Southwest Bancorp (OKSB) 10-Q 2015 Q1 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 March 31, 2015

OR 

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

For the transition period from __________ to __________

Commission File Number: 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 May 5, 2015, the issuer has 19,033,384 shares of its Common Stock, par value $1.00, outstanding.

1

SOUTHWEST BANCORP, INC. 

INDEX TO FORM 10-Q 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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	27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4. CONTROLS AND PROCEDURES	39
PART II. OTHER INFORMATION	40
ITEM 1. LEGAL PROCEEDINGS	40
ITEM 1A. RISK FACTORS	40
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
ITEM 6. EXHIBITS	41
SIGNATURES	42

2

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; 

· Expectations regarding our stock repurchase program;

· Expectations regarding dividends;

· Expectations regarding acquisitions and divestitures;

· 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, 2014. 

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.   

3

 SOUTHWEST BANCORP, INC.

Consolidated Statements of Financial Condition

	March 31,		December 31,
	2015		2014
(Dollars in thousands)	(unaudited)
Assets:
Cash and due from banks	$	20,510	$	19,705
Interest-bearing deposits		133,886		121,231
Cash and cash equivalents		154,396		140,936
Securities held to maturity (fair values of $11,921 and $12,880, respectively)		11,393		12,362
Securities available for sale (amortized cost of $363,352 and $352,275, respectively)		366,152		353,231
Loans held for sale		9,106		1,485
Loans receivable		1,429,139		1,398,506
Less:  Allowance for loan losses		(27,250)		(28,452)
Net loans receivable		1,401,889		1,370,054
Accrued interest receivable		4,974		4,723
Non-hedge derivative asset		1,273		787
Premises and equipment, net		18,437		18,588
Other real estate		2,255		3,097
Goodwill		1,214		1,214
Other intangible assets, net		3,866		3,927
Other assets		28,124		31,630
Total assets	$	2,003,079	$	1,942,034
Liabilities:
Deposits:
Noninterest-bearing demand	$	506,952	$	496,128
Interest-bearing demand		140,659		122,342
Money market accounts		488,569		461,679
Savings accounts		34,413		32,795
Time deposits of $100,000 or more		227,426		198,952
Other time deposits		218,435		222,103
Total deposits		1,616,454		1,533,999
Accrued interest payable		770		769
Non-hedge derivative liability		1,273		787
Other liabilities		8,167		9,920
Other borrowings		58,578		79,380
Subordinated debentures		46,393		46,393
Total liabilities		1,731,635		1,671,248
Shareholders' equity:
Common stock - $1 par value; 40,000,000 shares authorized;
19,900,350 and 19,810,877 shares issued, respectively		19,900		19,811
Additional paid in capital		101,395		101,245
Retained earnings		163,818		160,427
Accumulated other comprehensive income (loss)		673		(395)
Treasury stock, at cost; 867,310 and 617,818 shares, respectively		(14,342)		(10,302)
Total shareholders' equity		271,444		270,786
Total liabilities & shareholders' equity	$	2,003,079	$	1,942,034
The accompanying notes are an integral part of these statements.

4

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations

	For the three months
	ended March 31,
(Dollars in thousands, except earnings per share data)	2015		2014
Interest income:
Interest and fees on loans	$	15,570	$	15,775
Investment securities:
U.S. Government and agency obligations		336		427
Mortgage-backed securities		718		889
State and political subdivisions		289		296
Other securities		6		38
Other interest-earning assets		305		375
Total interest income		17,224		17,800
Interest expense:
Interest-bearing demand		33		40
Money market accounts		182		146
Savings accounts		8		11
Time deposits of $100,000 or more		238		449
Other time deposits		374		379
Other borrowings		227		225
Subordinated debentures		552		549
Total interest expense		1,614		1,799
Net interest income		15,610		16,001
Provision (credit) for loan losses		(1,887)		(986)
Net interest income after provision (credit)  for loan losses		17,497		16,987
Noninterest income:
Service charges and fees		2,428		2,596
Gain on sales of  mortgage loans, net		348		224
Gain on sales/calls of investment securities, net		5		135
Other noninterest income		59		70
Total noninterest income		2,840		3,025
Noninterest expense:
Salaries and employee benefits		7,914		8,126
Occupancy		2,284		2,284
Data processing		446		485
FDIC and other insurance		312		397
Other real estate, net		21		68
General and administrative		2,105		2,747
Total noninterest expense		13,082		14,107
Income before taxes		7,255		5,905
Taxes on income		2,720		2,214
Net income	$	4,535	$	3,691
Basic earnings per common share	$	0.24	$	0.19
Diluted earnings per common share		0.24		0.19
Common dividends declared per share		0.06		0.04
The accompanying notes are an integral part of these statements.

5

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income 

	For the three months
	ended March 31,
(Dollars in thousands)	2015		2014
Net income	$	4,535	$	3,691
Other comprehensive income:
Unrealized holding gain on available for sale securities		1,849		2,529
Reclassification adjustment for net gains arising during the period		(5)		(135)
Change in fair value of derivative used for cash flow hedge		(75)		102
Other comprehensive income, before tax		1,769		2,496
Tax expense related to items of other comprehensive
income		(701)		(966)
Other comprehensive income, net of tax		1,068		1,530
Comprehensive income	$	5,603	$	5,221
The accompanying notes are an integral part of these statements.

6

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows 

	For the three months
	ended March 31,
(Dollars in thousands)	2015		2014
Operating activities:
Net income	$	4,535	$	3,691
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(1,887)		(986)
Deferred tax expense		1,237		2,091
Asset depreciation		591		644
Securities premium amortization, net of discount accretion		710		678
Amortization of intangibles		237		183
Restricted stock amortization expense		292		193
Net gain on sales/calls of investment securities		(5)		(135)
Net gain on sales of mortgage loans		(348)		(224)
Net gain on sales of premises/equipment		(10)		(11)
Net gain on sales of other real estate		(58)		(52)
Proceeds from sales of held for sale loans		15,458		11,783
Held for sale loans originated for resale		(22,777)		(15,521)
Net changes in assets and liabilities:
Accrued interest receivable		(251)		(45)
Other assets		619		(1,399)
Accrued interest payable		1		(25)
Other liabilities		(1,118)		(1,613)
Net cash used in operating activities		(2,774)		(748)
Investing activities:
Proceeds from principal repayments, calls and maturities:
Held to maturity securities		940		1,000
Available for sale securities		22,696		17,994
Redemptions of other investments		-		792
Purchases of available for sale securities		(34,454)		(10,067)
Loans originated, net of principal repayments		(30,128)		(47,924)
Purchases of premises and equipment		(467)		(557)
Proceeds from sales of premises and equipment		38		38
Proceeds from sales of other real estate		900		52
Net cash used in investing activities		(40,475)		(38,672)
Financing activities:
Net increase in deposits		82,455		21,820
Net increase (decrease) in other borrowings		(20,802)		5,060
Net proceeds from issuance of common stock		239		60
Purchases of treasury stock		(4,040)		-
Common stock dividends paid		(1,142)		(784)
Preferred stock dividends paid		(1)		(1)
Net cash provided by financing activities		56,709		26,155
Net increase (decrease) in cash and cash equivalents		13,460		(13,265)
Cash and cash equivalents:
Beginning of period		140,936		279,839
End of period	$	154,396	$	266,574
The accompanying notes are an integral part of these statements.

7

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity 

								Accumulated
				Additional				Other				Total
	Common Stock			Paid in		Retained		Comprehensive			Treasury	Shareholders'
(Dollars in thousands)	Shares	Amount		Capital		Earnings		Gain/(Loss)			Stock	Equity
Balance, December 31, 2013	19,732,926	$	19,733	$	99,937	$	142,528	$	(3,011)	$	-	$	259,187
Dividends declared:
Preferred	-		-		-		(1)		-		-		(1)
Common, $0.04 per share,	-		-		-		(790)		-		-		(790)
Common stock issued	52,843		53		909		-		-		-		962
Net common stock issued under
employee plans and related tax expense	437		-		7		-		-		-		7
Other comprehensive income, net of tax	-		-		-		-		1,530		-		1,530
Net income	-		-		-		3,691		-		-		3,691
Balance, March 31, 2014	19,786,206	$	19,786	$	100,853	$	145,428	$	(1,481)	$	-	$	264,586
Balance, December 31, 2014	19,193,059	$	19,811	$	101,245	$	160,427	$	(395)	$	(10,302)	$	270,786
Dividends declared:
Preferred	-		-		-		(1)		-		-		(1)
Common, $0.06 per share,	-		-		-		(1,143)		-		-		(1,143)
Common stock issued	88,937		88		142		-		-		-		230
Net common stock issued under
employee plans and related tax expense	536		1		8		-		-		-		9
Other comprehensive income, net of tax	-		-		-		-		1,068		-		1,068
Treasury shares purchased	(249,492)		-		-		-		-		(4,040)		(4,040)
Net income	-		-		-		4,535		-		-		4,535
Balance, March 31, 2015	19,033,040	$	19,900	$	101,395	$	163,818	$	673	$	(14,342)	$	271,444
The accompanying notes are an integral part of these statements.

8

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 months ended March 31, 2015, and the cash flows for the three months ended March 31, 2015, 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, 2014.  

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”), Bank SNB, an Oklahoma state banking corporation (“Bank SNB”), our banking subsidiary,  SNB Capital Corporation, a lending and loan workout subsidiary, and the consolidated 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. 

NOTE 2:  INVESTMENT SECURITIES

A summary of the amortized cost and fair values of investment securities at March 31, 2015 and December 31, 2014 follows:

	Amortized		Gross Unrealized				Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
At March 31, 2015
Held to Maturity:
Obligations of state and political subdivisions	$	11,393	$	534	$	(6)	$	11,921
Total	$	11,393	$	534	$	(6)	$	11,921
Available for Sale:
Federal agency securities	$	91,285	$	707	$	(179)	$	91,813
Obligations of state and political subdivisions		32,651		775		(63)		33,363
Residential mortgage-backed securities		197,294		1,919		(527)		198,686
Asset-backed securities		9,616		-		(73)		9,543
Other securities		32,506		291		(50)		32,747
Total	$	363,352	$	3,692	$	(892)	$	366,152
At December 31, 2014
Held to Maturity:
Obligations of state and political subdivisions	$	12,362	$	528	$	(10)	$	12,880
Total	$	12,362	$	528	$	(10)	$	12,880
Available for Sale:
Federal agency securities	$	99,959	$	359	$	(772)	$	99,546
Obligations of state and political subdivisions		32,760		519		(140)		33,139
Residential mortgage-backed securities		177,391		1,686		(850)		178,227
Asset-backed securities		9,608		-		(60)		9,548
Other securities		32,557		240		(26)		32,771
Total	$	352,275	$	2,804	$	(1,848)	$	353,231

9

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 $7.9 million at March 31, 2015 and  $7.4 million at December 31, 2014.  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 March 31, 2015 follows: 

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	22,242	$	22,560	$	-	$	-
More than one year through five years		202,922		204,238		7,036		7,194
More than five years through ten years		92,488		93,361		1,001		1,043
More than ten years		45,700		45,993		3,356		3,684
Total	$	363,352	$	366,152	$	11,393	$	11,921

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 was a $5,000 gain on sales of securities for the three months ended March 31, 2015, which resulted from an additional gain on a private equity sale from the fourth quarter of 2014. There was a $0.1 million gain on sales of securities for the three months ended March 31, 2014, which was the result of the release of escrowed funds received in association with the sale of an investment that was carried at cost

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 March 31, 2015 and December 31, 2014.  Securities whose market values exceed cost are excluded from this table.     

10

				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 March 31, 2015
Held to Maturity:
Obligations of state and political subdivisions	1	$	1,708	$	(6)	$	-	$	1,702
	1	$	1,708	$	(6)	$	-	$	1,702
Available for Sale:
Federal agency securities	6	$	22,227	$	(2)	$	(177)	$	22,048
Obligations of state and political subdivisions	3		4,181		(1)		(62)		4,118
Residential mortgage-backed securities	27		65,225		(100)		(427)		64,698
Asset-backed securities	3		9,616		(73)		-		9,543
Other securities	2		9,517		(3)		(47)		9,467
Total	41	$	110,766	$	(179)	$	(713)	$	109,874
At December 31, 2014
Held to Maturity:
Obligations of state and political subdivisions	1	$	1,718	$	(10)	$	-	$	1,708
	1	$	1,718	$	(10)	$	-	$	1,708
Available for Sale:
Federal agency securities	13	$	60,578	$	(37)	$	(735)	$	59,806
Obligations of state and political subdivisions	8		10,076		-		(140)		9,936
Residential mortgage-backed securities	40		65,223		(110)		(740)		64,373
Asset-backed securities	3		9,608		(19)		(41)		9,548
Other securities	2		9,571		(3)		(23)		9,545
Total	66	$	155,056	$	(169)	$	(1,679)	$	153,208

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 March 31, 2015, 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 March 31, 2015, 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 $235.9 million and $218.5 million were pledged to meet such requirements at March 31, 2015 and December 31, 2014, respectively.  Any amount over-pledged can be released at any time.

11

NOTE 3: 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015		At December 31, 2014
Real estate mortgage:
Commercial	$	759,676	$	752,971
One-to-four family residential		86,343		77,531
Real estate construction:
Commercial		192,052		186,659
One-to-four family residential		12,586		10,464
Commercial		366,282		350,410
Installment and consumer:
Guaranteed student loans		-		37
Other		21,306		21,919
		1,438,245		1,399,991
Less: Allowance for loan losses		(27,250)		(28,452)
Total loans, net		1,410,995		1,371,539
Less: Loans held for sale (included above)		(9,106)		(1,485)
Net loans receivable	$	1,401,889	$	1,370,054

Concentrations of Credit.  At March 31, 2015, $496.1 million, or 35%, and  $413.5 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 $9.1 million and $1.5 million at March 31, 2015 and December 31, 2014, 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 $407.9 million and $410.3 million at March 31, 2015 and December 31, 2014, 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 was required to 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.  On April 10, 2015, Bank SNB entered into an agreement with the FDIC to terminate these loss sharing agreements with the FDIC. All future recoveries, charge-offs, and expenses related to these covered assets will now be recognized entirely by Bank SNB.

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.

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Loans covered under the loss sharing agreements with the FDIC 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.   

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 months ended March 31, 2015 and March 31, 2014.

	For the three months ended March 31,
	2015					2014
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	540	$	4,971	$	1,597	$	16,427
Payments received		-		(661)		-		(1,333)
Net charge-offs		-		-		(4)		(41)
Accretion		(121)		-		(90)		-
Balance at end of period	$	419	$	4,310	$	1,503	$	15,053

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 well-secured, 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. 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 March 31, 2015		At December 31, 2014
Real estate mortgage:
Commercial	$	2,247	$	2,195
One-to-four family residential		1,065		1,100
Real estate construction:
Commercial		392		73
Commercial		5,447		5,907
Other consumer		-		1
Total nonaccrual loans	$	9,151	$	9,276

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During the first three months of 2015,  an immaterial amount of interest income was received on nonaccruing loans.  If interest on all nonaccrual loans had been accrued for the three months ended March 31, 2015, additional interest income of $0.2 million would have been recorded.

The following table shows an age analysis of past due loans at March 31, 2015 and December 31, 2014. 

			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 March 31, 2015
Real estate mortgage:
Commercial	$	3,706	$	2,247	$	5,953	$	753,723	$	759,676	$	-
One-to-four family residential		192		1,065		1,257		85,086		86,343		-
Real estate construction:
Commercial		16		392		408		191,644		192,052		-
One-to-four family residential		-		-		-		12,586		12,586		-
Commercial		57		5,447		5,504		360,778		366,282		-
Other		68		-		68		21,238		21,306		-
Total	$	4,039	$	9,151	$	13,190	$	1,425,055		1,438,245	$	-
At December 31, 2014
Real estate mortgage:
Commercial	$	4,053	$	2,195	$	6,248	$	746,723	$	752,971	$	-
One-to-four family residential		122		1,100		1,222		76,309		77,531		-
Real estate construction:
Commercial		2,177		73		2,250		184,409		186,659		-
One-to-four family residential		-		-		-		10,464		10,464		-
Commercial		1,159		6,044		7,203		343,207		350,410		137
Other		162		1		163		21,793		21,956		-
Total	$	7,673	$	9,413	$	17,086	$	1,382,905		1,399,991	$	137

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 and homogeneous, loans, including mortgage, student, and consumer loans, 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. 

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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 March 31, 2015
Commercial real estate	$	10,830	$	13,186	$	11,401	$	11,464	$	1,951
One-to-four family residential		1,079		1,809		-		-		-
Real estate construction		392		392		-		-		-
Commercial		2,398		2,770		3,957		10,319		1,670
Other		1		2		-		-		-
Total	$	14,700	$	18,159	$	15,358	$	21,783	$	3,621
At December 31, 2014
Commercial real estate	$	12,382	$	14,752	$	11,497	$	11,556	$	2,047
One-to-four family residential		1,115		1,833		-		-		-
Real estate construction		73		104		-		-		-
Commercial		2,624		2,887		4,315		10,673		1,822
Other		1		2		-		-		-
Total	$	16,195	$	19,578	$	15,812		22,229	$	3,869

The average recorded investment and interest income recognized on impaired loans as of the three months ended March 31, 2015 and March 31, 2014 are shown in the following table:  

	As of and for the three months ended March 31,
	2015				2014
	Average				Average
	Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income
Commercial real estate	$	24,316	$	257	$	49,589	$	439
One-to-four family residential		1,799		-		4,109		-
Real estate construction		246		-		275		-
Commercial		6,470		12		9,805		24
Other		2		-		35		-
Total	$	32,833	$	269	$	63,813	$	463

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. 

15

Troubled debt restructured loans outstanding as of March 31, 2015 and December 31, 2014 were as follows: 

	At March 31, 2015				At December 31, 2014
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	19,984	$	904	$	21,685	$	1,082
One-to-four family residential		14		58		14		62
Commercial		909		502		1,032		655
Total	$	20,907	$	1,464	$	22,731	$	1,799

At March 31, 2015 and December 31, 2014,  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 months ended March 31, 2015 and March 31, 2014 are shown in the following table:     

	For the three months ended March 31,
	2015				2014
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial		-	$	-		3	$	244
Total		-	$	-		3	$	244

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.   

No loans modified as a troubled debt restructuring subsequently defaulted during the three months ended March 31, 2015 and March 31, 2014.  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.   

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 March 31, 2015 and December 31, 2014, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows: 

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	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At March 31, 2015
Grade:
Pass	$	693,014	$	85,171	$	203,819	$	338,520	$	21,208	$	1,341,732
Special Mention		40,143		22		225		8,407		98		48,895
Substandard		26,231		1,117		594		14,529		-		42,471
Doubtful		288		33		-		4,826		-		5,147
Total	$	759,676	$	86,343	$	204,638	$	366,282	$	21,306	$	1,438,245
At December 31, 2014
Grade:
Pass	$	690,791	$	76,322	$	194,670	$	331,594	$	21,849	$	1,315,226
Special Mention		34,287		22		420		7,144		106		41,979
Substandard		27,594		1,154		2,033		6,725		1		37,507
Doubtful		299		33		-		4,947		-		5,279
Total	$	752,971	$	77,531	$	197,123	$	350,410	$	21,956	$	1,399,991

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. 

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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 March 31, 2015
Balance at beginning of period	$	13,678	$	712	$	4,159	$	9,614	$	289	$	28,452
Loans charged-off		(2)		-		(5)		(191)		(32)		(230)
Recoveries		120		331		-		379		85		915
Provision for loan losses		(275)		(371)		(105)		(1,035)		(101)		(1,887)
Balance at end of period	$	13,521	$	672	$	4,049	$	8,767	$	241	$	27,250
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	1,951	$	-	$	-	$	1,670	$	-	$	3,621
Collectively evaluated for impairment		11,570		672		4,049		7,097		241		23,629
Acquired with deteriorated credit quality		-		-		-		-		-		-
Total ending allowance balance	$	13,521	$	672	$	4,049	$	8,767	$	241	$	27,250
Loans receivable ending balance:
Individually evaluated for impairment	$	21,206	$	426	$	392	$	6,355	$	1	$	28,380
Collectively evaluated for impairment		735,651		84,568		204,132		359,900		21,304		1,405,555
Acquired with deteriorated credit quality		2,819		1,349		114		27		1		4,310
Total ending loans balance	$	759,676	$	86,343	$	204,638	$	366,282	$	21,306	$	1,438,245

	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At March 31, 2014
Balance at beginning of period	$	18,854	$	850	$	5,523	$	10,985	$	451	$	36,663
Loans charged-off		(41)		-		(655)		(2,575)		(121)		(3,392)
Recoveries		2,284		18		-		308		30		2,640
Provision for loan losses		(2,238)		(152)		706		682		16		(986)
Balance at end of period	$	18,859	$	716	$	5,574	$	9,400	$	376	$	34,925
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	4,748	$	-	$	-	$	2,164	$	-	$	6,912
Collectively evaluated for impairment		14,105		715		5,574		7,236		376		28,006
Acquired with deteriorated credit quality		6		1		-		-		-		7
Total ending allowance balance	$	18,859	$	716	$	5,574	$	9,400	$	376	$	34,925
Loans receivable ending balance:
Individually evaluated for impairment	$	40,040	$	417	$	81	$	9,462	$	2	$	50,002
Collectively evaluated for impairment		715,640		80,782		172,368		255,932		30,345		1,255,067
Acquired with deteriorated credit quality		10,498		3,420		187		917		31		15,053
Total ending loans balance	$	766,178	$	84,619	$	172,636	$	266,311	$	30,378	$	1,320,122

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NOTE 4:  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 three months ended March 31, 2015. 

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. 

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.

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The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. 

			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 March 31, 2015
Available for sale securities:
Federal agency securities	$	91,813	$	-	$	91,813	$	-
Obligations of state and political subdivisions		33,363		-		33,363		-
Residential mortgage-backed securities		198,686		-		198,686		-
Asset-backed securities		9,543		-		9,543		-
Other securities		32,747		137		32,610		-
		-
Derivative instruments, net		(1,660)		-		(1,660)		-
Total	$	364,492	$	137	$	364,355	$	-
At December 31, 2014
Available for sale securities:
Federal agency securities	$	99,546		-		99,546		-
Obligations of state and political subdivisions		33,139		-		33,139		-
Residential mortgage-backed securities		178,227		-		178,227		-
Asset-backed securities		9,548		-		9,548		-
Other securities		32,771		142		32,629		-
Derivative instrument, net		(1,586)		-		(1,586)		-
Total	$	351,645	$	142	$	351,503	$	-

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.  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.   

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.

Assets that were measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014 are summarized below.   

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			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 March 31, 2015
Impaired loans at fair value :
Commercial real estate	$	11,401	$	-	$	11,401	$	-
Real estate construction		390		-		390		-
Commercial		5,267		-		5,267		-
Loans held for sale:
One-to-four family residential		8,461		-		8,461		-
Government guaranteed commercial real estate		638		-		638		-
Other loans held for sale		7		-		7		-
Mortgage loan servicing rights		3,399		-		-		3,399
Total	$	29,563	$	-	$	26,164	$	3,399
At December 31, 2014
Impaired loans at fair value :
Commercial real estate	$	11,762	$	-	$	11,762	$	-
Commercial		5,722		-		5,722		-
Loans held for sale:
One-to-four family residential		763		-		763		-
Government guaranteed commercial real estate		705		-		705		-
Other loans held for sale		17		-		17		-
Other real estate		3,097		-		3,097		-
Total	$	22,066	$	-	$	22,066	$	-

As of March 31, 2015, impaired loans measured at fair value with a carrying amount of $20.8 million were written down to a fair value of $17.1 million, resulting in a life-to-date impairment of $3.7 million.  As of December 31, 2014, impaired loans measured at fair value with a carrying amount of $21.9 million were written down to the fair value of $17.5 million at December 31, 2014, resulting in a life-to-date impairment charge of $4.4 million. 

As of December 31, 2014, other real estate assets were written down to their fair values, resulting in an impairment charge of $0.6 million,  which was included in noninterest expense.  No impairment was recognized during the period ended March 31, 2015.

As of March 31, 2015 and December 31, 2014, mortgage servicing rights were written down to their fair values, resulting in an impairment charge of $0.1 million and $0, respectively, which was included in noninterest expense.

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, 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. 

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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 and securities sold under agreements to repurchase.  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 March 31, 2015.   

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 March 31, 2015				At December 31, 2014
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	154,396	$	154,396	$	140,936	$	140,936
Securities held to maturity		11,393		11,921		12,362		12,880
Accrued interest receivable		4,974		4,974		4,723		4,723
Derivative asset		1,273		1,273		787		787
Investments included in other assets		7,949		7,949		7,444		7,444
Level 3 inputs:
Total loans, net of allowance		1,410,995		1,354,248		1,371,539		1,303,047
Financial liabilities:
Level 2 inputs:
Deposits		1,616,454		1,540,082		1,533,999		1,450,540
Accrued interest payable		770		770		769		769
Other liabilities		6,506		6,506		8,334		8,334
Derivative liabilities		2,934		2,934		2,373		2,373
Other borrowings		58,578		60,559		79,380		81,544
Subordinated debentures		46,393		46,393		46,393		46,393

NOTE 5: 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, in which credit risk is 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.  The

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fair value of derivative instruments are recognized as either assets or liabilities in the unaudited consolidated statements of financial condition. 

We have entered into three customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer.  As of March 31, 2015, these loans had an outstanding balance of  $34.2 million.  We have entered into offsetting agreements with a dealer counterparty.  The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the unaudited consolidated statements of financial condition.

	As of March 31, 2015				At December 31, 2014
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Non-hedge derivative assets		34,168		1,273	$	34,322	$	787
Non-hedge derivative liabilities		34,168		1,273		34,322		787

The floating rates to us in connection with these instruments are 2.97%,  2.87%, and 2.30% over the one-month LIBOR as of March 31, 2015.  There was $0.6 million of collateral required to be posted by us as of March 31, 2015 to dealer counterparties. We posted a security to cover the collateral required. These interest rate swaps are not designated as hedging instruments.

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 March 31, 2015 was 3.10%. 

The estimated fair value of the interest rate derivative contract outstanding as of March 31, 2015 and December 31, 2014 resulted in a pre-tax loss of $1.7 million and $1.6 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 March 31, 2015 and December 31, 2014.   

The effective portion of our gain or loss due to changes in the fair value of the derivative hedging instrument, a $50,000 gain and a $0.1 million loss for the three months ended March 31, 2015 and March 31, 2014, 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 $0.2 million for both the three months ended March 31, 2015 and March 31, 2014 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 $2.1 million at March 31, 2015 and December 31, 2014.

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

NOTE 6: TAXES ON INCOME 

Net deferred tax assets totaled $12.2 million at March 31, 2015 and $14.1 million at December 31, 2014.  Net deferred tax assets are included in other assets and no valuation allowance is recorded.

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 2011. 

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NOTE 7: SHAREHOLDERS’ EQUITY

Stock Repurchase Program

On August 14, 2014, our Board of Directors (the “Board”) authorized the repurchase of up to 5.0% or 990,000 shares, of our common stock.  The share repurchases are expected to be made primarily on the open market from time to time until August  14, 2015.  Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors. During the first quarter of 2015, we repurchased 249,492 shares for a total of $4.0 million.  As of March 31, 2015, we had repurchased 867,310 shares for a total of $14.3 million.

On February 24, 2015, our Board authorized a second share repurchase program of up to another 5.0%, or approximately 950,000 shares, of our common stock, effective upon the earlier of (i) the date we complete the repurchase of all of the shares we are authorized to repurchase under the current program, and (ii) August 14, 2015.

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
	ended March 31,
(Dollars in thousands, except earnings per share data)	2015		2014
Numerator:
Net income	$	4,535	$	3,691
Earnings allocated to participating securities		(70)		(40)
Numerator for basic earnings per common share	$	4,465	$	3,651
Effect of reallocating undistributed earnings
of participating securities		70		40
Numerator for diluted earnings per common share	$	4,535	$	3,691
Denominator:
Denominator for basic earnings per common share		18,760,648		19,526,351
Dilutive effect of stock compensation		173,527		149,212
Denominator for diluted earnings per common share		18,934,175		19,675,563
Earnings per common share:
Basic	$	0.24	$	0.19
Diluted	$	0.24	$	0.19

NOTE 9: OPERATING SEGMENTS  

We operate four principal segments:  Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations.  The Oklahoma Banking segment provides deposit and lending services and consists of residential mortgage lending services to customers. The Texas Banking segment and the Kansas Banking segment provide deposit and lending services.    Other Operations includes our funds management unit and corporate investments.  Prior to the first quarter of 2015,  we disclosed a Mortgage Banking segment, which included 1-4 family mortgages and the available for sale loans.  For segment reporting, the Mortgage Banking segment has been combined with and into the Oklahoma Banking segment due to those loans being managed from that location.  Prior period numbers have also been adjusted to reflect this change. This adjustment has no financial statement impact.

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.    

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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 March 31, 2015
	Oklahoma		Texas		Kansas		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Operations*		Company
Net interest income (loss)	$	9,735	$	5,220	$	1,463	$	(808)	$	15,610
Provision (credit) for loan losses		(1,233)		(250)		(403)		(1)		(1,887)
Noninterest income		2,039		309		302		190		2,840
Noninterest expenses		7,345		3,435		1,609		693		13,082
Income (loss) before taxes		5,662		2,344		559		(1,310)		7,255
Taxes on income		2,123		879		209		(491)		2,720
Net income (loss)	$	3,539	$	1,465	$	350	$	(819)	$	4,535
* Includes externally generated revenue of $0.4 million, primarily from investing services, and an internally generated loss of $1.0 million from the funds management unit.
Total loans at period end	$	814,949	$	478,005	$	145,291	$	-	$	1,438,245
Total assets at period end		828,576		476,075		145,552		552,876		2,003,079
Total deposits at period end		1,132,015		254,665		124,094		105,680		1,616,454

For the three months ended March 31, 2014
	Oklahoma		Texas		Kansas		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Operations*		Company
Net interest income	$	8,976	$	4,632	$	2,380	$	13	$	16,001
Provision (credit) for loan losses		1,947		(3,932)		999		-		(986)
Noninterest income		2,117		296		481		131		3,025
Noninterest expenses		7,582		3,228		2,628		669		14,107
Income (loss) before taxes		1,564		5,632		(766)		(525)		5,905
Taxes on income		586		2,112		(287)		(197)		2,214
Net income (loss)	$	978	$	3,520	$	(479)	$	(328)	$	3,691
* Includes externally generated revenue of $0.2 million, primarily from investing services, and an internally generated loss of $0.1 million from the funds management unit.
Total loans at period end	$	777,384	$	372,018	$	170,720	$	-	$	1,320,122
Total assets at period end		783,396		370,382		177,111		681,164		2,012,053
Total deposits at period end		1,115,821		229,383		246,998		13,704		1,605,906

NOTE 10:  COMMITMENTS AND CONTINGENCIES

Customer Risk Management Interest Rate Swap

On September  9, 2014, we entered into an agreement to provide one of our commercial borrowers a customer interest rate swap that effectively converts the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of March 31, 2015, the floating rate loan had an outstanding balance of $16.8 million.  The option to execute the swap is conditional on compliance with the loan and swap agreements, and will be subject to the terms of the International Swaps and Derivatives Association Master Agreement.  The fixed pay amount will be based on the market rates at the time of execution, and it is our intention to simultaneously execute an offsetting trade with an approved swap dealer counterparty with identical terms. 

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Legal Action

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.  Plaintiffs claim 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 plaintiffs’ request to certify the class; however, the Court permitted the plaintiffs to amend the filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014. On December 19, 2014, the Court issued a decision on the renewed motion, certifying a class with respect to claims of improper late fees, but denying class certification with respect to plaintiffs’ usury claims.   Plaintiffs thereafter filed a motion seeking leave to amend their complaint to add additional parties, which Sallie Mae opposed, and, on March 24, 2015, the Court denied the plaintiffs’ motion.

Bank SNB is not specifically named in the action.  However, 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 January 2015, FASB issued Accounting Standard Update No. 2015-01,  Income Statement—Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items; (“ASU 2015-01”). The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2016, and it is not expected to have an impact on the financial statements.

In February 2015, FASB issued Accounting Standard Update No. 2015-02,  Consolidation: Amendments to the Consolidation Analysis; (“ASU 2015-02”). The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2016, and it is not expected to have a material impact on the financial statements.

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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, which has been providing banking services since 1894. Through Bank SNB, we have twenty-one full-service banking offices primarily located primarily 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 March 31, 2015, we had total assets of $2.0 billion, deposits of $1.6 billion, and shareholders’ equity of $271.4 million.

On April 10, 2015, Bank SNB entered into an agreement with the FDIC to terminate the loss share agreements from its FDIC-assisted acquisition.  Bank SNB initially entered the agreements when it acquired the assets of First National Bank of Anthony from the FDIC in June 2009.  All future recoveries, charge-offs, and expenses related to these covered assets will now be recognized entirely by Bank SNB.

In January 2015, our Fort Worth, Texas branch formally opened, and on January 29, 2015, our second location in San Antonio, Texas received regulatory approval and will formally open in the second quarter of 2015.  We have already seen positive production in the Fort Worth market that is expected to produce good growth in the second quarter as our new team builds momentum.  The new San Antonio location provides needed space and a stronger profile for our growing investment in this market. 

Our share repurchase program, approved in August of 2014, authorized the repurchase of up to 5.0% or 990,000 shares of our outstanding common stock, par value $1.00 per share.  As of March 31, 2015, we had repurchased 867,310 shares for a total of $14.3 million.  During the first quarter of 2015, we purchased approximately 250,000 shares for a total of $4.0 million.  On February 24, 2015, our board of directors approved a second share repurchase program authorizing the repurchase of up to another 5.0%, or approximately 950,000 shares, effective upon the earlier of (i) the date we complete the repurchase of all of the shares we are authorized to repurchase under the current program, and (ii) August 14, 2015.

Our business operations are conducted through four operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. At March 31, 2015, the Oklahoma Banking segment accounted for $814.9 million in loans, the Texas Banking segment accounted for $478.0 million in loans, and the Kansas Banking segment accounted for $145.3 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 portfolios.  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 March 31, 2015, approximately $496.1 million, or 35%, of our loans were real estate industry loans. Despite the potential headwinds of the economic environment regarding low energy prices, we expect the real estate recovery to remain stable in 2015, 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, 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 remittance services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their

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practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities.  As of March 31, 2015,  $413.5 million, or 29%, of our loans were loans to individuals and businesses in the healthcare industry.    

As of March 31, 2015, 6% of our loan portfolio was concentrated in energy banking.  Our exposure continues to be focused with good companies that are generally well capitalized and have staying power for the long term.  While many of our customers have hedges in place through 2016, if oil prices remain at these low levels for an extended period, we could experience weaker energy loan demand and increased losses within our energy portfolio. Furthermore, a prolonged period of low oil prices could have a negative impact on the economies of energy-dominant states such as Oklahoma and Texas.  As a result, a prolonged period of low oil prices could have an adverse effect on our business, financial condition and results of operation.

FINANCIAL CONDITION

Investment Securities

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

	March 31,		December 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Federal agency securities	$	91,813	$	99,546	$	(7,733)	(7.77)	%
Obligations of state and political subdivisions		44,756		45,501		(745)	(1.64)
Residential mortgage-backed securities		198,686		178,227		20,459	11.48
Asset-backed securities		9,543		9,548		(5)	(0.05)
Other securities		32,747		32,771		(24)	(0.07)
Total	$	377,545	$	365,593	$	11,952	3.27	%

Loans

Total loans, including loans held for sale, were $1.4 billion at March 31, 2015.  The following table shows the composition of the loan portfolio at the dates indicated: 

(Dollars in thousands)	March 31, 2015		December 31, 2014		$ Change		% Change
Real estate mortgage
Commercial	$	759,676	$	752,971	$	6,705	0.89	%
One-to-four family residential		86,343		77,531		8,812	11.37
Real estate construction
Commercial		192,052		186,659		5,393	2.89
One-to-four family residential		12,586		10,464		2,122	20.28
Commercial		366,282		350,410		15,872	4.53
Installment and consumer
Guaranteed student loans		-		37		(37)	(100.00)
Other		21,306		21,919		(613)	(2.80)
Total loans	$	1,438,245	$	1,399,991	$	38,254	2.73	%

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

	March 31,		December 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Loans held for sale:
One-to-four family residential	$	8,461	$	763	$	7,698	1,008.91	%
Government guaranteed commercial real estate		638		705		(67)	(9.50)
Other loans held for sale		7		17		(10)	(58.82)
Total loans held for sale		9,106		1,485		7,621	513.20
Portfolio loans		1,429,139		1,398,506		30,633	2.19
Covered portfolio loans
Total  loans	$	1,438,245	$	1,399,991	$	38,254	2.73	%

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Allowance for Loan Losses

Management determines the appropriate level of the allowance for loan losses using an established methodology.  (See “Note 3:  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 $100,000, 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 all other loans (including impaired loans under $100,000) 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 March 31, 2015						As of December 31, 2014
(Dollars in thousands)	Loan Balance		Allowance		Allowance %		Loan Balance		Allowance		Allowance %
Nonaccrual	$	9,151	$	1,818	19.9	%	$	9,276	$	1,984	21.4	%
Performing TDR		20,907		1,803	8.6			22,731		1,884	8.3
All other		1,399,081		23,629	1.7			1,366,499		24,584	1.8
Total	$	1,429,139	$	27,250	1.9	%	$	1,398,506	$	28,452	2.0	%

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 and potential problem 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 (recoveries) for the period.  Net charge-offs (recoveries) for the first three months of 2015 were $(0.7) million, a change of $1.4 million from the $0.8 million recorded for the first three months of 2014.  The provision for loan losses for the first three months of 2015 was a negative (or credit) of $1.9 million, representing an increase of $0.9 million from the negative provision of $1.0 million recorded for the first three months of 2014.  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. 

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Nonperforming Loans / Nonperforming Assets 

At March 31, 2015, the allowance for loan losses was 297.78% of nonperforming loans, compared to 302.26% of nonperforming loans, at December 31, 2014.  Nonaccrual loans, which comprise the majority of nonperforming loans, were $9.2 million as of March 31, 2015, a decrease of $0.1 million, or 1%, from December 31, 2014.  We have taken cumulative net charge-offs related to these nonaccrual loans of $5.9 million as of March 31, 2015.  Nonaccrual loans at March 31, 2015 were comprised of 49 relationships and were primarily concentrated in commercial and industrial (60%) and commercial real estate (25%).  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)	March 31, 2015			December 31, 2014
Nonaccrual loans:
Commercial real estate	$	2,247		$	2,195
One-to-four family residential		1,065			1,100
Real estate construction		392			73
Commercial		5,447			5,907
Other consumer		-			1
Total nonaccrual loans		9,151			9,276
Past due 90 days or more:
Commercial		-			137
Total past due 90 days or more		-			137
Total nonperforming loans		9,151			9,413
Other real estate		2,255			3,097
Total nonperforming assets	$	11,406		$	12,510
Nonperforming assets to portfolio loans receivable and
other real estate		0.80	%		0.89	%
Nonperforming loans to portfolio loans receivable		0.64			0.67
Allowance for loan losses to nonperforming loans		297.78			302.26
Government-guaranteed portion of nonperforming loans	$	855		$	895

At  March 31, 2015,  nine credit relationships represented 80% of nonperforming loans.  These were all commercial, commercial real estate lending, or one-to-four family residential relationships and had an aggregate principal balance of $7.4 million and related impairment reserves of $1.8 million.  Cumulative net charge-offs for these nine relationships were $5.3 million as of March 31, 2015. 

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 $39.0 million at March 31, 2015, compared to $34.0 million at December 31, 2014.  Substantially all of these loans were performing in accordance with their present terms at March 31, 2015.  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 March 31, 2015, other real estate was $2.3 million, down from $3.1 million at December 31, 2014  due to property sales.  During the first three months of 2015, there was one sale of other real estate property, which had a principal value of $0.8 million,  and resulted in a net gain of $0.1 million.  In order to adjust the properties to their fair value, there were total other real estate write-downs of $0 during the first three months of 2015 compared to $0.6 million for the year ended December 31, 2014.

At March 31, 2015, the reserve for unfunded loan commitments was $2.2 million, a $0.2 million, or 9%, decrease from the amount at December 31, 2014.  Management believes the amount of the reserve is appropriate and is included in other liabilities on the unaudited consolidated statements of financial condition.  The decrease related primarily to continued improvement in asset quality and a corresponding decline in historical loss ratios used to calculate the reserve.      

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Deposits and Other Borrowings

Our deposits were $1.6 billion at March 31, 2015 and $1.5 billion at December 31, 2014.  The following table shows the composition of deposits at the dates indicated: 

	March 31,		December 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Noninterest-bearing demand	$	506,952	$	496,128	$	10,824	2.18	%
Interest-bearing demand		140,659		122,342		18,317	14.97
Money market accounts		488,569		461,679		26,890	5.82
Savings accounts		34,413		32,795		1,618	4.93
Time deposits of $100,000 or more		227,426		198,952		28,474	14.31
Other time deposits		218,435		222,103		(3,668)	(1.65)
Total deposits	$	1,616,454	$	1,533,999	$	82,455	5.38	%

We participate in the Certificate of Deposit Account Registry Service (“CDARS”) and CDARS deposits totaled $7.7 million at March 31, 2015 and $3.4 million at December 31, 2014.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, decreased $20.8 million, or 26%, to $58.6 million during the first three months of 2015.  The decrease primarily reflects the timing of repurchase agreements for the period.   

Wholesale funding, including FHLB borrowings, federal funds purchased, and brokered deposits, accounted for 7% of total funding at March 31, 2015.  See further discussion under the “Liquidity” section below.

Shareholders’ Equity

Shareholders’ equity increased $0.7 million, primarily due to net income of $4.5 million combined with an increase of $1.1 million in other comprehensive income, and partially offset by $4.0 million in stock repurchases and $1.1 million in common stock dividends, for the first three months of 2015.  At March 31, 2015, the accumulated other comprehensive gain on available for sale investment securities and derivative instruments (net of tax) was $0.7 million, an increase from a loss of  $0.4 million at December 31, 2014. 

At March 31, 2015, we and Bank SNB continued to exceed all applicable regulatory capital requirements.  See “Capital Requirements” on page 36. 

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RESULTS OF OPERATIONS 

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 and 2014 

Net income for the first quarter of 2015 of $4.5 million represented an increase of $0.8 million from the $3.7 million net income recorded for the first quarter of 2014.  Diluted earnings per share were $0.24 for the first quarter of 2015, compared to $0.19 for the first quarter of 2014.  The increase in quarterly net income was primarily the result of a  $1.0 million decrease in noninterest expense and a $0.9 million increase in the negative provision for loan losses, offset in part by a $0.4 million decrease in net interest income and a $0.2 million decrease in noninterest income.

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 3:  Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 35.)  

Net Interest Income 

	For the three months
	ended March 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Interest income:
Loans	$	15,570	$	15,775	$	(205)	(1.30)	%
Investment securities:
U.S. government and agency obligations		336		427		(91)	(21.31)
Mortgage-backed securities		718		889		(171)	(19.24)
State and political subdivisions		289		296		(7)	(2.36)
Other securities		6		38		(32)	(84.21)
Other interest-earning assets		305		375		(70)	(18.67)
Total interest income		17,224		17,800		(576)	(3.24)
Interest expense:
Interest-bearing demand deposits		33		40		(7)	(17.50)
Money market accounts		182		146		36	24.66
Savings accounts		8		11		(3)	(27.27)
Time deposits of $100,000 or more		238		449		(211)	(46.99)
Other time deposits		374		379		(5)	(1.32)
Other borrowings		227		225		2	0.89
Subordinated debentures		552		549		3	0.55
Total interest expense		1,614		1,799		(185)	(10.28)
Net interest income	$	15,610	$	16,001	$	(391)	(2.44)	%

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. On the other hand, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, rising interest rates could increase net interest income and when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, a decrease of market rates of interest could increase net interest income. 

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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 March 31,
	2015						2014
	Average				Average		Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
Assets
Loans (1) (2)	$	1,419,137	$	15,570	4.45	%	$	1,278,332	$	15,775	5.00	%
Investment securities (2)		367,877		1,349	1.49			388,639		1,650	1.72
Other interest-earning assets		158,940		305	0.78			280,327		375	0.54
Total interest-earning assets		1,945,954		17,224	3.59			1,947,298		17,800	3.71
Other assets		49,460						50,247
Total assets	$	1,995,414					$	1,997,545
Liabilities and shareholders' equity
Interest-bearing demand deposits	$	138,895	$	33	0.10	%	$	134,760	$	40	0.12	%
Money market accounts		484,639		182	0.15			436,763		146	0.14
Savings accounts		33,350		8	0.10			44,764		11	0.10
Time deposits		434,409		612	0.57			531,071		828	0.63
Total interest-bearing deposits		1,091,293		835	0.31			1,147,358		1,025	0.36
Other borrowings		72,307		227	1.27			80,806		225	1.13
Subordinated debentures		46,393		552	4.76			46,393		549	4.73
Total interest-bearing liabilities		1,209,993		1,614	0.54			1,274,557		1,799	0.57
Noninterest-bearing demand deposits		503,275						449,128
Other liabilities		10,918						10,489
Shareholders' equity		271,228						263,371
Total liabilities and shareholders' equity	$	1,995,414					$	1,997,545
Net interest income and interest rate spread			$	15,610	3.05	%			$	16,001	3.14	%
Net interest margin (3)					3.25	%					3.33	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		160.82%						152.78%
(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 first quarter of 2014, the first quarter 2015 yields on our interest-earning assets decreased 12  basis points, while the rates paid on our interest-bearing liabilities decreased 3 basis points, resulting in a decrease in the interest rate spread to 3.05%. Other contributing factors were the reduction in the level of overnight fed funds sold balances, resulting primarily from the branch sale that occurred in the second quarter of 2014 and loan growth when comparing balances to the prior year.  During the quarterly periods ended March 31, 2015 and March 31, 2014, annualized net interest margin was 3.25% and 3.33%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities increased to 160.82% from  152.78%, respectively.

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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 decrease in net interest income is primarily the result of higher interest expense on deposits. 

	For the three months ended March 31,
	2015 vs. 2014
	Increase		Due to Change
	Or		In Average:
(Dollars in thousands)	(Decrease)		Volume		Rate
Interest earned on:
Loans receivable (1)	$	(204)	$	1,556	$	(1,760)
Investment securities (1)		(301)		(85)		(216)
Other interest-earning assets		(71)		(199)		128
Total interest income		(576)		1,272		(1,848)
Interest paid on:
Interest-bearing demand		(7)		1		(8)
Money market accounts		36		17		19
Savings accounts		(3)		(3)		-
Time deposits		(216)		(148)		(68)
Other borrowings		2		(25)		27
Subordinated debentures		3		-		3
Total interest expense		(185)		(158)		(27)
Net interest income	$	(391)	$	1,430	$	(1,821)
(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 March 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Noninterest income:
Other service charges and fees	$	2,428	$	2,596	$	(168)	(6.47)	%
Other noninterest income		59		70		(11)	(15.71)
Gain on sale/call of investment securities		5		135		(130)	(96.30)
Gain on sales of mortgage loans:
One-to-four family residential		348		224		124	55.36
Total noninterest income	$	2,840	$	3,025	$	(185)	(6.12)	%

Other service and fees charges decreased primarily due to a decrease in direct checking and overdraft charges.

Other noninterest income decreased primarily as a result of decreased rent on bank owned facilities.

The gain on sale/call of investment securities decreased $0.1 million due to the sale of an investment carried at cost during the first quarter of 2014.

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

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Noninterest Expense

	For the three months
	ended March 31,
(Dollars in thousands)	2015		2014		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	$ 7,914	$	8,126	$	(212)	(2.61)	%
Occupancy		2,284		2,284		-	-
Data processing		446		485		(39)	(8.04)
FDIC and other insurance		312		397		(85)	(21.41)
Other real estate (net)		21		68		(47)	(69.12)
Unfunded loan commitment reserve		(225)		85		(310)	(364.71)
Other general and administrative		2,330		2,662		(332)	(12.47)
Total noninterest expense	$	$ 13,082	$	14,107	$	(1,025)	(7.27)	%

The number of full-time equivalent employees increased from 359 at the beginning of the quarter to 360 as of March 31, 2015.  As of March 31, 2014, the number of full-time equivalent employees was 397.  The decrease in personnel expense from the prior year is primarily the result of the decrease in the number of employees due to the Kansas branch sales and an overall decrease in personnel.

The decrease in data processing is from a decrease in overall data processing expenses.

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, which is due to improvements in asset quality and other factors.   

The decrease in other real estate net expenses is primarily the result of a decrease in overall other real estate. 

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 decrease in other general and administrative is primarily the result of lower legal,  consulting, supplies, and printing 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 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.  (See “Note 3:  Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Loans”) 

Taxes on Income

Our income tax expense was $2.7 million for the first three months of 2015 compared to $2.2 million for the first three months of 2014, an increase of $0.5 million, or 23%.  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 three months of 2015 was 37.49%, which is consistent with prior quarters.   

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”). 

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Bank SNB has approved federal funds purchase lines totaling $140.0 million with four banks.  There was no outstanding balance on these lines at March 31, 2015.  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 $88 million.  As of March 31, 2015, no borrowings were made through the BIC program.  In addition, Bank SNB has available a $337 million line of credit from the FHLB.  Borrowings under the FHLB lines are secured by investment securities and loans.  At March 31, 2015, Bank SNB’s FHLB line of credit had an outstanding balance of $25.0 million.  (See also “Deposits and Other Borrowings” on page 31 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 $33.6 million and $54.4 million as of March 31, 2015 and December 31, 2014, respectively. 

At March 31, 2015, $235.9 million of the total carrying value of investment securities of $352.3 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 three months of 2015, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity. 

During the first three months of 2015, cash and cash equivalents increased by $13.5 million, or 10%, to $154.4 million.  This increase was the net result of cash provided by financing activities of $56.7 million (primarily from net increases in deposits offset in part by a decrease in other borrowings and purchases of treasury stock), and offset by cash used in investing activities of $40.5 million (primarily from purchases of available for sale securities, and the increase in net loans originated),  and cash used in operating activities of $2.8 million. 

CAPITAL REQUIREMENTS

Basel III – United States banking regulators are members of the Basel Committee on Banking Supervision.  This committee issues accords, which include capital guidelines for use by regulators in individual countries, generally referred to as Basel I (1988), Basel II (2004), and Basel III (2011).  U.S. banking agencies published the final proposed rules to implement Basel III in the United States (the “Basel III Capital Rules”), which were effective for us January 1, 2015 (subject to a phase-in period for certain provisions).  The Basel III Capital Rules introduce a comprehensive new regulatory framework for U.S. banking organizations, which is consistent with international standards.  The implementation of Basel III is intended to help ensure that banks of all sizes maintain strong capital positions to keep them viable during times of financial stress and severe economic downturns.

The Basel III Capital Rules, among other things, introduce a new capital measure called “Common Equity Tier 1” (“CET1”), specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expand the scope of the deductions/adjustments as compared to existing regulations.

Under the Basel III Capital Rules, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:

· 4.5% CET1 to risk weighted assets

· 6.0% Tier 1 capital to risk weighted assets

· 8.0% Total capital to risk weighted assets

· 4.0% Tier 1 capital to average quarterly assets

When fully phased in on January 1, 2019, the Basel III Capital Rules will require us to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a “capital conservation buffer” equal to 2.5% of total risk-weighted assets (the “Capital Buffer”), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the Capital Buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the Capital Buffer and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average quarterly assets.  The Capital Buffer will be tested on a quarterly basis.  Our ability to pay dividends, discretionary bonuses, or repurchase stock will be restricted unless we maintain the Capital Buffer.  As of March 31, 2015, we are well-capitalized even if we apply the capital buffer, which does not go into effect until future years.

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The Basel III Capital Rules also prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and resulting in higher risk weights for a variety of asset categories. Specific changes to the rules impacting our determination of risk-weighted assets include, a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans, and a 150% risk weight to exposures that are 90 days past due.

Banks with under $250 billion in assets are given a one-time, opt-out election under the Basel III Capital Rules to filter from regulatory capital certain accumulated other comprehensive income (“AOCI”) components.  Without this election, a bank must reflect unrealized gains and losses on “available for sale” securities in regulatory capital.  This AOCI opt-out election must be made on a bank’s first regulatory report filed after January 1, 2015. 

In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss related to securities available for sale and effective cash flow hedges do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.

Capital Ratios  – Financial holding companies are required to maintain capital ratios set by the FRB in its Risk-Based Capital Guidelines.  At March 31, 2015, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 19.36%, a Tier I risk-based capital ratio of 18.10%, a Tier 1 leverage ratio of 15.75%, and a CET1 ratio of 18.10%.  Our CET1 ratio is the same as our Tier 1 ratio, because none of the deduction items exceeded the threshold of 10% of Tier 1 capital, either individually or in aggregate. As of March 31, 2015, 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, income taxes, 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, 2014.  

*   *   *   *   *   *   *

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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
March 31, 2015	14.03%	8.57%	3.07%
December 31, 2014	11.96%	7.10%	2.31%

When compared to December 31, 2014, net interest income at risk improved in each of the three interest rate scenarios.  The measured changes in net interest income for all scenarios are in compliance with the established policy limits. 

The measures of equity value at risk indicate the ongoing economic value of equity considering the effects of interest rate changes on 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 Southwest’s net assets.

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Estimated Changes in Economic Value of Equity (EVE)

Changes in Interest Rates:	+300 bp	+200 bp	+100 bp
March 31, 2015	5.98%	3.41%	0.54%
December 31, 2014	2.56%	1.09%	(0.52)%

As of March 31, 2015, the economic value of equity measure improved  in  each of the three rising interest rate scenarios when compared to the December 31, 2014 percentages.  The measured changes in economic value of equity for all scenarios are in compliance with the established policy limits.

*   *   *   *   *   *   *

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 March 31, 2015.  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 March 31, 2015. 

Changes in Internal Control over Financial Reporting 

No changes occurred during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II:  OTHER INFORMATION 

Item 1:  Legal proceedings

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.  Plaintiffs claim 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 plaintiffs’ request to certify the class; however, the Court permitted the plaintiffs to amend the filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014. On December 19, 2014, the Court issued a decision on the renewed motion, certifying a class with respect to claims of improper late fees, but denying class certification with respect to plaintiffs’ usury claims.   Plaintiffs thereafter filed a motion seeking leave to amend their complaint to add additional parties, which Sallie Mae opposed, and, on March 24, 2015, the Court denied the plaintiffs’ motion. 

Bank SNB is not specifically named in the action.  However, 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.

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.

Item 1A:  Risk Factors 

There were no material changes in risk factors during the first three months of 2015 from those disclosed in our Form 10-K for the year ended December 31, 2014.

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

On August 14, 2014, our Board authorized the repurchase of up to 5.0% or 990,000 shares, of our common stock. The share repurchases are expected to be made primarily on the open market from time to time until August 14, 2015.  Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors.

The table below sets forth information regarding the Company's repurchases of its common stock during the three months ended March 31, 2015.

	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
								372,182
January 1, 2015 to January 31, 2015		118,200	$	15.96		118,200		253,982
February 1, 2015 to February 28, 2015		104,808		16.33		104,808		149,174
March 1, 2015 to March 31, 2015		26,484		16.71		26,484		122,690
Total		249,492	$	16.19		249,492

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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

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SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

SOUTHWEST BANCORP, INC. 

(Registrant) 

By:  /s/ Mark W. Funke	May 5, 2015
Mark W. Funke President and Chief Executive Officer  (Principal Executive Officer)	Date
By:  /s/ Joe T. Shockley, Jr.	May 5, 2015
Joe T. Shockley, Jr. Executive Vice President and Chief   Financial Officer   (Principal Financial Officer)	Date

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