SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
13,937,910
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1 of 33
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at June 30, 2005 and December 31, 2004...........................3
Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004.................4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004...........................5
Unaudited Consolidated Statement of Shareholders' Equity for the six months ended June 30, 2005...........................6
Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2005 and
2004...................................................................................................................6
Notes to Unaudited Consolidated Financial Statements......................................................................7
Unaudited Average Balances, Yields and Rates..............................................................................13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................25
ITEM 4. CONTROLS AND PROCEDURES..........................................................................................26
PART II. OTHER INFORMATION...............................................................................................27
SIGNATURES................................................................................................................29
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(Dollars in thousands, except per share data) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 30,581 $ 24,097
Federal funds sold 500 -
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 31,081 24,097
Investment securities:
Held to maturity, fair value $1,581 (2005) and $2,509 (2004) 1,589 2,495
Available for sale, amortized cost $245,364 (2005) and $205,393 (2004) 243,367 204,092
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,793 13,464
Loans held for sale 391,074 354,557
Loans receivable, net of allowance for loan losses
of $20,841 (2005) and $18,991 (2004) 1,285,365 1,250,327
Accrued interest receivable 15,456 15,091
Premises and equipment, net 20,291 19,860
Other real estate 9,761 4,937
Other assets 27,869 24,867
---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,039,646 $ 1,913,787
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 221,067 $ 183,738
Interest-bearing demand 56,925 57,359
Money market accounts 385,516 379,818
Savings accounts 8,304 8,108
Time deposits of $100,000 or more 665,697 609,670
Other time deposits 328,969 261,365
---------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,666,478 1,500,058
Accrued interest payable 7,353 4,911
Income tax payable 2,720 2,266
Other borrowings 145,932 200,065
Other liabilities 6,522 7,370
Reserve for unfunded loan commitments 1,360 953
Subordinated debentures 46,393 72,180
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,876,758 1,787,803
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized;
14,658,042 (2005) and 12,243,042 (2004) shares issued and outstanding 14,658 12,243
Paid in capital 45,421 7,993
Retained earnings 116,583 107,905
Accumulated other comprehensive loss (1,222) (797)
Treasury stock, at cost; 715,056 (2005) and 138,189 (2004) shares (12,552) (1,360)
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 162,888 125,984
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $ 2,039,646 $ 1,913,787
=================================================================================================================================
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(Dollars in thousands, except earnings per share data) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $31,105 $22,419 $61,028 $43,223
Investment securities:
U.S. government and agency obligations 1,726 1,539 3,328 3,003
Mortgage-backed securities 157 155 300 343
State and political subdivisions 50 123 108 281
Other securities 189 185 389 328
Other interest-earning assets 18 2 38 3
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 33,245 24,423 65,191 47,181
INTEREST EXPENSE:
Interest-bearing demand 89 91 165 177
Money market accounts 2,383 1,450 4,287 2,804
Savings accounts 5 4 10 9
Time deposits of $100,000 or more 4,937 2,054 9,069 4,008
Other time deposits 2,250 1,362 4,074 2,800
Other borrowings 1,454 1,318 3,122 2,540
Subordinated debentures 1,235 1,079 2,480 2,160
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,353 7,358 23,207 14,498
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 20,892 17,065 41,984 32,683
Provision for loan losses 2,986 2,551 7,295 4,200
OTHER INCOME:
Service charges and fees 2,768 2,418 5,263 4,685
Other noninterest income 494 159 866 403
Gain on sales of loans 916 707 1,769 1,313
Gain on sales of investment securities - - - 1
- ------------------------------------------------------------------------------------------------------------------------
Total other income 4,178 3,284 7,898 6,402
OTHER EXPENSE:
Salaries and employee benefits 6,339 5,171 12,551 10,330
Occupancy 2,338 2,265 4,684 4,496
FDIC and other insurance 119 96 236 191
Other real estate 376 24 540 41
General and administrative 4,612 3,046 7,917 6,056
- ------------------------------------------------------------------------------------------------------------------------
Total other expense 13,784 10,602 25,928 21,114
- ------------------------------------------------------------------------------------------------------------------------
Income before taxes 8,300 7,196 16,659 13,771
Taxes on income 3,071 2,592 6,044 4,965
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 5,229 $ 4,604 $10,615 $ 8,806
========================================================================================================================
Basic earnings per share $ 0.42 $ 0.38 $ 0.86 $ 0.73
========================================================================================================================
Diluted earnings per share $ 0.40 $ 0.37 $ 0.83 $ 0.71
========================================================================================================================
Cash dividends declared per share $ 0.075 $ 0.07 $ 0.15 $ 0.14
========================================================================================================================
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
For the six months
ended June 30,
(Dollars in thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 10,615 $ 8,806
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 7,295 4,200
Deferred taxes (680) (3,637)
Depreciation and amortization expense 1,300 1,301
Amortization of premiums and accretion of
discounts on securities, net 51 90
Amortization of intangibles 193 159
Tax benefit from exercise of stock options 392 438
(Gain) Loss on sales/calls of securities - (1)
(Gain) Loss on sales of loans (1,769) (1,313)
(Gain) Loss on sales of premises/equipment (7) (7)
(Gain) Loss on other real estate owned, net 47 -
Proceeds from sales of residential mortgage loans 40,737 42,883
Residential mortgage loans originated for resale (41,831) (43,489)
Proceeds from sales of student loans 376,958 209,457
Student loans originated for resale (410,367) (288,357)
Changes in assets and liabilities:
Accrued interest receivable (365) (1,457)
Other assets (2,246) 394
Income taxes payable 454 3,938
Accrued interest payable 2,442 (707)
Other liabilities (1,023) 884
----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from operating activities (17,804) (66,418)
----------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 1,425 8,468
Available for sale securities 4,975 43,331
Purchases of Federal Home Loan Bank and Federal Reserve
Bank stock (329) (877)
Purchases of available for sale securities (45,514) (72,095)
Loans originated and principal repayments, net (49,338) (111,872)
Purchases of premises and equipment (1,778) (1,161)
Proceeds from sales of premises and equipment 64 176
Proceeds from sales of other real estate owned 2,286 120
----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from investing activities (88,209) (133,910)
----------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in deposits 166,420 151,775
Net increase (decrease) in other borrowings (54,133) 43,633
Net proceeds from issuance of common stock 40,354 1,142
Repayment of subordinated debentures (25,787) -
Purchases of treasury stock (12,095) -
Common stock dividends paid (1,762) (1,589)
----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from financing activities 112,997 194,961
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,984 (5,367)
Cash and cash equivalents,
Beginning of period 24,097 33,981
----------------------------------------------------------------------------------------------------------------------
End of period $ 31,081 $ 28,614
======================================================================================================================
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUM-
ULATED
OTHER TOTAL
COMPRE- SHARE-
(Dollars in thousands, COMMON STOCK PAID IN RETAINED HENSIVE TREASURY HOLDERS'
except per share data) SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 12,243,042 $ 12,243 $ 7,993 $ 107,905 $ (797) $ (1,360) $ 125,984
Cash dividends declared:
Common, $0.15 per share,
and other dividends - - - (1,937) - - (1,937)
Common stock issued:
Employee Stock Option Plan - - (143) - - 759 616
Employee Stock Purchase Plan - - 21 - - 17 38
Dividend Reinvestment Plan - - 24 - - 19 43
Restricted Stock - - 105 - - 108 213
Public Offering 2,415,000 2,415 37,029 - - - 39,444
Tax benefit related to exercise
of stock options - - 392 - - - 392
Other comprehensive income
(loss), net of tax - - - - (425) - (425)
Treasury shares purchased - - - - - (12,095) (12,095)
Net income - - - 10,615 - - 10,615
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 14,658,042 $ 14,658 $ 45,421 $ 116,583 $ (1,222) $ (12,552) $ 162,888
===================================================================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(Dollars in thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 5,229 $ 4,604 $ 10,615 $ 8,806
OTHER COMPREHENSIVE INCOME:
Unrealized holding gain (loss) on available
for sale securities 2,429 (4,073) (696) (3,168)
Reclassification adjustment for (gains) losses
arising during the period - - - (1)
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax 2,429 (4,073) (696) (3,169)
Tax (expense) benefit related to items
of other comprehensive income (loss) (942) 1,656 271 1,288
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 1,487 (2,417) (425) (1,881)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 6,716 $ 2,187 $ 10,190 $ 6,925
=====================================================================================================================
The accompanying notes are an integral part of this statement.
6
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and notes necessary for a complete presentation of financial
position, results of operations, shareholders' equity, cash flows, and
comprehensive income in conformity with accounting principles generally accepted
in the United States of America. However, the unaudited consolidated financial
statements include all adjustments which, in the opinion of management, are
necessary for a fair presentation. Those adjustments consist of normal,
recurring adjustments. The results of operations for the three and six months
ended June 30, 2005 and the cash flows for the six months ended June 30, 2005
should not be considered indicative of the results to be expected for the full
year. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year
ended December 31, 2004.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest"), its wholly owned financial
institution subsidiaries, the Stillwater National Bank and Trust Company
("Stillwater National"), SNB Bank of Wichita ("SNB Wichita"), and its management
consulting subsidiaries, Healthcare Strategic Support, Inc. ("HSSI"), and
Business Consulting Group, Inc. ("BCG"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3: RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
NOTE 4: INVESTMENT SECURITIES
The following table presents securities with gross unrealized losses and fair
value by length of time that the individual securities had been in a continuous
unrealized loss position at June 30, 2005. Securities whose market values exceed
cost are excluded from this table.
Continuous Unrealized Losses
Existing for:
- -------------------------------------------------------------------------------------------------------------------------------
Total
Fair Less Than More Than Unrealized
(Dollars in thousands) Value 12 Months 12 Months Losses
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. government and agency obligations $ 1,009 $ (9) $ - $ (9)
Obligations of state and political subdivisions - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 1,009 $ (9) $ - $ (9)
===============================================================================================================================
Available for Sale:
U.S. government and agency obligations $170,518 $(624) $(1,388) $(2,012)
Obligations of state and political subdivisions 1,236 (14) - (14)
Mortgage-backed securities 13,699 (133) (52) (185)
Other debt securities 1,235 (19) (13) (32)
- -------------------------------------------------------------------------------------------------------------------------------
Total $186,688 $(790) $(1,453) $(2,243)
===============================================================================================================================
7
Southwest has reviewed all these securities on an individual basis. These
unrealized losses occurred due to increases in interest rates and not as a
result of a decline in credit quality. Southwest has the ability and intent to
hold these securities for a period of time sufficient for a forecasted market
price recovery up to (or beyond) the cost of the investment, or to maturity when
the full cost will be recovered and, therefore, has determined that none of the
losses are other than temporary.
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Oklahoma City, and Tulsa areas of Oklahoma; in
Wichita, Kansas; and in the Dallas, Austin, and San Antonio, Texas metropolitan
areas. As a result, the collectibility of Southwest's loan portfolio can be
affected by changes in the economic conditions in these three states and in
those metropolitan areas. At June 30, 2005 and December 31, 2004, substantially
all of Southwest's loans were collateralized with real estate, inventory,
accounts receivable, and/or other assets, or were guaranteed by agencies of the
United States government or, in the case of private student loans, insured by a
private insurer.
At June 30, 2005, loans to individuals and businesses in the healthcare industry
totaled approximately $396.4 million, or 23%, of total loans and student loans
totaled approximately $383.6 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 $12.3 million,
or 55%, from December 31, 2004, and total nonperforming loans decreased $11.8
million, or 51%. Total nonperforming assets of $21.1 million (which includes
other real estate owned) decreased $7.0 million, or 25%, from the same period.
- ------------------------------------------------------------------------------------------
At At
(Dollars in thousands) JUNE 30, 2005 DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------
Nonaccrual loans (1) $ 9,955 $22,230
Past due 90 days or more (2) 1,427 929
------- -------
Total nonperforming loans 11,382 23,159
Other real estate owned 9,761 4,937
------- -------
Total nonperforming assets $21,143 $28,096
======= =======
Nonperforming loans to loans receivable 0.67% 1.43%
Allowance for loan losses to nonperforming loans 183.10% 82.00%
Nonperforming assets to loans receivable and
other real estate owned 1.24% 1.72%
(1) The government-guaranteed portion of loans included in these totals was $1.7
million (2005) and $1.4 million (2004).
(2) The government-guaranteed portion of loans included in these totals was
$9,000 (2005) and $38,000 (2004).
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $10.0 million at June 30, 2005. All of the
nonaccruing assets are subject to regular tests for impairment as part of
Southwest's allowance for loan losses methodology (see below).
During the first six months of 2005, $195,000 in interest income was received on
nonaccruing loans. If interest on those loans had been accrued for the six
months ended June 30, 2005, additional total interest income of $496,000 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 $46.2 million at June 30, 2005, compared to $25.6 million at
December 31, 2004, an increase of 80%. 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 SIX FOR THE
MONTHS ENDED YEAR ENDED
(Dollars in thousands) JUNE 30, 2005 DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 18,991 $ 15,009
Loans charged-off:
Real estate mortgage 2,681 812
Real estate construction 35 275
Commercial 3,023 8,382
Installment and consumer 339 565
- --------------------------------------------------------------------------------------------------
Total charge-offs 6,078 10,034
Recoveries:
Real estate mortgage 10 151
Commercial 595 907
Installment and consumer 28 90
- --------------------------------------------------------------------------------------------------
Total recoveries 633 1,148
- --------------------------------------------------------------------------------------------------
Net loans charged-off 5,445 8,886
Provision for loan losses 7,295 12,868
- --------------------------------------------------------------------------------------------------
Balance at end of period $ 20,841 $ 18,991
==================================================================================================
Loans outstanding:
Average $1,719,874 $1,527,935
End of period 1,697,280 1,623,875
Net charge-offs to total average loans (annualized) 0.64% 0.58%
Allowance for loan losses to total loans (end of period) 1.23% 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
9
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
six months of 2005. Southwest determined the level of the allowance for loan
losses at June 30, 2005, was appropriate, based on that methodology.
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few such loans may cause a significant increase in nonperforming assets, and may
lead to a material increase in charge-offs and the provision for loan losses in
future periods.
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 June 30, 2005, this reserve for
unfunded loan commitments was $1.4 million, an increase of $407,000, or 43%,
from the amount previously included in the allowance for loan losses at December
31, 2004. The reserve is computed using a methodology similar to that used to
determine the allowance for loan losses, modified to take into account the
probability of a drawdown on the commitment.
NOTE 7: STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan
(the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on an annual
basis and expire from five to ten years after the date of grant. Southwest
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Stock Plans; accordingly, no compensation expense related
to the grants of stock options has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plans
been determined based upon the fair value of the options at their grant date as
prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(Dollars in thousands, except per share data) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Net income, as reported $5,229 $4,604 $10,615 $8,806
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (75) (53) (273) (170)
- ---------------------------------------------------------------------------------------------------------------------------
Proforma net income $5,154 $4,551 $10,342 $8,636
===========================================================================================================================
Earnings per share:
Basic -- as reported $0.42 $0.38 $0.86 $0.73
Basic -- proforma $0.41 $0.38 $0.84 $0.72
Diluted -- as reported $0.40 $0.37 $0.83 $0.71
Diluted -- proforma $0.40 $0.36 $0.81 $0.70
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 six months of 2005, $22,713 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 June
30, 2005 and 2004, there were 2,500 and zero antidilutive options to purchase
common shares, respectively.
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic earnings per share 12,533,323 12,074,336 12,344,858 12,034,868
Effect of dilutive securities:
Stock options 360,477 430,346 395,781 449,157
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Diluted earnings per share 12,893,800 12,504,682 12,740,639 12,484,025
================================================================================================================================
NOTE 9: OPERATING SEGMENTS
Southwest operates four principal segments: Oklahoma Banking, Other States
Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment
consists of three operating units that provide lending and deposit services to
customers in the state of Oklahoma. The Other States Banking segment consists of
three operating units that provide lending and deposit services to the customers
in the states of Texas and Kansas. The Secondary Market segment consists of two
operating units that provide student lending services to post-secondary students
in Oklahoma and several other states and residential mortgage lending services
to customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is
included in Other Operations. The primary purpose of the fund management unit is
to manage Southwest's overall liquidity needs and interest rate risk. Each
segment borrows funds from and provides funds to the fund management unit as
needed to support its operations. The Other Operations segment also includes SNB
Investor Services and nonbank cash machine operations.
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 Six Months Ended June 30, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,358 $ 8,935 $ 10,353 $ 338 $ 41,984
Provision for loan losses 5,080 2,215 - - 7,295
Other income 3,554 491 1,849 2,004 7,898
Other expenses 14,297 5,434 2,782 3,415 25,928
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 6,535 1,777 9,420 (1,073) 16,659
Taxes on income 2,420 637 3,432 (445) 6,044
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,115 $ 1,140 $5,988 $ (628) $ 10,615
=============================================================================================================================
Fixed asset expenditures $ 426 $ 318 $ - $ 1,034 $ 1,778
Total loans at period end 889,243 425,767 382,191 79 1,697,280
Total assets at period end 902,294 423,960 400,996 312,396 2,039,646
For the Six Months Ended June 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,674 $ 6,357 $ 7,735 $ (2,083) $ 32,683
Provision for loan losses 2,699 1,501 - - 4,200
Other income 3,516 480 1,152 1,254 6,402
Other expenses 13,510 2,928 2,546 2,130 21,114
- -----------------------------------------------------------------------------------------------------------------------------
Income before taxes 7,981 2,408 6,341 (2,959) 13,771
Taxes on income 2,944 816 2,356 (1,151) 4,965
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,037 $ 1,592 $ 3,985 $ (1,808) $ 8,806
=============================================================================================================================
Fixed asset expenditures $ 239 $ 293 $ 2 $ 627 $ 1,161
Total loans at period end 887,902 312,777 297,931 151 1,498,761
Total assets at period end 895,387 316,515 298,317 276,945 1,787,164
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:
12
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective
date, and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented,
or (b) prior interim periods of the year of adoption.
Southwest plans to adopt Statement 123(R) on January 1, 2006 but has not yet
determined which method will be used. Management of Southwest believes that
adoption of Statement 123(R) will not have a material impact on Southwest's
consolidated financial condition or results of operations.
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- ------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30,
(Dollars in thousands) 2005 2004
- ------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
- ------------------------------------------------------------------------------------------------------------------
Assets
Total loans $1,726,037 7.23% $1,473,538 6.12%
Investment securities 229,692 3.71 218,987 3.68
Other interest-earning assets 2,565 2.81 1,436 0.56
-------------------------------------------------------------
Total interest-earning assets 1,958,294 6.81 1,693,961 5.80
Other assets 94,347 65,489
--------------- ---------------
Total assets $2,052,641 $1,759,450
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 66,671 0.54% $ 61,757 0.59%
Money market accounts 380,347 2.51 414,304 1.41
Savings accounts 8,524 0.24 7,629 0.21
Time deposits 998,651 2.89 662,647 2.07
------------------------------------------------------------
Total interest-bearing deposits 1,454,193 2.67 1,146,337 1.74
Other borrowings 172,872 3.37 243,138 2.18
Subordinated debentures 70,196 6.96 72,180 5.91
------------------------------------------------------------
Total interest-bearing liabilities 1,697,261 2.92 1,461,655 2.02
Noninterest-bearing demand deposits 198,823 171,977
Other liabilities 16,009 9,931
Shareholders' equity 140,548 115,887
--------------- ---------------
Total liabilities and shareholders' equity $2,052,641 $1,759,450
=============== ===============
Interest rate spread 3.89% 3.78%
============= =============
Net interest margin (1) 4.28% 4.05%
============= ==============
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.38% 115.89%
=============== ===============
(1) Net interest margin = annualized net interest income / average
interest-earning assets
13
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- ------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
- -----------------------------------------------------------------------------------------------------------------
Assets
Total loans $1,719,874 7.16% $1,426,632 6.09%
Investment securities 224,162 3.71 212,910 3.74
Other interest-earning assets 2,976 2.57 1,054 0.57
------------------------------------------------------------
Total interest-earning assets 1,947,012 6.75 1,640,596 5.78
Other assets 89,149 64,121
--------------- ----------
Total assets $2,036,161 $1,704,717
=============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 65,475 0.51% $ 60,686 0.59%
Money market accounts 379,029 2.28 400,096 1.41
Savings accounts 8,531 0.24 7,478 0.24
Time deposits 970,984 2.73 647,182 2.12
------------------------------------------------------------
Total interest-bearing deposits 1,424,019 2.49 1,115,442 1.77
Other borrowings 197,464 3.19 227,728 2.24
Subordinated debentures 71,182 6.93 72,180 5.92
------------------------------------------------------------
Total interest-bearing liabilities 1,692,665 2.76 1,415,350 2.06
Noninterest-bearing demand deposits 192,266 165,231
Other liabilities 15,639 9,835
Shareholders' equity 135,591 114,301
--------------- ----------
Total liabilities and shareholders' equity $2,036,161 $1,704,717
=============== ==========
Interest rate spread 3.99% 3.72%
======= =========
Net interest margin (1) 4.35% 4.01%
======= =========
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.03% 115.91%
============== ==========
(1) Net interest margin = annualized net interest income / average
interest-earning assets
14
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"), and Southwest's management consulting subsidiaries,
Healthcare Strategic Support, Inc. ("HSSI"), and Business Consulting Group, Inc.
("BCG"). Southwest is an independent company, not controlled by other
organizations or individuals.
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 these 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 its
expansion into Oklahoma City in 1982 and into Tulsa in 1985. This geographic
expansion is based on identification of markets with concentrations of customers
in Southwest's traditional areas of expertise: healthcare and health
professionals, businesses and their managers and owners, and commercial and
commercial real estate lending, and makes use of traditional and specialized
financial services. Specialized services include integrated document imaging and
cash management services designed to help customers in the healthcare industry
and other record-intensive enterprises operate more efficiently, and management
consulting services through Southwest's management consulting subsidiaries:
HSSI, which serves physicians, hospitals, and healthcare groups, and BCG, which
serves small and large commercial enterprises.
15
Beginning in 2002, Southwest has expanded operations into the states of Kansas
and Texas. At June 30, 2005, these offices accounted for $425.8 million in loans
(33% of portfolio loans and 25% of total loans, which includes loans held for
sale). During the first six months of 2005, these offices produced $1.1 million
in net income (11% of the consolidated total), and $37.9 million in asset
growth. Southwest has received regulatory approval to open two branch offices in
Austin, Texas and one branch office in San Antonio, Texas to replace existing
loan production offices; of these, only one of the Austin branches is currently
accepting deposits.
The Oklahoma Banking segment accounted for $4.1 million, or 39%, of year-to-date
net income, and $13.1 million in asset growth during the first six months of
2005.
Southwest has a long history of student and residential mortgage lending. These
operations comprise the Secondary Market business segment. During the first six
months of 2005, this segment produced $6.0 million in net income, up 50% from
the same period in 2004, and $32.4 million in asset growth since December 31,
2004. This growth was the result of expanded student lending, with residential
mortgage lending increasing only slightly from year-end 2004. Loan volumes in
the Secondary Market segment may vary significantly from period to period.
For additional information on Southwest's operating segments, please see Note 9,
Operating Segments, in the Notes to Unaudited Consolidated Financial Statements.
The total of net income of the segments discussed above exceeds consolidated net
income for the first six 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 over $2.0 billion at
June 30, 2005, without acquiring other financial institutions. Southwest
considers acquisitions of other financial institutions and other companies from
time to time, although it does not have any specific agreements or
understandings for any such acquisition at present. Southwest also considers,
from time to time, the establishment of new lending, banking and other offices
in additional geographic markets. Southwest also extends loans to borrowers in
Oklahoma and neighboring states through participations with correspondent banks.
FINANCIAL CONDITION
TOTAL ASSETS AND INVESTMENT SECURITIES
Southwest's total assets were $2.0 billion at June 30, 2005 and $1.9 billion at
December 31, 2004.
Southwest's investment security portfolio increased $38.7 million, or 18%, from
$220.1 million at December 31, 2004 to $258.7 million at June 30, 2005. The
increase occurred primarily in U.S. government and agency obligations, which
increased $37.4 million, or 21%, during the first six months of 2005. The funds
used to purchase these additional investment securities were provided by the
common stock offering that was completed during the second quarter of 2005.
16
LOANS
Total loans, including loans held for sale, were $1.7 billion at June 30, 2005,
a 5% increase from December 31, 2004. Southwest experienced increases in all
categories of loans, except other consumer loans, as shown in the following
table:
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------------
Real estate mortgage
Commercial $ 525,638 $ 523,358 $ 2,280 0.44%
One-to-four family residential 96,211 87,858 8,353 9.51
Real estate construction 274,822 248,278 26,544 10.69
Commercial 392,892 390,272 2,620 0.67
Installment and consumer
Student loans 383,585 348,970 34,615 9.92
Other 24,132 25,139 (1,007) (4.01)
- -------------------------------------------------------------------------------------------------------------------------
Total loans $1,697,280 $1,623,875 $ 73,405 4.52%
=========================================================================================================================
The composition of loans held for sale included in total loans is shown in the
following table.
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------------
Student loans $383,585 $348,970 $ 34,615 9.92%
One-to-four family residential 4,784 3,115 1,669 53.58
Other loans held for sale 2,705 2,472 233 9.43
- -------------------------------------------------------------------------------------------------------------------------
Total loans held for sale $391,074 $354,557 $ 36,517 10.30%
==========================================================================================================================
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 $1.9 million,
or 10%, from December 31, 2004 to June 30, 2005. This growth was necessary due
partially to the increase in potential nonperforming loans (See Note 5, "Loans
Receivable). In addition, due to the rapid growth in loans over the past several
years, a large portion of the loan portfolio and corresponding lending
relationships are of relatively recent origin, or "unseasoned", and require a
higher allowance.
At June 30, 2005, the allowance for loan losses was $20.8 million, or 1.23% of
total loans and 183.10% of nonperforming loans, compared to $19.0 million, or
1.17% of total loans and 82.00% of nonperforming loans, at December 31, 2004.
(See "Results of Operations-Provision for Loan Losses.")
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses. At June 30,
2005, this reserve for unfunded loan commitments was $1.4 million, a $407,000,
or 43%, increase from the amount previously included in the allowance for loan
losses at December 31, 2004. The amounts of the allowance for loan losses and
other financial information for December 31, 2004 and June 30, 2004 presented in
this report also reflect the reclassification of the reserve for unfunded loan
commitments from the allowance for loan losses to a separate liability account.
17
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.7 billion at June 30, 2005, an increase of $166.4
million, or 11%, from $1.5 billion at December 31, 2004. Increases occurred in
all categories of deposits other than interest-bearing demand accounts as shown
in the following table:
- --------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- --------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 221,067 $ 183,738 $ 37,329 20.32%
Interest-bearing demand 56,925 57,359 (434) (0.76)
Money market accounts 385,516 379,818 5,698 1.50
Savings accounts 8,304 8,108 196 2.42
Time deposits of $100,000 or more 665,697 609,670 56,027 9.19
Other time deposits 328,969 261,365 67,604 25.87
---------- ---------- ---------- -----
Total deposits $1,666,478 $1,500,058 $ 166,420 11.09%
========== ========== ========== =====
Stillwater National has unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS
Financial Services, Inc., RBC Dain Rauscher, Morgan Stanley & Co., Inc., and
CountryWide Securities that total $1.5 billion. At June 30, 2005, $429.1 million
in these retail certificates of deposit were included in time deposits of
$100,000 or more, an increase of $4.3 million, or 1%, from year-end 2004.
Stillwater National has other brokered certificates of deposit totaling $1.4
million included in total deposits at June 30, 2005.
Other borrowings decreased $54.1 million, or 27%, to $145.9 million during the
first six months of 2005.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $36.9 million, or 29%, due primarily to net
proceeds of the common stock offering and other stock issuances and earnings for
the first six months of 2005 offset in part by the repurchase of common stock,
dividends declared and a decrease in accumulated other comprehensive income
(net, after tax, unrealized gains on investment securities available for sale).
At June 30, 2005, Southwest, Stillwater National and SNB Wichita continued to
exceed all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2005 and 2004
Net income for the second quarter of 2005 of $5.2 million represented an
increase of $625,000, or 14%, over the $4.6 million earned in the second quarter
of 2004. Diluted earnings per share were $0.40 compared to $0.37, an 8%
increase. The increase in net income was primarily the result of a $3.8 million,
or 22%, increase in net interest income (fueled by loan growth and increased
interest margin), and an $894,000, or 27%, increase in other income (due mainly
to increased gains on sales of loans and service charges on deposit accounts),
offset in part by a $3.2 million, or 30%, increase in other expense (mainly as a
result of increased personnel, other real estate, and general and administrative
expenses), a $435,000, or 17%, increase in the provision for loan losses and a
$479,000, or 18%, increase in taxes on income.
On an operating segment basis, the increase in net income was led by a $474,000
reduced deficit from Other Operations and a $342,000 increase in net income from
the Secondary Market segment partially offset by a $102,000 reduction in net
income from the Other States Banking segment, and an $88,000 reduction in net
income from the Oklahoma Banking segment. The Secondary Market segment
contributed the largest portion ($2.6 million) of Southwest's net income in the
second 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 JUNE 30,
(Dollars in Thousands) 2005 2004 $ CHANGE % CHANGE
- -----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $31,105 $22,419 $8,686 38.74%
Investment securities:
U.S. government and agency obligations 1,726 1,539 187 12.15
Mortgage-backed securities 157 155 2 1.29
State and political subdivisions 50 123 (73) (59.35)
Other securities 189 185 4 2.16
Other interest-earning assets 18 2 16 800.00
----------------------------------------------------
Total interest income 33,245 24,423 8,822 36.12
Interest expense:
Interest-bearing demand 89 91 (2) (2.20)
Money market accounts 2,383 1,450 933 64.34
Savings accounts 5 4 1 25.00
Time deposits of $100,000 or more 4,937 2,054 2,883 140.36
Other time deposits 2,250 1,362 888 65.20
Other borrowings 1,454 1,318 136 10.32
Subordinated Debentures 1,235 1,079 156 14.46
----------------------------------------------------
Total interest expense 12,353 7,358 4,995 67.89
----------------------------------------------------
Net interest income $20,892 $17,065 $3,827 22.43%
====================================================
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 101 basis points, and
the rates paid on Southwest's interest-bearing liabilities increased 90 basis
points, resulting in an increase in the interest rate spread to 3.89% for the
second quarter of 2005 from 3.78% for the second quarter of 2004. During the
same periods, annualized net interest margin increased to 4.28% from 4.05%. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 115.38% for the second quarter of 2005 from 115.89% for the second
quarter of 2004.
The increase of interest income was the result of the 101 basis point increase
in the yield earned on interest-earning assets and the $264.3 million, or 16%,
increase in average interest-earning assets. Southwest's average loans increased
$252.5 million, or 17%, and the related yield increased to 7.23% for the second
quarter of 2005 from 6.12% in 2004. During the same period, average investment
securities increased $10.7 million, or 5%, and the related yield increased to
3.71% from 3.68%.
The increase in total interest expense can be attributed to the 90 basis point
increase in the rates paid on interest-bearing liabilities and the $235.6
million, or 16%, increase in average 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 increased for all other types of
deposits.
19
OTHER INCOME
- -------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED JUNE 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Other income:
ATM Service Charges $ 871 $ 794 $ 77 9.70%
Other service charges 1,498 1,339 159 11.87
Other customer fees 399 285 114 40.00
Other noninterest income 494 159 335 210.69
Gain on sales of loans receivable:
Student loan sales 567 268 299 111.57
Mortgage loan sales 340 340 - -
All other loan sales 9 99 (90) (90.91)
Gain (loss) on sales of investment securities - - - -
---------------------------------------------------
Total other income $4,178 $3,284 $894 27.22%
===================================================
The $335,000 increase in other noninterest income occurred primarily due to a
$281,000, or 508%, increase in consulting fees generated by Southwest's
consulting subsidiaries, HSSI and BCG, and a $34,000 increase in fees received
due to cash payment delays on student loan sales. The increase in other service
charges occurred primarily in overdraft service charges which increased $153,000
due to repricing those service charge rates earlier in the year to be more
consistent with other financial institutions in Southwest's markets. An increase
in surcharge rates at some cash machines, a larger number of cash machines being
operated, and the relocation of existing cash machines to higher transaction
volume areas all contributed to the $77,000 increase in ATM service charges.
Southwest's multi-state ATM network operated 291 ATM machines in 26 states at
June 30, 2005 compared to 285 ATM machines in 25 states at June 30, 2004.
OTHER EXPENSE
- -------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED JUNE 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 6,339 $ 5,171 $1,168 22.59%
Occupancy 2,338 2,265 73 3.22
FDIC and other insurance 119 96 23 23.96
Other real estate 376 24 352 1,466.67
General and administrative 4,612 3,046 1,566 51.41
- -------------------------------------------------------------------------------------------------------------------
Total other expense $13,784 $10,602 $3,182 30.01%
- -------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits increased $1.2 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 331 at the end of
the second quarter of 2004 to 365 at the end of the second quarter of 2005.
The primary factor in the increase of occupancy expense was a $74,000 increase
in building rental expenses due to office expansion in Texas and Wichita,
Kansas.
The increase in other real estate expenses occurred as we continued operations
of certain acquired properties and prepared other properties to be sold.
20
The increase in general and administrative expense was due primarily to the
required write-off of $970,000 in unamortized issuance costs related to the SBI
Capital trust preferred securities that were redeemed in June 2005 and a
$407,000 provision for unfunded loan commitments.
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2005 and 2004
Net income for the first six months of 2005 of $10.6 million represented an
increase of $1.8 million, or 21%, over the $8.8 million earned in the first six
months of 2004. Diluted earnings per share were $0.83 compared to $0.71, a 17%
increase. The increase in net income was primarily the result of a $9.3 million,
or 28%, increase in net interest income (fueled by loan growth and increased
interest margin), and a $1.5 million, or 23%, increase in other income (due
mainly to increased gains on sales of loans and service charges on deposit
accounts), offset in part by a $4.8 million, or 23%, increase in other expense
(mainly as a result of increased personnel, other real estate, and general and
administrative expenses, and a provision for unfunded loan commitments), a $3.1
million, or 74%, increase in the provision for loan losses and a $1.1 million,
or 22%, increase in taxes on income.
On an operating segment basis, the increase in net income was led by a $2.0
million increase in net income from the Secondary Market segment and a $1.2
million reduction in the deficit from Other Operations, partially offset by a
$922,000 decrease in net income from the Oklahoma Banking segment, and a
$452,000 decrease in net income from the Other States Banking segment. The
Secondary Market segment contributed the largest portion ($6.0 million) of
Southwest's net income in the first six months 2005. The contribution from the
Secondary Market segment may vary significantly from period to period as a
result of changes in loan volume, interest rates and market behavior; the number
of schools participating in Southwest's student lending programs, the sizes of
their enrollment, and the graduation status of student borrowers; and other
factors.
NET INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
(Dollars in thousands, except share data) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $61,028 $43,223 $17,805 41.19%
Investment securities:
U.S. government and agency obligations 3,328 3,003 325 10.82
Mortgage-backed securities 300 343 (43) (12.54)
State and political subdivisions 108 281 (173) (61.57)
Other securities 389 328 61 18.60
Other interest-earning assets 38 3 35 1,166.67
----------------------------------------------------
Total interest income 65,191 47,181 18,010 38.17
Interest expense:
Interest-bearing demand 165 177 (12) (6.78)
Money market accounts 4,287 2,804 1,483 52.89
Savings accounts 10 9 1 11.11
Time deposits of $100,000 or more 9,069 4,008 5,061 126.27
Other time deposits 4,074 2,800 1,274 45.50
Other borrowings 3,122 2,540 582 22.91
Subordinated Debentures 2,480 2,160 320 14.81
----------------------------------------------------
Total interest expense 23,207 14,498 8,709 60.07
----------------------------------------------------
Net interest income $41,984 $32,683 $ 9,301 28.46%
====================================================
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.
21
Yields on Southwest's interest-earning assets increased 97 basis points, and the
rates paid on Southwest's interest-bearing liabilities increased 70 basis
points, resulting in an increase in the interest rate spread to 3.99% for the
first six months of 2005 from 3.72% for the first six month of 2004. During the
same periods, annualized net interest margin increased from 4.01% to 4.35%. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 115.03% for the first six months of 2005 from 115.91% for the first
six months of 2004.
The principal factor in the increase of interest income was the $306.4 million,
or 19%, increase in average interest-earning assets. Interest income also
benefited from the 97 basis point increase in the yield earned on
interest-earning assets. Southwest's average loans increased $293.2 million, or
21%, and the related yield increased to 7.16% for the first six months quarter
of 2005 from 6.09% in 2004. During the same period, average investment
securities increased $11.3 million, or 5%, and the related yield decreased to
3.71% from 3.74%.
The increase in total interest expense can be attributed to the 70 basis point
increase in the rates paid on interest-bearing liabilities and the $277.3
million, or 20%, increase in average 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 increased for all other types of
deposits.
OTHER INCOME
- -------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Other income:
ATM Service Charges $1,675 $1,525 $ 150 9.84%
Other service charges 2,846 2,614 232 8.88
Other customer fees 742 546 196 35.90
Other noninterest income 866 403 463 114.89
Gain on sales of loans receivable:
Student loan sales 1,206 519 687 132.37
Mortgage loan sales 537 582 (45) (7.73)
All other loan sales 26 212 (186) (87.74)
Gain (loss) on sales of investment securities - 1 (1) (100.00)
----------------------------------------------------------
Total other income $7,898 $6,402 $1,496 23.37%
==========================================================
The $463,000 increase in other noninterest income occurred primarily due to a
$316,000, or 164%, increase in consulting fees generated by Southwest's
consulting subsidiaries, HSSI and BCG, and a $60,000 increase in fees received
due to cash payment delays on student loan sales. The increase in other service
charges occurred primarily in overdraft service charges which increased $324,000
due to repricing those service charge rates earlier in the year to be more
consistent with other financial institutions in Southwest's markets. An increase
in surcharge rates at some cash machines, more cash machines being operated, and
the relocation of existing cash machines to higher transaction volume areas all
contributed to the $150,000 increase in ATM service charges.
Southwest's multi-state ATM network operated 291 ATM machines in 26 states at
June 30, 2005 compared to 285 ATM machines in 25 states at June 30, 2004.
22
OTHER EXPENSE
- -------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits $12,551 $10,330 $2,221 21.50%
Occupancy 4,684 4,496 188 4.18
FDIC and other insurance 236 191 45 23.56
Other real estate 540 41 499 1,217.07
General and administrative 7,917 6,056 1,861 30.73
----------------------------------------------------
Total other expenses $25,928 $21,114 $4,814 22.80%
====================================================
Salaries and employee benefits increased $2.2 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 331 at the end of
the second quarter of 2004 to 365 at the end of the second quarter of 2005.
The primary factor in the increase of occupancy expense was a $129,000 increase
in building rental expenses due to office expansion in Texas and Wichita,
Kansas. Other increases in line items such as security services, utilities,
equipment rental and maintenance contracts also occurred due to these additional
offices.
The increase in other real estate expenses occurred as we continued operations
of certain acquired properties and prepared other properties to be sold.
The increase in general and administrative expense was due primarily to the
required write-off of $970,000 in unamortized issuance costs related to the SBI
Capital trust preferred securities that were redeemed in June 2005, a $407,000
provision for unfunded loan commitments during the second quarter, a $203,000
increase in accounting fees ($142,500 of which was the cost of work performed
for Sarbanes-Oxley Section 404 compliance and attestation), a $184,000 increase
in fees paid in connection with government-guaranteed loans, and a $133,000
increase in legal fees.
* * * * * * *
PROVISIONS FOR LOAN LOSSES AND FOR UNFUNDED LOAN COMMITMENTS
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses and the reserve for unfunded loan commitments at the
levels Southwest determines is appropriate based on a systematic methodology.
(See Note 6, "Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments," in the Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $20.8 million increased $1.9 million, or 10%,
from year-end 2004. A provision for loan losses of $7.3 million was recorded in
the first six months of 2005, an increase of $3.1 million, or 74%, from the
first six months of 2004. A provision for loan losses of $3.0 million was
recorded for the second quarter of 2005, an increase of $435,000, or 17%, from
the second 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 June 30,
2005, this reserve for unfunded loan commitments was $1.4 million, a $407,000,
or 43%, increase from the amount previously included in the allowance for loan
losses at December 31, 2004. The amounts of the allowance for loan losses and
other financial information for December 31, 2004 and June 30, 2004 presented in
this report also reflect the reclassification of the reserve for unfunded loan
commitments from the allowance for loan losses to a separate liability account.
The provision for unfunded loan commitments is a component of general and
administrative expense on Southwest's consolidated statements of operations.
23
TAXES ON INCOME
Southwest's income tax expense was $6.0 million and $5.0 million for the first
six months of 2005 and 2004, respectively, an increase of $1.1 million, or 22%,
and was $3.1 million and $2.6 million for the second quarters of 2005 and 2004,
respectively, an increase of $479,000, or 18%. Southwest's effective tax rates
have been lower than federal and state statutory rates primarily because of
tax-exempt income on municipal obligations and loans, 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 $1.6 million at June 30,
2005. Stillwater National has approved federal funds purchase lines totaling
$305.5 million with eight banks; $1.5 million was outstanding on these lines at
June 30, 2005. In addition, Stillwater National has available a $200.0 million
line of credit from Sallie Mae and a $330.8 million line of credit from the FHLB
and SNB Wichita has a $10.5 million line of credit from the FHLB. Borrowings
under the Sallie Mae line would be secured by student loans. Borrowings under
the FHLB lines are secured by investment securities and loans. The Sallie Mae
line expires April 30, 2007; no amount was outstanding on this line at June 30,
2005. The Stillwater National FHLB line of credit had an outstanding balance of
$105.3 million at June 30, 2005; no amount was outstanding on the SNB Wichita
line of credit at the FHLB at June 30, 2005. See also "Deposits and Other
Borrowings" on page 2.
Stillwater National sells securities under agreements to repurchase with
Stillwater National retaining custody of the collateral. Collateral consists of
direct obligations of U.S. government and agency obligations, which are
designated as pledged with Stillwater National's safekeeping agent. These
transactions are for one-to-four day periods.
During the first six 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.
JUNE 30, 2005 JUNE 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
(Dollars in thousands) AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
- --------------------------------------------------------------------------------------------------------------------------
Amount outstanding at end of period $37,536 $105,300 $36,679 $162,870
Weighted average rate paid at end of period 2.08% 3.93% 0.62% 2.95%
Average Balance:
For the three months ended $32,443 $108,465 $39,204 $166,165
For the six months ended $32,639 $122,337 $39,306 $154,254
Average Rate Paid:
For the three months ended 3.78% 3.87% 0.62% 2.80%
For the six months ended 1.89% 3.70% 0.62% 2.92%
Maximum amount outstanding at any month end $47,717 $131,950 $44,465 $189,788
24
During the first six months of 2005, cash and cash equivalents increased by $7.0
million, or 29%, to $31.1 million. This increase was the net result of cash
provided from financing activities of $113.0 million (primarily from an increase
in deposits), offset in part by cash used in net loan origination and other
investing activities of $88.2 million and cash used in operating activities of
$17.8 million, primarily to fund an increase in loans held for sale.
During the first six months of 2004, cash and cash equivalents decreased by $5.4
million, or 19%, to $28.6 million. This decrease was the net result of cash used
in net loan origination and other investing activities of $133.9 million and
cash used in operating activities of $66.4 million, offset in part by cash
provided from financing activities of $194.9 million.
CAPITAL RESOURCES
In the first six months of 2005, total shareholders' equity increased $36.9
million, or 29%, to $162.9 million due primarily to the $39.4 million net
proceeds from the common stock offering. Earnings, net of cash dividends
declared on common stock, contributed $8.7 million to shareholders' equity
during this six month period. The sale or issuance of common stock through the
dividend reinvestment plan, the employee stock purchase plan, and the employee
stock option plan and the issuance of restricted stock contributed an additional
$1.3 million to shareholders' equity in the first six months of 2005, including
tax benefits realized by Southwest relating to option exercises. Accumulated
comprehensive income (loss), consisting of net unrealized gains (losses) on
investment securities available for sale (net of tax), was $(1.2) million at
June 30, 2005 compared to $(797,000) at December 31, 2004. Southwest purchased
$12.1 million in shares at a price of $18.00 per share during the first six
months of 2005.
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are
commonly known as Risk-Based Capital Guidelines. At June 30, 2005, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 13.92%, a Tier I risk-based capital ratio of 12.67%, and a leverage
ratio of 10.20%. As of June 30, 2005, Stillwater National and SNB Wichita also
met the criteria for classification as "well-capitalized" institutions under the
prompt corrective action rules promulgated under the Federal Deposit Insurance
Act. Designation as a well-capitalized institution under these regulations does
not constitute a recommendation or endorsement of Southwest, Stillwater National
or SNB Wichita by Federal bank or thrift regulators.
Southwest declared a dividend of $0.075 per common share payable on July 1, 2005
to shareholders of record as of June 17, 2005.
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2004.
25
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 June 30, 2005. Southwest's
Chief Executive Officer and Chief Financial Officer participated in the
evaluation. Based on this evaluation, Southwest's Chief Executive Officer and
Chief Financial Officer concluded that Southwest's disclosure controls and
procedures were effective as of June 30, 2005.
FIRST SIX MONTHS 2005 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change occurred during the first six months of 2005 that has materially
affected, or is reasonably likely to materially affect, Southwest's internal
control over financial reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Readers of this report should be aware that non-GAAP
ratios and other measures presented by some banking organizations or financial
analysts may not be directly comparable to similarly named ratios or other
measures used by Southwest or other banking organizations.
26
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Unregistered sales of equity securities and use of proceeds
There were no unregistered sales of equity securities by
Southwest during the quarter ended June 30, 2005.
The following table provides information on Southwest's
purchases of its common stock during the three months ended
June 30, 2005.
Issuer Purchases of Equity Securities (1)
------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum
(a) Total Shares Purchased Number that May
Number of as Part of Publicly Yet Be Purchased
Shares (b) Average Price Announced Plans or Under the Plans or
Period Purchased (3) Paid per Share Programs Programs (2)
------------------------------------------------------------------------------------------------------------
April 2005
------------------------------------------------------------------------------------------------------------
May 2005 671,956 $18.00 671,956 17,840
------------------------------------------------------------------------------------------------------------
June 2005
------------------------------------------------------------------------------------------------------------
(1) Includes purchases of Southwest's stock made by or on
behalf of the Company or any affiliated purchasers of the
Company as defined in Securities and Exchange Commission
Rule 10b-18.
(2) In April 2004, Southwest publicly announced a stock
repurchase program that permitted the repurchase of up to
5%, or approximately 500,000 shares, of its outstanding
common stock. That program replaced a similar plan that
expired in 2003. The April 2004 plan expired on March 31,
2005, and has not been replaced.
(3) All of the shares shown were purchased pursuant to a
Selling Shareholder Agreement (the "Agreement") dated May
13, 2005, with Betty B. Kerns ("BBK"), the Joyce P. Berry
Revocable Trust, the Joe M. Berry Trust, the Berry
Charitable Remainder Trust, and BKP, L.L.C. (the "Selling
Shareholders"). Under the terms of the Agreement,
Southwest agreed to repurchase from the Selling
Shareholders an aggregate of 689,796 shares of Southwest
common stock, par value $1.00 per share, for a price per
share of $18.00. Southwest purchased the remaining shares
under this agreement in July 2005.
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
At Southwest's annual shareholders' meeting, held on April 28,
2005, the shareholders of Southwest elected four Directors
with terms expiring at the 2008 annual shareholders' meeting.
The Directors elected and the shareholder vote in the election
of each Director were as follows:
For Withheld
---------- --------
J. Berry Harrison 10,853,814 247,487
Erd M. Johnson 10,866,974 234,327
Betty B. Kerns 10,530,872 570,429
Russell W. Teubner 10,872,168 229,134
27
Other Directors continuing in office following the annual
shareholders' meeting were James E. Berry II, Thomas D. Berry,
Joe Berry Cannon, Rick Green, David P. Lambert, Linford R.
Pitts and Robert B. Rodgers.
Also at Southwest's annual shareholders' meeting, the
shareholders of Southwest approved a proposal to ratify the
selection of Ernst & Young, LLP, as Southwest's independent
registered public accounting firm for the year 2005. The
shareholder vote on this matter was 10,935,869 votes for the
proposal; 37,260 votes against the proposal; 128,172 votes
abstaining; and no broker non-votes.
Item 5. Other information
None
Item 6. Exhibits
Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST BANCORP, INC.
(Registrant)
By: /s/ Rick Green August 8, 2005
------------------------------------------ ------------------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell August 8, 2005
------------------------------------------ ------------------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
29