,076
============================================================================================
Earnings per share:
Basic -- as reported $0.44 $0.35
Basic -- proforma $0.43 $0.34
Diluted -- as reported $0.43 $0.34
Diluted -- proforma $0.41 $0.33
In the first quarter of 2005, 10,800 shares in restricted common shares were
awarded to outside directors of Southwest at a grant date fair value of $19.75
per share. The restrictions on these outside directors' shares expire after
three years. Southwest will recognize compensation expense over the restricted
period. During the first quarter of 2005, $5,925 in compensation expense was
recorded related to these restricted shares.
10
NOTE 8: EARNINGS PER SHARE
Basic earnings per share is computed based upon net income divided by the
weighted average number of shares outstanding during each period. Diluted
earnings per share is computed based upon net income divided by the weighted
average number of shares outstanding during each period adjusted for the effect
of dilutive potential shares calculated using the treasury stock method. At
March 31, 2005 and 2004, there were 130,736 and zero antidilutive options to
purchase common shares, respectively.
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
- ------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
- ------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic earnings per share 12,154,300 11,995,400
Effect of dilutive securities:
Stock options 474,562 467,967
- ------------------------------------------------------------------------------
Weighted average shares outstanding:
Diluted earnings per share 12,628,862 12,463,367
==============================================================================
NOTE 9: OPERATING SEGMENTS
Southwest operates four principal segments: Oklahoma Banking, Other States
Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment
consists of three operating units that provide lending and deposit services to
customers in the state of Oklahoma. The Other States Banking segment consists of
three operating units that provide lending and deposit services to the customers
in the states of Texas and Kansas. The Secondary Market segment consists of two
operating units that provide student lending services to post-secondary students
in Oklahoma and several other states and residential mortgage lending services
to customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is
included in Other Operations. The primary purpose of the fund management unit is
to manage Southwest's overall liquidity needs and interest rate risk. Each
segment borrows funds from and provides funds to the funds management unit as
needed to support its operations. The Other Operations segment also includes SNB
Investor Services and nonbank cash machine 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 to the consolidated financial
statements.
11
The following table summarizes financial results by operating segment:
For the Three Months Ended March 31, 2005
- -------------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,874 $ 4,371 $ 5,785 $ 62 $ 21,092
Provision for loan losses 3,130 1,179 - - 4,309
Other income 1,704 226 876 914 3,720
Other expenses 6,937 2,590 1,376 1,241 12,144
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 2,511 828 5,285 (265) 8,359
Taxes on income 907 298 1,869 (101) 2,973
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,604 $ 530 $ 3,416 $ (164) $ 5,386
===================================================================================================================
Fixed asset expenditures $ 188 $ 116 $ - $ 383 $ 687
Total loans at period end $877,435 $399,343 $396,820 $ 180 $1,673,778
Total assets at period end $895,612 $396,266 $416,666 $286,025 $1,994,569
For the Three Months Ended March 31, 2004
- -------------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,106 $ 2,874 $ 3,556 $ (918) $ 15,618
Provision for loan losses 1,133 516 - - 1,649
Other income 1,727 283 513 595 3,118
Other expenses 6,818 1,334 1,264 1,096 10,512
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 3,882 1,307 2,805 (1,419) 6,575
Taxes on income 1,444 427 1,051 (549) 2,373
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,438 $ 880 $ 1,754 $ (870) $ 4,202
===================================================================================================================
Fixed asset expenditures $ 81 $ 173 $ 2 $ 207 $ 463
Total loans at period end $880,491 $266,462 $272,178 $ 151 $1,419,282
Total assets at period end $892,688 $261,756 $278,797 $262,000 $1,695,241
12
NOTE 10. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. On April 14, 2005,
the SEC announced it would provide for a phased-in implementation process for
this revised statement.
Generally, the approach to accounting for share-based payments in Statement
123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than January 1, 2006. Early adoption
will be permitted in periods in which financial statements have not yet been
issued. Statement 123(R) permits public companies to adopt its requirements
using one of two methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective
date, and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented,
or (b) prior interim periods of the year of adoption.
Southwest plans to adopt Statement 123(R) on January 1, 2006 but has not yet
determined which method will be used. Management of Southwest believes that
adoption of Statement 123(R) will not have a material impact on Southwest's
consolidated financial condition or results of operations.
13
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- -------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
(Dollars in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Total loans $1,713,666 7.08% $1,379,726 6.06%
Investment securities 218,570 3.72 206,834 3.80
Other interest-earning assets 3,393 2.39 671 0.60
-----------------------------------------------------
Total interest-earning assets 1,935,629 6.69 1,587,231 5.77
Other assets 83,676 62,751
---------- ----------
Total assets $2,019,305 $1,649,982
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 64,266 0.48% $ 59,614 0.58%
Money market accounts 377,642 2.04 385,886 1.41
Savings accounts 8,539 0.24 7,330 0.27
Time deposits 943,008 2.56 631,719 2.16
--------------------------------------------------------
Total interest-bearing deposits 1,393,455 2.31 1,084,549 1.79
Other borrowings 222,330 3.04 212,318 2.31
Subordinated debentures 72,180 6.90 72,180 5.92
--------------------------------------------------------
Total interest-bearing liabilities 1,687,965 2.61 1,369,047 2.10
Noninterest-bearing demand deposits 185,636 158,485
Other liabilities 15,126 9,736
Shareholders' equity 130,578 112,714
---------- ----------
Total liabilities and shareholders' equity $2,019,305 $1,649,982
========== ==========
Interest rate spread 4.08% 3.67%
==== ====
Net interest margin (1) 4.42% 3.96%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.67% 115.94%
========= ==========
(1) Net interest margin = annualized net interest income / average
interest-earning assets
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.
14
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"), and Southwest's management consulting subsidiaries,
Healthcare Strategic Support, Inc., and Business Consulting Group, Inc. ("BCG").
Southwest is an independent company, not controlled by other organizations or
individuals. Southwest pursues an established strategy of independent operation
for the benefit of all of its shareholders.
A substantial portion of Southwest's current business and focus for the future
are services for healthcare facilities and professionals, local businesses,
their primary employees, and other managers and professionals. Southwest seeks
to be the premier financial services company for its selected markets.
Information regarding Southwest can be retrieved via the Internet at
www.oksb.com. Stillwater National and SNB Wichita offer commercial and consumer
lending, deposit, and investment services, and specialized cash management,
consulting, and other financial services from offices in Stillwater, Oklahoma
City, Tulsa and Chickasha, Oklahoma, Wichita, Kansas and metropolitan Dallas,
Austin, and San Antonio, Texas; loan production offices in Kansas City, Kansas,
and on the campuses of Oklahoma State University-Tulsa and the University of
Oklahoma Health Sciences Center-Oklahoma City; and on the Internet. Information
regarding products and services of Stillwater National and SNB Wichita,
including SNB DirectBanker(R), Southwest's online banking product, can be
retrieved via the Internet, at www.banksnb.com and www.snbwichita.com. The
Stillwater National and SNB Wichita websites and online banking technology are
frequently updated in response to the changing needs of the large base of
Internet banking customers. The information on our websites is not a part of
this report on form 10-Q.
Southwest's banking philosophy is to provide a high level of customer service, a
wide range of financial services, and products responsive to customer needs.
This philosophy has led to the development of a line of deposit, lending, and
other financial products that respond to professional and commercial customer
needs for speed, efficiency, and information. These include Southwest's Sweep
Agreements, Business Mail Processing, and SNB DirectBanker(R) and other Internet
banking products, which complement Southwest's more traditional banking
products. Southwest also emphasizes marketing personal banking, investment, and
other financial services to highly educated, professional and business persons
in its markets. Southwest seeks to build close relationships with businesses,
professionals and their principals and to service their banking needs throughout
their business development and professional lives. 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 and into Tulsa in 1985. This geographic expansion is based on
identification of markets with concentrations of customers in Southwest's
traditional areas of expertise: healthcare and health professionals, businesses
and their managers and owners, and commercial and commercial real estate
lending, and makes use of traditional and specialized financial services.
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.
Beginning in 2002, Southwest has expanded operations into the states of Kansas
and Texas. At March 31, 2005, Southwest had seven offices in those states.
During the first quarter of 2005, these offices produced $530,000 in net income
(10% of the consolidated total), a decrease from $880,000 for the first quarter
of 2004, and $10.2 million in new banking assets. Southwest has received
regulatory approval to open two branch offices in Austin, Texas and one branch
office in San Antonio, Texas to replace existing loan production offices. Those
offices are not yet accepting deposits.
Our Oklahoma Banking segment accounted for $1.6 million, or 30%, of year-to-date
net income, and $6.5 million in new banking assets during the first three months
of 2005.
15
Southwest has a long history of student and residential mortgage lending. These
operations comprise our Secondary Market business segment. During the first
quarter of 2005, this segment produced $3.4 million in net income, up 95% from
the same period in 2004, and $48.1 million in additional banking assets since
December 31, 2004. This growth was the result of expanded student lending, with
residential mortgage lending increasing only slightly from year-end 2004. Loan
volumes in the Secondary Market segment may vary significantly from period to
period.
For additional information on our operating segments, please see Note 9,
Operating Segments, in the Notes to Unaudited Consolidated Financial Statements.
The total of net income of the segments discussed above exceeds consolidated net
income for the first three months of 2005 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 $2.0 billion
at March 31, 2005, without acquiring other financial institutions. Southwest
considers acquisitions of other financial institutions and other companies from
time to time, although it does not have any specific agreements or
understandings for any such acquisition at present. Southwest also considers,
from time to time, the establishment of new lending, banking and other offices
in additional geographic markets. Southwest also extends loans to borrowers in
Oklahoma and neighboring states through participations with correspondent banks.
FINANCIAL CONDITION
TOTAL ASSETS
Southwest's total assets were $2.0 billion at March 31, 2005 and $1.9 billion at
December 31, 2004.
LOANS
Total loans, including loans held for sale, were $1.7 billion at March 31, 2005,
a 3% increase from December 31, 2004. Southwest experienced increases in all
categories of loans, other than real estate construction loans, as shown in the
following table:
- ------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ------------------------------------------------------------------------------------------------------------
Real estate mortgage
Commercial $ 527,137 $ 523,358 $ 3,779 0.72 %
One-to-four family residential 91,738 87,858 3,880 4.42
Real estate construction 244,491 248,278 (3,787) (1.53)
Commercial 394,772 390,272 4,500 1.15
Installment and consumer
Student loans 390,492 348,970 41,522 11.90
Other 25,148 25,139 9 0.04
- ------------------------------------------------------------------------------------------------------------
Total loans $1,673,778 $1,623,875 $49,903 3.07 %
============================================================================================================
The composition of loans held for sale included in total loans is shown in the
following table.
16
- -------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------
Student loans $390,492 $348,970 $41,522 11.90 %
One-to-four family residential 3,782 3,115 667 21.41
Other loans held for sale 5,905 2,472 3,433 138.88
-------- -------- ------- -------
Total loans held for sale $400,179 $354,557 $45,622 12.87 %
======== ======== ======= =======
Management determines the appropriate level of the allowance for loan losses
using a systematic methodology. (See Note 6, "Allowance for Loan Losses and
Reserve for Unfunded Loan Commitments," in the Notes to Unaudited Consolidated
Financial Statements.) The allowance for loan losses increased by $669,000, or
4%, from December 31, 2004 to March 31, 2005. This growth was necessary due
partially to the increase in potential nonperforming loans (See Note 5, "Loans
Receivable). In addition, due to our rapid growth in loans over the past several
years, a large portion of our loan portfolio and our lending relationships are
of relatively recent origin, or "unseasoned", and require a higher allowance.
At March 31, 2005, the allowance for loan losses was $19.7 million, or 1.17% of
total loans and 141.91% of nonperforming loans, compared to $19.0 million, or
1.17% of total loans and 82.00% of nonperforming loans, at December 31, 2004.
Substantially all of the allowance is related to portfolio loans. The allowance
allocated to portfolio loans was 1.53% of portfolio loans at March 31, 2005,
compared to 1.48% at December 31, 2004. (See "Results of Operations-Provision
for Loan Losses.")
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses. At March
31, 2005, this reserve for unfunded loan commitments was $953,000, the same
amount previously included in the allowance for loan losses at December 31,
2004. The amounts of the allowance for loan losses and other financial
information for December 31, 2004 and March 31, 2004 presented in this report
also reflect the reclassification of the reserve for unfunded loan commitments
from the allowance for loan losses to a separate liability account.
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.6 billion at March 31, 2005, an increase of $129.0
million, or 9%, from $1.5 billion at December 31, 2004. Increases occurred in
all categories of deposits other than money market accounts as shown in the
following table:
- -------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 198,821 $ 183,738 $15,083 8.21 %
Interest-bearing demand 65,045 57,359 7,686 13.40
Money market accounts 365,835 379,818 (13,983) (3.68)
Savings accounts 8,602 8,108 494 6.09
Time deposits of $100,000 or more 681,927 609,670 72,257 11.85
Other time deposits 308,704 261,365 47,339 18.11
---------- ---------- -------- ------
Total deposits $1,628,934 $1,500,058 $128,876 8.59 %
========== ========== ======== ======
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., Citigroup Global Markets, Inc.,
Wachovia Securities LLC, UBS Financial Services, Inc., RBC Dain Rauscher and
CountryWide Securities that total $1.5 billion. At March 31, 2005, $467.4
million in these retail certificates of deposit were included in total deposits,
an increase of $42.7 million, or 10%, from year-end 2004. Stillwater National
has other brokered certificates of deposit totaling $12.3 million included in
total deposits at March 31, 2005.
17
Other borrowings decreased $52.2 million, or 26%, to $147.9 million during the
first three months of 2005.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $3.8 million, or 3%, due primarily to earnings
for the first three months of 2005, stock option exercises, and stock issuances
offset in part by dividends declared and a decrease in accumulated other
comprehensive income (net, after tax, unrealized gains on investment securities
available for sale). At March 31, 2005, Southwest, Stillwater National and SNB
Wichita continued to exceed all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31 2005 and 2004
Net income for the first quarter of 2005 of $5.4 million represented an increase
of $1.2 million, or 28%, over the $4.2 million earned in the first quarter of
2004. Diluted earnings per share were $0.43 compared to $0.34, a 26% increase.
The increase in net income was primarily the result of a $5.5 million, or 35%,
increase in net interest income (fueled by loan growth and increased interest
margin), and a $602,000, or 19%, increase in other income (due mainly to
increased gains on sales of loans and service charges on deposit accounts),
offset in part by a $2.7 million, or 161%, increase in the provision for loan
losses, a $1.6 million, or 16%, increase in other expense (mainly as a result of
increased personnel and general and administrative expenses), and a $600,000, or
25%, increase in taxes on income.
On an operating segment basis, the increase in net income was led by a $1.7
million increase in net income from the Secondary Market segment, due primarily
to increased student lending volume, and a $706,000 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 ($3.4 million) of Southwest's net
income in the first quarter 2005. The contribution from the Secondary Market
segment may vary significantly from period to period as a result of changes in
loan volume, interest rates and market behavior; the number of schools
participating in Southwest's student lending programs, the sizes of their
enrollment, and the graduation status of student borrowers; and other factors.
18
NET INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $29,923 $20,804 $9,119 43.83 %
Investment securities:
U.S. Government and agency obligations 1,602 1,464 138 9.43
Mortgage-backed securities 143 188 (45) (23.94)
State and political subdivisions 58 158 (100) (63.29)
Other securities 200 143 57 39.86
Other interest-earning assets 20 1 19 1,900.00
----------------------------------------------------------
Total interest income 31,946 22,758 9,188 40.37
Interest expense:
Interest-bearing demand 76 86 (10) (11.63)
Money market accounts 1,904 1,354 550 40.62
Savings accounts 5 5 - -
Time deposits of $100,000 or more 4,132 1,954 2,178 111.46
Other time deposits 1,824 1,438 386 26.84
Other borrowings 1,668 1,222 446 36.50
Subordinated debentures 1,245 1,081 164 15.17
----------------------------------------------------------
Total interest expense 10,854 7,140 3,714 52.02
----------------------------------------------------------
Net interest income $21,092 $15,618 $5,474 35.05 %
==========================================================
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 92 basis points, and the
rates paid on Southwest's interest-bearing liabilities increased 51 basis
points, resulting in an increase in the interest rate spread to 4.08% for the
first quarter of 2005 from 3.67% for the first quarter of 2004. During the same
periods, annualized net interest margin increased from 3.96% to 4.42%. The ratio
of average interest-earning assets to average interest-bearing liabilities
decreased to 114.67% for the first quarter of 2005 from 115.94% for the first
quarter of 2004.
The principal factor in the increase of interest income was the $348.4 million,
or 22%, increase in average interest-earning assets. Interest income also
benefited from the 92 basis point increase in the yield earned on
interest-earning assets. Southwest's average loans increased $333.9 million, or
24%, and the related yield increased to 7.08% for the first quarter of 2005 from
6.06% in 2004. During the same period, average investment securities increased
$11.7 million, or 6%, and the related yield was reduced to 3.72% from 3.80%.
The increase in total interest expense can be attributed to the $318.9 million,
or 23%, increase in average interest-bearing liabilities and the 51 basis point
increase in the rates paid on interest-bearing liabilities. The increase in
interest expense on subordinated debentures is due to rate increases on the two
variable rate issuances of subordinated debentures. Rates paid on deposits
decreased for interest-bearing demand and savings accounts and increased for
money market accounts and time deposits.
19
OTHER INCOME
- ----------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ----------------------------------------------------------------------------------------------------------------
Other income:
ATM Service Charges $ 805 $ 732 $ 73 9.97 %
Other service charges 1,333 1,269 64 5.04
Other customer fees 357 265 92 34.72
Other noninterest income 372 245 127 51.84
Gain on sales of loans receivable:
Student loan sales 639 251 388 154.58
Mortgage loan sales 197 242 (45) (18.60)
All other loan sales 17 113 (96) (84.96)
Gain (loss) on sales of investment securities - 1 (1) (100.00)
-------------------------------------------------------
Total other income $3,720 $3,118 $602 19.31 %
=======================================================
Other income increased $602,000, or 19%, due primarily to the $388,000 increase
in gains on sales of student loans. Other contributing factors were the $73,000
increase in ATM service charges and the $64,000 increase in other service
charges. An increase in surcharge rates at some cash machines, more cash
machines being operated, and the relocation of existing cash machines to higher
transaction volume areas all contributed to the increase in ATM service charges.
The increase in other service charges occurred due to the repricing of overdraft
service charges to be more consistent with other financial institutions in our
markets. Other noninterest income also increased $127,000, or 52% due to a
$35,000 increase in consulting fees generated by Southwest's subsidiaries,
Healthcare Strategic Services, Inc. and Business Consulting Group, Inc. and a
$31,000 increase in fees received due to cash payment delays on student loan
sales.
Southwest's multi-state ATM network operated 292 ATM machines in 26 states at
March 31, 2005 compared to 288 ATM machines in 25 states at March 31, 2004.
OTHER EXPENSE
- ------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 6,212 $ 5,159 $1,053 20.41 %
Occupancy 2,346 2,231 115 5.15
FDIC and other insurance 117 95 22 23.16
Other real estate 164 17 147 864.71
General and administrative 3,305 3,010 295 9.80
-----------------------------------------------------------
Total other expense $12,144 $10,512 $1,632 15.53 %
===========================================================
Salaries and employee benefits increased $1.1 million primarily as a result of
an increase in the number of employees as well as normal compensation increases.
The number of full-time equivalent employees increased from 333 at the end of
the first quarter of 2004 to 367 at the end of the first quarter of 2005.
The primary factor in the increase of occupancy expense was a $55,000 increase
in building rental expenses due to the opening of three additional branches in
Texas and expansion of office space in Wichita, Kansas.
The increase in general and administrative expense was due primarily to a
$157,000 increase in accounting fees, $142,500 of which was the cost of work
performed for Sarbanes-Oxley Section 404 compliance and attestation. General and
administrative expense also reflected an $82,000 increase in fees paid in
connection with government-guaranteed loans, and a $57,000 increase in legal
fees.
* * * * * * *
20
Provision for Loan Losses
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses and the reserve for unfunded loan commitments at the
levels Southwest determines is appropriate based on a systematic methodology.
(See Note 6, "Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments," in the Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $19.7 million increased $669,000, or 4%, from
year-end 2004. A provision for loan losses of $4.3 million was recorded in the
first quarter of 2005, an increase of $2.7 million, or 161%, from the first
quarter of 2004. (See Note 5, "Loans Receivable," in the Notes to Unaudited
Consolidated Financial Statements.)
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses. At March
31, 2005, this reserve for unfunded loan commitments was $953,000, the same
amount previously included in the allowance for loan losses at December 31,
2004. The amounts of the allowance for loan losses and other financial
information for December 31, 2004 and March 31, 2004 presented in this report
also reflect the reclassification of the reserve for unfunded loan commitments
from the allowance for loan losses to a separate liability account.
Taxes on Income
Southwest's income tax expense was $3.0 million and $2.4 million for the first
three months of 2005 and 2004, respectively, an increase of $600,000, or 25%.
Southwest's effective tax rates have been lower than federal and state statutory
rates primarily because of tax-exempt income on municipal obligations and loans,
the organization in July 2001 of a real estate investment trust and tax credits
generated by certain lending and investment activities.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as student loans, residential mortgage loans, and SBA loans, and
available for sale investments. Additional sources of liquidity, including cash
flow from the repayment of loans and the sale of participations in outstanding
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of deposits and liquid assets and
accessibility to the capital and money markets. These funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans, and operate the
organization.
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("Sallie Mae"), the F&M Bank of Tulsa ("F&M"), and the Federal Home Loan Bank of
Topeka ("FHLB"). Stillwater National also carries interest-bearing demand notes
issued by the U.S. Treasury in connection with the Treasury Tax and Loan note
program; the outstanding balance of those notes was $1.2 million at March 31,
2005. Stillwater National has approved federal funds purchase lines totaling
$300.5 million with one other bank and four institutional brokers; no amounts
were outstanding on these lines at March 31, 2005. In addition, Stillwater
National has available a $35.0 million line of credit from the Sallie Mae and a
$316.5 million line of credit from the FHLB and SNB Wichita has a $10.0 million
line of credit from the FHLB. Borrowings under the Sallie Mae line would be
secured by student loans. Borrowings under the FHLB lines are secured by
investment securities and loans. The Sallie Mae line expires April 20, 2007; no
amount was outstanding on this line at March 31, 2005. The Stillwater National
FHLB line of credit had an outstanding balance of $106.5 million at March 31,
2005; no amount was outstanding on the SNB Wichita line of credit at the FHLB at
March 31, 2005. See also "Deposits and Other Borrowings" on page 17.
21
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 three months of 2005, the only categories of other borrowings
whose averages exceeded 30% of ending shareholders' equity were repurchase
agreements and funds borrowed from the FHLB.
MARCH 31, 2005 MARCH 31, 2004
- --------------------------------------------------------------------------------------------------------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
(Dollars in thousands) AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
- --------------------------------------------------------------------------------------------------------------------------
Amount outstanding at end of period $40,166 $106,500 $43,243 $131,715
Weighted average rate paid at end of period 1.70% 3.77% 0.62% 3.16%
Average Balance:
For the three months ended $32,836 $136,364 $39,408 $142,344
Average Rate Paid:
For the three months ended 1.70% 3.57% 0.62% 3.06%
Maximum amount outstanding at any month end $47,717 $131,950 $43,243 $144,470
During the first three months of 2005, cash and cash equivalents increased by
$23.7 million, or 99%, to $47.8 million. This increase was the net result of
cash provided from financing activities of $76.7 million (primarily from an
increase in deposits), offset in part by cash used in net loan origination and
other investing activities of $17.1 million and cash used in operating
activities of $35.9 million, primarily to fund an increase in loans held for
sale.
During the first three months of 2004, cash and cash equivalents decreased by
$6.3 million, or 18%, to $27.7 million. This decrease was the net result of cash
used in net loan origination and other investing activities of $49.0 million and
cash used in operating activities of $63.6 million, offset in part by cash
provided from financing activities of $106.3 million.
CAPITAL RESOURCES
In the first three months of 2005, total shareholders' equity increased $3.8
million, or 3%, to $129.7 million. Earnings, net of cash dividends declared on
common stock, contributed $4.5 million to shareholders' equity during this three
month period. The sale or issuance of common stock through the dividend
reinvestment plan, the employee stock purchase plan, and the employee stock
option plan and the issuance of restricted stock contributed an additional $1.2
million to shareholders' equity in the first quarter of 2005, including tax
benefits realized by Southwest relating to option exercises. Accumulated
comprehensive income (loss), consisting of net unrealized gains (losses) on
investment securities available for sale (net of tax), was $(2.7) million at
March 31, 2005 compared to $(797,000) at December 31, 2004.
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 March 31, 2005, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 13.89%, a Tier I risk-based capital ratio of 11.03%, and a leverage
ratio of 8.75%. As of March 31, 2005, Stillwater National and SNB Wichita also
met the criteria for classification as "well-capitalized" institutions under the
prompt corrective action rules promulgated under the Federal Deposit Insurance
Act. Designation as a well-capitalized institution under these regulations does
not constitute a recommendation or endorsement of Southwest, Stillwater National
or SNB Wichita by Federal bank or thrift regulators.
Southwest declared a dividend of $0.075 per common share payable on April 1,
2005 to shareholders of record as of March 17, 2005.
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EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2004.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, Southwest's management evaluated the effectiveness of
Southwest's disclosure controls and procedures as of March 31, 2005. Southwest's
Chief Executive Officer and Chief Financial Officer participated in the
evaluation. Based on this evaluation, Southwest's Chief Executive Officer and
Chief Financial Officer concluded that Southwest's disclosure controls and
procedures were effective as of March 31, 2005.
First Quarter 2005 Changes in Internal Control over Financial Reporting
No change occurred during the first quarter of 2005 that has materially
affected, or is reasonably likely to materially affect, Southwest's internal
control over financial reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Readers of this report should be aware that non-GAAP
ratios and other measures presented by some banking organizations or financial
analysts may not be directly comparable to similarly named ratios or other
measures used by Southwest or other banking organizations.
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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
*Exhibit 10.1 Amended and Restated Severance Compensation Plan
*Exhibit 10.2 Restricted Stock Agreements
Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications
- -----------------
* Compensatory plan or agreement
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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 May 09, 2005
------------------------------------- -----------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell May 09, 2005
------------------------------------- -----------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
25