Southwest Bancorp 10Q 2014 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________

FORM 10-Q

__________________

[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

[ ]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: 001-34110

SOUTHWEST BANCORP, INC.

(Exact name of registrant as specified in its charter)



Oklahoma		73-1136584
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

608 South Main Street, Stillwater, Oklahoma		74074
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (405) 742-1800

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 12 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 90 days.

[ x ] YES[ ] NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[ x ] YES[ ] NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ] Accelerated Filer [ x ] Non-Accelerated Filer [ ]Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES[ x ] NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 7, 2014, the issuer has 19,793,460 shares of its Common Stock, par value $1.00, outstanding.

SOUTHWEST BANCORP, INC.

INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Statements of Financial Condition	4

Unaudited Consolidated Statements of Operations	5

Unaudited Consolidated Statements of Comprehensive Income	6

Unaudited Consolidated Statements of Cash Flows	7

Unaudited Consolidated Statements of Shareholders’ Equity	8

Notes to Unaudited Consolidated Financial Statements	9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS	29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4. CONTROLS AND PROCEDURES	45

PART II: OTHER INFORMATION	46

SIGNATURES	47

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”) makes forward-looking statements in this Form 10-Q and documents incorporated by reference into it that are subject to risks and uncertainties. Forward-looking statements often use words such as “anticipate”, “target”, “outlook”, “forecast”, “will”, “should”, “expect”, “estimate”, “intend”, “plan”, “goal”,
“believe”, or other words with similar meanings. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time, many of which are beyond our control. We intend these statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include:

Statements of our goals, intentions, and expectations;

Estimates of risks and of future costs and benefits;

Expectations regarding our future financial performance and the financial performance of our operating segments;

Expectations regarding regulatory actions;

Expectations regarding our ability to utilize tax loss benefits;

Assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs;

Estimates of the value of assets held for sale or available for sale; and

Statements of our 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; changes in effective tax rates or the expiration of favorable tax provisions; changes in regulatory standards and examination policies; and a variety of other matters. These other matters include, among other things, the direct and indirect effects of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and supervisory policies of banking regulators. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past growth and performance do not necessarily indicate our future results. For other factors, risks, and uncertainties that could cause actual results to differ materially from estimates and projections contained in forward-looking statements, please read the “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

The cautionary statements in this Form 10-Q and any documents incorporated by reference herein also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this Form 10-Q, whether as a result of differences in actual results, changes in assumptions, or changes in other factors affecting such statements, except as required by law.

Management’s discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Financial Condition



	June 30,		December 31,
(Dollars in thousands)	2014		2013
Assets:
Cash and due from banks	$	28,369	$	28,062
Interest-bearing deposits		86,785		251,777
Cash and cash equivalents		115,154		279,839
Securities held to maturity (fair values of $11,286 and $12,115, respectively)		10,682		11,720
Securities available for sale (amortized cost of $373,609 and $385,423, respectively)		375,191		382,479
Loans held for sale		6,803		3,060
Loans receivable (includes loss share: $606 and $1,812, respectively)		1,344,897		1,267,843
Less: Allowance for loan losses		(33,083)		(36,663)
Net loans receivable		1,311,814		1,231,180
Accrued interest receivable		4,636		5,335
Non-hedge derivative asset		121		-
Premises and equipment, net		19,096		20,833
Other real estate		4,285		2,654
Goodwill		1,214		1,214
Other intangible assets, net		3,849		4,980
Other assets		32,313		38,129
Total assets	$	1,885,158	$	1,981,423

Liabilities:
Deposits:
Noninterest-bearing demand	$	427,431	$	444,796
Interest-bearing demand		124,712		120,156
Money market accounts		430,296		439,981
Savings accounts		31,187		41,727
Time deposits of $100,000 or more		209,059		251,185
Other time deposits		241,170		286,241
Total deposits		1,463,855		1,584,086
Accrued interest payable		772		832
Non-hedge derivative liability		121		-
Other liabilities		11,906		10,293
Other borrowings		90,760		80,632
Subordinated debentures		46,393		46,393
Total liabilities		1,613,807		1,722,236
Shareholders' equity:
Common stock - $1 par value; 40,000,000 shares authorized;
19,793,123, 19,732,926, shares issued and outstanding, respectively		19,793		19,733
Paid in capital		100,962		99,937
Retained earnings		150,789		142,528
Accumulated other comprehensive loss		(193)		(3,011)
Total shareholders' equity		271,351		259,187
Total liabilities & shareholders' equity	$	1,885,158	$	1,981,423

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations



	For the three months				For the six months
	ended June 30,				ended June 30,
(Dollars in thousands, except earnings per share data)	2014		2013		2014		2013
Interest income:
Interest and fees on loans	$	16,343	$	16,415	$	32,118	$	33,421
Investment securities:
U.S. Government and agency obligations		337		426		764		898
Mortgage-backed securities		937		833		1,826		1,700
State and political subdivisions		294		302		590		606
Other securities		60		33		98		81
Other interest-earning assets		314		255		689		495
Total interest income		18,285		18,264		36,085		37,201

Interest expense:
Interest-bearing demand		40		37		80		82
Money market accounts		136		190		282		426
Savings accounts		11		12		22		24
Time deposits of $100,000 or more		338		613		787		1,311
Other time deposits		406		590		785		1,251
Other borrowings		223		222		448		442
Subordinated debentures		557		1,466		1,106		2,925
Total interest expense		1,711		3,130		3,510		6,461

Net interest income		16,574		15,134		32,575		30,740

Provision for loan losses		(355)		(876)		(1,341)		(378)
Net interest income after provision for loan losses		16,929		16,010		33,916		31,118

Noninterest income:
Service charges and fees		2,608		2,607		5,204		5,267
Gain on sale of bank branches, net		4,378		-		4,378		-
Gain on sales of mortgage loans, net		463		831		687		1,645
Gain on sale/call of investment securities, net		629		-		764		-
Other noninterest income		168		53		238		116
Total noninterest income		8,246		3,491		11,271		7,028

Noninterest expense:
Salaries and employee benefits		8,472		8,039		16,598		16,175
Occupancy		2,783		2,679		5,552		5,253
FDIC and other insurance		314		400		711		891
Other real estate, net		511		(1,394)		579		(1,041)
General and administrative		3,252		3,115		5,999		5,949
Total noninterest expense		15,332		12,839		29,439		27,227
Income before taxes		9,843		6,662		15,748		10,919
Taxes on income		3,691		2,248		5,905		4,116
Net income	$	6,152	$	4,414	$	9,843	$	6,803

Basic earnings per common share	$	0.31	$	0.22	$	0.50	$	0.34
Diluted earnings per common share		0.31		0.22		0.50		0.34
Common dividends declared per share		0.04		-		0.08		-

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income



	For the three months				For the six months
	ended June 30,				ended June 30,
(Dollars in thousands)	2014		2013		2014		2013

Net income	$	6,152	$	4,414	$	9,843	$	6,803

Other comprehensive income:
Unrealized holding gain (loss) on available for sale securities		2,132		(6,481)		4,526		(6,750)
Change in fair value of derivative used for cash flow hedge		(32)		1,276		70		1,517
Other comprehensive income (loss), before tax		2,100		(5,205)		4,596		(5,233)
Tax benefit (expense) related to items of other comprehensive
income (loss)		(812)		1,982		(1,778)		1,994
Other comprehensive income (loss), net of tax		1,288		(3,223)		2,818		(3,239)
Comprehensive income	$	7,440	$	1,191	$	12,661	$	3,564

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows



	For the six months
	ended June 30,
(Dollars in thousands)	2014		2013
Operating activities:
Net income	$	9,843	$	6,803
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(1,341)		(378)
Adjustment to other real estate		320		1,887
Deferred tax expense		5,609		3,830
Asset depreciation		1,301		1,218
Securities premium amortization, net of discount accretion		1,341		1,965
Amortization of intangibles		393		723
Stock based compensation expense		430		554
Net gain on sales/calls of investment securities		(764)		-
Net gain on sales of mortgage loans		(687)		(1,645)
Net (gain) loss on sales of premises/equipment		37		(9)
Net (gain) loss on sales of other real estate		18		(3,535)
Net gain from sale of bank branches		(4,378)		-
Proceeds from sales of held for sale loans		35,711		76,711
Held for sale loans originated for resale		(38,709)		(76,921)
Net changes in assets and liabilities:
Accrued interest receivable		398		298
Other assets		(1,687)		26,934
Accrued interest payable		(73)		(96)
Other liabilities		1,080		(2,771)
Net cash provided by operating activities		8,842		35,568
Investing activities:
Proceeds from principal repayments, calls and maturities:
Held to maturity securities		1,000		5,000
Available for sale securities		45,343		64,043
Redemptions (purchases) of other investments		885		(12)
Purchases of available for sale securities		(34,833)		(73,050)
Loans originated, net of principal repayments		(109,347)		56,512
Cash outflows from sale of bank branches, net		(94,806)		-
Purchases of premises and equipment		(1,034)		(631)
Proceeds from sales of premises and equipment		39		50
Proceeds from sales of other real estate		251		15,167
Net cash provided by (used in) investing activities		(192,502)		67,079
Financing activities:
Net increase (decrease) in deposits		10,344		(93,617)
Net increase in other borrowings		10,128		3,972
Net proceeds from issuance of common stock		75		178
Repurchase of common stock warrant		-		(2,287)
Common stock dividends paid		(1,571)		-
Preferred stock dividends paid		(1)		-
Net cash provided by (used in) financing activities		18,975		(91,754)
Net increase (decrease) in cash and cash equivalents		(164,685)		10,893
Cash and cash equivalents:
Beginning of period		279,839		288,079
End of period	$	115,154	$	298,972

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity



								Accumulated
				Additional				Other		Total
	Common Stock			Paid in		Retained		Comprehensive		Shareholders'
(Dollars in thousands)	Shares	Amount		Capital		Earnings		Loss		Equity
Balance, December 31, 2012	19,529,705	$	19,530	$	99,705	$	125,093	$	1,728	$	246,056

Warrant repurchase	-		-		(2,287)		-		-		(2,287)
Common stock issued	161,600		162		1,909		-		-		2,071
Net common stock issued under employee
plans and related tax expense	1,301		1		15		-		-		16
Other comprehensive loss, net of tax	-		-		-		-		(3,239)		(3,239)
Net income	-		-		-		6,803		-		6,803

Balance, June 30, 2013	19,692,606	$	19,693	$	99,342	$	131,896	$	(1,511)	$	249,420

Balance, December 31, 2013	19,732,926	$	19,733	$	99,937	$	142,528	$	(3,011)	$	259,187

Dividends paid:
Preferred	-		-		-		(1)		-		(1)
Common, $0.08 per share,	-		-		-		(1,581)		-		(1,581)
Common stock issued	59,343		59		1,010		-		-		1,069
Net common stock issued under employee
plans and related tax expense	854		1		15		-		-		16
Other comprehensive income, net of tax	-		-		-		-		2,818		2,818
Net income	-		-		-		9,843		-		9,843

Balance, June 30, 2014	19,793,123	$	19,793	$	100,962	$	150,789	$	(193)	$	271,351

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1: SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

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. However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. Those adjustments consist of normal recurring adjustments. The results of operations for the three and six months ended June 30, 2014, and the cash flows for the six months ended June 30, 2014, 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, 2013.

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”), our wholly owned financial institution subsidiaries, Bank SNB, National Association (“Bank SNB”), our banking subsidiary, SNB Capital Corporation, a lending and loan workout subsidiary, and consolidated the subsidiaries of Bank SNB, including SNB Real Estate Holdings, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

In accordance with Accounting Standards Codification (“ASC”) 855, Subsequent Events, we have evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. Please see Note 12: Subsequent Events for more detail.

NOTE 2: DISPOSALS

On January 16, 2014, we announced the execution of agreements to sell branch banks in Overland Park, Anthony, and Harper, Kansas, which were all a part of our Kansas operating segment. After strategic evaluation, we decided to sell these branches in order to invest our capital and resources in Wichita, Hutchinson, and South Hutchinson to better fit our product lines in Kansas, along with our banking offices in Oklahoma and Texas. There are no further plans to divest of any other banking offices at this time, and we will focus on growing our presence in other markets in which we operate.

During the second quarter of 2014, the Overland Park branch was sold to Fidelity Bank in Wichita, Kansas, and the Anthony and Harper, Kansas branches were sold to BancCentral, National Association, in Alva, Oklahoma. The sold branches had combined total deposits of $130.6 million and loans of $27.9 million.

These transactions resulted in a net gain of $4.4 million, which is included as a separate line item under noninterest income in the gain on sale of bank branches, net line item on the unaudited consolidated statements of operations.

NOTE 3: INVESTMENT SECURITIES

A summary of the amortized cost and fair values of investment securities at June 30, 2014 and December 31, 2013 follows:



	Amortized		Gross Unrealized				Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
At June 30, 2014
Held to Maturity:
Obligations of state and political subdivisions	$	10,682	$	604	$	-	$	11,286
Total	$	10,682	$	604	$	-	$	11,286

Available for Sale:
Federal agency securities	$	112,929	$	383	$	(1,098)	$	112,214
Obligations of state and political subdivisions		33,469		399		(221)		33,647
Residential mortgage-backed securities		183,590		2,121		(1,289)		184,422
Asset-backed securities		9,593		3		(42)		9,554
Other securities		34,028		1,354		(28)		35,354
Total	$	373,609	$	4,260	$	(2,678)	$	375,191

At December 31, 2013
Held to Maturity:
Obligations of state and political subdivisions	$	11,720	$	395	$	-	$	12,115
Total	$	11,720	$	395	$	-	$	12,115

Available for Sale:
Federal agency securities	$	123,332	$	330	$	(2,889)	$	120,773
Obligations of state and political subdivisions		33,685		36		(1,085)		32,636
Residential mortgage-backed securities		183,512		1,747		(2,089)		183,170
Asset-backed securities		9,578		-		(96)		9,482
Other securities		35,316		1,267		(165)		36,418
Total	$	385,423	$	3,380	$	(6,324)	$	382,479

Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. Other securities consist of corporate stock.

Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank (“FHLB”) stock, and certain other investments, are carried at cost and included in other assets on the unaudited consolidated statements of financial condition. Total investments carried at cost were $7.3 million at June 30, 2014 and $8.1 million at December 31, 2013. There are no identified events or changes in circumstances that may have a significant adverse effect on the investments carried at cost.

A comparison of the amortized cost and approximate fair value of our investment securities by maturity date at June 30, 2014 follows:



	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	22,931	$	23,279	$	940	$	949
More than one year through five years		172,375		174,510		2,221		2,287
More than five years through ten years		121,916		120,739		4,137		4,311
More than ten years		56,387		56,663		3,384		3,739
Total	$	373,609	$	375,191	$	10,682	$	11,286

The foregoing analysis assumes that our residential mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to our investment securities for this analysis.

Gain or loss on sale of investments is based upon the specific identification method. There were no sales of securities available for sale for the six months ended June 30, 2014 or June 30, 2013.

The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at June 30, 2014 and December 31, 2013. Securities whose market values exceed cost are excluded from this table.



				Continuous Unrealized
		Amortized cost of		Loss Existing for:				Fair value of
	Number of	securities with		Less Than		More Than		securities with
(Dollars in thousands)	Securities	unrealized losses		12 Months		12 Months		unrealized losses
At June 30, 2014
Available for Sale:
Federal agency securities	15	$	59,185	$	(695)	$	(403)	$	58,087
Obligations of state and political subdivisions	9		13,149		(66)		(155)		12,928
Residential mortgage-backed securities	39		66,734		(1,029)		(260)		65,445
Asset-backed securities	2		7,838		(42)		-		7,796
Other securities	3		14,679		(28)		-		14,651
Total	68	$	161,585	$	(1,860)	$	(818)	$	158,907

At December 31, 2013
Available for Sale:
Federal agency securities	24	$	87,921	$	(2,885)	$	(4)	$	85,032
Obligations of state and political subdivisions	20		31,579		(887)		(198)		30,494
Residential mortgage-backed securities	53		104,667		(2,015)		(74)		102,578
Asset-backed securities	3		9,578		(96)		-		9,482
Other securities	8		27,728		(165)		-		27,563
Total	108	$	261,473	$	(6,048)	$	(276)	$	255,149

We evaluate all securities on an individual basis for other-than-temporary impairment on at least a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.

We have the ability and intent to hold the securities classified as held to maturity until they mature, at which time we expect to receive full value for the securities. Furthermore, as of June 30, 2014, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not likely that we will have to sell any such securities before a recovery of cost. The declines in fair value were attributable to recent increases in market interest rates over the yields available at the time the underlying securities were purchased or increases in spreads over market interest rates. Management does not believe any of the securities are impaired due to credit quality. Accordingly, as of June 30, 2014, management believes the impairment of these investments is not deemed to be other-than-temporary.

As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $249.9 million and $292.6 million were pledged to meet such requirements at June 30, 2014 and December 31, 2013, respectively. Any amount over-pledged can be released at any time.

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas. Our commercial lending operations are concentrated in Oklahoma City, Tulsa, Dallas, Wichita, and other metropolitan markets in Oklahoma, Texas, and Kansas. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see Note 9: Operating Segments for more detail regarding loans by market. At June 30, 2014 and December 31, 2013, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.

Our loan classifications were as follows:




(Dollars in thousands)	At June 30, 2014		At December 31, 2013
Real estate mortgage:
Commercial	$	769,021	$	752,279
One-to-four family residential		79,542		83,988
Real estate construction:
Commercial		166,981		143,848
One-to-four family residential		8,359		4,646
Commercial		300,163		255,058
Installment and consumer:
Guaranteed student loans		4,282		4,394
Other		23,352		26,690
		1,351,700		1,270,903
Less: Allowance for loan losses		(33,083)		(36,663)
Total loans, net	$	1,318,617	$	1,234,240

Concentrations of Credit. At June 30, 2014, $459.7 million, or 34%, and $398.7 million, or 29%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industry, respectively. We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.

Loans Held for Sale. We had loans which were held for sale of $6.8 million and $3.1 million at June 30, 2014 and December 31, 2013, respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of our one-to-four family residential loans and loan servicing rights are sold to one buyer. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. These loans are available for sale in the secondary market.

Loan Servicing. We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $397.3 million and $390.7 million at June 30, 2014 and December 31, 2013, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.

Acquired Loans. On June 19, 2009, Bank SNB entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire substantially all loans as well as certain other related assets of First National Bank of Anthony, Anthony, Kansas in an FDIC-assisted transaction. Bank SNB and the FDIC entered into loss sharing agreements that provide Bank SNB with significant protection against credit losses from loans and related assets acquired in the transaction. Under these agreements, for a period of ten years for 1-4 family real estate loans and for a period of five years for other loans, the FDIC will reimburse Bank SNB for 80% of net losses up to $35.0 million on covered assets, primarily acquired loans and other real estate, and for 95% of any net losses above $35.0 million. Bank SNB services the covered assets. The five-year period for other loans expired June 30, 2014.

Due to the immateriality of the remaining balance of loans covered under the loss sharing agreement with the FDIC, covered and noncovered loans have been combined for reporting purposes. Prior period numbers have also been adjusted to reflect this change. This adjustment has no financial statement impact.

Loans covered under the loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported in loans. The acquired loans were initially recorded at fair value (as determined

by the present value of expected future cash flows) with no allowance for loan losses. Subsequent decreases in expected cash flows are recognized as impairments. Valuation allowances on these loans reflect only losses incurred after the acquisition.

The expected payments from the FDIC under the loss sharing agreements are recorded as part of loans in the unaudited consolidated statements of financial condition.

Changes in the carrying amounts and accretable yields for loans acquired under the loss sharing agreement with the FDIC were as follows for the three and six months ended June 30, 2014 and June 30, 2013.



	For the three months ended June 30,
	2014					2013
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	1,503	$	15,053	$	1,707	$	23,601
Payments received		-		(6,766)		-		(1,941)
Net charge-offs		(5)		(367)		-		(70)
Accretion		(638)		-		(127)		56
Balance at end of period	$	860	$	7,920	$	1,580	$	21,646



	For the six months ended June 30,
	2014				2013
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	1,597	$	16,427	$	1,904	$	25,707
Payments received		-		(8,099)		-		(3,830)
Transfers to other real estate / repossessed assets		-		-		(33)		(375)
Net charge-offs		(9)		(408)		(1)		(70)
Accretion		(728)		-		(290)		214
Balance at end of period	$	860	$	7,920	$	1,580	$	21,646

Nonperforming / Past Due Loans. We identify past due loans based on contractual terms on a loan by loan basis and generally place loans, except for consumer loans, on nonaccrual when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. Interest accrual may also be discontinued earlier if, in management’s opinion, collection is unlikely. Generally, past due consumer installment loans are not placed on nonaccrual but are charged-off when they are four months past due. Accrued interest is written off when a loan is placed on nonaccrual status. Subsequent interest income is recorded when cash receipts are received from the borrower and collectability of the principal amount is reasonably assured.

Under generally accepted accounting principles and instructions to reports of condition and income of federal banking regulators, a nonaccrual loan may be returned to accrual status: (i) when none of its principal and interest is due and unpaid, repayment is expected, and there has been a sustained period (at least six months) of repayment performance; (ii) when the loan is not brought current, but there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or (iii) when the loan otherwise becomes well-secured and in the process of collection. Purchased nonperforming loans also may be returned to accrual status without becoming fully current. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance.

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 us 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.

The following table shows the recorded investment in loans on nonaccrual status.




(Dollars in thousands)	At June 30, 2014		At December 31, 2013
Real estate mortgage:
Commercial	$	7,613	$	7,766
One-to-four family residential		1,180		513
Real estate construction:
Commercial		82		2,721
Commercial		7,484		8,769
Other consumer		119		50
Total nonaccrual loans	$	16,478	$	19,819

During the first six months of 2014, an immaterial amount of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the six months ended June 30, 2014, additional interest income of $0.5 million would have been recorded.

Net cumulative charge-offs against nonaccrual loans at June 30, 2014 and December 31, 2013 were $6.2 million and $8.2 million, respectively.

The following table shows an age analysis of past due loans at June 30, 2014 and December 31, 2013.



			90 days and								Recorded loans
	30-89 days		greater		Total past				Total		> 90 days and
(Dollars in thousands)	past due		past due		due		Current		loans		accruing
At June 30, 2014
Real estate mortgage:
Commercial	$	4,538	$	7,613	$	12,151	$	756,870	$	769,021	$	-
One-to-four family residential		234		1,180		1,414		78,128		79,542		-
Real estate construction:
Commercial		-		82		82		166,899		166,981		-
One-to-four family residential		-		-		-		8,359		8,359		-
Commercial		773		7,484		8,257		291,906		300,163		-
Other		74		119		193		27,441		27,634		-
Total	$	5,619	$	16,478	$	22,097	$	1,329,603		1,351,700	$	-

At December 31, 2013
Real estate mortgage:
Commercial	$	3,851	$	7,766	$	11,617	$	740,662	$	752,279	$	-
One-to-four family residential		302		513		815		83,173		83,988		-
Real estate construction:
Commercial		569		2,721		3,290		140,558		143,848		-
One-to-four family residential		-		-		-		4,646		4,646		-
Commercial		1,998		8,819		10,817		244,241		255,058		50
Other		128		53		181		30,903		31,084		3
Total	$	6,848	$	19,872	$	26,720	$	1,244,183		1,270,903	$	53

Impaired Loans. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Each loan deemed to be impaired (loans on nonaccrual status and greater than one-hundred thousand, and all troubled debt restructurings) is evaluated on an individual basis using the discounted present value of expected cash flows based on the loan’s initial effective interest rate, the fair value of collateral, or the market value of the loan. Smaller balance, homogeneous loans, including mortgage, student, and consumer, are collectively evaluated for impairment.

Interest payments on impaired loans are applied to principal until collectability of the principal amount is reasonably assured, and at that time interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

Impaired loans are shown in the following table:



	With No Specific Allowance				With A Specific Allowance
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Investment		Balance		Allowance
At June 30, 2014
Commercial real estate	$	29,954	$	31,355	$	16,207	$	16,291	$	3,598
One-to-four family residential		1,650		1,795		10		49		-
Real estate construction		82		108		-		-		-
Commercial		2,195		2,832		6,678		12,699		2,625
Other		119		238		-		-		-
Total	$	34,000	$	36,328	$	22,895	$	29,039	$	6,223

At December 31, 2013
Commercial real estate	$	38,077	$	39,544	$	15,903	$	16,186	$	4,015
One-to-four family residential		510		630		42		94		4
Real estate construction		84		106		2,636		2,762		18
Commercial		1,120		1,254		9,177		14,608		3,863
Other		4		6		46		72		46
Total	$	39,795	$	41,540	$	27,804		33,722	$	7,946

The average recorded investment and interest income recognized on impaired loans as of the six months ended June 30, 2014 and June 30, 2013 is shown in the following table:



	As of and for the six months ended June 30,
	2014				2013
	Average				Average
	Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income
Commercial real estate	$	43,104	$	663	$	64,490	$	968
One-to-four family residential		3,649		1		4,844		1
Real estate construction		251		-		5,514		-
Commercial		9,693		42		13,880		46
Other		69		-		161		-
Total	$	56,766	$	706	$	88,889	$	1,015

Troubled Debt Restructurings. Our loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months.

When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.

Troubled debt restructured loans outstanding as of June 30, 2014 and December 31, 2013 were as follows:



	At June 30, 2014				At December 31, 2013
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	37,212	$	3,840	$	44,442	$	4,456
One-to-four family residential		16		121		18		162
Commercial		1,388		273		1,527		648
Consumer		-		-		-		46
Total	$	38,616	$	4,234	$	45,987	$	5,312

At June 30, 2014 and December 31, 2013, we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in a troubled debt restructuring.

Loans modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2014 and June 30, 2013 are shown in the following table:



	For the three months ended June 30,
	2014				2013
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		2	$	9,684		2	$	1,722
Commercial		-		-		2		1,307
Total		2	$	9,684		4	$	3,029


	For the six months ended June 30,
	2014				2013
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		2	$	9,684		7	$	2,948
Commercial		3		229		5		1,863
Total		5	$	9,913		12	$	4,811

The modifications of loans identified as troubled debt restructurings primarily related to payment reductions, payment extensions, and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.

The following table presents the recorded investment and the number of loans modified as a troubled debt restructuring that subsequently defaulted during the three and six months ended June 30, 2014 and June 30, 2013. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.



	For the three months ended June 30,
	2014				2013
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		Investment		Contracts		Investment
Commercial		1	$	205		1	$	1,048
Total		1	$	205		1	$	1,048


	For the six months ended June 30,
	2014				2013
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		Investment		Contracts		Investment
Commercial real estate		-	$	-		1	$	550
Commercial		1		205		1		1,048
Total		1	$	205		2	$	1,598

Credit Quality Indicators. To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings:

Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans are considered nonperforming.

Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of June 30, 2014 and December 31, 2013, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows:



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At June 30, 2014
Grade:
Pass	$	649,528	$	77,779	$	149,316	$	284,442	$	27,382	$	1,188,447
Special Mention		51,345		104		7,164		4,013		133		62,759
Substandard		67,750		1,625		18,860		6,328		119		94,682
Doubtful		398		34		-		5,380		-		5,812
Total	$	769,021	$	79,542	$	175,340	$	300,163	$	27,634	$	1,351,700

At December 31, 2013
Grade:
Pass	$	610,929	$	81,534	$	101,715	$	233,132	$	30,893	$	1,058,203
Special Mention		62,932		1,452		22,576		6,130		141		93,231
Substandard		77,453		944		24,203		11,329		50		113,979
Doubtful		965		58		-		4,467		-		5,490
Total	$	752,279	$	83,988	$	148,494	$	255,058	$	31,084	$	1,270,903

Allowance for Loan Losses. The allowance for loan losses is a reserve established through the provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on periodic review and evaluation of the loan portfolio and quarterly assessments of the probable losses inherent in the loan portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate after the effects of net charge-offs for the period.

Management believes the level of the allowance is appropriate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components, specific and general. There is no one factor, or group of factors, that produces the amount of an appropriate allowance for loan losses, as the methodology for assessing the allowance for loan losses makes use of evaluations of individual impaired loans along with other factors and analysis of loan categories. This assessment is highly qualitative and relies upon judgments and estimates by management.

The specific allowance is recorded based on the result of an evaluation consistent with ASC 310.10.35, Receivables: Subsequent Measurement, for each impaired loan. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated

value of the collateral. Charge-offs against the allowance for impaired loans are made when and to the extent loans are deemed uncollectible. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

The general component of the allowance is calculated based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into loan pools by type of loan. The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is located. Our primary markets are Oklahoma, Texas, and Kansas, and loans secured by real estate in those states are included in the “in-market” pool, with the remaining loans defaulting to the “out-of-market” pool. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us. The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.

Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and considered in the determination of the allowance for loan losses. We are not aware of any significant time lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment.

The following tables show the balance in the allowance for loan losses and the recorded investment in loans for the dates indicated by portfolio classification disaggregated on the basis of impairment evaluation method.



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At June 30, 2014
Balance at beginning of period	$	18,854	$	850	$	5,523	$	10,985	$	451	$	36,663
Loans charged-off		(683)		(126)		(655)		(3,514)		(405)		(5,383)
Recoveries		2,343		146		-		595		60		3,144
Provision for loan losses		(3,538)		(238)		418		1,742		275		(1,341)
Balance at end of period	$	16,976	$	632	$	5,286	$	9,808	$	381	$	33,083

Allowance for loan losses ending balance:
Individually evaluated for impairment	$	3,598	$	-	$	-	$	2,625	$	-	$	6,223
Collectively evaluated for impairment		13,378		632		5,286		7,183		381		26,860
Acquired with deteriorated credit quality		-		-		-		-		-		-
Total ending allowance balance	$	16,976	$	632	$	5,286	$	9,808	$	381	$	33,083

Loans receivable ending balance:
Individually evaluated for impairment	$	42,588	$	387	$	82	$	8,873	$	119	$	52,049
Collectively evaluated for impairment		720,559		77,284		175,132		291,242		27,514		1,291,731
Acquired with deteriorated credit quality		5,874		1,871		126		48		1		7,920
Total ending loans balance	$	769,021	$	79,542	$	175,340	$	300,163	$	27,634	$	1,351,700



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At June 30, 2013
Balance at beginning of period	$	27,223	$	861	$	5,271	$	12,604	$	759	$	46,718
Loans charged-off		(509)		(577)		(131)		(5,335)		(171)		(6,723)
Recoveries		86		47		39		499		64		735
Provision for loan losses		(5,685)		731		1,650		2,989		(63)		(378)
Balance at end of period	$	21,115	$	1,062	$	6,829	$	10,757	$	589	$	40,352

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	4,076		-		-		3,840		59		7,975
Collectively evaluated for impairment		17,019		1,000		6,829		6,917		530		32,295
Acquired with deteriorated credit quality		20		62		-		-		-		82
Total ending allowance balance	$	21,115	$	1,062	$	6,829	$	10,757	$	589	$	40,352

Loans receivable ending balance:
Individually evaluated for impairment	$	46,321		418		5,989		12,574		63		65,365
Collectively evaluated for impairment		740,365		77,027		158,159		223,093		32,434		1,231,078
Acquired with deteriorated credit quality		15,452		4,253		320		1,554		67		21,646
Total ending loans balance	$	802,138	$	81,698	$	164,468	$	237,221	$	32,564	$	1,318,089

NOTE 5: FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

ASC 820, Fair Value Measurements and Disclosure, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1Quoted prices in active markets for identical instruments.

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on our estimated fair value amounts. There were no significant changes in valuation methods used to estimate fair value during the six months ended June 30, 2014.

A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:

Available for sale securities – The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices. We obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. We

review the prices supplied by our independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.

The fair value of a single private equity investment is estimated based on our proportionate share of the net asset value, $2.5 million and $2.4 million as of June 30, 2014 and December 31, 2013, respectively. The investee invests in small and mid-sized U.S. financial institutions and other financial-related companies. This investment has a quarterly redemption with sixty-five days’ notice.

Derivative instruments – We utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate. This has been designated as a cash flow hedge. We also offer an interest rate swap program that permits qualified customers to manage interest rate risk on variable rate loans with Bank SNB. Derivative contracts are executed between our customers and Bank SNB. Offsetting contracts are executed by Bank SNB and approved counterparties. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us. The fair value of the interest rate swap agreements are obtained from dealer quotes.

The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013.



			Fair Value Measurement at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At June 30, 2014
Available for sale securities:
Federal agency securities	$	112,214	$	-	$	112,214	$	-
Obligations of state and political subdivisions		33,647		-		33,647		-
Residential mortgage-backed securities		184,422		-		184,422		-
Asset-backed securities		9,554		-		9,554		-
Other securities		35,354		142		35,212		-
		-
Derivative instruments, net		(1,897)		-		(1,897)		-
Total	$	373,294	$	142	$	373,152	$	-

At December 31, 2013
Available for sale securities:
Federal agency securities	$	120,773	$	-	$	120,773	$	-
Obligations of state and political subdivisions		32,636		-		32,636		-
Residential mortgage-backed securities		183,170		-		183,170		-
Asset-backed securities		9,482				9,482
Other securities		36,418		151		36,267		-

Derivative instrument, net		(1,967)		-		(1,967)		-
Total	$	380,512	$	151	$	380,361	$	-

Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:

Impaired loans – Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on third-party appraisals. Certain other impaired loans are analyzed and reported through a specific valuation allowance based upon the net present value of cash flows.

Loans held for sale – Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis based on loan commitments. The fair value of loans held for sale is based on existing investor commitments.

Other real estate – Other real estate fair value is based on third-party appraisals for significant properties less the estimated costs to sell the asset.

Goodwill – Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value. There has been no impairment during 2014 or 2013; therefore, no fair value adjustment was recorded through earnings.

Core deposit premiums – The fair value of core deposit premiums are based on third-party appraisals.

Mortgage loan servicing rights – There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions. As of June 30, 2014, there was no impairment; therefore, no fair value adjustments were recorded through earnings.

Assets that were measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013 are summarized below.



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At June 30, 2014
Impaired loans at fair value :
Commercial real estate	$	24,327	$	-	$	24,327	$	-
One-to-four family residential		10		-		10		-
Commercial		7,011		-		7,011		-
Other consumer		117		-		117		-

Loans held for sale:
One-to-four family residential		6,028		-		6,028		-
Government guaranteed commercial real estate		738		-		738		-
Other loans held for sale		37		-		37		-

Other real estate		4,285		-		4,285		-
Goodwill		1,214		-		1,214		-
Core deposit premium		667		-		667		-
Mortgage loan servicing rights		3,182		-		-		3,182
Total	$	47,616	$	-	$	44,434	$	3,182

At December 31, 2013
Impaired loans at fair value :
Commercial real estate	$	20,764	$	-	$	20,764	$	-
One-to-four family residential		1,045		-		1,045		-
Real estate construction		2,636		-		2,636
Commercial		9,176		-		9,176		-
Other consumer		75		-		75		-

Loans held for sale:
One-to-four family residential		2,235		-		2,235		-
Government guaranteed commercial real estate		769		-		769		-
Other loans held for sale		56		-		56		-

Other real estate		2,654		-		2,654		-
Goodwill		1,214		-		1,214		-
Core deposit premium		2,058		-		2,058		-
Mortgage loan servicing rights		3,492		-		-		3,492
Total	$	46,174	$	-	$	42,682	$	3,492

Impaired loans measured at fair value with a carrying amount of $38.3 million were written down to a fair value of $31.5 million, resulting in a life-to-date impairment of $6.8 million, of which $3.8 million was included in the provision for loan losses for the six months ended June 30, 2014. As of December 31, 2013, impaired loans measured at fair value with a carrying amount of $47.0 million were written down to the fair value of $33.7 million at December 31, 2013, resulting in a life-to-date impairment charge of $13.3 million, of which $0.05 million was included in the provision for loan losses for the year ended December 31, 2013.

As of June 30, 2014 and December 31, 2013, other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $0.3 million and $2.2 million, respectively, which was included in noninterest expense.

As of June 30, 2014, $1.1 million of the core deposit premium was written off as a result of the bank branch sales. As of December 31, 2013, there was no impairment; therefore, no fair value adjustments were recorded through earnings.

ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:

Cash and cash equivalents – For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Securities held to maturity – The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.

Loans, net of allowance – Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics. Our loans have been aggregated by categories consisting of commercial, real estate, student, and other consumer. The fair value of loans is estimated by discounting the cash flows using risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks.

Accrued interest receivable – The carrying amount is a reasonable estimate of fair value for accrued interest receivable.

Investments included in other assets – The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.

Deposits – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Accrued interest payable and other liabilities – The estimated fair value of accrued interest payable and other liabilities, which primarily includes trade accounts payable, approximates their carrying values.

Other borrowings – Included in other borrowings are FHLB advances, securities sold under agreements to repurchase, and treasury tax and loan demand notes. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.

Subordinated debentures – Our two subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at June 30, 2014.

The carrying values and estimated fair values of our financial instruments segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value were as follows:



	At June 30, 2014				At December 31, 2013
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	115,154	$	115,154	$	279,839	$	279,839
Securities held to maturity		10,682		11,286		11,720		12,115
Accrued interest receivable		4,636		4,636		5,335		5,335
Derivative asset		121		121		-		-
Investments included in other assets		7,255		7,255		8,140		8,140
Level 3 inputs:
Total loans, net of allowance		1,351,700		1,263,456		1,234,240		1,190,869
Financial liabilities:
Level 2 inputs:
Deposits		1,463,855		1,380,169		1,584,086		1,486,939
Accrued interest payable		772		772		832		832
Other liabilities		10,009		10,009		8,248		8,248
Derivative liabilities		2,018		2,018		1,967		1,967
Other borrowings		90,760		93,319		80,632		83,593
Subordinated debentures		46,393		46,393		46,393		46,393

NOTE 6: DERIVATIVE INSTRUMENTS

We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within policy guidelines. All derivative instruments are carried at fair value, and changes in fair value are reported in earnings. Credit risk is also considered in determining fair value.

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee. Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.

Customer Risk Management Interest Rate Swaps

Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us. If we enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the unaudited consolidated statements of financial condition.

We have entered into one customer interest rate swap agreement that effectively converts the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of June 30, 2014, this loan had an outstanding balance of $11.0 million. We have entered into an offsetting agreement with a dealer counterparty. As of June 30, 2014, the fair value of each contract was $0.1 million and is included as a non-hedge derivative asset and non-hedge derivative liability in the unaudited consolidated statement of financial condition. The floating rate to us in connection with these instruments is 2.97% over the one-month LIBOR. There is currently no collateral required to be posted by us. This interest rate swap is not designated as a hedging instrument.

Interest Rate Swap

We have an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap contract was designated as a hedging instrument in cash flow hedges with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning

February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”). Under the swap, we pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by us as of June 30, 2014 was 3.08%.

The estimated fair value of the interest rate derivative contract outstanding as of June 30, 2014 and December 31, 2013 resulted in a pre-tax loss of $1.9 million and $2.0 million, respectively, and was included in other liabilities in the unaudited consolidated statements of financial condition. We obtained the counterparty valuation to validate the interest rate derivative contract as of June 30, 2014 and December 31, 2013.

The effective portion of our gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.04 million gain and a $0.9 million gain for the six months ended June 30, 2014 and June 30, 2013, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.

Net cash outflows as a result of the interest rate swap agreement were $0.4 million for both the six months ended June 30, 2014 and June 30, 2013 and were included in interest expense on subordinated debentures.

The fair value of cash and securities posted as collateral by us related to the interest rate swap derivative contract was $4.1 million at June 30, 2014 and December 31, 2013.

There are no credit-risk-related contingent features associated with our derivative contract.

NOTE 7: TAXES ON INCOME

Net deferred tax assets totaled $17.6 million at June 30, 2014 and $24.9 million at December 31, 2013. Net deferred tax assets are included in other assets and no valuation allowance is recorded.

As of December 31, 2013, we were in a cumulative pretax loss position as a result of the loss incurred in 2011, resulting in a $10.7 million federal net operating loss carryforward expiring in 2031. As of June 30, 2014, none of the pretax loss remains to be offset by pretax income generated in future periods. We have fully utilized the remaining federal net operating loss carryforward during the second quarter of 2014.

We monitor our deferred tax assets for realizability and conducted an interim analysis to assess the need for a valuation allowance at June 30, 2014. As part of this analysis management considered evidence associated with the taxable income generated in the first six months of 2014, a long history of taxable income, and projected pretax income in future years. While realization of the deferred tax benefit is not assured, it is management’s judgment, after review of all available evidence and based on the weight of such evidence, that a valuation allowance is not required as realization of these benefits meets the “more likely than not” standard under generally accepted accounting principles.

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal or state tax examinations for years before 2010.

NOTE 8: EARNINGS PER SHARE

Earnings per common share is computed using the two-class method prescribed by ASC 260, Earnings Per Share. Using the two-class method, basic earnings per common share is computed based upon net income divided by the weighted average number of common shares outstanding during each period, which excludes outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table shows the computation of basic and diluted earnings per common share:



	For the three months				For the six months
	ended June 30,				ended June 30,
(Dollars in thousands, except earnings per share data)	2014		2013		2014		2013
Numerator:
Net income	$	6,152	$	4,414	$	9,843	$	6,803
Earnings allocated to participating securities		(80)		(45)		(119)		(52)
Numerator for basic earnings per common share	$	6,072	$	4,369	$	9,724	$	6,751
Effect of reallocating undistributed earnings
of participating securities		80		45		119		52
Numerator for diluted earnings per common share	$	6,152	$	4,414	$	9,843	$	6,803

Denominator:
Denominator for basic earnings per common share		19,520,967		19,492,020		19,524,859		19,492,602
Dilutive effect of stock compensation		143,867		108,734		130,767		38,703
Denominator for diluted earnings per common share		19,664,834		19,600,754		19,655,626		19,531,305
Earnings per common share:
Basic	$	0.31	$	0.22	$	0.50	$	0.34
Diluted	$	0.31	$	0.22	$	0.50	$	0.34

NOTE 9: OPERATING SEGMENTS

We operate five principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. The Oklahoma Banking segment, the Texas Banking segment, and the Kansas Banking segment provide deposit and lending services. The Mortgage Banking segment consists of residential mortgage lending services to customers. Prior to the fourth quarter of 2013, the Mortgage Banking segment only included all loans available for sale in the secondary market. During the fourth quarter of 2013, 1-4 family mortgages were added to the available for sale loans in the Mortgage Banking segment. This adjustment would have had an immaterial impact on interest income for the first half of 2013. Other Operations includes our funds management unit and corporate investments.

The primary purpose of the funds management unit is to manage our overall internal liquidity needs and interest rate risk. Each segment borrows funds from or provides funds to the funds management unit as needed to support its operations. The value of funds provided to and the cost of funds borrowed from the funds management unit by each segment are internally priced at rates that approximate market rates for funds with similar duration. The yield used in the funds transfer pricing curve is a blend of rates based on the volume usage of retail and brokered certificates of deposit and FHLB advances.

The accounting policies of each reportable segment are the same as Southwest’s. 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 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 at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile to the consolidated financial statements. The following table summarizes financial results by operating segment:


For the three months ended June 30, 2014
	Oklahoma		Texas		Kansas		Mortgage		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Banking		Operations		Company
Net interest income (loss)	$	9,295	$	4,457	$	3,075	$	201	$	(454)	$	16,574
Provision for loan losses		(1,460)		1,449		(340)		(4)		-		(355)
Noninterest income		1,722		243		420		610		5,251		8,246
Noninterest expenses		7,302		3,232		2,658		568		1,572		15,332
Income before taxes		5,175		19		1,177		247		3,225		9,843
Taxes on income		1,941		7		441		93		1,209		3,691
Net income	$	3,234	$	12	$	736	$	154	$	2,016	$	6,152


For the three months ended June 30, 2013
	Oklahoma		Texas		Kansas		Mortgage		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Banking		Operations		Company
Net interest income (loss)	$	8,434	$	4,593	$	2,560	$	165	$	(618)	$	15,134
Provision for loan losses		(714)		(1,269)		107		(12)		1,012		(876)
Noninterest income		1,787		307		485		847		65		3,491
Noninterest expenses		6,876		1,080		3,179		612		1,092		12,839
Income (loss) before taxes		4,059		5,089		(241)		412		(2,657)		6,662
Taxes on income		1,420		1,727		(99)		137		(937)		2,248
Net income (loss)	$	2,639	$	3,362	$	(142)	$	275	$	(1,720)	$	4,414


For the six months ended June 30, 2014
	Oklahoma		Texas		Kansas		Mortgage		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Banking		Operations*		Company
Net interest income (loss)	$	18,124	$	9,089	$	5,455	$	348	$	(441)	$	32,575
Provision for loan losses		516		(2,483)		659		(33)		-		(1,341)
Noninterest income		3,422		539		901		1,027		5,382		11,271
Noninterest expenses		14,361		6,460		5,286		1,091		2,241		29,439
Income before taxes		6,669		5,651		411		317		2,700		15,748
Taxes on income		2,501		2,119		154		119		1,012		5,905
Net income	$	4,168	$	3,532	$	257	$	198	$	1,688	$	9,843

* Includes externally generated revenue of $5.6 million, primarily from investing services, and an internally generated loss of $0.7 million from the funds management unit

Total loans at period end		773,663		408,385		145,247		24,402		3		1,351,700
Total assets at period end		779,315		405,524		147,644		27,687		524,988		1,885,158
Total deposits at period end		1,079,566		206,031		111,615		7,093		59,550		1,463,855


For the six months ended June 30, 2013
	Oklahoma		Texas		Kansas		Mortgage		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Banking		Operations*		Company
Net interest income (loss)	$	16,693	$	9,608	$	5,046	$	301	$	(908)	$	30,740
Provision for loan losses		156		(1,563)		30		(13)		1,012		(378)
Noninterest income		3,554		694		950		1,561		269		7,028
Noninterest expenses		14,247		3,687		6,074		1,174		2,045		27,227
Income (loss) before taxes		5,844		8,178		(108)		701		(3,696)		10,919
Taxes on income		2,203		3,082		(40)		264		(1,393)		4,116
Net income (loss)	$	3,641	$	5,096	$	(68)	$	437	$	(2,303)	$	6,803

* Includes externally generated loss of $1.1 million, primarily from investing services, and an internally generated revenue of $0.4 million from the funds management unit

Total loans at period end		656,352		444,327		210,189		7,217		4		1,318,089
Total assets at period end		661,036		436,460		215,489		10,035		708,942		2,031,962
Total deposits at period end		1,171,876		173,735		248,805		4,807		16,738		1,615,961

NOTE 10: COMMITMENTS AND CONTINGENCIES

On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae. The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae. Plaintiff claims that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code. Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action. On March 26, 2014, the Court denied the plaintiff’s request to certify the class; however, the Court permitted the plaintiff to amend its filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014.

Bank SNB is not named in the action. In the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”). Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB. Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.

Due to the uncertainty regarding (i) the size and scope of the class, (ii) whether a class will ultimately be certified, (iii) the particular class members, (iv) the interest rate on loans made by Bank SNB charged to particular class members, (v) the late fees charged to particular class members, (vi) the time period that will ultimately be at issue if a class is certified in the Ubaldi Case, (vii) the theories, if any, under which the plaintiffs might prevail, (viii) whether Sallie Mae will make a claim against us for indemnification or repurchase, and (ix) the likelihood that Sallie Mae would prevail if it makes such a claim, we cannot estimate the amount or the range of losses that may arise as a result of the Ubaldi Case.

In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management currently does not expect that the outcome of such actions will have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.

NOTE 11: NEW AUTHORITATIVE ACCOUNTING GUIDANCE

In May 2014, FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customer, (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede existing revenue guidance under United States GAAP and International Financial Reporting Standards. The standard core principal is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU does require new recurring disclosures. The guidance becomes effective for us on January 1, 2017. The impact as a result of this standard on our operations and financial statements is still being assessed.

In April 2014, FASB issued Accounting Standard Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment, reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 raises the threshold for disposals to qualify as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2015, and it is not expected to have an impact on the financial statements.

In January 2014, FASB issued Accounting Standard Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, (“ASU 2014-04”). ASU 2014-04 clarifies when an entity is considered to have obtained physical possession (from an in-substance possession or foreclosure) of a residential real estate property collateralizing a mortgage loan. Upon physical possession of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2015, and is not expected to have an impact on the financial statements.

In July 2013, FASB issued Accounting Standard Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. The guidance became effective for us on January 1, 2014 and did not have any impact on the financial statements.

NOTE 12: SUBSEQUENT EVENT

On July 28, 2014, we announced that Bank SNB, our wholly owned banking subsidiary, intends to file an application with the State of Oklahoma State Banking Department seeking to convert from a national association to an Oklahoma state-chartered bank (the “Charter Conversion”). The Charter Conversion is expected to be completed in the third or fourth calendar quarter of 2014. As a result, we will no longer be regulated by the Office of the Comptroller of the Currency, but will be regulated by the Oklahoma State Banking Department and the Federal Reserve Bank. This move will provide efficiencies and cost savings from lower annual assessment fees of an estimated $0.1 million.

SOUTHWEST BANCORP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Southwest Bancorp, Inc. (“we”, “our”, “us”, or “Southwest”) is a financial holding company for Bank SNB, National Association, which has been providing banking services since 1894. Through Bank SNB, we have twenty-one full-service banking offices primarily located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas. We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and consumer banking services, including commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services and products. At June 30, 2014 we had total assets of $1.9 billion, deposits of $1.5 billion, and shareholders’ equity of $271.4 million.

Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. At June 30, 2014, the Oklahoma Banking segment accounted for $773.7 million in loans, the Texas Banking segment accounted for $408.4 million in loans, the Kansas Banking segment accounted for $145.2 million in loans, and the Mortgage Banking segment accounted for $24.4 million in loans. Please see “Financial Condition: Loans” below for additional information. For additional information on our operating segments, please see “Note 9: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements.

Our common stock is traded on the NASDAQ Global Select Market under the symbol OKSB. We focus on converting our strategic vision into long-term shareholder value.

INDUSTRY FOCUS

Our area of expertise focuses on the special financial needs of healthcare and health professionals, commercial real estate borrowers, businesses and their managers and owners, commercial lending, and energy banking. The healthcare and real estate industries make up the majority of our loan and deposit portfolio. We conduct regular reviews of our current and potential healthcare and real estate lending and the appropriate concentrations within those industries based upon economic and regulatory conditions.

As of June 30, 2014, approximately $459.7 million, or 34%, of our loans were real estate industry loans. We expect that the real estate recovery should continue to improve in 2014 as the market has progressed further through the economic and real estate cycles. Job growth, solid corporate profits, and recovery in the housing market are all positives for the real estate industry. Conversely, the high unemployment rate, uncertainty over government regulation and fiscal/monetary policy, and a concern about the rising cost of debt capital are all industry risk factors.

Our tactical focus on healthcare lending was established in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of June 30, 2014, approximately $398.7 million, or 29%, of our loans were loans to individuals and businesses in the healthcare industry.

FINANCIAL CONDITION

Investment Securities

The following table shows the composition of the investment portfolio at the dates indicated:


	June 30,		December 31,
(Dollars in thousands)	2014		2013		$ Change		% Change
Federal agency securities	$	112,214	$	120,773	$	(8,559)	(7.09)	%
Obligations of state and political subdivisions		44,329		44,356		(27)	(0.06)
Residential mortgage-backed securities		184,422		183,170		1,252	0.68
Asset-backed securities		9,554		9,482		72	0.76
Other securities		35,354		36,418		(1,064)	(2.92)
Total	$	385,873	$	394,199	$	(8,326)	(2.11)	%

Loans

Total loans, including loans held for sale, were $1.4 billion at June 30, 2014. The following table shows the composition of the loan portfolio at the dates indicated:



					Total		Total
(Dollars in thousands)	June 30, 2014		December 31, 2013		$ Change		% Change
Real estate mortgage
Commercial	$	769,021	$	752,279	$	16,742	2.23	%
One-to-four family residential		79,542		83,988		(4,446)	(5.29)
Real estate construction
Commercial		166,981		143,848		23,133	16.08
One-to-four family residential		8,359		4,646		3,713	79.92
Commercial		300,163		255,058		45,105	17.68
Installment and consumer
Guaranteed student loans		4,282		4,394		(112)	(2.55)
Other		23,352		26,690		(3,338)	(12.51)
Total loans	$	1,351,700	$	1,270,903	$	80,797	6.36	%

As further discussed in “Note 2: Disposals” in the Notes to Unaudited Consolidated Financial Statements, approximately $27.9 million of loans were included in disposal of the community bank branches.

The composition of loans held for sale and a reconciliation to total loans is shown in the following table:


	June 30,		December 31,
(Dollars in thousands)	2014		2013		$ Change		% Change
Loans held for sale:
One-to-four family residential		6,029		2,235		3,794	169.75	%
Government guaranteed commercial real estate		737		769		(32)	(4.16)
Other loans held for sale		37		56		(19)	(33.93)
Total loans held for sale		6,803		3,060		3,743	122.32
Portfolio loans		1,344,897		1,267,843		77,054	6.08
Total loans	$	1,351,700	$	1,270,903	$	80,797	6.36	%

Allowance for Loan Losses

Management determines the appropriate level of the allowance for loan losses using an established methodology. (See “Note 4: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.) Management believes the amount of the allowance is appropriate, based on our analysis.

The allowance for loan losses on loans is comprised of two components. Loans deemed to be impaired (loans on nonaccrual status and greater than one-hundred thousand, and all troubled debt restructurings) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific

allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

The allowance on the unimpaired loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors, segmented into loan pools by type of loan and market area.

The composition of the allowance for loan losses, at the dates indicated, is shown in the following table:


	As of June 30, 2014						As of December 31, 2013
(Dollars in thousands)	Loan Balance		Allowance		Allowance %		Loan Balance		Allowance		Allowance %
Nonaccrual	$	14,137	$	3,696	26.1	%	$	18,560	$	4,313	23.2	%
Performing TDR		37,912		2,527	6.7			42,692		3,627	8.5
All other		1,292,848		26,860	2.1			1,206,591		28,723	2.4
Total	$	1,344,897	$	33,083	2.5	%	$	1,267,843	$	36,663	2.9	%

The decrease in the allowance for nonaccrual loans was the result of current period charge-offs related to nonperforming loans. The decrease in the allowance relating to the other loans resulted from the increase in the loan portfolio, the decrease in the dollar amounts of impaired loans in the loan portfolio, and in consideration of trends and qualitative factors, including portfolio loss trends as well as management’s assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans.

The amount of the loan loss provision, or negative provision, for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the first six months of 2014 were $2.2 million, a decrease of $3.8 million, from the $6.0 million recorded for the first six months of 2013. The provision for loan losses for the first six months of 2014 was a negative (or credit) of $1.3 million, representing an increase of $0.9 million from the negative provision of $0.4 million recorded for the first six months of 2013. The increase in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs.

Nonperforming Loans / Nonperforming Assets

At June 30, 2014, the allowance for loan losses was 200.77% of nonperforming loans, compared to 184.50% of nonperforming loans, at December 31, 2013. Nonaccrual loans, which comprise the majority of nonperforming loans, were $16.5 million as of June 30, 2014, a decrease of $3.3 million, or 17%, from December 31, 2013. We have taken cumulative net charge-offs related to these nonaccrual loans of $5.3 million as of June 30, 2014. Nonaccrual loans at June 30, 2014 were comprised of 56 relationships and were primarily concentrated in commercial real estate (46%), commercial and industrial (45%). All nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. These loans are believed to have sufficient collateral and are in the process of being collected.




(Dollars in thousands)	June 30, 2014			December 31, 2013
Nonaccrual loans:
Commercial real estate	$	7,613		$	7,766
One-to-four family residential		1,180			513
Real estate construction		82			2,721
Commercial		7,484			8,769
Other consumer		119			50
Total nonaccrual loans		16,478			19,819

Past due 90 days or more:
Commercial		-			50
Other consumer		-			3
Total past due 90 days or more		-			53
Total nonperforming loans		16,478			19,872
Other real estate		4,285			2,654
Total nonperforming assets	$	20,763		$	22,526

Nonperforming assets to portfolio loans receivable and
other real estate		1.54	%		1.57	%
Nonperforming loans to portfolio loans receivable		1.23			1.22
Allowance for loan losses to nonperforming loans		200.77			184.50
Government-guaranteed portion of nonperforming loans	$	1,623		$	875

Subsequent to the end of the second quarter, Southwest collected a $1.3 million recovery of a prior period loan loss and a $6.8 million payoff of a related restructured potential problem loan.

At June 30, 2014, nine credit relationships represented 79% of nonperforming loans. These were all commercial or commercial real estate lending relationships and had an aggregate principal balance of $13.1 million and related impairment reserves of $3.5 million. Cumulative net charge-offs for these nine relationships were $5.3 million as of June 30, 2014.

Performing loans considered potential problem loans (loans which are not included in the past due or nonaccrual categories but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms) amounted to approximately $84.2 million at June 30, 2014, compared to $99.8 million at December 31, 2013. Substantially all of these loans were performing in accordance with their present terms at June 30, 2014. Loans may be monitored by management and reported as potential problem 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.

At June 30, 2014, other real estate was $4.3 million, up from $2.7 million at December 31, 2013 due to the addition of other properties. During the first six months of 2014, there were four sales of other real estate property, which had a principal value of $0.3 million, and resulted in a net loss of $0.02 million. In order to adjust the fair value of property values, there were total other real estate write-downs of $0.3 million during the first six months of 2014 compared to the total other real estate write-downs of $1.5 million at December 31, 2013.

At June 30, 2014, the reserve for unfunded loan commitments was $2.9 million, a $0.1 million, or 3%, increase from the amount at December 31, 2013. Management believes the amount of the reserve is appropriate and is included in other liabilities on the unaudited consolidated statements of financial condition. The increase related primarily to an increase in the level of outstanding commitments.

Deposits and Other Borrowings

Our deposits were $1.5 billion at June 30, 2014 and $1.6 billion at December 31, 2013. The following table shows the composition of deposits at the dates indicated:


	June 30,		December 31,
(Dollars in thousands)	2014		2013		$ Change		% Change
Noninterest-bearing demand	$	427,431	$	444,796	$	(17,365)	(3.90)	%
Interest-bearing demand		124,712		120,156		4,556	3.79
Money market accounts		430,296		439,981		(9,685)	(2.20)
Savings accounts		31,187		41,727		(10,540)	(25.26)
Time deposits of $100,000 or more		209,059		251,185		(42,126)	(16.77)
Other time deposits		241,170		286,241		(45,071)	(15.75)
Total deposits	$	1,463,855	$	1,584,086	$	(120,231)	(7.59)	%

We participate in the Certificate of Deposit Account Registry Service (“CDARS”) and CDARS deposits totaled $1.3 million at June 30, 2014 and December 31, 2013.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $10.1 million, or 13%, to $90.8 million during the first six months of 2014. The increase primarily reflects the timing of repurchase agreements for the period.

As further discussed in “Note 2: Disposals” in the Notes to the Unaudited Consolidated Financial Statements, approximately $130.6 million of deposits were included in the sale of the community bank branches.

Shareholders’ Equity

Shareholders’ equity increased $12.2 million, or 5%, primarily due to net income of $9.8 million, for the first six months of 2014. At June 30, 2014, the accumulated other comprehensive loss on available for sale investment securities and derivative instruments (net of tax) was $0.2 million, a decrease from $3.0 million at December 31, 2013.

At June 30, 2014, we and Bank SNB continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 42.

RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2014 and 2013

Net income for the second quarter of 2014 of $6.2 million represented an increase of $1.8 million from the $4.4 million net income recorded for the second quarter of 2013. Diluted earnings per share were $0.31 for the second quarter of 2014, compared to $0.22 for the second quarter of 2013. The increase in quarterly net income was primarily the result of a $1.4 million, or 10%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013, and the $4.8 million increase in noninterest income, primarily driven by the pre-tax net gain on the sale of the community bank branches, offset in part by a $0.5 million decline in the negative provision for loan losses and a $2.5 million increase in noninterest expense.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See “Note 4: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 41.)

Net Interest Income


	For the three months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Interest income:
Loans	$	16,343	$	16,415	$	(72)	(0.44)	%
Investment securities:
U.S. government and agency obligations		337		426		(89)	(20.89)
Mortgage-backed securities		937		833		104	12.48
State and political subdivisions		294		302		(8)	(2.65)
Other securities		60		33		27	81.82
Other interest-earning assets		314		255		59	23.14
Total interest income		18,285		18,264		21	0.11

Interest expense:
Interest-bearing demand deposits		40		37		3	8.11
Money market accounts		136		190		(54)	(28.42)
Savings accounts		11		12		(1)	(8.33)
Time deposits of $100,000 or more		338		613		(275)	(44.86)
Other time deposits		406		590		(184)	(31.19)
Other borrowings		223		222		1	0.45
Subordinated debentures		557		1,466		(909)	(62.01)
Total interest expense		1,711		3,130		(1,419)	(45.34)

Net interest income	$	16,574	$	15,134	$	1,440	9.51	%

Net interest income is the difference between the interest income we earn on our loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because rates on different types of assets and liabilities may react differently and at different times to changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, 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.

AVERAGE BALANCES, YIELDS AND RATES

The following table shows average interest-earning assets and interest-bearing liabilities and the average yields and rates on them for the periods indicated.


	For the three months ended June 30,
	2014						2013
	Average				Average		Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
Assets
Loans (1) (2)	$	1,331,126	$	16,343	4.92	%	$	1,318,950	$	16,415	4.99	%
Investment securities (2)		384,395		1,628	1.70			374,353		1,594	1.71
Other interest-earning assets		183,378		314	0.69			282,067		255	0.36
Total interest-earning assets		1,898,899		18,285	3.86			1,975,370		18,264	3.71
Other assets		49,829						63,390
Total assets	$	1,948,728					$	2,038,760

Liabilities and shareholders' equity
Interest-bearing demand deposits	$	130,232	$	40	0.12	%	$	126,250	$	37	0.12	%
Money market accounts		421,001		136	0.13			420,477		190	0.18
Savings accounts		43,124		11	0.10			38,833		12	0.12
Time deposits		493,805		744	0.60			633,647		1,203	0.76
Total interest-bearing deposits		1,088,162		931	0.34			1,219,207		1,442	0.47
Other borrowings		85,682		223	1.04			71,857		222	1.24
Subordinated debentures		46,393		557	4.80			81,963		1,466	7.15
Total interest-bearing liabilities		1,220,237		1,711	0.56			1,373,027		3,130	0.91
Noninterest-bearing demand deposits		449,364						402,224
Other liabilities		10,751						10,561
Shareholders' equity		268,376						252,948
Total liabilities and shareholders' equity	$	1,948,728					$	2,038,760

Net interest income and interest rate spread			$	16,574	3.30	%			$	15,134	2.80	%
Net interest margin (3)					3.50	%					3.07	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		155.62%						143.87%


(1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material.
(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
(3) Net interest margin = annualized net interest income / average interest-earning assets

Compared to the second quarter of 2013, the second quarter 2014 yields on our interest-earning assets increased 15 basis points, while the rates paid on our interest-bearing liabilities decreased 35 basis points, resulting in an increase in the interest rate spread to 3.30%. During the quarterly periods ended June 30, 2014 and June 30, 2013, annualized net interest margin was 3.50% and 3.07%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities increased to 155.62% from 143.87%.

RATE VOLUME TABLE

The following table analyzes changes in our interest income and interest expense 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.

With the rate environment remaining low in the short to mid-term, earning assets and interest bearing liabilities are repricing at lower rates. The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013.



	For the three months ended June 30,
	2014 vs. 2013
	Increase		Due to Change
	Or		In Average:
(Dollars in thousands)	(Decrease)		Volume		Rate
Interest earned on:
Loans receivable (1)	$	(72)	$	6	$	(78)
Investment securities (1)		34		42		(8)
Other interest-earning assets		59		(111)		170
Total interest income		21		(63)		84

Interest paid on:
Interest-bearing demand		3		1		2
Money market accounts		(54)		-		(54)
Savings accounts		(1)		1		(2)
Time deposits		(459)		(239)		(220)
Other borrowings		1		39		(38)
Subordinated debentures		(909)		(517)		(392)
Total interest expense		(1,419)		(715)		(704)

Net interest income	$	1,440	$	652	$	788

(1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.

Noninterest Income


	For the three months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Noninterest income:
Other service charges	$	2,306	$	2,408	$	(102)	(4.24)	%
Other fees		302		199		103	51.76
Other noninterest income		168		53		115	216.98
Gain on sale of branches, net		4,378		-		4,378	100.00
Gain on sale/call of investment securities		629		-		629	100.00
Gain on sales of mortgage loans:
One-to-four family residential		463		818		(355)	(43.40)
All other loan sales		-		13		(13)	(100.00)
Total noninterest income	$	8,246	$	3,491	$	4,755	136.21	%

Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

Other noninterest income increased primarily as a result of interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014.

Gain on sale of branches consisted of $4.4 million recognized as the pre-tax net gain on disposal of the community bank branches in the second quarter of 2014. (See “Note 2: Disposals” in the Notes to Unaudited Consolidated Financial Statements for more details.)

The gain on sale/call of investment securities was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession.

Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year.

Noninterest Expense


	For the three months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	8,472	$	$ 8,039	$	433	5.39	%
Occupancy		2,783		2,679		104	3.88
FDIC and other insurance		314		400		(86)	(21.50)
Other real estate (net)		511		(1,394)		1,905	(136.66)
Unfunded loan commitment reserve		12		255		(243)	(95.29)
Other general and administrative		3,240		2,860		380	13.29
Total noninterest expense	$	15,332	$	12,839	$	2,493	19.42	%

The number of full-time equivalent employees decreased from 397 at the beginning of the quarter to 364 as of June 30, 2014. The increase in personnel expense from the prior year is primarily the result of restructuring costs and increased benefit expense.

Our financial institution subsidiary pays deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and a decrease in the assessment rates.

The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year.

The unfunded loan commitment reserve expense decreased primarily as a result of continued improvement in asset quality and the corresponding decline in historical loss ratios used to calculate the reserve.

The increase in other general and administrative is primarily the result of higher miscellaneous, legal, marketing, and consulting fees, which is partially offset by lower accounting fees.

FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2014 and 2013

Net income for the six months ended June 30, 2014 of $9.8 million represented an increase of $3.0 million from the $6.8 million net income for the six months ended June 30, 2013. Diluted earnings per share were $0.50 for the six months ended June 30, 2014, compared to $0.34 for the six months ended June 30, 2013. The increase in net income was the result of a $1.8 million, or 6%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest expense due to the redemption of the 10.5% Trust Preferred Securities in third quarter of 2013, a $1.0 million increase in the negative provision for loan losses, resulting from improved asset quality, a $4.2 million increase in noninterest income, primarily the pre-tax net gain on sale of community bank branches, offset in part by a $2.2 million increase in noninterest expense due to decreased gains recognized on sale of other real estate properties and increased employee benefit expenses.

Net Interest Income


	For the six months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Interest income:
Loans	$	32,118	$	33,421	$	(1,303)	(3.90)	%
Investment securities:
U.S. government and agency obligations		764		898		(134)	(14.92)
Mortgage-backed securities		1,826		1,700��		126	7.41
State and political subdivisions		590		606		(16)	(2.64)
Other securities		98		81		17	20.99
Other interest-earning assets		689		495		194	39.19
Total interest income		36,085		37,201		(1,116)	(3.00)

Interest expense:
Interest-bearing demand deposits		80		82		(2)	(2.44)
Money market accounts		282		426		(144)	(33.80)
Savings accounts		22		24		(2)	(8.33)
Time deposits of $100,000 or more		787		1,311		(524)	(39.97)
Other time deposits		785		1,251		(466)	(37.25)
Other borrowings		448		442		6	1.36
Subordinated debentures		1,106		2,925		(1,819)	(62.19)
Total interest expense		3,510		6,461		(2,951)	(45.67)

Net interest income	$	32,575	$	30,740	$	1,835	5.97	%

AVERAGE BALANCES, YIELDS AND RATES

The following table shows average interest-earning assets and interest-bearing liabilities and the average yields and rates on them for the periods indicated.


	For the six months ended June 30,
(Dollars in thousands)	2014						2013
	Average				Average		Average				Average
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
Assets
Loans (1) (2)	$	1,304,876	$	32,118	4.96	%	$	1,337,111	$	33,421	5.04	%
Investment securities		386,506		3,278	1.71			377,422		3,285	1.76
Other interest-earning assets		231,584		689	0.60			275,269		495	0.36
Total interest-earning assets		1,922,966		36,085	3.78			1,989,802		37,201	3.77
Other assets		50,036						75,423
Total assets	$	1,973,002					$	2,065,225

Liabilities and shareholders' equity
Interest-bearing demand deposits	$	132,483	$	80	0.12	%	$	129,905	$	82	0.13	%
Money market accounts		428,839		282	0.13			420,058		426	0.20
Savings accounts		43,939		22	0.10			38,777		24	0.12
Time deposits		512,335		1,572	0.62			658,266		2,562	0.78
Total interest-bearing deposits		1,117,596		1,956	0.35			1,247,006		3,094	0.50
Other borrowings		83,258		448	1.09			70,798		442	1.26
Subordinated debentures		46,393		1,106	4.77			81,963		2,925	7.14
Total interest-bearing liabilities		1,247,247		3,510	0.57			1,399,767		6,461	0.93
Noninterest-bearing demand deposits		449,247						402,882
Other liabilities		10,621						11,418
Shareholders' equity		265,887						251,158
Total liabilities and shareholders' equity	$	1,973,002					$	2,065,225

Net interest income and interest rate spread			$	32,575	3.21	%			$	30,740	2.84	%
Net interest margin (3)					3.42	%					3.12	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		154.18%						142.15%


(1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material.
(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
(3) Net interest margin = annualized net interest income / average interest-earning assets

Compared to the six months ended June 30, 2013, the six months ended June 30, 2014 yields on our interest-earning assets increased 1 basis point, while the rates paid on our interest-bearing liabilities decreased 36 basis points, resulting in an increase in the interest rate spread to 3.21%. During the same periods, annualized net interest margin was 3.42% and 3.12%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 154.18% from 142.15%.

RATE VOLUME TABLE

With the rate environment remaining low, earning assets and interest bearing liabilites are repricing at lower rates. The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013.



	For the six months ended June 30,
	2014 vs. 2013
	Increase		Due to Change
	Or		In Average:
(Dollars in thousands)	(Decrease)		Volume		Rate
Interest earned on:
Loans receivable (1)	$	(1,303)	$	(1,050)	$	(253)
Investment securities (1)		(7)		78		(85)
Other interest-earning assets		194		(89)		283
Total interest income		(1,116)		(1,061)		(55)

Interest paid on:
Interest-bearing demand		(2)		2		(4)
Money market accounts		(144)		9		(153)
Savings accounts		(2)		3		(5)
Time deposits		(990)		(509)		(481)
Other borrowings		6		72		(66)
Subordinated debentures		(1,819)		(1,031)		(788)
Total interest expense		(2,951)		(1,454)		(1,497)

Net interest income	$	1,835	$	393	$	1,442

(1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis, because it is not considered material.

Noninterest Income


	For the six months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Noninterest income:
Other service charges	$	4,566	$	4,747	$	(181)	(3.81)	%
Other fees		638		520		118	22.69
Other noninterest income		238		116		122	105.17
Gain on sale of branches, net		4,378		-		4,378	100.00
Gain on sale/call of investment securities		764		-		764	100.00
Gain on sales of mortgage loans:
One-to-four family residential		687		1,612		(925)	(57.38)
All other loan sales		-		33		(33)	(100.00)
Total noninterest income	$	11,271	$	7,028	$	4,243	60.37	%

Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

Other noninterest income increased primarily as a result of interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014.

Gain on sale of branches consisted of $4.4 million recognized as the pre-tax net gain on disposal of the community bank branches in the second quarter of 2014. See “Note 2: Disposals” for more details.

The gain on sale/call of investment securities was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession, and the result of the release of escrowed funds received in association with the sale of an investment that was carried at cost.

Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year.

Noninterest Expense


	For the six months
	ended June 30,
(Dollars in thousands)	2014		2013		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	16,598	$	16,175	$	423	2.62	%
Occupancy		5,552		5,253		299	5.69
FDIC and other insurance		711		891		(180)	(20.20)
Other real estate (net)		579		(1,041)		1,620	(155.62)
Unfunded loan commitment reserve		97		371		(274)	(73.85)
Other general and administrative		5,902		5,578		324	5.81
Total noninterest expense	$	29,439	$	27,227	$	2,212	8.12	%

The number of full-time equivalent employees decreased from 402 at the beginning of the year to 364 as of June 30, 2014. The increase in personnel expense from prior year is primarily the result of restructuring costs and increased employee benefit expense.

Our financial institution subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and a decrease in the assessment rates.

The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year.

The increase in other general and administrative is primarily the result of higher consulting fees, legal fees, and marketing costs, which is partially offset with lower accounting fees.

Provisions for Loan Losses

The provision for loan losses is the amount of expense (or credit) that is required to maintain the allowance for losses at an appropriate level based upon the inherent risks in the loan portfolio after the effects of net charge-offs (or recoveries) for the period. The decline in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs. (See “Note 4: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Loans”)

Taxes on Income

Our income tax expense was $5.9 million for the first six months of 2014 compared to $4.1 million for the first six months of 2013, an increase of $1.8 million, or 43%. The increase in the income tax expense is the result of increased pretax income and fluctuations in permanent book/tax differences. The effective tax rate for the first six months of 2014 was 37.50%.

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 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, reductions in liquid assets, and accessibility to capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization.

Southwest and Bank SNB have 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”) and the Federal Home Loan Bank of Topeka (“FHLB”).

Bank SNB also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program. There was no outstanding balance of those notes at June 30, 2014. Bank SNB has approved federal funds purchase lines totaling $140.0 million with four banks. There was no outstanding balance on these lines at June 30, 2014. Bank SNB is qualified to borrow funds from the FRB through their Borrower-In-Custody (“BIC”) program. Collateral under this program consists of pledged selected commercial and industrial loans. Currently the collateral allows Bank SNB to borrow up to $53 million. As of June 30, 2014, no borrowings were made through the BIC program. In addition, Bank SNB has available a $322 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At June 30, 2014, Bank SNB’s FHLB line of credit had an outstanding balance of $25.0 million.

(See also “Deposits and Other Borrowings” on page 33 for funds available and “Note 9: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for a discussion of our funds management unit.)

Bank SNB sells securities under agreements to repurchase with Bank SNB retaining custody of the collateral. Collateral consists of U.S. government agency obligations, which are designated as pledged with Bank SNB’s safekeeping agent. These transactions are for one to four day periods. Outstanding balances under this program were $65.8 million and $55.6 million as of June 30, 2014 and December 31, 2013, respectively.

At June 30, 2014, $249.9 million of the total carrying value of investment securities of $373.6 million were pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Any amount over pledged can be released at any time.

During the first six months of 2014, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity.

During the first six months of 2014, cash and cash equivalents decreased by $164.7 million, or 59%, to $115.2 million. This decrease was the net result of cash used in investing activities of $192.5 million (primarily from an increase in loans originated, cash outflows from the sale of bank branches, and purchases of available for sale securities offset by repayments of securities), cash provided by financing activities of $19.0 million (primarily from net increases in deposits and other borrowings), and offset in part by cash provided by operating activities of $8.8 million.

CAPITAL REQUIREMENTS

Financial holding companies are required to maintain capital ratios set by the FRB in its Risk-Based Capital Guidelines. At June 30, 2014, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 21.43%, a Tier I risk-based capital ratio of 20.13%, and a Tier 1 leverage ratio of 15.95%. As of June 30, 2014, Bank SNB met the criteria for classification as “well-capitalized” institutions under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest or Bank SNB by bank regulators.

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.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies followed by Southwest Bancorp, Inc. conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the financial services industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses, the valuation of securities and income taxes, and goodwill and other intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

There have been no significant changes in our application of critical accounting policies since December 31, 2013.

* * * * * * *

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our income is largely dependent on our net interest income. We seek to maximize our net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds such as noninterest-bearing deposits and shareholders’ equity.

We attempt to manage interest rate risk while enhancing net interest margin by adjusting our asset/liability position. At times, depending on the level of general interest rates, the relationship between long-term and other interest rates, market conditions, and competitive factors, we may increase our interest rate risk position in order to increase its net interest margin. We monitor interest rate risk and adjust the composition of our rate-sensitive assets and liabilities in order to limit our exposure to changes in interest rates on net interest income over time. Our asset/liability committee reviews our interest rate risk position and profitability and recommends adjustments. Our asset/liability committee also reviews the securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions. Notwithstanding our interest rate risk management activities, the actual magnitude, direction, and relationship of future interest rates are uncertain and can have adverse effects on net income and liquidity.

A principal objective of our asset/liability management effort is to balance the various factors that generate interest rate risk, thereby maintaining our interest rate sensitivity within acceptable risk levels. To measure our interest rate sensitivity position, we utilize a simulation model that facilitates the forecasting of net interest income over the next twelve month period under a variety of interest rate and growth scenarios.

The earnings simulation model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net income. Actual results differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions, cash flows, and management strategies, among other factors.

The balance sheet is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, and 300 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at various interest rate shock levels.

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Estimated Changes in Net Interest Income



Changes in Interest Rates:	+ 300 bp	+200 bp	+100 bp

June 30, 2014	7.67%	3.73%	(0.14)%
December 31, 2013	6.25%	2.99%	(0.03)%

The current overnight rate as established by the Federal Open Market Committee is in the 0% to 0.25% range. We believe that all down rate scenarios are impractical since they would result in an overnight rate of less than 0%. As a result, the down 100 bp, down 200 bp and down 300 bp scenarios have been excluded. Net interest income at risk declined marginally in the +100 bp scenario when compared to the December 31, 2013 risk position. Our greatest exposure to changes in interest rate is in the +300 bp scenario with an increase in net interest income of 7.67% on June 30, 2014, a 1.42% increase from the December 31, 2013 level of 6.25%. Bank SNB is in compliance with all policy limits established for net interest income at risk.

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on our cash flows, and discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of net assets.

Estimated Changes in Economic Value of Equity (EVE)



Changes in Interest Rates:	+300 bp	+200 bp	+100 bp

June 30, 2014	(0.91)%	(1.36)%	(1.92)%
December 31, 2013	(6.69)%	(4.63)%	(2.91)%

As of June 30, 2014 the economic value of equity measure improved in each of the three rising interest rate scenarios when compared to the December 31, 2013 percentages. Our largest economic value of equity exposure is the +300 bp scenario. The +300 bp scenario was (0.91%) on June 30, 2014, a 5.78% improvement over the December 31, 2013 value of (6.69%). Bank SNB is in compliance with all policy limits established for the economic value of equity.

* * * * * * *

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by SEC rules, our management evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. Our Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.

Changes in Internal Control over Financial Reporting

No changes occurred during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal proceedings

We and our subsidiaries are regularly subject to various claims and legal actions arising in the normal course of business that are not disclosed in this report. Management currently does not expect that ultimate disposition of any of these matters will have a material adverse effect on our financial statements. We are not currently aware of any additional, or material changes to, pending or threatened litigation against us or our subsidiaries that involves any of our property or the property of our subsidiaries that could have a material adverse effect on our financial statements.

Item 1A: Risk Factors

There were no material changes in risk factors during the first six months of 2014 from those disclosed in our Form 10-K for the year ended December 31, 2013.

Item 2: Unregistered sales of equity securities and use of proceeds

None

Item 3: Defaults upon senior securities

None

Item 4: Mine Safety Disclosures

Not Applicable

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

Exhibit 101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements

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/ Mark W. Funke		August 7, 2014
Mark W. Funke President and Chief Executive Officer (Principal Executive Officer)		Date

By: /s/ Joe T. Shockley, Jr.		August 7, 2014
Joe T. Shockley, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)		Date

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Southwest Bancorp (OKSB) Inactive 10-Q2014 Q2 Quarterly report

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