SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
608 South Main Street 74074
Stillwater, Oklahoma (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (405) 372-2230
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
[ x ] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ x ] YES [ ] NO
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] YES [ x ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
14,018,646
1 of 35
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition at September 30,
2005 and December 31, 2004................................................3
Unaudited Consolidated Statements of Operations for the three and nine
months ended September 30, 2005 and 2004..................................4
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004.........................................5
Unaudited Consolidated Statement of Shareholders' Equity for the nine
months ended September 30, 2005...........................................6
Unaudited Consolidated Statements of Comprehensive Income for the three
and nine months ended September 30, 2005 and 2004.........................6
Notes to Unaudited Consolidated Financial Statements........................7
Unaudited Average Balances, Yields and Rates...............................14
Unaudited Rate Volume Table.......................,........................16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........27
ITEM 4. CONTROLS AND PROCEDURES..............................................28
PART II. OTHER INFORMATION...................................................29
SIGNATURES....................................................................30
2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands, except per share data) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 38,881 $ 24,097
Federal funds sold 48,500 -
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 87,381 24,097
Investment securities:
Held to maturity, fair value $1,214 (2005) and $2,509 (2004) 1,223 2,495
Available for sale, amortized cost $257,646 (2005) and $205,393 (2004) 253,069 204,092
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,920 13,464
Loans held for sale 381,597 354,557
Loans receivable, net of allowance for loan losses
of $21,920 (2005) and $18,991 (2004) 1,297,302 1,250,327
Accrued interest receivable 14,476 15,091
Premises and equipment, net 20,492 19,860
Other real estate 9,610 4,937
Other assets 28,184 24,867
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $2,107,254 $1,913,787
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 229,462 $ 183,738
Interest-bearing demand 49,927 57,359
Money market accounts 410,789 379,818
Savings accounts 8,789 8,108
Time deposits of $100,000 or more 640,503 609,670
Other time deposits 345,435 261,365
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,684,905 1,500,058
Accrued interest payable 8,086 4,911
Income tax payable 1,595 2,266
Other borrowings 190,571 200,065
Other liabilities 7,846 7,370
Reserve for unfunded loan commitments 1,391 953
Subordinated debentures 46,393 72,180
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,940,787 1,787,803
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized;
14,658,042 (2005) and 12,243,042 (2004) shares issued and outstanding 14,658 12,243
Paid in capital 45,724 7,993
Retained earnings 121,342 107,905
Accumulated other comprehensive loss (2,803) (797)
Treasury stock, at cost; 693,364 (2005) and 138,189 (2004) shares (12,454) (1,360)
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 166,467 125,984
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $2,107,254 $1,913,787
=================================================================================================================================
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(Dollars in thousands, except earnings per share data) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $32,429 $25,245 $ 93,457 $68,468
Investment securities:
U.S. government and agency obligations 2,119 1,570 5,447 4,573
Mortgage-backed securities 159 159 459 502
State and political subdivisions 31 63 139 344
Other securities 179 168 568 496
Other interest-earning assets 31 4 69 7
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 34,948 27,209 100,139 74,390
INTEREST EXPENSE:
Interest-bearing demand 57 63 222 240
Money market accounts 2,914 1,621 7,201 4,425
Savings accounts 6 5 16 14
Time deposits of $100,000 or more 5,235 2,460 14,304 6,468
Other time deposits 2,638 1,311 6,712 4,111
Other borrowings 1,904 1,643 5,026 4,183
Subordinated debentures 801 1,136 3,281 3,296
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 13,555 8,239 36,762 22,737
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 21,393 18,970 63,377 51,653
Provision for loan losses 4,142 3,900 11,437 8,100
OTHER INCOME:
Service charges and fees 2,894 2,629 8,157 7,314
Other noninterest income 364 328 1,230 731
Gain on sales of loans 1,333 1,073 3,102 2,386
Gain (loss) on sales of investment securities - (110) - (109)
- -----------------------------------------------------------------------------------------------------------------------
Total other income 4,591 3,920 12,489 10,322
OTHER EXPENSE:
Salaries and employee benefits 6,173 5,563 18,724 15,893
Occupancy 2,704 2,500 7,388 6,996
FDIC and other insurance 124 110 360 301
Other real estate 230 66 770 107
General and administrative 3,494 2,998 11,411 9,054
- -----------------------------------------------------------------------------------------------------------------------
Total other expense 12,725 11,237 38,653 32,351
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 9,117 7,753 25,776 21,524
Taxes on income 3,310 2,898 9,354 7,863
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 5,807 $ 4,855 $ 16,422 $13,661
=======================================================================================================================
Basic earnings per share $ 0.41 $ 0.40 $ 1.27 $ 1.13
=======================================================================================================================
Diluted earnings per share $ 0.41 $ 0.38 $ 1.24 $ 1.09
=======================================================================================================================
Cash dividends declared per share $ 0.075 $ 0.07 $ 0.225 $ 0.21
=======================================================================================================================
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 16,422 $ 13,661
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 11,437 8,100
Deferred taxes (808) (1,551)
Depreciation and amortization expense 1,967 1,962
Amortization of premiums and accretion of
discounts on securities, net 106 132
Amortization of intangibles 284 239
Tax benefit from exercise of stock options 591 459
(Gain) Loss on sales/calls of securities - 109
(Gain) Loss on sales of loans (3,102) (2,386)
(Gain) Loss on sales of premises/equipment 20 (9)
(Gain) Loss on other real estate owned, net (2) 53
Proceeds from sales of residential mortgage loans 69,066 67,484
Residential mortgage loans originated for resale (68,422) (67,856)
Proceeds from sales of student loans 603,790 357,538
Student loans originated for resale (627,911) (486,148)
Changes in assets and liabilities:
Accrued interest receivable 615 (2,605)
Other assets (1,525) 108
Income taxes payable (671) 4,639
Accrued interest payable 3,175 (114)
Other liabilities 276 2,188
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from operating activities 5,308 (103,997)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities - 8,540
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 1,785 13,398
Available for sale securities 8,070 61,632
Purchases of Federal Home Loan Bank and Federal Reserve
Bank stock (456) (2,066)
Purchases of available for sale securities (60,940) (88,311)
Loans originated and principal repayments, net (65,688) (171,962)
Purchases of premises and equipment (2,694) (2,061)
Proceeds from sales of premises and equipment 90 204
Proceeds from sales of other real estate owned 2,567 215
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from investing activities (117,266) (180,411)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 184,847 220,830
Net increase (decrease) in other borrowings (9,494) 61,872
Net proceeds from issuance of common stock 40,877 1,178
Repayment of subordinated debentures (25,787) -
Purchases of treasury stock (12,416) -
Common stock dividends paid (2,785) (2,435)
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from financing activities 175,242 281,445
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 63,284 (2,963)
CASH AND CASH EQUIVALENTS,
Beginning of period 24,097 33,981
- ----------------------------------------------------------------------------------------------------------------------
End of period $ 87,381 $ 31,018
======================================================================================================================
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUM-
ULATED
OTHER TOTAL
COMPRE- SHARE-
(Dollars in thousands, COMMON STOCK PAID IN RETAINED HENSIVE TREASURY HOLDERS'
except per share data) SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 12,243,042 $12,243 $7,993 $107,905 $ (797) $(1,360) $125,984
Cash dividends declared:
Common, $0.225 per share,
and other dividends - - - (2,985) - - (2,985)
Common stock issued:
Employee Stock Option Plan - - (111) - - 1,168 1,057
Employee Stock Purchase Plan - - 31 - - 25 56
Dividend Reinvestment Plan - - 35 - - 30 65
Restricted Stock - - 97 - - 99 196
Public Offering 2,415,000 2,415 37,088 - - - 39,503
Tax benefit related to exercise
of stock options - - 591 - - - 591
Other comprehensive income
(loss), net of tax - - - - (2,006) - (2,006)
Treasury shares purchased - - - - - (12,416) (12,416)
Net income - - - 16,422 - - 16,422
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 14,658,042 $14,658 $45,724 $121,342 $(2,803) $(12,454) $166,467
==================================================================================================================================
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 5,807 $ 4,855 $ 16,422 $ 13,661
OTHER COMPREHENSIVE INCOME:
Unrealized holding gain (loss) on available
for sale securities (2,580) 2,126 (3,276) (1,042)
Reclassification adjustment for (gains) losses
arising during the period - 110 - 109
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (2,580) 2,236 (3,276) (933)
Tax (expense) benefit related to items
of other comprehensive income (loss) 999 (908) 1,270 380
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (1,581) 1,328 (2,006) (553)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 4,226 $ 6,183 $ 14,416 $ 13,108
=====================================================================================================================
The accompanying notes are an integral part of this statement.
6
SOUTHWEST BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
information and notes necessary for a complete presentation of financial
position, results of operations, shareholders' equity, cash flows, and
comprehensive income in conformity with accounting principles generally accepted
in the United States of America. However, the unaudited consolidated financial
statements include all adjustments which, in the opinion of management, are
necessary for a fair presentation. Those adjustments consist of normal,
recurring adjustments. The results of operations for the three and nine months
ended September 30, 2005 and the cash flows for the nine months ended September
30, 2005 should not be considered indicative of the results to be expected for
the full year. These unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year
ended December 31, 2004.
NOTE 2: PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Southwest Bancorp, Inc. ("Southwest"), its wholly owned financial
institution subsidiaries, the Stillwater National Bank and Trust Company
("Stillwater National"), SNB Bank of Wichita ("SNB Wichita"), and its management
consulting subsidiaries, Healthcare Strategic Support, Inc. ("HSSI"), and
Business Consulting Group, Inc. ("BCG"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3: RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
NOTE 4: INVESTMENT SECURITIES
The following table presents securities with gross unrealized losses and fair
value by length of time that the individual securities had been in a continuous
unrealized loss position at September 30, 2005. Securities whose market values
exceed cost are excluded from this table.
Continuous Unrealized Losses
Existing for:
- -----------------------------------------------------------------------------------------------------
Total
Fair Less Than More Than Unrealized
(Dollars in thousands) Value 12 Months 12 Months Losses
- -----------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. government and agency obligations $ 1,003 $ (9) $ - $ (9)
- -----------------------------------------------------------------------------------------------------
Total $ 1,003 $ (9) $ - $ (9)
=====================================================================================================
Available for Sale:
U.S. government and agency obligations $221,883 $(4,365) $(35) $(4,400)
Obligations of state and political subdivisions 1,226 (24) - (24)
Mortgage-backed securities 16,628 (222) (17) (239)
Other debt securities 968 (32) - (32)
- -----------------------------------------------------------------------------------------------------
Total $240,705 $(4,643) $(52) $(4,695)
=====================================================================================================
7
Southwest has reviewed all these securities on an individual basis. These
unrealized losses occurred due to increases in interest rates and not as a
result of a decline in credit quality. Southwest has the ability and intent to
hold these securities for a period of time sufficient for a forecasted market
price recovery up to (or beyond) the cost of the investment, or to maturity when
the full cost will be recovered and, therefore, has determined that none of the
losses are other than temporary.
NOTE 5: LOANS RECEIVABLE
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Kansas and Texas. Its commercial lending operations are
concentrated in the Stillwater, Oklahoma City, and Tulsa areas of Oklahoma; in
Wichita, Kansas; and in the Dallas, Austin, and San Antonio, Texas metropolitan
areas. As a result, the collectibility of Southwest's loan portfolio can be
affected by changes in the economic conditions in these three states and in
those metropolitan areas. At September 30, 2005 and December 31, 2004,
substantially all of Southwest's loans were collateralized with real estate,
inventory, accounts receivable, and/or other assets, or were guaranteed by
agencies of the United States government or, in the case of private student
loans, insured by a private insurer.
At September 30, 2005, loans to individuals and businesses in the healthcare
industry totaled approximately $405.1 million, or 24%, of total loans and
student loans totaled approximately $375.2 million, or 22%, of total loans.
Southwest does not have any other concentrations of loans to individuals or
businesses involved in a single industry totaling 5% or more of total loans.
Nonperforming assets and other risk elements of the loan portfolio are shown
below as of the indicated dates. Total nonaccrual loans increased $911,000, or
4%, from December 31, 2004, and total nonperforming loans increased $4.8
million, or 21%. Total nonperforming assets of $37.6 million (which includes
other real estate owned) increased $9.5 million, or 34%, from the same period.
- -----------------------------------------------------------------------------------------------------
AT AT
(Dollars in thousands) SEPTEMBER 30, 2005 DECEMBER 31, 2004
- -----------------------------------------------------------------------------------------------------
Nonaccrual loans (1) $23,141 $22,230
Past due 90 days or more (2) 4,812 929
----------------------- ---------------------
Total nonperforming loans 27,953 23,159
Other real estate owned 9,610 4,937
----------------------- ---------------------
Total nonperforming assets $37,563 $28,096
======================= =====================
Nonperforming loans to loans receivable 1.64% 1.43%
Allowance for loan losses to nonperforming loans 78.42% 82.00%
Nonperforming assets to loans receivable and
other real estate owned 2.20% 1.72%
(1) The government-guaranteed portion of loans included in these totals was
$1.5 million (2005) and $1.4 million (2004).
(2) The government-guaranteed portion of loans included in these totals was
$89,000 (2005) and $38,000 (2004).
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $23.1 million at September 30, 2005. All of
the nonaccruing assets are subject to regular tests for impairment as part of
Southwest's allowance for loan losses methodology (see below).
During the first nine months of 2005, $195,000 in interest income was received
on nonaccruing loans. If interest on those loans had been accrued for the nine
months ended September 30, 2005, additional total interest income of $799,000
would have been recorded.
Performing loans considered potential nonperforming loans (loans that are not
included in the past due, nonaccrual or restructured categories but for which
known information about possible credit problems cause management to have doubts
as to the ability of the borrowers to comply with the present loan repayment
terms and which may become nonperforming in the future) amounted to
approximately $33.2 million at September 30, 2005, compared to $25.6 million at
December 31, 2004, an increase of 29%. Loans may be monitored by management and
reported as potential nonperforming loans for an extended period of time during
which management continues to be uncertain as to the ability of certain
borrowers to comply with the present loan repayment terms. These loans are
subject to continuing management attention and are considered by management in
determining the level of the allowance for loan losses.
8
NOTE 6: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS
Activity in the allowance for loan losses is shown below for the indicated
periods.
- ------------------------------------------------------------------------------------------------------------------------
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
(Dollars in thousands) SEPTEMBER 30, 2005 DECEMBER 31, 2004
- ------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 18,991 $ 15,009
Loans charged-off:
Real estate mortgage 2,851 812
Real estate construction 155 275
Commercial 5,946 8,382
Installment and consumer 403 565
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 9,355 10,034
Recoveries:
Real estate mortgage 138 151
Real estate construction 1 -
Commercial 661 907
Installment and consumer 47 90
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 847 1,148
- ------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 8,508 8,886
Provision for loan losses 11,437 12,868
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 21,920 $ 18,991
========================================================================================================================
Loans outstanding:
Average $1,724,208 $1,527,935
End of period 1,700,819 1,623,875
Net charge-offs to total average loans (annualized) 0.66% 0.58%
Allowance for loan losses to total loans (end of period) 1.29% 1.17%
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and an unallocated allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual. The use of
these loss factors is intended to reduce the differences between estimated
losses inherent in the portfolio and observed losses. Formula allowances also
are established for loans that do not have specific allowances according to the
application of credit risk factors. These factors are set by management to
reflect its assessment of the relative level of risk inherent in each credit
grade. Specific allowances are established in cases where management has
identified significant conditions or circumstances related to individual loans
that management believes indicate the probability that losses may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The unallocated allowance is based
upon management's evaluation of various factors that are not directly measured
in the determination of the formula and specific allowances. These factors may
include general economic and business conditions affecting lending areas, credit
quality trends (including trends in delinquencies and nonperforming loans
expected to result from existing conditions), loan volumes and concentrations,
specific industry conditions within portfolio categories, recent loss experience
in particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. There were no changes in
estimation methods or assumptions that affected the methodology for assessing
the appropriateness of the allowance during the first nine months of 2005.
Southwest determined the level of the allowance for loan losses at September 30,
2005, was appropriate, based on that methodology.
9
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few such loans may cause a significant increase in nonperforming assets, and may
lead to a material increase in charge-offs and the provision for loan losses in
future periods.
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses; all
affected prior periods have been restated. At September 30, 2005, this reserve
for unfunded loan commitments was $1.4 million, an increase of $438,000, or 46%,
from the amount previously included in the allowance for loan losses at December
31, 2004. The reserve is computed using a methodology similar to that used to
determine the allowance for loan losses, modified to take into account the
probability of a drawdown on the commitment.
NOTE 7: STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan
(the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on an annual
basis and expire from five to ten years after the date of grant. Southwest
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the Stock Plans; accordingly, no compensation expense related
to the grants of stock options has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plans
been determined based upon the fair value of the options at their grant date as
prescribed in Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
10
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(Dollars in thousands, except per share data) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Net income, as reported $5,807 $4,855 $16,422 $13,661
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (7) (56) (280) (226)
- ---------------------------------------------------------------------------------------------------------------------------
Proforma net income $5,800 $4,799 $16,142 $13,435
===========================================================================================================================
Earnings per share:
Basic -- as reported $0.41 $0.40 $1.27 $1.13
Basic -- proforma $0.41 $0.39 $1.25 $1.11
Diluted -- as reported $0.41 $0.38 $1.24 $1.09
Diluted -- proforma $0.40 $0.38 $1.21 $1.07
Outside directors of Southwest have been awarded 9,900 shares in restricted
common shares at a grant date fair value of $19.75 per share. The restrictions
on these outside directors' shares expire after three years. Southwest will
recognize compensation expense over the restricted period. During the first nine
months of 2005, $38,019 in compensation expense was recorded related to these
restricted shares.
NOTE 8: EARNINGS PER SHARE
Basic earnings per share is computed based upon net income divided by the
weighted average number of shares outstanding during each period. Diluted
earnings per share is computed based upon net income divided by the weighted
average number of shares outstanding during each period adjusted for the effect
of dilutive potential shares calculated using the treasury stock method. At
September 30, 2005 and 2004, there were 2,500 and zero antidilutive options to
purchase common shares, respectively.
The following is a reconciliation of the shares used in the calculations of
basic and diluted earnings per share:
- ------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic earnings per share 13,944,877 12,081,379 12,884,058 12,050,485
Effect of dilutive securities:
Stock options 414,931 466,583 401,913 455,008
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Diluted earnings per share 14,359,808 12,547,962 13,285,971 12,505,493
======================================================================================================
NOTE 9: OPERATING SEGMENTS
Southwest operates four principal segments: Oklahoma Banking, Other States
Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment
consists of three operating units that provide lending and deposit services to
customers in the state of Oklahoma. The Other States Banking segment consists of
three operating units that provide lending and deposit services to the customers
in the states of Texas and Kansas. The Secondary Market segment consists of two
operating units that provide student lending services to post-secondary students
in Oklahoma and several other states and residential mortgage lending services
to customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is
included in Other Operations. The primary purpose of the fund management unit is
to manage Southwest's overall liquidity needs and interest rate risk. Each
segment borrows funds from and provides funds to the fund management unit as
needed to support its operations. The Other Operations segment also includes SNB
Investor Services and nonbank cash machine operations.
11
Southwest identifies reportable segments by type of service provided and
geographic location. Operating results are adjusted for intercompany loan
participations and borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of
Southwest. Expenses for consolidated back-office operations are allocated to
operating segments based on estimated uses of those services. General overhead
expenses such as executive administration, accounting and internal audit are
allocated based on the direct expense and/or deposit and loan volumes of the
operating segment. Income tax expense for the operating segments is calculated
essentially at statutory rates. The Other Operations segment records the tax
expense or benefit necessary to reconcile to the consolidated financial
statements.
12
The following table summarizes financial results by operating segment:
For the Nine Months Ended September 30, 2005
- ---------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ---------------------------------------------------------------------------------------------------------------
Net interest income $34,298 $ 13,807 $13,899 $ 1,373 $ 63,377
Provision for loan losses 8,160 3,277 - - 11,437
Other income 5,514 677 3,258 3,040 12,489
Other expenses 21,387 8,297 4,485 4,484 38,653
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 10,265 2,910 12,672 (71) 25,776
Taxes on income 3,785 1,054 4,621 (106) 9,354
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,480 $ 1,856 $ 8,051 $ 35 $ 16,422
================================================================================================================
Fixed asset expenditures $ 446 $ 1,025 $ - $ 1,223 $ 2,694
Total loans at period end 855,858 463,837 380,970 154 1,700,819
Total assets at period end 867,559 462,469 397,345 379,881 2,107,254
For the Nine Months Ended September 30, 2004
- ----------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ----------------------------------------------------------------------------------------------------------------
Net interest income $31,393 $ 9,991 $13,003 $ (2,734) $ 51,653
Provision for loan losses 5,233 2,867 - - 8,100
Other income 5,389 655 2,211 2,067 10,322
Other expenses 20,423 4,733 4,177 3,018 32,351
- ----------------------------------------------------------------------------------------------------------------
Income before taxes 11,126 3,046 11,037 (3,685) 21,524
Taxes on income 4,145 1,059 4,116 (1,457) 7,863
- ----------------------------------------------------------------------------------------------------------------
Net income $ 6,981 $ 1,987 $ 6,921 $ (2,228) $ 13,661
================================================================================================================
Fixed asset expenditures $ 334 $ 415 $ 2 $ 1,310 $ 2,061
Total loans at period end 912,211 348,441 346,300 151 1,607,103
Total assets at period end 918,126 344,187 355,952 264,185 1,882,450
NOTE 10. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. On April 14, 2005,
the SEC announced it would provide for a phased-in implementation process for
this revised statement.
Generally, the approach to accounting for share-based payments in Statement
123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than January 1, 2006. Early adoption
will be permitted in periods in which financial statements have not yet been
issued. Statement 123(R) permits public companies to adopt its requirements
using one of two methods:
13
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective
date, and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented,
or (b) prior interim periods of the year of adoption.
Southwest plans to adopt Statement 123(R) on January 1, 2006 but has not yet
determined which method will be used. Management of Southwest believes that
adoption of Statement 123(R) will not have a material impact on Southwest's
consolidated financial condition or results of operations.
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Total loans $1,732,734 7.43% $1,580,974 6.35%
Investment securities 263,868 3.74 216,828 3.60
Other interest-earning assets 3,535 3.48 1,222 1.30
----------------------------------------------------------
Total interest-earning assets 2,000,137 6.93 1,799,024 6.02
Other assets 93,258 66,378
------------- -----------
Total assets $2,093,395 $1,865,402
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 53,187 0.43% $ 56,137 0.45%
Money market accounts 395,668 2.92 433,426 1.49
Savings accounts 8,513 0.28 8,204 0.24
Time deposits 977,272 3.20 704,142 2.13
----------------------------------------------------------
Total interest-bearing deposits 1,434,640 3.00 1,201,909 1.81
Other borrowings 209,475 3.61 281,549 2.32
Subordinated debentures 46,393 6.76 72,180 6.16
----------------------------------------------------------
Total interest-bearing liabilities 1,690,508 3.18 1,555,638 2.11
Noninterest-bearing demand deposits 217,812 178,408
Other liabilities 18,239 12,075
Shareholders' equity 166,836 119,281
------------- -----------
Total liabilities and shareholders' equity $2,093,395 $1,865,402
============= ===========
Interest rate spread 3.75% 3.91%
============= ===============
Net interest margin (1) 4.24% 4.19%
============= ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.32% 115.65%
============= ===========
(1) Net interest margin = annualized net interest income / average
interest-earning assets
14
SOUTHWEST BANCORP, INC.
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
- -----------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE YIELD/RATE
- -----------------------------------------------------------------------------------------------------------
ASSETS
Total loans $1,724,208 7.25% $1,478,443 6.19%
Investment securities 237,543 3.72 214,224 3.69
Other interest-earning assets 3,165 2.91 1,111 0.84
--------------------------------------------------------
Total interest-earning assets 1,964,916 6.81 1,693,778 5.87
Other assets 90,535 64,879
------------ -----------
Total assets $2,055,451 $1,758,657
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 61,334 0.48% $ 59,158 0.54%
Money market accounts 384,637 2.50 411,274 1.44
Savings accounts 8,525 0.25 7,721 0.24
Time deposits 973,103 2.89 666,308 2.12
--------------------------------------------------------
Total interest-bearing deposits 1,427,599 2.66 1,144,461 1.78
Other borrowings 201,512 3.33 245,799 2.27
Subordinated debentures 62,828 6.89 72,180 6.00
--------------------------------------------------------
Total interest-bearing liabilities 1,691,939 2.90 1,462,440 2.08
Noninterest-bearing demand deposits 200,875 169,656
Other liabilities 16,516 10,587
Shareholders' equity 146,121 115,974
------------ -----------
Total liabilities and shareholders' equity $2,055,451 $1,758,657
============ ===========
Interest rate spread 3.91% 3.79%
============== ===============
Net interest margin (1) 4.31% 4.07%
============== ===============
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.13% 115.82%
============ ===========
(1) Net interest margin = annualized net interest income / average
interest-earning assets
15
SOUTHWEST BANCORP, INC.
The following table analyzes changes in interest income and interest expense of
Southwest for the periods indicated. For each category of interest-earning asset
and interest-bearing liability, information is provided on changes attributable
to: (i) changes in volume (changes in volume multiplied by the prior period's
rate); and (ii) changes in rates (changes in rate multiplied by the prior
period's volume). Changes in rate-volume (changes in rate multiplied by the
changes in volume) are allocated between changes in rate and changes in volume
in proportion to the relative contribution of each.
- -------------------------------------------------------------------------------
FOR THE FIRST NINE MONTHS OF
(Dollars in thousands) 2005 VS. 2004
- -------------------------------------------------------------------------------
INCREASE DUE TO CHANGE
OR IN AVERAGE:
(DECREASE) VOLUME RATE
- -------------------------------------------------------------------------------
INTEREST EARNED ON:
Loans receivable (1) $24,989 $12,318 $ 12,671
Investment securities 698 612 86
Other interest-earning assets 62 26 36
---------------------------------------
Total interest income 25,749 12,956 12,793
INTEREST PAID ON:
Interest-bearing demand (18) 14 (32)
Money market accounts 2,776 (471) 3,247
Savings accounts 2 1 1
Time deposits 10,437 5,836 4,601
Other borrowings 843 (1,219) 2,062
Subordinated debentures (15) (607) 592
---------------------------------------
Total interest expense 14,025 3,554 10,471
---------------------------------------
Net interest income $11,724 $ 9,402 $ 2,322
=======================================
(1) Average balances include nonaccrual loans. Fees included in interest
income on loans receivable are not considered material. Interest on
tax-exempt loans and securities is not shown on a tax-equivalent basis
because it is not considered material.
16
SOUTHWEST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This management's discussion and analysis of
financial condition and results of operations, the notes to Southwest's
unaudited consolidated financial statements, and other portions of this report
include forward-looking statements such as: statements of Southwest's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; expectations regarding future financial performance of Southwest and
its operating segments; assessments of loan quality, probable loan losses, and
the amount and timing of loan payoffs; liquidity, contractual obligations,
off-balance sheet risk, and market or interest rate risk; and statements of
Southwest's ability to achieve financial and other goals. These forward-looking
statements are subject to significant uncertainties because they are based upon:
the amount and timing of future changes in interest rates, market behavior, and
other economic conditions; future laws, regulations, and accounting principles;
and a variety of other matters. Because of these uncertainties, the actual
future results may be materially different from the results indicated by these
forward-looking statements. In addition, Southwest's past growth and performance
do not necessarily indicate its future results.
You should read this management's discussion and analysis of Southwest's
consolidated financial condition and results of operations in conjunction with
Southwest's unaudited consolidated financial statements and the accompanying
notes.
GENERAL
Southwest Bancorp, Inc. ("Southwest") is a financial holding company for the
Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of
Wichita ("SNB Wichita"), Healthcare Strategic Support, Inc. ("HSSI"), and
Business Consulting Group, Inc. ("BCG"). Through its subsidiaries, Southwest
offers commercial and consumer lending, deposit and investment services, and
specialized cash management, consulting and other financial services from
offices in Oklahoma City, Stillwater, Tulsa, and Chickasha, Oklahoma; Austin,
Dallas and San Antonio, Texas; and Kansas City and Wichita, Kansas and on the
Internet, through SNB DirectBanker(R). Southwest's banking philosophy is to
provide a high level of customer service, a wide range of financial services,
and products responsive to customer needs with a focus on serving healthcare and
health professionals, businesses and their managers and owners, and commercial
and commercial real estate borrowers. This philosophy has led to the development
of a line of deposit, lending, and other financial products that respond to
professional and commercial customer needs for speed, efficiency, and
information, and complement more traditional banking products. Such specialized
financial services include integrated document imaging and cash management
services designed to help our customers in the healthcare industry and other
record-intensive enterprises operate more efficiently, and management consulting
services through Southwest's management consulting subsidiaries: HSSI, which
serves physicians, hospitals, and healthcare groups, and BCG, which serves small
and large commercial enterprises. Information regarding Southwest is available
on line at www.oksb.com. Information regarding the products and services of
Southwest's subsidiaries is available on line at www.banksnb.com and
www.snbwichita.com. The information on these websites is not a part of this
report on form 10-Q.
Southwest's strategic focus includes expansion in carefully selected geographic
markets based upon a tested business model developed in connection with its
expansion into Oklahoma City in 1982 and into Tulsa in 1985. This geographic
expansion is based on identification of markets with concentrations of customers
in Southwest's traditional areas of expertise: healthcare and health
professionals, businesses and their managers and owners, and commercial and
commercial real estate lending, and makes use of traditional and specialized
financial services.
Beginning in 2002, Southwest has expanded operations into the states of Kansas
and Texas. At September 30, 2005, these offices accounted for $463.8 million in
loans (35% of portfolio loans and 27% of total loans, which include loans held
for sale). During the first nine months of 2005, these offices produced $1.9
million in net income (11% of the consolidated total), and $76.4 million in
asset growth. Southwest has received regulatory approval to open two branch
offices in Austin, Texas and one branch office in San Antonio, Texas to replace
existing loan production offices; of these, only one of the Austin branches is
currently accepting deposits.
17
Southwest currently plans to open two to four additional offices in Texas,
including one or more in the Houston area. The timing of new office openings in
these targeted markets depends primarily on executive staffing, and to a lesser
extent on premises selection.
The Oklahoma Banking segment accounted for $6.5 million, or 39%, of year-to-date
net income, and experienced a $21.6 million reduction in total assets during the
first nine months of 2005.
Southwest has a long history of student and residential mortgage lending. These
operations comprise the Secondary Market business segment. In 2004, Southwest
was one of the top 40 student lenders in the nation by dollar volume. During the
first nine months of 2005, this segment produced $8.1 million in net income, and
$28.8 million in asset growth since December 31, 2004. This growth was the
result of expanded student lending, with residential mortgage lending increasing
only slightly from year-end 2004. Loan volumes in the Secondary Market segment
may vary significantly from period to period.
Southwest conducts general consumer banking operations, and may establish or
acquire additional community banking offices in selected markets.
For additional information on Southwest's operating segments, please see Note 9,
Operating Segments, in the Notes to Unaudited Consolidated Financial Statements.
The total of net income of the segments discussed above does not equal
consolidated net income for the first nine months of 2005 due to income and
expenses allocated to the Other Operations segment, which provides funding and
liquidity services to the rest of the organization.
Southwest was organized in 1981 as the holding company for Stillwater National,
which was chartered in 1894. Southwest has established and pursued a strategy of
independent operation for the benefit of all of its shareholders. Southwest has
grown from $434 million in assets since becoming a public company at year-end
1993, to over $2.1 billion at September 30, 2005, without acquiring other
financial institutions. Southwest considers acquisitions of other financial
institutions and other companies from time to time, although it does not have
any specific agreements or understandings for any such acquisition at present.
Southwest also considers, from time to time, the establishment of new lending,
banking and other offices in additional geographic markets. Southwest also
extends loans to borrowers in Oklahoma and neighboring states through
participations with correspondent banks.
FINANCIAL CONDITION
TOTAL ASSETS AND INVESTMENT SECURITIES
Southwest's total assets were $2.1 billion at September 30, 2005 and $1.9
billion at December 31, 2004.
Southwest's investment security portfolio increased $48.1 million, or 22%, from
$220.1 million at December 31, 2004 to $268.2 million at September 30, 2005. The
increase occurred primarily in U.S. government and agency obligations, which
increased $49.9 million, or 28%, during the first nine months of 2005. The funds
used to purchase these additional investment securities were provided by the
common stock offering that was completed during the second quarter of 2005.
LOANS
Total loans, including loans held for sale, were $1.7 billion at September 30,
2005, a 5% increase from December 31, 2004. Southwest experienced increases in
all categories of loans, except other commercial loans, as shown in the
following table:
18
- -----------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -----------------------------------------------------------------------------------------------------
Real estate mortgage
Commercial $ 543,937 $ 523,358 $20,579 3.93 %
One-to-four family residential 93,860 87,858 6,002 6.83
Real estate construction 277,722 248,278 29,444 11.86
Commercial 381,584 390,272 (8,688) (2.23)
Installment and consumer
Student loans 375,178 348,970 26,208 7.51
Other 28,538 25,139 3,399 13.52
- -----------------------------------------------------------------------------------------------------
Total loans $1,700,819 $1,623,875 $76,944 4.74 %
=====================================================================================================
The composition of loans held for sale included in total loans is shown in the
following table.
- ----------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ----------------------------------------------------------------------------------------------------
Student loans $375,178 $348,970 $26,208 7.51 %
One-to-four family residential 3,521 3,115 406 13.03
Other loans held for sale 2,898 2,472 426 17.23
- ----------------------------------------------------------------------------------------------------
Total loans held for sale $381,597 $354,557 $27,040 7.63 %
====================================================================================================
Management determines the appropriate level of the allowance for loan losses
using a systematic methodology. (See Note 6, "Allowance for Loan Losses and
Reserve for Unfunded Loan Commitments," in the Notes to Unaudited Consolidated
Financial Statements.) The allowance for loan losses increased by $2.9 million,
or 15%, from December 31, 2004 to September 30, 2005. The increase in the
allowance was the result of increases in loss factors for performing commercial
mortgage and other commercial loans, greater allowances relating to
nonperforming loans, and an increase in the unallocated allowance.
At September 30, 2005, the allowance for loan losses was $21.9 million, or 1.29%
of total loans and 78.42% of nonperforming loans, compared to $19.0 million, or
1.17% of total loans and 82.00% of nonperforming loans, at December 31, 2004.
(See "Results of Operations-Provision for Loan Losses.")
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses. At
September 30, 2005, this reserve for unfunded loan commitments was $1.4 million,
a $438,000, or 46%, increase from the amount previously included in the
allowance for loan losses at December 31, 2004. The amounts of the allowance for
loan losses and other financial information for December 31, 2004 and September
30, 2004 presented in this report also reflect the reclassification of the
reserve for unfunded loan commitments from the allowance for loan losses to a
separate liability account and the provision for unfunded loan commitments from
the provision for loan losses to general and administrative expense.
DEPOSITS AND OTHER BORROWINGS
Southwest's deposits were $1.7 billion at September 30, 2005, an increase of
$184.8 million, or 12%, from $1.5 billion at December 31, 2004. Increases
occurred in all categories of deposits other than interest-bearing demand
accounts as shown in the following table:
19
- -----------------------------------------------------------------------------------------------------
September 30, December 31,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -----------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 229,462 $ 183,738 $ 45,724 24.89 %
Interest-bearing demand 49,927 57,359 (7,432) (12.96)
Money market accounts 410,789 379,818 30,971 8.15
Savings accounts 8,789 8,108 681 8.40
Time deposits of $100,000 or more 640,503 609,670 30,833 5.06
Other time deposits 345,435 261,365 84,070 32.17
-------------- -------------- ---------- ----------
Total deposits $1,684,905 $1,500,058 $184,847 12.32 %
============== ============== ========== ==========
Stillwater National has unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS
Financial Services, Inc., RBC Dain Rauscher, Morgan Stanley & Co., Inc., and
CountryWide Securities that total $1.5 billion. At September 30, 2005, $399.0
million in these retail certificates of deposit were included in time deposits
of $100,000 or more, a reduction of $25.7 million, or 6%, from year-end 2004.
Stillwater National has other brokered certificates of deposit totaling $695,000
included in total deposits at September 30, 2005.
Other borrowings decreased $9.5 million, or 5%, to $190.6 million during the
first nine months of 2005.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $40.5 million, or 32%, due primarily to net
proceeds of the common stock offering and other stock issuances, and earnings
for the first nine months of 2005 offset in part by the repurchase of common
stock, dividends declared and a decrease in accumulated other comprehensive
income (net, after tax, unrealized gains on investment securities available for
sale). At September 30, 2005, Southwest, Stillwater National and SNB Wichita
continued to exceed all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2005 and 2004
Net income for the third quarter of 2005 of $5.8 million represented an increase
of $952,000, or 20%, over the $4.9 million earned in the third quarter of 2004.
Diluted earnings per share were $0.41 compared to $0.38, an 8% increase. The
increase in net income was primarily the result of a $2.4 million, or 13%,
increase in net interest income (fueled by loan growth and increased interest
margin), and an $671,000, or 17%, increase in other income (due mainly to
increased service charges on deposit accounts and gains on sales of loans),
offset in part by a $1.5 million, or 13%, increase in other expense (mainly as a
result of increased salaries and employee benefits, occupancy, and general and
administrative expenses), a $242,000, or 6%, increase in the provision for loan
losses and a $412,000, or 14%, increase in taxes on income.
On an operating segment basis, the increase in net income was led by a $1.1
million increase and a change from a net deficit to net income from Other
Operations, a $421,000 increase in net income from the Oklahoma Banking segment,
and a $321,000 increase in net income from the Other States Banking segment
partially offset by an $873,000 reduction in net income from the Secondary
Market segment. The Oklahoma Banking segment made the largest contribution to
net income during the third quarter 2005, with the Secondary Market segment
being second. The contribution from the Secondary Market segment may vary
significantly from period to period as a result of changes in loan volume,
interest rates and market behavior; the number of schools participating in
Southwest's student lending programs, the sizes of their enrollment, and the
graduation status of student borrowers; and other factors.
20
NET INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $32,429 $25,245 $7,184 28.46 %
Investment securities:
U.S. government and agency obligations 2,119 1,570 549 34.97
Mortgage-backed securities 159 159 0 0.00
State and political subdivisions 31 63 (32) (50.79)
Other securities 179 168 11 6.55
Other interest-earning assets 31 4 27 675.00
----------------------------------------------------------
Total interest income 34,948 27,209 7,739 28.44
Interest expense:
Interest-bearing demand 57 63 (6) (9.52)
Money market accounts 2,914 1,621 1,293 79.77
Savings accounts 6 5 1 20.00
Time deposits of $100,000 or more 5,235 2,460 2,775 112.80
Other time deposits 2,638 1,311 1,327 101.22
Other borrowings 1,904 1,643 261 15.89
Subordinated debentures 801 1,136 (335) (29.49)
----------------------------------------------------------
Total interest expense 13,555 8,239 5,316 64.52
----------------------------------------------------------
Net interest income $21,393 $18,970 $2,423 12.77 %
==========================================================
Net interest income is the difference between the interest income Southwest
earns on its loans, investments and other interest-earning assets, and the
interest paid on interest-bearing liabilities, such as deposits and borrowings.
Because different types of assets and liabilities owned by Southwest may react
differently, and at different times, to changes in market interest rates, net
interest income is affected by changes in market interest rates. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest
could reduce net interest income. Similarly, when interest-earning assets mature
or reprice more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income.
Yields on Southwest's interest-earning assets increased 91 basis points, and the
rates paid on Southwest's interest-bearing liabilities increased 107 basis
points, resulting in a decrease in the interest rate spread to 3.75% for the
third quarter of 2005 from 3.91% for the third quarter of 2004. During the same
periods, annualized net interest margin increased to 4.24% from 4.19% and the
ratio of average interest-earning assets to average interest-bearing liabilities
increased to 118.32% from 115.65%.
The increase of interest income was the result of the 91 basis point increase in
the yield earned on interest-earning assets and the $201.1 million, or 11%,
increase in average interest-earning assets. Southwest's average loans increased
$151.8 million, or 10%, and the related yield increased to 7.43% for the third
quarter of 2005 from 6.35% in 2004. During the same period, average investment
securities increased $47.0 million, or 22%, and the related yield increased to
3.74% from 3.60%.
The increase in total interest expense can be attributed to the 107 basis point
increase in the rates paid on interest-bearing liabilities and the $134.9
million, or 9%, increase in average interest-bearing liabilities. The decrease
in interest expense on subordinated debentures is due to the redemption of one
issue of subordinated debentures during the second quarter 2005 partially offset
by rate increases on the remaining two variable rate issuances of subordinated
debentures. Rates paid on deposits decreased for interest-bearing demand and
increased for all other types of deposits.
21
OTHER INCOME
- ------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ------------------------------------------------------------------------------------------------------------
Other income:
ATM Service Charges $ 889 $ 794 $ 95 11.96 %
Other service charges 1,610 1,548 62 4.01
Other customer fees 395 287 108 37.63
Other noninterest income 364 328 36 10.98
Gain (loss) on sales of loans receivable:
Student loan sales 882 659 223 33.84
Mortgage loan sales 397 338 59 17.46
All other loan sales 54 76 (22) (28.95)
Gain (loss) on sales of investment securities - (110) 110 (100.00)
------------------------------------------------------
Total other income $4,591 $3,920 $671 17.12 %
======================================================
The volume of student loan sales during the third quarter 2005 was $226.8
million compared to $148.1 million during the third quarter 2004, which led to
the increase in gain on sales of student loans indicated in the table above. The
major factor in the increase of other customer fees was a $59,000 increase in
letter of credit fees.
An increase in surcharge rates at some cash machines, a larger number of cash
machines being operated, and the relocation of existing cash machines to higher
transaction volume areas all contributed to the increase in ATM service charges.
Southwest's multi-state ATM network operated 292 ATM machines in 27 states at
September 30, 2005 compared to 286 ATM machines in 25 states at September 30,
2004.
OTHER EXPENSE
- -------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 6,173 $ 5,563 $ 610 10.97 %
Occupancy 2,704 2,500 204 8.16
FDIC and other insurance 124 110 14 12.73
Other real estate 230 66 164 248.48
General and administrative 3,494 2,998 496 16.54
----------------------------------------------------------
Total other expense $12,725 $11,237 $1,488 13.24 %
==========================================================
Salaries and employee benefits increased $610,000 primarily as a result of an
increase in the number of employees as well as normal compensation increases.
The number of full-time equivalent employees increased from 360 at the end of
the third quarter of 2004 to 371 at the end of the third quarter of 2005.
The primary factor in the increase of occupancy expense was a $73,000 increase
in building rental expenses due to office expansion in Texas and Wichita,
Kansas.
The increase in other real estate expenses occurred as we continued operations
of certain acquired properties and prepared other properties to be sold.
22
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 and 2004
Net income for the first nine months of 2005 of $16.4 million represented an
increase of $2.8 million, or 20%, over the $13.7 million earned in the first
nine months of 2004. Diluted earnings per share were $1.24 compared to $1.09, a
14% increase. The increase in net income was primarily the result of a $11.7
million, or 23%, increase in net interest income (fueled by loan growth and
increased interest margin), and a $2.2 million, or 21%, increase in other income
(due mainly to increased service charges on deposit accounts and gains on sales
of loans), offset in part by a $6.3 million, or 19%, increase in other expense
(mainly as a result of increased salaries and employee benefits, other real
estate, and general and administrative expenses), a $3.3 million, or 41%,
increase in the provision for loan losses and a $1.5 million, or 19%, increase
in taxes on income.
On an operating segment basis, the increase in net income was led by a $2.3
million increase and a shift from a net deficit to net income from Other
Operations and a $1.1 million increase in net income from the Secondary Market
segment, partially offset by a $501,000 decrease in net income from the Oklahoma
Banking segment, and a $131,000 decrease in net income from the Other States
Banking segment. The Secondary Market segment contributed the largest portion
($8.1 million) of Southwest's net income in the first nine months 2005. The
contribution from the Secondary Market segment may vary significantly from
period to period as a result of changes in loan volume, interest rates and
market behavior; the number of schools participating in Southwest's student
lending programs, the sizes of their enrollment, and the graduation status of
student borrowers; and other factors.
NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ----------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $93,457 $68,468 $24,989 36.50 %
Investment securities:
U.S. government and agency obligations 5,447 4,573 874 19.11
Mortgage-backed securities 459 502 (43) (8.57)
State and political subdivisions 139 344 (205) (59.59)
Other securities 568 496 72 14.52
Other interest-earning assets 69 7 62 885.71
-------------------------------------------------------
Total interest income 100,139 74,390 25,749 34.61
Interest expense:
Interest-bearing demand 222 240 (18) (7.50)
Money market accounts 7,201 4,425 2,776 62.73
Savings accounts 16 14 2 14.29
Time deposits of $100,000 or more 14,304 6,468 7,836 121.15
Other time deposits 6,712 4,111 2,601 63.27
Other borrowings 5,026 4,183 843 20.15
Subordinated debentures 3,281 3,296 (15) (0.46)
-------------------------------------------------------
Total interest expense 36,762 22,737 14,025 61.68
-------------------------------------------------------
Net interest income $63,377 $51,653 $11,724 22.70 %
=======================================================
Net interest income is the difference between the interest income Southwest
earns on its loans, investments and other interest-earning assets, and the
interest paid on interest-bearing liabilities, such as deposits and borrowings.
Because different types of assets and liabilities owned by Southwest may react
differently, and at different times, to changes in market interest rates, net
interest income is affected by changes in market interest rates. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest
could reduce net interest income. Similarly, when interest-earning assets mature
or reprice more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income.
23
Yields on Southwest's interest-earning assets increased 94 basis points, and the
rates paid on Southwest's interest-bearing liabilities increased 82 basis
points, resulting in an increase in the interest rate spread to 3.91% for the
first nine months of 2005 from 3.79% for the first nine month of 2004. During
the same periods, annualized net interest margin increased to 4.31% from 4.07%
and the ratio of average interest-earning assets to average interest-bearing
liabilities increased to 116.13% from 115.82%.
The principal factors in the increase of interest income was the $271.1 million,
or 16%, increase in average interest-earning assets and the 94 basis point
increase in the yield earned on interest-earning assets. Southwest's average
loans increased $245.8 million, or 17%, and the related yield increased to 7.25%
for the first nine months of 2005 from 6.19% in 2004. During the same period,
average investment securities increased $23.3 million, or 11%, and the related
yield increased to 3.72% from 3.69%.
The increase in total interest expense can be attributed to the 82 basis point
increase in the rates paid on interest-bearing liabilities and the $229.5
million, or 16%, increase in average interest-bearing liabilities. The decrease
in interest expense on subordinated debentures is due to the redemption of one
issue of subordinated debentures during the second quarter 2005 partially offset
by rate increases on the remaining two variable rate issuances of subordinated
debentures. Rates paid on deposits decreased for interest-bearing demand and
increased for all other types of deposits.
OTHER INCOME
- -----------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- -----------------------------------------------------------------------------------------------------------
Other income:
ATM Service Charges $2,565 $2,319 $ 246 10.61 %
Other service charges 4,455 4,162 293 7.04
Other customer fees 1,137 833 304 36.49
Other noninterest income 1,230 731 499 68.26
Gain (loss) on sales of loans receivable:
Student loan sales 2,088 1,178 910 77.25
Mortgage loan sales 934 920 14 1.52
All other loan sales 80 288 (208) (72.22)
Gain (loss) on sales of investment securities - (109) 109 (100.00)
------------------------------------------------------
Total other income $12,489 $10,322 $2,167 20.99 %
======================================================
The $499,000 increase in other noninterest income occurred primarily due to a
$336,000 increase in consulting fees generated by Southwest's consulting
subsidiaries, HSSI and BCG, and a $105,000 increase in fees received due to cash
payment delays on student loan sales. The increase in other service charges
occurred primarily in overdraft service charges which increased $277,000 due to
repricing those service charge rates earlier in the year to be more consistent
with other financial institutions in Southwest's markets.
An increase in surcharge rates at some cash machines, more cash machines being
operated, and the relocation of existing cash machines to higher transaction
volume areas all contributed to the increase in ATM service charges. Southwest's
multi-state ATM network operated 292 ATM machines in 27 states at September 30,
2005 compared to 286 ATM machines in 25 states at September 30, 2004.
24
OTHER EXPENSE
- ----------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(Dollars in thousands) 2005 2004 $ CHANGE % CHANGE
- ----------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits $18,724 $15,893 $2,831 17.81 %
Occupancy 7,388 6,996 392 5.60
FDIC and other insurance 360 301 59 19.60
Other real estate 770 107 663 619.63
General and administrative 11,411 9,054 2,357 26.03
-------------------------------------------------------
Total other expenses $38,653 $32,351 $6,302 19.48 %
=======================================================
Salaries and employee benefits increased $2.8 million primarily as a result of
an increase in the number of employees as well as normal compensation increases.
The number of full-time equivalent employees increased from 335 at the end of
2003 to 360 at the end of the third quarter of 2004 to 371 at the end of the
third quarter of 2005.
The primary factor in the increase of occupancy expense was a $202,000 increase
in building rental expenses due to office expansion in Texas and Wichita,
Kansas. Other increases in line items such as security services, utilities,
equipment rental and maintenance contracts also occurred due to these additional
offices.
The increase in other real estate expenses occurred as we continued operations
of certain acquired properties and prepared other properties to be sold.
The increase in general and administrative expense was due primarily to the
required write-off of $970,000 in unamortized issuance costs related to the SBI
Capital trust preferred securities that were redeemed in June 2005, a $438,000
provision for unfunded loan commitments, a $206,000 increase in fees paid in
connection with government-guaranteed loans, a $181,000 increase in accounting
fees ($142,500 of which was the cost of work performed for Sarbanes-Oxley
Section 404 compliance and attestation), and a $179,000 increase in legal fees.
* * * * * * *
PROVISIONS FOR LOAN LOSSES AND FOR UNFUNDED LOAN COMMITMENTS
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses and the reserve for unfunded loan commitments at the
levels Southwest determines is appropriate based on a systematic methodology.
(See Note 6, "Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments," in the Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $21.9 million increased $2.9 million, or 15%,
from year-end 2004. A provision for loan losses of $11.4 million was recorded in
the first nine months of 2005, an increase of $3.3 million, or 41%, from the
first nine months of 2004. A provision for loan losses of $4.1 million was
recorded for the third quarter of 2005, an increase of $242,000, or 6%, from the
third quarter of 2004. (See Note 5, "Loans Receivable," in the Notes to
Unaudited Consolidated Financial Statements.)
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses. At
September 30, 2005, this reserve for unfunded loan commitments was $1.4 million,
a $438,000, or 46%, increase from the amount previously included in the
allowance for loan losses at December 31, 2004. The amounts of the allowance for
loan losses and other financial information for December 31, 2004 and September
30, 2004 presented in this report also reflect the reclassification of the
reserve for unfunded loan commitments from the allowance for loan losses to a
separate liability account. The provision for unfunded loan commitments is a
component of general and administrative expense on Southwest's consolidated
statements of operations.
25
TAXES ON INCOME
Southwest's income tax expense was $9.4 million and $7.9 million for the first
nine months of 2005 and 2004, respectively, an increase of $1.5 million, or 19%,
and was $3.3 million and $2.9 million for the third quarters of 2005 and 2004,
respectively, an increase of $412,000, or 14%. Southwest's effective tax rates
have been lower than federal and state statutory rates primarily because of
tax-exempt income on municipal obligations and loans, the organization in July
2001 of a real estate investment trust, and tax credits generated by certain
lending and investment activities.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as student loans, residential mortgage loans, and SBA loans, and
available for sale investments. Additional sources of liquidity, including cash
flow from the repayment of loans and the sale of participations in outstanding
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of deposits and liquid assets and
accessibility to the capital and money markets. These funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans, and operate the
organization.
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("Sallie Mae"), the F&M Bank of Tulsa ("F&M"), and the Federal Home Loan Bank of
Topeka ("FHLB"). Stillwater National also carries interest-bearing demand notes
issued by the U.S. Treasury in connection with the Treasury Tax and Loan note
program; the outstanding balance of those notes was $990,000 at September 30,
2005. Stillwater National has approved federal funds purchase lines totaling
$350.5 million with nine banks; $1.5 million was outstanding on these lines at
September 30, 2005. In addition, Stillwater National has available a $200.0
million line of credit from Sallie Mae and a $327.7 million line of credit from
the FHLB and SNB Wichita has a $10.2 million line of credit from the FHLB.
Borrowings under the Sallie Mae line would be secured by student loans.
Borrowings under the FHLB lines are secured by investment securities and loans.
The Sallie Mae line expires April 30, 2007; no amount was outstanding on this
line at September 30, 2005. The Stillwater National FHLB line of credit had an
outstanding balance of $146.5 million at September 30, 2005; no amount was
outstanding on the SNB Wichita line of credit at the FHLB at September 30, 2005.
See also "Deposits and Other Borrowings" on page 18.
Stillwater National sells securities under agreements to repurchase with
Stillwater National retaining custody of the collateral. Collateral consists of
direct obligations of U.S. government and agency obligations, which are
designated as pledged with Stillwater National's safekeeping agent. These
transactions are for one-to-four day periods.
During the first nine months of 2005, the only categories of other borrowings
whose averages exceeded 30% of ending shareholders' equity were repurchase
agreements and funds borrowed from the FHLB.
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
- --------------------------------------------------------------------------------------------------------------------
FUNDS FUNDS
REPURCHASE BORROWED REPURCHASE BORROWED
(Dollars in thousands) AGREEMENTS FROM THE FHLB AGREEMENTS FROM THE FHLB
- --------------------------------------------------------------------------------------------------------------------
Amount outstanding at end of period $41,581 $146,500 $36,615 $165,890
Weighted average rate paid at end of period 2.52% 3.97% 0.76% 3.08%
Average Balance:
For the three months ended $36,264 $129,317 $32,667 $190,696
For the nine months ended $33,861 $124,689 $37,076 $166,491
Average Rate Paid:
For the three months ended 2.52% 3.96% 0.76% 2.83%
For the nine months ended 2.12% 3.79% 0.66% 2.89%
Maximum amount outstanding at any month end $47,717 $146,500 $44,465 $189,788
26
During the first nine months of 2005, cash and cash equivalents increased by
$63.3 million, or 263%, to $87.4 million. This increase was the net result of
cash provided from financing activities of $175.2 million (primarily from an
increase in deposits) and cash provided from operating activities of $5.3
million, offset in part by cash used in net loan origination and other investing
activities of $117.2 million.
During the first nine months of 2004, cash and cash equivalents decreased by
$3.0 million, or 9%, to $31.0 million. This decrease was the net result of cash
used in net loan origination and other investing activities of $180.4 million
and cash used in operating activities of $104.0 million, offset in part by cash
provided from financing activities of $281.4 million.
CAPITAL RESOURCES
In the first nine months of 2005, total shareholders' equity increased $40.5
million, or 32%, to $166.5 million due primarily to the $39.5 million net
proceeds from the common stock offering. Earnings, net of cash dividends
declared on common stock, contributed $13.4 million to shareholders' equity
during this nine month period. The sale or issuance of common stock through the
dividend reinvestment plan, the employee stock purchase plan, and the employee
stock option plan and the issuance of restricted stock contributed an additional
$2.0 million to shareholders' equity in the first nine months of 2005, including
tax benefits realized by Southwest relating to option exercises. Accumulated
comprehensive income (loss), consisting of net unrealized gains (losses) on
investment securities available for sale (net of tax), was $(2.8) million at
September 30, 2005 compared to $(797,000) at December 31, 2004. Southwest
purchased $12.4 million in shares during the first nine months of 2005.
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are
commonly known as Risk-Based Capital Guidelines. At September 30, 2005,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 14.06%, a Tier I risk-based capital ratio of 12.80%,
and a leverage ratio of 10.24%. As of September 30, 2005, Stillwater National
and SNB Wichita also met the criteria for classification as "well-capitalized"
institutions under the prompt corrective action rules promulgated under the
Federal Deposit Insurance Act. Designation as a well-capitalized institution
under these regulations does not constitute a recommendation or endorsement of
Southwest, Stillwater National or SNB Wichita by Federal bank or thrift
regulators.
Southwest declared a dividend of $0.075 per common share payable on October 1,
2005 to shareholders of record as of September 19, 2005.
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited
consolidated financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
and practices within the banking industry which require the measurement of
financial position and operating results in terms of historical dollars without
considering fluctuations in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation.
* * * * * * *
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2004.
27
CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As required by SEC rules, Southwest's management evaluated the effectiveness of
Southwest's disclosure controls and procedures as of September 30, 2005.
Southwest's Chief Executive Officer and Chief Financial Officer participated in
the evaluation. Based on this evaluation, Southwest's Chief Executive Officer
and Chief Financial Officer concluded that Southwest's disclosure controls and
procedures were effective as of September 30, 2005.
FIRST NINE MONTHS 2005 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change occurred during the first nine months of 2005 that has materially
affected, or is reasonably likely to materially affect, Southwest's internal
control over financial reporting.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt
interest-earning assets. Readers of this report should be aware that non-GAAP
ratios and other measures presented by some banking organizations or financial
analysts may not be directly comparable to similarly named ratios or other
measures used by Southwest or other banking organizations.
28
PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Unregistered sales of equity securities and use of proceeds
There were no unregistered sales of equity securities by
Southwest during the quarter ended September 30, 2005.
The following table provides information on Southwest's
purchases of its common stock during the three months ended
September 30, 2005.
Issuer Purchases of Equity Securities (1)
---------------------------------------------------------------------------------------------------------
(a) Total (c) Total Number of
Number of Shares Purchased as (d) Maximum Number
Shares Part of Publicly that May Yet Be
Purchased (b) Average Price Announced Plans or Purchased Under the
Period (3) Paid per Share Programs Plans or Programs (2)
---------------------------------------------------------------------------------------------------------
July 2005 17,840 $18.00 17,840 -
---------------------------------------------------------------------------------------------------------
August 2005 - - - -
---------------------------------------------------------------------------------------------------------
September 2005 - - - -
---------------------------------------------------------------------------------------------------------
(1) Includes purchases of Southwest's stock made by or on behalf
of the Company or any affiliated purchasers of the Company as
defined in Securities and Exchange Commission Rule 10b-18.
(2) In April 2004, Southwest publicly announced a stock repurchase
program that permitted the repurchase of up to 5%, or
approximately 500,000 shares, of its outstanding common stock.
That program replaced a similar plan that expired in 2003. The
April 2004 plan expired on March 31, 2005, and has not been
replaced.
(3) All of the shares shown were purchased pursuant to a Selling
Shareholder Agreement (the "Agreement") dated May 13, 2005,
with Betty B. Kerns ("BBK"), the Joyce P. Berry Revocable
Trust, the Joe M. Berry Trust, the Berry Charitable Remainder
Trust, and BKP, L.L.C. (the "Selling Shareholders"). Under the
terms of the Agreement, Southwest agreed to repurchase from
the Selling Shareholders an aggregate of 689,796 shares of
Southwest common stock, par value $1.00 per share, for a price
per share of $18.00. Southwest purchased 671,956 shares under
this agreement in May 2005.
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits
Exhibit 31(a),(b) Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32(a),(b) 18 U.S.C. Section 1350 Certifications
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST BANCORP, INC.
(Registrant)
By: /s/ Rick Green November 7, 2005
------------------------------------------- --------------------------
Rick Green Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kerby Crowell November 7, 2005
------------------------------------------- ---------------------------
Kerby Crowell Date
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
30