Southwest Bancorp 10Q 2017 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, 2017

[ ]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,” “smaller reporting company,” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ] Accelerated Filer [ x ] Non-Accelerated Filer [ ] Smaller Reporting Company [ ] Emerging Growth Company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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, 2017, the issuer has 18,687,109 shares of its Common Stock, par value $1.00, outstanding.

SOUTHWEST BANCORP, INC.

INDEX TO FORM 10-Q

9
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 CONDITION AND RESULTS OF OPERATIONS	29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40

ITEM 4. CONTROLS AND PROCEDURES	41

PART II. OTHER INFORMATION	42

ITEM 1. LEGAL PROCEEDINGS	42

ITEM 1A. RISK FACTORS	42

ITEM 6. EXHIBITS	42

SIGNATURES	43

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 our planned merger with Simmons First National Corporation;

Expectations regarding integration of acquired banks;

Assessments of loan quality, probable loan losses or negative provisions, 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, 2016.

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

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

SOUTHWEST BANCORP, INC.

Consolidated Statements of Financial Condition



	March 31,		December 31,
	2017		2016
(Dollars in thousands)	(unaudited)
Assets:
Cash and due from banks	$	28,400	$	36,831
Interest-bearing deposits		36,702		38,819
Cash and cash equivalents		65,102		75,650
Securities held to maturity (fair values of $10,680 and $10,677, respectively)		10,413		10,443
Securities available for sale (amortized cost of $422,672 and $427,113, respectively)		422,640		426,218
Loans held for sale		4,980		4,386
Loans receivable		1,931,463		1,872,746
Less: Allowance for loan losses		(27,543)		(27,546)
Net loans receivable		1,903,920		1,845,200
Accrued interest receivable		6,357		6,194
Non-hedge derivative asset		2,043		1,235
Premises and equipment, net		22,341		22,808
Other real estate		350		350
Goodwill		13,545		13,545
Other intangible assets, net		5,693		5,790
Bank owned life insurance		28,795		28,575
Other assets		36,415		34,998
Total assets	$	2,522,594	$	2,475,392

Liabilities:
Deposits:
Noninterest-bearing demand	$	541,021	$	551,709
Interest-bearing demand		177,676		152,656
Money market accounts		591,368		567,058
Savings accounts		58,387		56,410
Time deposits of $100,000 or more		353,244		360,307
Other time deposits		255,569		257,878
Total deposits		1,977,265		1,946,018
Accrued interest payable		1,190		1,132
Non-hedge derivative liability		2,043		1,235
Other liabilities		10,144		10,171
Other borrowings		194,645		183,814
Subordinated debentures		46,393		46,393
Total liabilities		2,231,680		2,188,763
Shareholders' equity:
Common stock - $1 par value; 40,000,000 shares authorized;
21,260,934 and 21,230,714 shares issued, respectively		21,261		21,231
Additional paid in capital		123,417		123,112
Retained earnings		188,638		184,840
Accumulated other comprehensive loss		(302)		(907)
Treasury stock, at cost; 2,571,912 and 2,555,987 shares, respectively		(42,100)		(41,647)
Total shareholders' equity		290,914		286,629
Total liabilities & shareholders' equity	$	2,522,594	$	2,475,392

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations


	For the three months
	ended March 31,
(Dollars in thousands, except earnings per share data)	2017		2016
Interest income:
Interest and fees on loans	$	20,944	$	20,030
Investment securities:
U.S. government and agency obligations		269		296
Mortgage-backed securities		1,123		1,077
State and political subdivisions		339		348
Other securities		321		244
Other interest-earning assets		75		53
Total interest income		23,071		22,048

Interest expense:
Interest-bearing demand		90		62
Money market accounts		472		321
Savings accounts		19		19
Time deposits of $100,000 or more		810		367
Other time deposits		449		538
Other borrowings		478		309
Subordinated debentures		590		592
Total interest expense		2,908		2,208

Net interest income		20,163		19,840

Provision for loan losses		1,776		4,375
Net interest income after provision for loan losses		18,387		15,465

Noninterest income:
Service charges and fees		2,681		2,549
Gain on sales of mortgage loans, net		552		401
Gain on sales/calls of investment securities, net		451		126
Other noninterest income		1,196		339
Total noninterest income		4,880		3,415

Noninterest expense:
Salaries and employee benefits		9,900		9,342
Occupancy		2,373		2,671
Data processing		409		470
FDIC and other insurance		273		368
Other real estate, net		3		13
Provision (credit) for unfunded loan commitments		(388)		215
General and administrative		2,733		2,917
Total noninterest expense		15,303		15,996
Income before taxes		7,964		2,884
Taxes on income		2,685		1,015
Net income	$	5,279	$	1,869

Basic earnings per common share	$	0.28	$	0.10
Diluted earnings per common share		0.28		0.10
Common dividends declared per share		0.08		0.08

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income



	For the three months
	ended March 31,
(Dollars in thousands)	2017		2016

Net income	$	5,279	$	1,869

Other comprehensive income:
Unrealized holding gain on available for sale securities		863		3,111
Reclassification adjustment for net gains arising during the period		-		(126)
Change in fair value of derivative used for cash flow hedge		157		116
Other comprehensive income, before tax		1,020		3,101
Tax expense related to items of other comprehensive
income		(415)		(1,265)
Other comprehensive income, net of tax		605		1,836
Comprehensive income	$	5,884	$	3,705

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows



	For the three months
	ended March 31,
(Dollars in thousands)	2017		2016
Operating activities:
Net income	$	5,279	$	1,869
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses		1,776		4,375
Deferred tax expense		745		-
Asset depreciation		610		718
Securities premium amortization, net of discount accretion		881		706
Amortization of intangibles		229		630
Restricted stock amortization expense		200		201
Net gain on sales/calls of investment securities		(451)		(126)
Net gain on sales of mortgage loans		(552)		(401)
Net (gain) loss on sales of premises/equipment		3		(2)
Proceeds from sales of held for sale loans		25,581		23,165
Held for sale loans originated for resale		(25,866)		(17,109)
Net changes in assets and liabilities:
Accrued interest receivable		(163)		(71)
Bank owned life insurance		(220)		(229)
Other assets		(1,151)		(3,801)
Accrued interest payable		58		27
Other liabilities		1,319		1,290
Net cash provided by operating activities		8,278		11,242
Investing activities:
Proceeds from sales of available for sale securities		-		22,804
Proceeds from principal repayments, calls, and maturities:
Available for sale securities		20,219		13,925
Purchases of available for sale securities		(16,629)		(45,226)
Net purchases of FHLB stock		(2,115)		(559)
Loans originated, net of principal repayments		(60,642)		(11,208)
Purchases of premises and equipment		(146)		(453)
Proceeds from sales of premises and equipment		-		23
Net cash used in investing activities		(59,313)		(20,694)
Financing activities:
Net increase in deposits		31,247		11,143
Net increase in other borrowings		10,831		6,836
Net proceeds from issuance of common stock		335		191
Purchases of treasury stock		(453)		(12,750)
Redemption of trust preferred securities		-		(5,155)
Common stock dividends paid		(1,472)		(1,588)
Preferred stock dividends paid		(1)		(1)
Net cash provided by (used in) financing activities		40,487		(1,324)
Net decrease in cash and cash equivalents		(10,548)		(10,776)
Cash and cash equivalents:
Beginning of period		75,650		78,129
End of period	$	65,102	$	67,353

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity



								Accumulated
				Additional				Other				Total
	Common Stock			Paid-in		Retained		Comprehensive			Treasury	Shareholders'
(Dollars in thousands)	Shares	Amount		Capital		Earnings		Income Gain/(Loss)			Stock	Equity
Balance, December 31, 2015	20,006,802	$	21,138	$	121,966	$	173,210	$	(1,290)	$	(18,926)	$	296,098

Dividends declared:
Preferred	-		-		-		(1)		-		-		(1)
Common, $0.08 per share	-		-		-		(1,582)		-		-		(1,582)
Net common stock issued under
employee plans and related tax expense	87,006		87		104		-		-		-		191
Other comprehensive income, net of tax	-		-		-		-		1,836		-		1,836
Treasury shares purchased	(808,763)		-		-		-		-		(12,750)		(12,750)
Net income	-		-		-		1,869		-		-		1,869

Balance, March 31, 2016	19,285,045	$	21,225	$	122,070	$	173,496	$	546	$	(31,676)	$	285,661

Balance, December 31, 2016	18,674,727	$	21,231	$	123,112	$	184,840	$	(907)	$	(41,647)	$	286,629

Dividends declared:
Preferred	-		-		-		(1)		-		-		(1)
Common, $0.08 per share	-		-		-		(1,480)		-		-		(1,480)
Net common stock issued under
employee plans and related tax expense	30,220		30		305		-		-		-		335
Other comprehensive income, net of tax	-		-		-		-		605		-		605
Treasury shares purchased	(15,925)		-		-		-		-		(453)		(453)
Net income	-		-		-		5,279		-		-		5,279

Balance, March 31, 2017	18,689,022	$	21,261	$	123,417	$	188,638	$	(302)	$	(42,100)	$	290,914

The accompanying notes are an integral part of these statements.

SOUTHWEST BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1: SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, shareholders’ equity, cash flows, and comprehensive income in conformity with accounting principles generally accepted in the United States. However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. Those adjustments consist of normal recurring adjustments. The results of operations for the three months ended March 31, 2017, and the cash flows for the three months ended March 31, 2017, 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, 2016.

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”), and our consolidated subsidiaries, including our banking subsidiary Bank SNB, an Oklahoma state banking corporation (“Bank SNB”), and its consolidated subsidiaries. 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, 2017 and December 31, 2016 follows:



	Amortized		Gross Unrealized				Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
At March 31, 2017
Held to Maturity:
Obligations of state and political subdivisions	$	10,413	$	269	$	(2)	$	10,680
Total	$	10,413	$	269	$	(2)	$	10,680

Available for Sale:
Federal agency securities	$	66,633	$	256	$	(190)	$	66,699
Obligations of state and political subdivisions		45,952		565		(105)		46,412
Residential mortgage-backed securities		281,179		582		(1,498)		280,263
Asset-backed securities		8,890		11		(34)		8,867
Corporate debt		20,018		442		(61)		20,399
Total	$	422,672	$	1,856	$	(1,888)	$	422,640

At December 31, 2016
Held to Maturity:
Obligations of state and political subdivisions	$	10,443	$	242	$	(8)	$	10,677
Total	$	10,443	$	242	$	(8)	$	10,677

Available for Sale:
Federal agency securities	$	69,691	$	201	$	(198)	$	69,694
Obligations of state and political subdivisions		46,105		461		(191)		46,375
Residential mortgage-backed securities		282,035		573		(1,966)		280,642
Asset-backed securities		9,265		-		(88)		9,177
Corporate debt		20,017		385		(72)		20,330
Total	$	427,113	$	1,620	$	(2,515)	$	426,218

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 consolidated statements of financial condition. Total investments carried at cost were $16.6 million and $14.6 million at March 31, 2017 and December 31, 2016, respectively. 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, 2017 follows:



	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	10,916	$	10,941	$	-	$	-
More than one year through five years		253,317		253,341		9,273		9,530
More than five years through ten years		104,901		104,627		1,140		1,150
More than ten years		53,538		53,731		-		-
Total	$	422,672	$	422,640	$	10,413	$	10,680

The foregoing analysis assumes that our residential mortgage-backed securities mature during the period in which they are estimated to be prepaid and are based on expected maturities. Expected maturities differ from contractual maturities because borrowers of the underlying mortgages may have the right to call or prepay obligations with or without prepayment penalties. 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. The table below shows the proceeds, gross realized gains and gross realized losses recognized on the investment portfolio for the three months ended March 31, 2017 and March 31, 2016. Proceeds from sales recognized during the three months ended March 31, 2017 resulted from the sale of a private equity investment carried at cost and recorded in other assets. Proceeds from sales during the three months ended March 31, 2016 resulted from a slight restructuring of our investment portfolio.


		For the three months
		ended March 31,
(Dollars in thousands)		2017		2016
Proceeds from sales	$	601	$	22,804
Gross realized gains		451		172
Gross realized losses		-		(46)

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, 2017 and December 31, 2016. Securities whose market values exceed cost are excluded from this table.



				Continuous Unrealized
		Amortized cost of		Loss Existing for:				Fair value of
	Number of	securities with		Less Than		More Than		securities with
(Dollars in thousands)	Securities	unrealized losses		12 Months		12 Months		unrealized losses
At March 31, 2017
Held to Maturity:
Obligations of state and political subdivisions	5	$	442	$	(2)	$	-	$	440
	5	$	442	$	(2)	$	-	$	440

Available for Sale:
Federal agency securities	14	$	34,729	$	(111)	$	(79)	$	34,539
Obligations of state and political subdivisions	18		9,739		(57)		(48)		9,634
Residential mortgage-backed securities	86		200,195		(1,183)		(315)		198,697
Asset-backed securities	1		3,952		-		(34)		3,918
Corporate debt	2		5,007		-		(61)		4,946
Total	121	$	253,622	$	(1,351)	$	(537)	$	251,734

At December 31, 2016
Held to Maturity:
Obligations of state and political subdivisions	7	$	1,987	$	(8)	$	-	$	1,979
	7	$	1,987	$	(8)	$	-	$	1,979

Available for Sale:
Federal agency securities	13	$	34,734	$	(111)	$	(87)	$	34,536
Obligations of state and political subdivisions	36		18,283		(145)		(46)		18,092
Residential mortgage-backed securities	89		225,986		(1,618)		(348)		224,020
Asset-backed securities	3		9,265		-		(88)		9,177
Corporate debt	2		5,005		-		(72)		4,933
Total	143	$	293,273	$	(1,874)	$	(641)	$	290,758

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 amount by 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, 2017, 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, 2017, 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 $203.1 million and $199.0 million were pledged to meet such requirements at March 31, 2017 and December 31, 2016, respectively. Any amount over-pledged can be released at any time.

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, Kansas, and Colorado. Our commercial lending operations are concentrated in Oklahoma City, Tulsa, Dallas, Wichita, and other metropolitan markets in Oklahoma, Texas, Kansas, and Colorado. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. See “Note 9: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for more detail regarding loans by market. At March 31, 2017 and December 31, 2016, 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, 2017		At December 31, 2016
Real estate mortgage:
Commercial	$	925,458	$	882,071
One-to-four family residential		210,495		199,123
Real estate construction:
Commercial		193,937		199,113
One-to-four family residential		18,426		20,946
Commercial		570,001		556,248
Installment and consumer		18,126		19,631
		1,936,443		1,877,132
Less: Allowance for loan losses		(27,543)		(27,546)
Total loans, net		1,908,900		1,849,586
Less: Loans held for sale (included above)		(4,980)		(4,386)
Net loans receivable	$	1,903,920	$	1,845,200

Concentrations of Credit. At March 31, 2017, $625.9 million, or 32%, and $431.6 million, or 22%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industries, 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 held for sale of $5.0 million and $4.4 million at March 31, 2017 and December 31, 2016, 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 $459.0 million and $460.6 million at March 31, 2017 and December 31, 2016, 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 October 9, 2015, we completed the acquisition of First Commercial Bancshares (“Bancshares”) by merging Bancshares with and into us (the “Bancshares Merger”). In connection with the Bancshares Merger, First Commercial Bank was merged with and into Bank SNB, with Bank SNB being the surviving bank. We evaluated $200.0 million of the loans purchased in conjunction with the merger in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, and those loans were recorded with a $4.5 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $7.8 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $3.3 million discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

Changes in the carrying amounts and accretable yields for all ACS 310-30 loans that were acquired were as follows for the three months ended March 31, 2017 and March 31, 2016:



	For the three months ended March 31,
	2017					2016
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	630	$	4,632	$	807	$	7,914
Payments received		-		(815)				(504)
Net charge-offs		-		-		-		(122)
Accretion		(143)		-		(65)		-
Balance at end of period	$	487	$	3,817	$	742	$	7,288

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 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 (including energy banking credits) 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, 2017		At December 31, 2016
Real estate mortgage:
Commercial	$	570	$	6,471
One-to-four family residential		2,730		2,766
Real estate construction:
Commercial		522		522
One-to-four family residential		448		448
Commercial		12,182		5,949
Other consumer		29		111
Total nonaccrual loans	$	16,481	$	16,267

During the first three months of 2017, $0.1 million of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the three months ended March 31, 2017, 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, 2017 and December 31, 2016:



			90 days +								Recorded loans
	30-89 days		past due and		Total past				Total		> 90 days and
(Dollars in thousands)	past due		nonaccrual		due		Current		loans		accruing
At March 31, 2017
Real estate mortgage:
Commercial	$	1,616	$	570	$	2,186	$	923,272	$	925,458	$	-
One-to-four family residential		376		2,838		3,214		207,281		210,495		108
Real estate construction:
Commercial		-		522		522		193,415		193,937		-
One-to-four family residential		-		448		448		17,978		18,426		-
Commercial		1,924		12,183		14,107		555,894		570,001		1
Other		295		30		325		17,801		18,126		1
Total	$	4,211	$	16,591	$	20,802	$	1,915,641	$	1,936,443	$	110

At December 31, 2016
Real estate mortgage:
Commercial	$	24	$	6,472	$	6,496	$	875,575	$	882,071	$	-
One-to-four family residential		631		2,903		3,534		195,589		199,123		138
Real estate construction:
Commercial		-		522		522		198,591		199,113		-
One-to-four family residential		-		448		448		20,498		20,946		-
Commercial		2,530		6,142		8,672		547,576		556,248		193
Other		359		123		482		19,149		19,631		12
Total	$	3,544	$	16,610	$	20,154	$	1,856,978	$	1,877,132	$	343

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 $100,000, 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 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.

Impaired loans as of March 31, 2017 and December 31, 2016 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, 2017
Commercial real estate	$	1,676	$	3,212	$	-	$	-	$	-
One-to-four family residential		1,152		1,434		1,593		1,617		63
Real estate construction		523		654		447		517		40
Commercial		707		2,571		11,493		14,023		3,481
Other		29		34		-		-		-
Total	$	4,087	$	7,905	$	13,533	$	16,157	$	3,584

At December 31, 2016
Commercial real estate	$	1,536	$	3,057	$	6,053	$	6,529	$	2,219
One-to-four family residential		1,188		1,535		1,593		1,698		63
Real estate construction		762		926		207		245		40
Commercial		1,032		2,861		4,963		7,480		1,346
Other		111		115		-		-		-
Total	$	4,629	$	8,494	$	12,816	$	15,952	$	3,668

The average recorded investment of loans classified as impaired and the interest income recognized on those loans for the three months ended March 31, 2017 and March 31, 2016 are shown in the following table:



	As of and for the three months ended March 31,
	2017				2016
	Average				Average
	Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income
Commercial real estate	$	2,766	$	33	$	25,133	$	252
One-to-four family residential		3,245		1		4,067		-
Real estate construction		1,044		-		1,539		-
Commercial		8,360		91		13,169		8
Other		29		-		80		-
Total	$	15,444	$	125	$	43,988	$	260

Troubled Debt Restructurings. Our loan portfolio also includes certain loans that have been modified in troubled debt restructurings, 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 are then further 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 the evaluation done with respect 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.

Troubled debt restructured loans outstanding as of March 31, 2017 and December 31, 2016 were as follows:



	At March 31, 2017				At December 31, 2016
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	1,106	$	280	$	1,118	$	475
One-to-four family residential		15		45		15		46
Commercial		18		3,243		45		3,323
Total	$	1,139	$	3,568	$	1,178	$	3,844

At March 31, 2017 and December 31, 2016, we had no significant commitments to lend additional funds to debtors whose loan terms had been modified in a troubled debt restructuring.

Loans modified as troubled debt restructurings that occurred during the three months ended March 31, 2017 and March 31, 2016 are shown in the following table:



	For the three months ended March 31,
	2017				2016
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial		-		-		1		260
Total		-	$	-		1	$	260

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.

There were no loans modified as a troubled debt restructuring that subsequently defaulted during the three months ended March 31, 2017 or March 31, 2016. 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, 2017 and December 31, 2016, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows:



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At March 31, 2017
Grade:
Pass	$	894,735	$	203,837	$	201,854	$	508,938	$	18,097	$	1,827,461
Special Mention		17,986		1,973		8,951		21,509		-		50,419
Substandard		12,737		4,685		1,558		39,257		29		58,266
Doubtful		-		-		-		297		-		297
Total	$	925,458	$	210,495	$	212,363	$	570,001	$	18,126	$	1,936,443

At December 31, 2016
Grade:
Pass	$	857,290	$	192,395	$	210,780	$	498,039	$	19,518	$	1,778,022
Special Mention		4,479		1,983		7,720		24,639		-		38,821
Substandard		20,302		4,745		1,559		33,175		113		59,894
Doubtful		-		-		-		395		-		395
Total	$	882,071	$	199,123	$	220,059	$	556,248	$	19,631	$	1,877,132

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. Commercial real estate pools are further segmented by market type for non-owner occupied and owner occupied collateral. Our primary markets are Oklahoma, Texas, Kansas, and Colorado. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us. The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.

Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and considered in the determination of the allowance for loan losses. We are not aware of any significant time

lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment.

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



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At March 31, 2017
Balance at beginning of fiscal year	$	12,507	$	1,163	$	3,502	$	10,058	$	316	$	27,546
Loans charged-off		(2,029)		-		-		(12)		(116)		(2,157)
Recoveries		182		55		-		117		24		378
Provision for loan losses		1,353		2		(347)		676		92		1,776
Balance at end of period	$	12,013	$	1,220	$	3,155	$	10,839	$	316	$	27,543

Allowance for loan losses ending balance:
Individually evaluated for impairment	$	-	$	63	$	-	$	3,481	$	-	$	3,544
Collectively evaluated for impairment		12,013		1,157		3,115		7,358		316		23,959
Acquired with deteriorated credit quality		-		-		40		-		-		40
Total ending allowance balance	$	12,013	$	1,220	$	3,155	$	10,839	$	316	$	27,543

Loans receivable ending balance:
Individually evaluated for impairment	$	712	$	1,762	$	390	$	11,789	$	-	$	14,653
Collectively evaluated for impairment		922,999		207,541		211,318		557,989		18,126		1,917,973
Acquired with deteriorated credit quality		1,747		1,192		655		223		-		3,817
Total ending loans balance	$	925,458	$	210,495	$	212,363	$	570,001	$	18,126	$	1,936,443



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At March 31, 2016
Balance at beginning of fiscal year	$	12,716	$	700	$	2,533	$	9,965	$	192	$	26,106
Loans charged-off		(14)		(84)		-		(3,553)		(74)		(3,725)
Recoveries		201		43		-		145		23		412
Provision for loan losses		(1,782)		216		367		5,517		57		4,375
Balance at end of period	$	11,121	$	875	$	2,900	$	12,074	$	198	$	27,168

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	914	$	135	$	40	$	3,038	$	-	$	4,127
Collectively evaluated for impairment		10,207		740		2,860		9,036		198		23,041
Acquired with deteriorated credit quality		-		-		-		-		-		-
Total ending allowance balance	$	11,121	$	875	$	2,900	$	12,074	$	198	$	27,168

Loans receivable ending balance:
Individually evaluated for impairment	$	20,341	$	560	$	390	$	13,153	$	43	$	34,487
Collectively evaluated for impairment		854,097		155,892		179,489		530,203		20,428		1,740,109
Acquired with deteriorated credit quality		4,384		1,626		777		466		35		7,288
Total ending loans balance	$	878,822	$	158,078	$	180,656	$	543,822	$	20,506	$	1,781,884

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, 2017.

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 and collateral requirements. The fair value of the interest rate swap agreements are obtained from dealer quotes.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:



			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, 2017
Available for sale securities:
Federal agency securities	$	66,699	$	-	$	66,699		$	-
Obligations of state and political subdivisions		46,412		-		46,412			-
Residential mortgage-backed securities		280,263		-		280,263			-
Asset-backed securities		8,867		-		8,867			-
Corporate debt		20,399		214		20,185			-

Derivative asset		2,043		-		2,043			-
Derivative liability		(2,541)		-		(2,541)			-
Total	$	422,142	$	214	$	421,928		$	-

At December 31, 2016
Available for sale securities:
Federal agency securities	$	69,694	$	-	$	69,694		$	-
Obligations of state and political subdivisions		46,375		-		46,375			-
Residential mortgage-backed securities		280,642		-		280,642			-
Asset-backed securities		9,177		-		9,177			-
Corporate debt		20,330		213		20,117	��		-

Derivative asset		1,235		-		1,235			-
Derivative liability		(1,890)		-		(1,890)			-
Total	$	425,563	$	213	$	425,350		$	-

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 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.

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

Goodwill – Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value.

Assets that were measured at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016 are summarized below.



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
At March 31, 2017
Impaired loans at fair value :
One-to-four family residential	$	1,593	$	-	$	-	$	1,593
Real estate construction		447		-		-		447
Commercial		11,492		-		-		11,492

Loans held for sale:
One-to-four family residential		4,980		-		4,980		-
Total	$	18,512	$	-	$	4,980	$	13,532

At December 31, 2016
Impaired loans at fair value :
Commercial real estate	$	6,053	$	-	$	-	$	6,053
One-to-four family residential		1,593		-		-		1,593
Real estate construction		207		-		-		207
Commercial		5,357		-		-		5,357

Loans held for sale:
One-to-four family residential		4,386		-		4,386		-
Total	$	17,596	$	-	$	4,386	$	13,210

For the period ended March 31, 2017, impaired loans measured at fair value with a carrying amount of $17.1 million were written down to a fair value of $13.5 million, resulting in a life-to-date impairment of $3.6 million. For the year ended December 31, 2016, impaired loans measured at fair value with a carrying amount of $19.7 million were written down to a fair value of $13.2 million at December 31, 2016, resulting in a life-to-date impairment charge of $6.5 million.

No impairment was recognized for other real estate during the periods ended March 31, 2017 or December 31, 2016.

As of March 31, 2017, mortgage servicing rights had a fair value of $4.5 million, which exceeded the book value of $3.5 million. Because the fair value exceeded the book value, there was no impairment charge at March 31, 2017. As of December 31, 2016, the mortgage servicing rights had a fair value of $4.2 million, which exceeded the book value of $3.5 million. Because the fair value exceeded the book value, there was no impairment charge at December 31, 2016.

No impairment of core deposit premiums or goodwill was recognized during the periods ending March 31, 2017 or December 31, 2016.

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.

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, 2017.

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, 2017				At December 31, 2016
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	65,102	$	65,102	$	75,650	$	75,650
Securities held to maturity		10,413		10,680		10,443		10,677
Accrued interest receivable		6,357		6,357		6,194		6,194
Mortgage loan servicing rights		3,516		4,490		3,491		4,159
Bank-owned life insurance		28,795		28,795		28,575		28,575
Investments included in other assets		16,624		16,624		14,627		14,627
Level 3 inputs:
Total loans, net of allowance		1,908,900		1,900,248		1,849,586		1,839,960
Financial liabilities:
Level 2 inputs:
Deposits		1,977,265		1,929,085		1,946,018		1,897,927
Accrued interest payable		1,190		1,190		1,132		1,132
Other liabilities		9,646		9,646		9,516		9,516
Other borrowings		194,645		194,743		183,814		183,926
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 our policy guidelines. All derivative instruments are carried at fair value and 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 with 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 and the differing collateral requirements. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of derivative instruments is recognized as either assets or liabilities in the consolidated statements of financial condition.

We have entered into fifteen customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR or prime rate to a fixed rate for the customer. As of March 31, 2017, these loans had an outstanding balance of $160.1 million. We have entered into offsetting agreements with dealer counterparties. The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the consolidated statements of financial condition:


	As of March 31, 2017				At December 31, 2016
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Non-hedge derivative assets	$	160,125	$	2,043	$	123,953	$	1,235
Non-hedge derivative liabilities		160,125		2,043		123,953		1,235

The margin rates to us in connection with these instruments are a contractual percentage over the one-month LIBOR or a minimal percentage under the prime rate. From time to time, it may be necessary to post collateral with our dealer counterparties to secure the market values of these contracts. As of March 31, 2017, there was no collateral requirement with any of our dealer counterparties given the market values of these contracts. 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, 2017 was 3.87%.

The estimated fair value of the interest rate swap contract outstanding as of March 31, 2017 and December 31, 2016 resulted in a pre-tax loss of $0.5 million and $0.7 million, respectively, and was included in other liabilities in the consolidated statements of financial condition. We obtained the counterparty valuation to validate the interest rate derivative contract as of March 31, 2017 and December 31, 2016.

The effective portion of our gain or loss due to changes in the fair value of the interest rate swap contract, a $0.1 million loss for both the three months ended March 31, 2017 and March 31, 2016, 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 contract were $0.1 million for both the three months ended March 31, 2017 and March 31, 2016 and were included in interest expense on subordinated debentures.

We posted cash collateral with our counterparty related to the interest rate swap contract in excess of the required $0.6 million and $0.7 million at March 31, 2017 and December 31, 2016, respectively.

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

NOTE 6: TAXES ON INCOME

Net deferred tax assets totaled $12.0 million at March 31, 2017 and $13.2 million at December 31, 2016. Net deferred tax assets are included in other assets and no valuation allowance is considered necessary.

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 2013.

NOTE 7: SHAREHOLDERS’ EQUITY

Stock Repurchase Program

On May 25, 2016, the Board authorized our fourth stock repurchase program since August 2014. The program authorizes the repurchase of up to another 5.0%, or approximately 921,000 shares, of our outstanding common stock and became effective February 23, 2017, which was the original expiration date of the third program. During the first quarter of 2017, we have made no repurchases. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors. Our ability to repurchase our common stock is limited during the time that our planned merger with Simmons First National Corporation is pending.

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)	2017		2016
Numerator:
Net income	$	5,279	$	1,869
Earnings allocated to participating securities		(83)		(26)
Numerator for earnings per common share	$	5,196	$	1,843

Denominator:
Denominator for basic earnings per common share		18,363,405		19,257,445
Dilutive effect of stock compensation		169,094		10,028
Denominator for diluted earnings per common share		18,532,499		19,267,473
Earnings per common share:
Basic	$	0.28	$	0.10
Diluted	$	0.28	$	0.10

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, including residential mortgage lending services to customers. Due to its size and our management structure, our Colorado banking operations are included within the Oklahoma Banking segment. The Texas Banking segment and the Kansas Banking segment provide deposit and lending services. Other Operations includes our funds management unit and corporate investments.

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

The accounting policies of each reportable segment are the same as ours. 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, 2017
	Oklahoma		Texas		Kansas		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Operations*		Company
Net interest income (loss)	$	12,794	$	6,088	$	1,558	$	(277)	$	20,163
Provision (credit) for loan losses		1,422		491		(134)		(3)		1,776
Noninterest income		3,260		456		302		862		4,880
Noninterest expenses		9,697		3,197		1,407		1,002		15,303
Income (loss) before taxes		4,935		2,856		587		(414)		7,964
Taxes on income (loss)		1,663		963		198		(139)		2,685
Net income (loss)	$	3,272	$	1,893	$	389	$	(275)	$	5,279

* Includes externally generated revenue of $1.3 million, primarily from investing services, and an internally generated loss of $0.7 million from the funds management unit.

Total loans at period end	$	1,153,417	$	639,945	$	143,081	$	-	$	1,936,443
Total assets at period end		1,189,746		636,350		141,939		554,559		2,522,594
Total deposits at period end		1,358,251		192,867		159,828		266,319		1,977,265


For the three months ended March 31, 2016
	Oklahoma		Texas		Kansas		Other		Total
(Dollars in thousands)	Banking		Banking		Banking		Operations*		Company
Net interest income (loss)	$	12,938	$	5,566	$	1,828	$	(492)	$	19,840
Provision for loan losses		260		1,915		2,199		1		4,375
Noninterest income		2,195		302		318		600		3,415
Noninterest expenses		9,960		3,731		1,417		888		15,996
Income (loss) before taxes		4,913		222		(1,470)		(781)		2,884
Taxes on income (loss)		1,729		78		(517)		(275)		1,015
Net income (loss)	$	3,184	$	144	$	(953)	$	(506)	$	1,869

* Includes externally generated revenue of $0.9 million, primarily from investing services, and an internally generated loss of $0.8 million from the funds management unit.

Total loans at period end	$	1,060,483	$	560,421	$	160,980	$	-	$	1,781,884
Total assets at period end		1,105,545		556,405		160,031		538,838		2,360,819
Total deposits at period end		1,359,179		195,593		130,283		210,193		1,895,248

NOTE 10: COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with U.S. generally accepted accounting principles, these transactions are not presented in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit.

A loan commitment is a binding contract to lend up to a maximum amount for a specified period of time provided there is no violation of any financial, economic, or other terms of the contract. A standby letter of credit obligates us to honor a financial commitment to a third party should our customer fail to perform. Many loan commitments and most standby letters of credit expire unfunded, and, therefore, total commitments do not represent our future funding obligations. Loan commitments and letters of credit are made under normal credit terms, including interest rates and collateral prevailing at the time, and usually require the payment of a fee by the customer. Commercial letters of credit are commitments generally issued to finance the movement of goods between buyers and sellers. Our exposure to credit loss, assuming commitments are funded, in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. We do not anticipate any material losses as a result of the commitments.

As of March 31, 2017 and December 31, 2016, our loan commitments were $421.9 million and $429.4 million, respectively. As of March 31, 2017 and December 31, 2016, our standby letters of credit obligations were $6.2 million and $7.2 million, respectively.

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 borrower’s loan interest rate from a floating rate based on LIBOR to a fixed rate. As of March 31, 2017, the floating rate loan had an outstanding balance of $14.5 million. The option to execute the swap is conditioned on the borrower’s 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 payment 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.

As of March 31, 2017 and December 31, 2016, we had eight risk participation agreements and seven risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. As of March 31, 2017 and December 31, 2016, the current notional amount for these transactions were $51.1 million and $34.7 million, respectively.

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. On June 5, 2015, the law firm Cohen Milstein Sellers & Toll based in Washington, D.C. entered its appearance as co-counsel on behalf of plaintiffs.

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.

Simmons First National Corporation (Pending Merger)

On December 14, 2016, we entered into a Merger Agreement with Simmons First National Corporation (“Simmons”), an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock, subject to potential adjustments. The completion of the Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions.

NOTE 11: NEW AUTHORITATIVE ACCOUNTING GUIDANCE

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance becomes effective for us on January 1, 2019. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are evaluating the impact of this ASU on our financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that estimates credit losses on most financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity securities, using the current expected credit loss (CECL) model. Under this model, entities will estimate credit losses over the financial instrument’s entire contractual term from the date of initial recognition of that instrument. The ASU also requires incremental disclosures on how the entity developed its estimates. This guidance becomes effective for us on January 1, 2020. We are evaluating the impact of this ASU on our financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance specifically addresses eight classification issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies, including bank-owned life insurance (BOLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of the ASU on our financial statements and disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The ASU requires companies to recognize the income tax consequences of an intercompany asset transfer when the transfer occurs. The amendments in this ASU do not change accounting for the pre-tax effects of intra-entity asset transfers under Topic 810, Consolidation, and do not apply to intra-entity inventory transfers. The economic consequences of intra-entity asset sales—other than inventory—will be recognized in the period in which the transaction occurs and no longer deferred. A reporting entity’s effective tax rate likely will be affected due to the immediate recognition of the seller’s taxes and

buyer’s deferred taxes, particularly when the transaction has no effect on consolidated pre-tax income. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of this ASU on our financial statement disclosures.

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The main objective of this new standard is to help financial statement preparers evaluate whether a set of transferred assets and activities (either acquired or disposed of) is a business. Accounting for a business combination differs significantly from that of an asset acquisition. Because the definition of a business affects acquisitions, disposals, goodwill, and consolidation, the revised definition of a business is generally expected to reduce the number of transactions that qualify as a business combination. This guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The set is not a business if this screen is met. If this screen is not met, however, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This guidance becomes effective for us on January 1, 2018, and we are evaluating the impact of this ASU on our financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance will simplify financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. This ASU simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Entities will still perform their annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the fair value exceeds the carrying amount, no impairment should be recorded. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charged based on that difference. Impairment losses on goodwill cannot be reversed once recognized. This guidance becomes effective for us on January 1, 2020, and we are evaluating the impact of this ASU on our financial statements and disclosures.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU primarily defines in-substance nonfinancial assets and provides guidance for partial sales of nonfinancial assets. It also eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This guidance becomes effective for us on January 1, 2019, and we are evaluating the impact of this ASU on our financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. This ASU amends the amortization period for certain callable debt securities held at a premium by more closely aligning the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Previously, the premiums on callable debt securities generally were required to be amortized based on the maturity date. Under this update, the premiums on certain callable debt securities held at a premium are to be amortized based on the earliest call date. This update is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company has elected to early adopt this update effective January 1, 2017, which did not have a material impact on our financial statements and disclosures.

SOUTHWEST BANCORP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 thirty full-service banking offices located primarily along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, Kansas, and in Colorado. In addition, we have a fully dedicated loan production office in Denver, Colorado. 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 services, specialized cash management, and other financial services and products. At March 31, 2017 we had total assets of $2.5 billion, deposits of $2.0 billion, and shareholders’ equity of $290.9 million.

On December 14, 2016, we entered into a Merger Agreement with Simmons, an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock, subject to potential adjustments. The completion of the Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions.

Our business operations are conducted through four operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. Due to its size and our management structure, Colorado banking operations are included within our Oklahoma Banking segment. At March 31, 2017, the Oklahoma Banking segment accounted for $1.2 billion in loans, the Texas Banking segment accounted for $639.9 million in loans, and the Kansas Banking segment accounted for $143.1 million in loans. For additional information on the composition of our loans, see “Loans” in the “Financial Condition” section on page 30. For additional information on our operating segments, 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: (i) healthcare and health professionals; (ii) commercial real estate borrowers, businesses and their managers and owners; (iii) commercial lending; and (iv) 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, 2017, $625.9 million, or 32%, of our loans were real estate industry loans. Economic factors that affect commercial real estate values include job growth, corporate profits, and business expansion. The unemployment rate, uncertainty over government regulation and fiscal policy, the rising cost of debt capital, and depressed oil and gas prices 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 practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of March 31, 2017, $431.6 million, or 22%, of our loans were to individuals and businesses in the healthcare industry.

As of March 31, 2017, approximately 4% of our loan portfolio was concentrated in the oil and gas industry. Our exposure continues to be focused on production based companies and servicing companies, representing 83% and 17%, respectively, of

our energy portfolio. If oil prices return to lower 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 or stagnant oil prices could have a negative impact on the economies of energy-dominant states such as Oklahoma and Texas. As a result, low oil prices could have an adverse effect on our business, financial condition, and results of operation. We have the ability to adjust the borrowing base on outstanding commitments based on market price and condition.

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)	2017		2016		$ Change		% Change
Federal agency securities	$	66,699	$	69,694	$	(2,995)	(4.30)	%
Obligations of state and political subdivisions		56,825		56,818		7	0.01
Residential mortgage-backed securities		280,263		280,642		(379)	(0.14)
Asset-backed securities		8,867		9,177		(310)	(3.38)
Corporate debt		20,399		20,330		69	0.34
Total	$	433,053	$	436,661	$	(3,608)	(0.83)	%

Loans

Total loans, including loans held for sale, were $1.9 billion at March 31, 2017. The following table shows the composition of the loan portfolio at the dates indicated:




(Dollars in thousands)	March 31, 2017		December 31, 2016		$ Change		% Change
Real estate mortgage
Commercial	$	925,458	$	882,071	$	43,387	4.92	%
One-to-four family residential		210,495		199,123		11,372	5.71
Real estate construction
Commercial		193,937		199,113		(5,176)	(2.60)
One-to-four family residential		18,426		20,946		(2,520)	(12.03)
Commercial		570,001		556,248		13,753	2.47
Installment and consumer
Other		18,126		19,631		(1,505)	(7.67)
Total loans	$	1,936,443	$	1,877,132	$	59,311	3.16	%

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)	2017		2016		$ Change		% Change
Loans held for sale:
One-to-four family residential	$	4,980	$	4,386	$	594	13.54	%
Total loans held for sale		4,980		4,386		594	13.54
Portfolio loans		1,931,463		1,872,746		58,717	3.14
Total loans	$	1,936,443	$	1,877,132	$	59,311	3.16	%

Allowance for Loan Losses

Management determines the appropriate level of the allowance for loan losses using an established methodology. Management believes the amount of the allowance is appropriate, based on our analysis. For additional information, see “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.

The allowance for loan losses on loans is comprised of two components. We consider all non-accrual loans and troubled debt restructuring loans to be impaired loans. However, all troubled debt restructuring loans and non-accrual loans greater than or equal

to $100,000 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 non-accrual loans less than $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, 2017						As of December 31, 2016
(Dollars in thousands)	Loan Balance		Allowance		Allowance %		Loan Balance		Allowance		Allowance %
Nonaccrual	$	16,481	$	3,584	21.7	%	$	16,267	$	3,668	22.5	%
Performing TDR		1,139		-	0.0			1,178		-	0.0
All other excluding loans held for sale		1,913,843		23,959	1.3			1,855,301		23,878	1.3
Total	$	1,931,463	$	27,543	1.4	%	$	1,872,746	$	27,546	1.5	%

The decrease in the allowance for nonaccrual loans was primarily the result of a $2.0 million charge-off that had been previously reserved, plus principal reductions and improvements in impaired loans, which was reduced by needed reserves on a few additional impaired credits. The allowance relating to the other loans reflects the consideration of improving portfolio loss trends and qualitative factors including 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 for the first quarter of 2017 were $1.8 million, or 0.38% (annualized) of average portfolio loans, compared to net charge-offs of $3.3 million, or 0.75% (annualized) of average portfolio loans, for the first quarter of 2016. The provision for loan losses for the first quarter of 2017 was $1.8 million, representing a decrease of $2.6 million from the provision of $4.4 million recorded for the first quarter of 2016. The first quarter 2017 provision was driven by loan growth and an increase in reserves on a few classified loans.

Nonperforming Loans / Nonperforming Assets

At March 31, 2017, the allowance for loan losses was 166.01% of nonperforming loans, compared to 165.84% of nonperforming loans, at December 31, 2016. Nonaccrual loans, which comprise the majority of nonperforming loans, were $16.5 million as of March 31, 2017, an increase of $0.2 million, or 1%, from December 31, 2016. We have taken cumulative net charge-offs related to these nonaccrual loans of $3.0 million as of March 31, 2017. Nonaccrual loans at March 31, 2017 were comprised of 42 relationships and were primarily concentrated in commercial and industrial (73.92%) and residential real estate (16.56%). 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, 2017			December 31, 2016
Nonaccrual loans:
Commercial real estate	$	570		$	6,471
One-to-four family residential		2,730			2,766
Real estate construction		970			970
Commercial		12,182			5,949
Other consumer		29			111
Total nonaccrual loans		16,481			16,267

Past due 90 days or more:
Commercial		1			193
One-to-four family residential		108			138
Other consumer		1			12
Total past due 90 days or more		110			343
Total nonperforming loans		16,591			16,610
Other real estate		350			350
Total nonperforming assets	$	16,941		$	16,960

Nonperforming assets to portfolio loans receivable and
other real estate		0.88	%		0.91	%
Nonperforming loans to portfolio loans receivable		0.86			0.89
Allowance for loan losses to nonperforming loans		166.01			165.84

At March 31, 2017, six credit relationships represented 76% of nonperforming loans and 75% of nonperforming assets. At December 31, 2016, six credit relationships represented 77% of nonperforming loans and 74% of nonperforming assets.

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 $42.1 million at March 31, 2017, compared to $44.0 million at December 31, 2016. Substantially all of these loans were performing in accordance with their present terms at March 31, 2017. 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, 2017, other real estate was $0.4 million, unchanged from December 31, 2016.

At March 31, 2017, the reserve for unfunded loan commitments was $2.1 million, a $0.4 million, or 16%, decrease from the reserve amount at December 31, 2016. Management believes the amount of the reserve is appropriate and is included in other liabilities on the consolidated statements of financial condition. The decrease is related primarily to a reduction in the outstanding unfunded loan commitments.

Deposits and Other Borrowings

Our deposits were $2.0 billion at March 31, 2017 and December 31, 2016. The following table shows the composition of deposits at the dates indicated:


	March 31,		December 31,
(Dollars in thousands)	2017		2016		$ Change		% Change
Noninterest-bearing demand	$	541,021	$	551,709	$	(10,688)	(1.94)	%
Interest-bearing demand		177,676		152,656		25,020	16.39
Money market accounts		591,368		567,058		24,310	4.29
Savings accounts		58,387		56,410		1,977	3.50
Time deposits of $100,000 or more		353,244		360,307		(7,063)	(1.96)
Other time deposits		255,569		257,878		(2,309)	(0.90)
Total deposits	$	1,977,265	$	1,946,018	$	31,247	1.61	%

Some of our interest-bearing deposits were obtained through brokered transactions and we participate in the Certificate of Deposit Account Registry Service (“CDARS”). CDARS deposits totaled $24.9 million at March 31, 2017 and $29.0 million at December 31, 2016.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $10.8 million, or 6%, to $194.6 million during the first three months of 2017. The increase primarily reflects the change in short-term FHLB advances for the period.

Wholesale funding, including FHLB borrowings, federal funds purchased, and brokered deposits, accounted for 21% and 19% of total funding at March 31, 2017 and December 31, 2016, respectively. See further discussion under the “Liquidity” section on page 37.

Shareholders’ Equity

Shareholders’ equity increased $4.3 million during the first quarter of 2017 primarily due to net income of $5.3 million and a decrease of $0.6 million in other comprehensive loss, offset in part by $0.4 million in Treasury stock repurchases and $1.5 million in common stock dividends declared. At March 31, 2017, the accumulated other comprehensive loss on available for sale investment securities and derivative instruments (net of tax) was $0.3 million, an improvement from $0.9 million at December 31, 2016.

At March 31, 2017, we and Bank SNB continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 38.

RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2017 and 2016

Net income of $5.3 million for the first quarter of 2017 represented an increase of $3.4 million from the $1.9 million net income recorded for the first quarter of 2016. Diluted earnings per share were $0.28 for the first quarter of 2017, compared to $0.10 for the first quarter of 2016. The increase in quarterly net income was primarily the result of a $0.3 million increase in net interest income, a $2.6 million decrease in the provision for loan losses, a $1.5 million increase in noninterest income, and a $0.7 million decrease in noninterest expense, offset in part by a $1.7 million increase in income taxes.

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. For additional information, see “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 37.

Net Interest Income


	For the three months
	ended March 31,
(Dollars in thousands)	2017		2016		$ Change		% Change
Interest income:
Loans	$	20,944	$	20,030	$	914	4.56	%
Investment securities:
U.S. government and agency obligations		269		296		(27)	(9.12)
Mortgage-backed securities		1,123		1,077		46	4.27
State and political subdivisions		339		348		(9)	(2.59)
Other securities		321		244		77	31.56
Other interest-earning assets		75		53		22	41.51
Total interest income		23,071		22,048		1,023	4.64

Interest expense:
Interest-bearing demand deposits		90		62		28	45.16
Money market accounts		472		321		151	47.04
Savings accounts		19		19		-	-
Time deposits of $100,000 or more		810		367		443	120.71
Other time deposits		449		538		(89)	(16.54)
Other borrowings		478		309		169	54.69
Subordinated debentures		590		592		(2)	(0.34)
Total interest expense		2,908		2,208		700	31.70

Net interest income	$	20,163	$	19,840	$	323	1.63	%

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.

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,
	2017						2016
	Average				Average		Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
Assets
Loans (1) (2)	$	1,899,047	$	20,944	4.47	%	$	1,788,992	$	20,030	4.50	%
Investment securities (2)		431,542		2,052	1.93			412,307		1,965	1.92
Other interest-earning assets		56,089		75	0.54			51,031		53	0.42
Total interest-earning assets		2,386,678		23,071	3.92			2,252,330		22,048	3.94
Other assets		102,331						107,874
Total assets	$	2,489,009					$	2,360,204

Liabilities and shareholders' equity
Interest-bearing demand deposits	$	187,269	$	90	0.19	%	$	160,638	$	62	0.16	%
Money market accounts		573,364		472	0.33			542,800		321	0.24
Savings accounts		58,021		19	0.13			55,834		19	0.14
Time deposits		611,170		1,259	0.84			564,213		905	0.65
Total interest-bearing deposits		1,429,824		1,840	0.52			1,323,485		1,307	0.40
Other borrowings		174,362		478	1.11			117,171		309	1.06
Subordinated debentures		46,393		590	5.09			48,546		592	4.88
Total interest-bearing liabilities		1,650,579		2,908	0.71			1,489,202		2,208	0.60
Noninterest-bearing demand deposits		536,101						563,022
Other liabilities		13,070						14,769
Shareholders' equity		289,259						293,211
Total liabilities and shareholders' equity	$	2,489,009					$	2,360,204

Net interest income and interest rate spread			$	20,163	3.21	%			$	19,840	3.34	%
Net interest margin (3)					3.43	%					3.54	%
Ratio of average interest-earning assets
to average interest-bearing liabilities		144.60%						151.24%


(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 2016, the first quarter 2017 yields on our interest-earning assets decreased 2 basis points, while the rates paid on our interest-bearing liabilities increased 11 basis points, resulting in a decrease in the interest rate spread from 3.34% to 3.21%. During the quarterly periods ended March 31, 2017 and March 31, 2016, annualized net interest margin was 3.43% and 3.54%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities was 144.60% and 151.24%, respectively.

RATE VOLUME TABLE

The following table analyzes changes in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.

With the rate environment remaining low in the short to mid-term, earning assets and interest bearing liabilities are repricing at lower rates. The increase in net interest income is primarily the result of higher interest income from loans, driven by loan volume, offset in part by higher interest expense primarily on time deposits and other borrowings.



	For the three months ended March 31,
	2017 vs. 2016
	Increase		Due to Change
	Or		In Average:
(Dollars in thousands)	(Decrease)		Volume		Rate
Interest earned on:
Loans receivable (1)	$	914	$	1,217	$	(303)
Investment securities (1)		87		91		(4)
Other interest-earning assets		22		6		16
Total interest income		1,023		1,314		(291)

Interest paid on:
Interest-bearing demand		28		11		17
Money market accounts		151		19		132
Savings accounts		-		1		(1)
Time deposits		354		78		276
Other borrowings		169		156		13
Subordinated debentures		(2)		(27)		25
Total interest expense		700		238		462

Net interest income	$	323	$	1,076	$	(753)

(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)	2017		2016		$ Change		% Change
Noninterest income:
Other service charges and fees	$	2,681	$	2,549	$	132	5.18	%
Other noninterest income		1,196		339		857	252.80
Gain on sale/call of investment securities		451		126		325	257.94
Gain on sales of mortgage loans, net		552		401		151	37.66
Total noninterest income	$	4,880	$	3,415	$	1,465	42.90	%

Other service charges and fees for the three months ended March 31, 2017 increased $0.1 million compared to the three months ended March 31, 2016.

Other noninterest income for the three months ended March 31, 2017 increased $0.9 million compared to the three months ended March 31, 2016 primarily as a result of a $0.6 million increase in customer risk management interest rate swap income combined with a $0.3 million increase in other noninterest income.

The gain on sale/call of investment securities for the three months ended March 31, 2017 increased $0.3 million compared to the three months ended March 31, 2016 due to the sale of a private equity investment.

Gain on sales of mortgage loans for the three months ended March 31, 2017 increased $0.2 million as compared to the three months ended March 31, 2016 and is primarily a reflection of increased activity in residential mortgage lending.

Noninterest Expense


	For the three months
	ended March 31,
(Dollars in thousands)	2017		2016		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	9,900	$	9,342	$	558	5.97	%
Occupancy		2,373		2,671		(298)	(11.16)
Data processing		409		470		(61)	(12.98)
FDIC and other insurance		273		368		(95)	(25.82)
Other real estate (net)		3		13		(10)	(76.92)
Provision (credit) for unfunded loan commitments		(388)		215		(603)	(280.47)
Other general and administrative		$2,733		$2,917		(184)	(6.31)
Total noninterest expense	$	15,303	$	15,996	$	(693)	(4.33)	%

The number of full-time equivalent employees decreased from 411 as of March 31, 2016 to 380 as of March 31, 2017. The increase in personnel expense from the prior year is primarily due to increased incentives, severance costs, payroll taxes, and benefits.

The decreases in occupancy and data processing for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 is due primarily to decreased rental expense, depreciation expense, maintenance contract amortization expense, and data processing expense related to software expense.

The provision (credit) for unfunded loan commitments for the three months ended March 31, 2017 decreased compared to the three months ended March 31, 2016, primarily as a result of a decrease in the level of unfunded commitments related to loans outstanding at March 31, 2017.

The decrease in other general and administrative for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 is primarily the result of decreased business development expenses, decreased intangible amortization expense, decreased legal fees, and decreased administrative expenses (i.e. telephone, postage, supplies, etc.).

Provision for Loan Losses

The provision for loan losses is the amount that is required to maintain the allowance for loan losses at an appropriate level based upon the inherent risks in the loan portfolio after the net effects of charge-offs and recoveries for the period. The provision for loan losses was $1.8 million for the first quarter of 2017, representing a decrease of $2.6 million from the provision of $4.4 million recorded for the first three months of 2016. The first quarter 2017 provision was driven by loan growth and an increase in reserves on a few classified loans. For additional information, see “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.

Taxes on Income

Our income tax expense was $2.7 million for the first three months of 2017 compared to $1.0 million for the first three months of 2016, an increase of $1.7 million, or 165%. 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 2017 was 33.71%, compared to 35.19% as of March 31, 2016. The decline in the effective tax rate includes a $0.2 million tax benefit due to the adoption of an accounting principle related to the tax benefit on vested stock incentive awards that became effective January 1, 2017.

LIQUIDITY

Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of highly marketable assets such as available for sale investments. Additional sources of liquidity, including cash flow from the repayment of loans and the sale of participations in outstanding loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of deposits, reductions in liquid assets, and accessibility to capital and

money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization.

Southwest and Bank SNB have available various forms of short-term borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Topeka (“FHLB”).

Bank SNB has approved federal funds purchased lines totaling $70.0 million with three financial entities. There was no outstanding balance on these lines at March 31, 2017. 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 $110.5 million. As of March 31, 2017, no borrowings were made through the BIC program. In addition, Bank SNB has available a $551.6 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At March 31, 2017, Bank SNB’s FHLB line of credit had an outstanding balance of $185.0 million. See also “Deposits and Other Borrowings” on page 32 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 $9.6 million and $45.8 million as of March 31, 2017 and December 31, 2016, respectively.

At March 31, 2017, $203.1 million of the total carrying value of investment securities of $433.1 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 2017, cash and cash equivalents decreased by $10.5 million, or 14%, to $65.1 million compared to December 31, 2016. This decrease was the net result of cash used in investing activities of $59.3 million (primarily from the increase in net loans originated), offset in part by cash provided by financing activities of $40.5 million (primarily from net increases in deposits and other borrowings, offset in part by common stock dividends paid), and by cash provided by operating activities of $8.3 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, 2017, we are well-capitalized even if we apply the capital buffer on a fully phased-in basis.

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 was required to 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, 2017, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 15.44%, a Tier I risk-based capital ratio of 14.19%, a Tier 1 leverage ratio of 12.98%, and a CET1 ratio of 12.20%. As of March 31, 2017, 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, 2016.

* * * * * * *

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 while maintaining adequate levels of liquidity and capital. 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.

The Asset/Liability Committee is responsible for managing interest rate risk in accordance with policy guidelines established by the Board of Directors. The Committee monitors projected variation in net interest income and economic value of equity due to specified changes in interest rates over time, local and national market conditions, and market interest rates. The committee also reviews the liquidity, capital, deposit mix, loan mix, and investment strategy. A principal objective of the asset and liability management effort is to balance the various factors that generate interest rate risk, thereby maintaining the interest rate sensitivity within acceptable risk levels. To measure interest rate sensitivity, we utilize a simulation model that facilitates the forecasting of net interest income under a variety of interest rate 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 project net income. Actual results will differ from simulated results due to timing, cash flows, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

To measure the level of interest rate risk, the balance sheet is modeled under alternative interest rate scenarios that include immediate rates shocks of +/- 100, 200, and 300 basis points (“bps”), although we may not use particular scenarios that are determined to be impractical in the current rate environment. It is management’s goal to structure the balance sheet so that forecasted net interest income and the economic value of equity at risk do not exceed policy guidelines at the 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. 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 bps	+200 bps	+100 bps	-100 bps

March 31, 2017	16.58%	10.28%	3.93%	-12.18%
December 31, 2016	17.41%	10.98%	4.32%	-11.66%

When compared to December 31, 2016, net interest income marginally declined in each of the four 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.

Estimated Changes in Economic Value of Equity (EVE)



Changes in Interest Rates:	+300 bps	+200 bps	+100 bps	-100 bps

March 31, 2017	2.90%	2.10%	1.23%	-0.53%
December 31, 2016	4.07%	2.80%	1.43%	-0.31%

As of March 31, 2017, the economic value of equity measure decreased in each of the four interest rate scenarios when compared to December 31, 2016. The measured changes in economic value of equity for all scenarios are in compliance with the established policy limits.

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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, 2017. 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, 2017.

Changes in Internal Control over Financial Reporting

No changes occurred during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

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.

Item 1A: Risk Factors

There were no material changes in risk factors during the first three months of 2017 from those disclosed in our Form 10-K for the year ended December 31, 2016.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3: Defaults upon Senior Securities

None

Item 4: Mine Safety Disclosures

Not Applicable

Item 5: Other Information

None

Item 6: Exhibits

Exhibit 31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications

Exhibit 32(a), (b) 18 U.S.C. Section 1350 Certifications

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

SIGNATURES

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

SOUTHWEST BANCORP, INC.

(Registrant)


By: /s/ Mark W. Funke		May 5, 2017
Mark W. Funke President and Chief Executive Officer (Principal Executive Officer)		Date

By: /s/ Joe T. Shockley, Jr.		May 5, 2017
Joe T. Shockley, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)		Date

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Southwest Bancorp (OKSB) Inactive 10-Q2017 Q1 Quarterly report

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