Southwest Bancorp (OKSB) 10-Q 2010 Q4 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from                    to                    

Commission File Number: 0-23064

SOUTHWEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Oklahoma	73-1136584
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
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.

þ YESo 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).

o YESo 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 “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero	Accelerated Filerþ	Non-Accelerated Filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

o YES      þ NO

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

19,396,546 (11/05/10)

SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition	3
Unaudited Consolidated Statements of Operations	4
Unaudited Consolidated Statements of Cash Flows	5
Unaudited Consolidated Statement of Shareholders’ Equity	6
Unaudited Consolidated Statements of Comprehensive Income	7
Notes to Unaudited Consolidated Financial Statements	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS	23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4. CONTROLS AND PROCEDURES	39
PART II: OTHER INFORMATION	40
SIGNATURES	41
EX-31.A
EX-31.B
EX-32.A
EX-32.B

2

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Financial Condition

	September 30,			December 31,
(Dollars in thousands)	2010			2009
Assets
Cash and cash equivalents	$	89,458		$	118,847
Investment securities:
Held to maturity, fair value $9,185 and $6,754, respectively		9,093			6,670
Available for sale, amortized cost $226,323 and $236,199, respectively		231,751			237,703
Other investments at cost		10,389			19,066
Loans held for sale		34,868			43,134
Noncovered loans receivable		2,412,796			2,539,294
Less: Allowance for loan losses		(72,418	)		(62,413	)
Net noncovered loans		2,340,378			2,476,881
Covered loans receivable (includes loss share of $17.9 million and $23.9 million, respectively)		60,558			85,405
Net loans receivable		2,400,936			2,562,286
Accrued interest receivable		9,663			10,806
Premises and equipment, net		25,075			26,536
Noncovered other real estate		35,723			18,432
Covered other real estate		4,448			4,748
Goodwill		6,811			6,811
Other intangible assets, net		5,358			5,779
Prepaid FDIC insurance premium		11,057			14,581
Other assets		30,645			32,892
Total assets	$	2,905,275		$	3,108,291
Liabilities:
Deposits:
Noninterest-bearing demand	$	329,655		$	324,829
Interest-bearing demand		86,153			74,201
Money market accounts		518,422			505,521
Savings accounts		25,556			25,730
Time deposits of $100,000 or more		795,303			1,004,439
Other time deposits		590,559			658,010
Total deposits		2,345,648			2,592,730
Accrued interest payable		2,457			3,191
Income tax payable		6,603			4,486
Other liabilities		9,522			13,121
Other borrowings		82,506			103,022
Subordinated debentures		81,963			81,963
Total liabilities		2,528,699			2,798,513
Shareholders’ equity:
Serial preferred stock — $1,000 par value; 2,000,000 shares authorized; 70,000 shares issued		67,548			67,037
Common stock — $1 par value; 40,000,000 shares authorized; 19,395,675 and 14,750,713 shares issued, respectively		19,396			14,751
Paid in capital		98,750			49,029
Retained earnings		187,535			178,016
Accumulated other comprehensive income		3,347			945
Total shareholders’ equity		376,576			309,778
Total liabilities & shareholders’ equity	$	2,905,275		$	3,108,291

The accompanying notes are an integral part of this statement.

3

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations

	For the three months				For the nine months
	ended September 30,				ended September 30,
(Dollars in thousands, except earnings per share data)	2010		2009		2010		2009
Interest income:
Interest and fees on loans	$	32,824	$	35,607	$	101,087	$	104,884
Investment securities:
U.S. Government and agency obligations		526		397		1,675		1,370
Mortgage-backed securities		1,430		1,527		4,329		4,681
State and political subdivisions		61		70		203		234
Other securities		187		128		637		428
Other interest-earning assets		55		4		190		13
Total interest income		35,083		37,733		108,121		111,610
Interest expense:
Interest-bearing demand		111		107		383		410
Money market accounts		976		1,220		3,026		3,784
Savings accounts		15		39		47		62
Time deposits of $100,000 or more		3,128		4,822		10,669		16,524
Other time deposits		2,572		3,909		8,222		12,449
Other borrowings		524		960		1,565		3,424
Subordinated debentures		1,305		1,276		3,848		4,063
Total interest expense		8,631		12,333		27,760		40,716
Net interest income		26,452		25,400		80,361		70,894
Provision for loan losses		11,988		10,177		28,295		28,536
Net interest income after provision for loan losses		14,464		15,223		52,066		42,358
Noninterest income:
Service charges and fees		2,994		2,992		9,260		8,409
Other noninterest income		83		322		515		806
Gain on acquisition		—		—		—		3,281
Gain on sales of loans		653		386		2,054		2,030
Gain on sale/call of investment securities		2,605		10		2,646		2,922
Total noninterest income		6,335		3,710		14,475		17,448
Noninterest expense:
Salaries and employee benefits		7,183		7,824		22,400		21,950
Occupancy		2,835		2,958		8,454		8,478
FDIC and other insurance		1,347		1,134		4,455		4,444
Other real estate, net		228		90		963		91
General and administrative		3,825		3,522		10,550		9,854
Total noninterest expense		15,418		15,528		46,822		44,817
Income before taxes		5,381		3,405		19,719		14,989
Taxes on income		1,508		1,271		7,063		5,581
Net income	$	3,873	$	2,134	$	12,656	$	9,408
Net income available to common shareholders	$	2,825	$	1,097	$	9,520	$	6,303
Basic earnings per common share	$	0.15	$	0.07	$	0.55	$	0.43
Diluted earnings per common share	$	0.15	$	0.07	$	0.55	$	0.43
Cash dividends declared per share	$	—	$	0.0238	$	—	$	0.0714

The accompanying notes are an integral part of this statement.

4

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

	For the nine months
	ended September 30,
(Dollars in thousands)	2010			2009
Operating activities:
Net income	$	12,656		$	9,408
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		28,295			28,536
Deferred tax benefit		(4,959	)		(4,973	)
Asset depreciation		2,135			2,223
Securities premium amortization (discount accretion), net		1,361			1,297
Amortization of intangibles		1,101			1,268
Stock based compensation		283			248
Net gain on sales/calls of investment securities		(2,646	)		(2,922	)
Net gain on sales of available for sale loans		(2,054	)		(2,030	)
Net loss on sales of premises/equipment		138			15
Net gain on sales of other real estate		(189	)		(403	)
Gain from FDIC-assisted acquisition		—			(3,281	)
Proceeds from sales of residential mortgage loans		72,572			124,358
Residential mortgage loans originated for resale		(74,204	)		(124,867	)
Proceeds from sales of student loans		50,211			81,396
Student loans originated for resale		(19,259	)		(58,116	)
Net change in assets and liabilities:
Accrued interest receivable		1,143			718
Other assets		8,427			2,542
Income taxes payable		2,131			414
Excess tax benefit from share-based payment arrangements		(14	)		(243	)
Accrued interest payable		(734	)		(2,473	)
Other liabilities		(1,978	)		834
Net cash provided by operating activities		74,416			53,949
Investing activities:
Proceeds from sales of available for sale securities		57,783			122,694
Proceeds from principal repayments, calls and maturities:
Held to maturity securities		2,700			1,550
Available for sale securities		53,286			58,046
Proceeds from sales of other investments		9,761			—
Purchases of other investments		(1,100	)		(200	)
Purchases of held to maturity securities		(5,134	)		—
Purchases of available for sale securities		(99,880	)		(154,902	)
(Loans originated) and principal repayments, net		86,686			(81,225	)
FDIC assisted acquisition, net		—			17,161
Purchases of premises and equipment		(825	)		(2,965	)
Proceeds from sales of premises and equipment		50			89
Proceeds from sales of other real estate		9,259			6,260
Net cash provided by (used in) investing activities		112,586			(33,492	)
Financing activities:
Net increase (decrease) in deposits		(247,082	)		158,033
Net decrease in other borrowings		(20,516	)		(170,361	)
Net proceeds from issuance of common stock		54,169			947
Excess tax benefit from share-based payment arrangements		14			243
Preferred stock dividends paid		(2,625	)		(2,431	)
Common stock dividends paid		(351	)		(2,081	)
Net cash used in financing activities		(216,391	)		(15,650	)
Net increase (decrease) in cash and cash equivalents		(29,389	)		4,807
Cash and cash equivalents:
Beginning of period		118,847			27,287
End of period	$	89,458		$	32,094

The accompanying notes are an integral part of this statement.

5

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statement of Shareholders’ Equity

												Accumulated
												Other		Total
	Preferred		Common Stock				Paid in		Retained			Comprehensive		Shareholders’
(Dollars in thousands)	Stock		Shares		Amount		Capital		Earnings			Income		Equity
Balance, December 31, 2009	$	67,037		14,750,713	$	14,751	$	49,029	$	178,016		$	945	$	309,778
Cash dividends:
Preferred		—		—		—		—		(2,625	)		—		(2,625	)
Other dividends		—		—		—		—		(1	)		—		(1	)
Warrant amortization		511		—		—		—		(511	)		—		—
Common stock issued:
Offering		—		4,600,000		4,600		49,418		—			—		54,018
Employee Stock Option Plan		—		13,200		13		57		—			—		70
Employee Stock Purchase Plan		—		5,481		6		49		—			—		55
Restricted Stock		—		26,281		26		183		—			—		209
Tax benefit related to exercise of stock options		—		—		—		14		—			—		14
Other comprehensive income, net of tax		—		—		—		—		—			2,402		2,402
Net income		—		—		—		—		12,656			—		12,656
Balance, September 30, 2010	$	67,548		19,395,675	$	19,396	$	98,750	$	187,535		$	3,347	$	376,576

The accompanying notes are an integral part of this statement.

6

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

	For the three months						For the nine months
	ended September 30,						ended September 30,
(Dollars in thousands)	2010			2009			2010			2009
Net income	$	3,873		$	2,134		$	12,656		$	9,408
Other comprehensive income:
Unrealized holding gain (loss) on available for sale securities		(309	)		2,947			6,569			2,464
Reclassification adjustment for losses arising during the period		(2,605	)		(10	)		(2,646	)		(2,922	)
Other comprehensive income (loss), before tax		(2,914	)		2,937			3,923			(458	)
Tax benefit (expense) related to items of other comprehensive income		1,128			(1,133	)		(1,521	)		194
Other comprehensive income (loss), net of tax		(1,786	)		1,804			2,402			(264	)
Comprehensive income	$	2,087		$	3,938		$	15,058		$	9,144

The accompanying notes are an integral part of this statement.

7

SOUTHWEST BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1: GENERAL

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, shareholders’ equity, cash flows, and comprehensive income in conformity with accounting principles generally accepted in the United States. However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. Those adjustments consist of normal recurring adjustments. The results of operations for the three and nine months ended September 30, 2010, and the cash flows for the nine months ended September 30, 2010, 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, 2009.

NOTE 2: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“Southwest”), its wholly owned financial institution subsidiaries, Stillwater National Bank and Trust Company (“Stillwater National”) and Bank of Kansas, and SNB Capital Corporation, a lending and loan workout subsidiary. Healthcare Strategic Support, Inc., a healthcare consulting subsidiary, was sold on February 28, 2010, and a management consulting subsidiary, Business Consulting Group, Inc., became inactive during the first quarter of 2010. All significant intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made to prior year amounts on the cash flow statement to conform to current year presentation.

In accordance with Accounting Standards Codification (“ASC”) 855,Subsequent Events, Southwest has 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 3: INVESTMENT SECURITIES AND OTHER INVESTMENTS

A summary of the amortized cost and fair values of investment securities at September 30, 2010 and December 31, 2009 follows:

	Amortized		Gross Unrealized					Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At September 30, 2010:
Held to Maturity:
Obligations of state and political subdivisions	$	9,093	$	104	$	(12	)	$	9,185
Total	$	9,093	$	104	$	(12	)	$	9,185
Available for Sale:
U.S. Government obligations	$	1,099	$	12	$	—		$	1,111
Federal agency securities		49,598		743		(249	)		50,092
Obligations of state and political subdivisions		675		7		—			682
Residential mortgage-backed securities		173,848		4,682		(88	)		178,442
Equity securities		1,103		321		—			1,424
Total	$	226,323	$	5,765	$	(337	)	$	231,751

8

	Amortized		Gross Unrealized					Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At December 31, 2009:
Held to Maturity:
Obligations of state and political subdivisions	$	6,670	$	84	$	—		$	6,754
Total	$	6,670	$	84	$	—		$	6,754
Available for Sale:
U.S. Government obligations	$	1,098	$	2	$	—		$	1,100
Federal agency securities		75,789		445		(849	)		75,385
Obligations of state and political subdivisions		837		16		—			853
Residential mortgage-backed securities		157,539		2,241		(634	)		159,146
Equity securities		936		283		—			1,219
Total	$	236,199	$	2,987	$	(1,483	)	$	237,703

Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”).

Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments, are carried at cost. Total investments carried at cost were $10.4 million and $19.1 million at September 30, 2010 and December 31, 2009, respectively. There are no identified events or changes in circumstances that may have a significant adverse effect on these investments carried at cost.

A comparison of the amortized cost and approximate fair value of Southwest’s investment securities by maturity date at September 30, 2010 follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	23,001	$	23,266	$	2,470	$	2,493
More than one year through five years		153,681		158,150		5,473		5,554
More than five years through ten years		36,344		36,948		1,150		1,138
More than ten years		13,297		13,387		—		—
Total	$	226,323	$	231,751	$	9,093	$	9,185

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

Gain or loss on sale of investments is based upon the specific identification method. Sales of investment securities available for sale were as follows:

	For the three months				For the nine months
	ended September 30,				ended September 30,
(Dollars in thousands)	2010		2009		2010		2009
Proceeds from sales	$	57,783	$	—	$	57,783	$	122,694
Gross realized gains		2,480		—		2,480		2,911
Gross realized losses		—		—		—		—

9

The following tables present securities with gross unrealized losses and fair value by length of time that the individual securities had been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009. 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 September 30, 2010:
Held to Maturity:
Obligations of state and political subdivisions		1	$	1,150	$	(12	)	$	—	$	1,138
Total		1	$	1,150	$	(12	)	$	—	$	1,138
Available for Sale:
Federal agency securities		4	$	10,750	$	(249	)	$	—	$	10,501
Residential mortgage-backed securities		15		26,601		(88	)		—		26,513
Total		19	$	37,351	$	(337	)	$	—	$	37,014
At December 31, 2009:
Available for Sale:
Federal agency securities		14	$	38,710	$	(849	)	$	—	$	37,861
Obligations of state and political subdivisions		1		55		—			—		55
Residential mortgage-backed securities		20		59,327		(634	)		—		58,693
Total		35	$	98,092	$	(1,483	)	$	—	$	96,609

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

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time Southwest expects to receive full value for the securities. Furthermore, as of September 30, 2010, 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 more likely than not that Southwest will not have to sell any such securities before a recovery of cost. The declines in fair value are attributable to 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 September 30, 2010, management believes the impairment of these investments is not deemed to be other-than-temporary.

Available for sale investment securities pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB had carrying values of $191.1 million and $209.0 million at September 30, 2010 and December 31, 2009, respectively. Any amount over pledged can be released at any time.

NOTE 4: LOANS AND OTHER REAL ESTATE

Southwest extends commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas. Its commercial lending operations are concentrated in Oklahoma City, Dallas, Tulsa, and other metropolitan markets in Texas, Kansas, and Oklahoma. As a result, the collectibility of Southwest’s loan portfolio can be affected by changes in the economic conditions in those states and markets. At September 30, 2010 and December 31, 2009, substantially all of Southwest’s loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.

Southwest earns 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 $261.3 million and $223.2 million at September 30, 2010 and September 30, 2009, respectively.

10

Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized on an individual loan by loan basis over the period of estimated net servicing income.

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

Loans covered under the loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported in loans and are referred to as “covered” loans. Covered loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Subsequent decreases in expected cash flows are recognized as impairments. The allowance for loan losses on these impaired loans reflect only losses incurred after the acquisition.

Other real estate covered under the loss sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC and is referred to as “covered” other real estate. Fair value adjustments on covered other real estate result in a reduction of the covered other real estate carrying amount and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss charged against earnings.

The expected payments from the FDIC under the loss sharing agreements are recorded as part of the covered loans in the Unaudited Consolidated Statement of Financial Condition. As of September 30, 2010, Bank of Kansas has identified $14.2 million in cumulative net losses to submit to the FDIC under such loss sharing agreements.

ASC 310.30,Loan and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The carrying value of the FDIC covered assets at September 30, 2010 consisted of loans accounted for in accordance with ASC 310.30 and other assets as follows:

	ASC 310.30
(Dollars in thousands)	Loans		Other		Total
Commercial real estate	$	24,336	$	—	$	24,336
1-4 family residential		6,591		—		6,591
Real estate construction		6,705		—		6,705
Commercial		4,441		—		4,441
Consumer		563		—		563
Other real estate		—		4,448		4,448
Estimated loss reimbursement from the FDIC		17,922		—		17,922
Total covered assets	$	60,558	$	4,448	$	65,006

Changes in the carrying and net accretable amounts for ASC 310.30 loans were as follows for the three and nine months ended September 30, 2010:

	For the three months ended						For the nine months ended
	September 30, 2010						September 30, 2010
	Net			Carrying			Net			Carrying
	accretable			amount			accretable			amount
(Dollars in thousands)	amount			of loans			amount			of loans
Fair value of acquired loans at beginning of period	$	2,956		$	68,006		$	3,074		$	85,405
Payments received		—			(6,616	)		—			(21,048	)
Transfers to other real estate		(35	)		(638	)		(87	)		(3,778	)
Charge-offs		(125	)		(241	)		(18	)		(241	)
Amortization		(47	)		47			(220	)		220
Balance at end of period	$	2,749		$	60,558		$	2,749		$	60,558

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As of September 30, 2010, approximately $706.1 million, or 29%, of Southwest’s noncovered portfolio loans consisted of loans to individuals and businesses in the healthcare industry. Southwest does not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.

Nonperforming assets and other risk elements of the loan portfolio are shown below as of the indicated dates.

	September 30, 2010						December 31, 2009
(Dollars in thousands)	Noncovered			Covered			Noncovered			Covered
Nonaccrual loans:
Commercial real estate	$	34,448		$	2,180		$	28,351		$	1,847
One-to-four family residential		6,354			918			9,387			2,243
Real estate construction		88,590			4,141			57,586			7,525
Commercial		5,788			667			10,404			665
Other consumer		29			—			159			42
Total nonaccrual loans	$	135,209		$	7,906		$	105,887		$	12,322
Past due 90 days or more:
Commercial real estate	$	—		$	1,707		$	100		$	542
One-to-four family residential		47			—			76			—
Real estate construction		—			164			—			574
Commercial		392			—			18			—
Other consumer		13			—			116			20
Total past due 90 days or more		452			1,871			310			1,136
Total nonperforming loans		135,661			9,777			106,197			13,458
Other real estate		35,723			4,448			18,432			4,748
Total nonperforming assets	$	171,384		$	14,225		$	124,629		$	18,206
Performing restructured	$	5,334		$	—		$	—		$	—
Nonperforming assets to portfolio loans receivable and other real estate		7.00	%		21.88	%		4.87	%		20.19	%
Nonperforming loans to portfolio loans receivable		5.62	%		16.14	%		4.18	%		15.76	%
Allowance for loan losses to nonperforming loans		53.38	%		—			58.77	%		—
Government-guaranteed portion of nonperforming loans	$	14		$	6,218		$	277		$	7,683

All of the noncovered nonaccruing assets are subject to regular tests for impairment as part of Southwest’s allowance for loan losses methodology (see Note 5).

During the first nine months of 2010, $0.3 million of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the nine months ended September 30, 2010, additional interest income of $4.9 million would have been recorded.

Included in noncovered nonaccrual loans as of September 30, 2010 and December 31, 2009, respectively, are eleven and five collateral dependent lending relationships with aggregate principal balances of approximately $100.2 million and $59.0 million and related impairment reserves of $16.0 million and $4.9 million, which were established based on recent appraisal values obtained for the respective properties. At September 30, 2010, ten of these lending relationships are in the commercial real estate industry and include a residential condominium construction project with two loans outstanding, a retail building project with one loan outstanding, a lending relationship consisting of two loans that includes two retail commercial real estate buildings for lease, a lending relationship consisting of three loans for residential care buildings, four residential land development lending relationships, one with three loans, two with two loans, and the other with one loan outstanding, and two commercial land development relationships each with one loan outstanding. The eleventh lending relationship is a one-to-four family residential loan and consists of two loans that include complexes of townhomes for lease.

Under generally accepted accounting principles and instructions to reports of condition and income of federal banking regulators, a nonaccrual loan may be returned to accrual status: 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; when the loan is not brought current, but there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or when the loan otherwise becomes well-secured and in the process of collection. Purchased impaired loans also may be returned to accrual status without becoming fully current. Loans that have been restructured because of weakened

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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.

NOTE 5: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS

Activity in the allowance for loan losses is shown below for the indicated periods.

	For the nine			For the			For the nine
	months ended			year ended			months ended
(Dollars in thousands)	September 30, 2010*			December 31, 2009*			September 30, 2009*
Balance at beginning of period	$	62,413		$	39,773		$	39,773
Loans charged-off:
Commercial real estate		3,162			3,622			3,017
One-to-four family residential		2,465			1,476			1,134
Real estate construction		9,285			7,464			3,352
Commercial		3,890			5,223			3,656
Other consumer		917			1,128			998
Total charge-offs		19,719			18,913			12,157
Recoveries:
Commercial real estate		146			438			243
One-to-four family residential		199			430			46
Real estate construction		598			344			343
Commercial		343			893			739
Other consumer		143			272			254
Total recoveries		1,429			2,377			1,625
Net loans charged-off		18,290			16,536			10,532
Provision for loan losses		28,295			39,176			28,536
Balance at end of period	$	72,418		$	62,413		$	57,777
* Charge-offs to covered loans for the period ended September 30, 2010 were $0.2 million. There were no charge-offs or recoveries to covered loans for the periods ended December 31, 2009 and September 30, 2009.
Portfolio loans outstanding:
Average (noncovered)	$	2,494,924		$	2,614,045		$	2,595,739
End of period (noncovered)		2,412,796			2,539,294			2,572,111
Net charge-offs to average portfolio loans (annualized)		0.98	%		0.63	%		0.54	%
Allowance for loan losses to noncovered portfolio loans (end of period)		3.00	%		2.46	%		2.25	%

The allowance for loan losses is a reserve established through a 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 continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the 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.

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 analyses of loan categories. This assessment is highly qualitative and relies upon judgments and estimates by management.

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.

Each loan deemed to be impaired (all loans on nonaccrual or restructured) is 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 on the result consistent with ASC 310.10.35,Receivables: Subsequent Measurement. 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

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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 remaining portion 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. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to Southwest. These 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 upon discovery of factors that may significantly affect the value of the collateral. Appraisals usually 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. Southwest is 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.

Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to Southwest but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods.

The reserve for unfunded loan commitments was $2.2 million and $3.5 million at September 30, 2010 and December 31, 2009, respectively. The reserve, which is included in other liabilities on Southwest’s Unaudited Consolidated Statement of Financial Condition, is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment.

NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill totaled $6.8 million at September 30, 2010 and December 31, 2009.

Other intangible assets totaled $5.4 million at September 30, 2010, including $3.7 million related to core deposits and $1.7 million related to mortgage loan servicing rights. Other intangible assets totaled $5.8 million at December 31, 2009, including $4.1 million related to core deposits and $1.7 million related to mortgage loan servicing rights.

NOTE 7: ISSUANCE OF COMMON STOCK

On April 29, 2010, Southwest closed a public offering of 4,600,000 shares of common stock, including 600,000 shares pursuant to the underwriter’s over-allotment option, at a price of $12.50 per share resulting in aggregate proceeds of $57.5 million. The net proceeds of the offering were $54.0 million and were used to increase Southwest’s working capital and for general corporate purposes, including investment of $25.0 million in its financial institution subsidiaries, Stillwater National and Bank of Kansas.

NOTE 8: 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, Southwest utilizes 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:

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Level 1	Quoted prices in active markets for identical assets or liabilities: Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2	Observable 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 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments. This category includes U.S. Government and agency securities, residential mortgage-backed debt securities, municipal obligation securities, loans held for sale, certain private equity investments, and other real estate.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes certain impaired loans, certain other real estate, goodwill, and other intangible assets.

The estimated fair value amounts have been determined by Southwest 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 Southwest could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

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

          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. Guaranteed student loans held for sale are carried at the lower of cost or market, which is determined on an aggregate basis.

          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. The fair value of a certain private equity investment is estimated based on Southwest’s proportionate share of the net asset value, $1.2 million as of September 30, 2010. The investee invests in small and mid-sized U.S. financial institutions and other financial-related companies. This investment has a quarterly redemption with sixty-five days notice.

As of September 30, 2010, assets measured at fair value on a recurring basis are summarized below:

			Fair Value Measurement at Reporting Date Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Loans held for sale:
Student loans	$	5,960	$	—	$	5,960	$	—
One-to-four family residential		8,347		—		8,347		—
Other loans held for sale		20,561		—		20,561		—
Available for sale securities:
U.S. Government obligations		1,111		1,111		—		—
Federal agency securities		50,092		—		50,092		—
Obligations of state and political subdivisions		682		—		682		—
Residential mortgage-backed securities		178,442		—		178,442		—
Equity securities		1,424		182		1,242		—
Total	$	266,619	$	1,293	$	265,326	$	—

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

15

evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:

     Impaired loans— Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on third-party appraisals or Level 3 inputs based on customized discounting criteria. Certain other impaired loans are remeasured and reported through a specific valuation allowance allocation of the allowance for loan losses based upon the net present value of cash flows.

     Other real estate— Other real estate fair value is based on third-party appraisals for significant properties.

     Goodwill— Fair value of goodwill is based on the fair value of each of Southwest’s reporting units to which goodwill is allocated compared with their respective carrying value. There has been no impairment during 2010; therefore, no fair value adjustment was recorded through earnings.

     Core deposit premiums— The fair value of core deposit premiums are based on third-party appraisals. There has been no impairment during 2010; therefore, no fair value adjustment was recorded through earnings.

     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. There has been no impairment during 2010; therefore, no fair value adjustment was recorded through earnings.

As of September 30, 2010, assets measured at fair value on a nonrecurring basis are summarized below:

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	At		Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs		Total Gains
(Dollars in thousands)	2010		(Level 1)		(Level 2)		(Level 3)		(Losses)
Noncovered impaired loans at fair value:
Commercial real estate	$	27,775	$	—	$	27,775	$	—	$	(1,557	)
One-to-four family residential		6,017		—		6,017		—		(224	)
Real estate construction		55,754		—		42,249		13,505		(13,934	)
Commercial		5,489		—		5,489		—		(170	)
Other consumer		30		—		30		—		93
Noncovered other real estate		35,723		—		35,723		—		(209	)
Total	$	130,788	$	—	$	117,283	$	13,505	$	(16,001	)

Noncovered impaired loans measured at fair value with a carrying amount of $124.2 million were written down to a fair value of $95.1 million, resulting in a life-to-date impairment of $29.1 million, of which $15.8 million was included in the provision for loan losses for the nine months ended September 30, 2010.

Noncovered other real estate assets were written down to their respective fair values, resulting in impairment charges of $0.2 million, which was included in noninterest expense for the nine months ended September 30, 2010.

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.

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

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

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

     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.

     Other borrowings— 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 value 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. Included in other borrowings are federal funds purchased, FHLB advances, securities sold under agreements to repurchase, and treasury tax and loan demand notes.

     Subordinated debentures— Two subordinated debentures have floating rates that reset quarterly and the third subordinated debenture has a fixed rate. The fair value of the floating rate subordinated debentures approximates current book value. The fair value of the fixed rate subordinated debenture is based on market price.

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

The carrying values and estimated fair values of Southwest’s financial instruments follow:

	At September 30, 2010				At December 31, 2009
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Values		Values		Values		Values
Financial assets:
Cash and cash equivalents	$	89,458	$	89,458	$	118,847	$	118,847
Investment securities:
Held to maturity		9,093		9,185		6,670		6,754
Available for sale		231,751		231,751		237,703		237,703
Other investments		10,389		10,389		19,066		19,066
Total loans		2,435,804		2,340,646		2,605,420		2,567,369
Accrued interest receivable		9,663		9,663		10,806		10,806
Financial liabilities:
Deposits		2,345,648		2,311,094		2,592,730		2,583,691
Accrued interest payable		2,457		2,457		3,191		3,191
Other liabilities		9,522		9,522		13,121		13,121
Other borrowings		82,506		82,866		103,022		103,527
Subordinated debentures		81,963		85,413		81,963		83,343

NOTE 9: SHARE-BASED COMPENSATION

The Southwest Bancorp, Inc. 2008 Stock Based Award Plan (the “2008 Stock Plan”) provides directors and selected key employees with the opportunity to acquire common stock through grants of options exercisable for common stock and other stock based awards. The 2008 Stock Plan replaced the Southwest Bancorp, Inc. 1999 Stock Option Plan, as amended (the “1999 Plan”). Options issued under the 1999 Plan continue in effect and are subject to the requirements of the plan, but no new options will be granted under this plan. The 2008 Stock Plan authorizes awards for up to 800,000 shares of Southwest common stock over its ten-year term; to date, 52,800 shares have been issued.

Stock Options

The exercise price of all stock options granted under the Stock Plans is the fair market value on the grant date. Depending upon terms of the stock option agreements, stock options generally become exercisable on an annual basis and expire from five to ten years after the date of grant.

No stock options have been granted in 2010 or 2009.

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A summary of options outstanding under the Stock Plans as of September 30, 2010, and changes during the nine month period then ended, is presented below.

						Weighted
				Weighted		Average Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value (dollars
	Options			Price		Life (Years)		in thousands)
Outstanding at December 31, 2009		379,324		$	20.98
Granted		—			—
Exercised		(13,200	)		5.33
Canceled/expired		(111,615	)		20.29
Outstanding at September 30, 2010		254,509		$	22.09		0.85	$	194
Total exercisable at September 30, 2010		254,509		$	22.09		0.85	$	194

As of September 30, 2010, all of Southwest’s outstanding stock options had become vested. The fair value of the options that became vested during the nine month period was $6,000.

Restricted Stock

Restricted shares outstanding as of September 30, 2010 and 2009 were 104,198 and 77,917, respectively. For the nine months ended September 30, 2010, Southwest recognized $0.2 million in compensation expense, net of tax, related to all restricted shares outstanding compared to $0.1 million in compensation expense, net of tax, that was recorded in the first nine months of 2009. As of September 30, 2010, there was $0.2 million of total unrecognized compensation expense related to restricted shares granted under the Stock Plans. This unrecognized expense is expected to be recognized during the next year.

The 2010 grant of restricted stock vests upon the first anniversary of the date of grant provided the director remains a director of Southwest or a subsidiary on that date. The restrictions on the shares expire one year after the award date or upon a change in control of Southwest (subject to the prohibition on parachute payments imposed by the American Reinvestment and Recovery Act) or the permanent and total disability or death of the participant. Southwest will recognize compensation expense over the restricted period.

The 2008 and 2009 grants of restricted stock vest one-third on the first, second, and third anniversaries of the date of grant provided the director or employee remains a director or employee of Southwest or a subsidiary on those dates. The restrictions on the shares expire three years after the award date or upon a change in control of Southwest (subject to the prohibition on parachute payments imposed by the American Reinvestment and Recovery Act) or the permanent and total disability or death of the participant. Southwest will continue to recognize compensation expense over the restricted periods.

NOTE 10: TAXES ON INCOME

In accordance with ASC 740,Income Taxes, the total gross balance of unrecognized tax benefits at September 30, 2010 was $5.1 million. Of this total, $1.8 million (net of federal benefit on state issues) represents the amount of unrecognized tax benefits that if recognized would favorably affect the effective tax rate in future periods.

Southwest recognizes interest accrued related to unrecognized tax benefits and penalties in operating expenses. For the nine months ended September 30, 2010, an additional $0.5 million has been accrued in interest and penalties. Southwest had approximately $3.0 million accrued for interest and penalties at September 30, 2010.

Southwest and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, Southwest is no longer subject to U.S. federal or state tax examinations for years before 2005.

Southwest is currently under audit by the State of Oklahoma for the 2002 through 2007 tax years. During 2008, Southwest received a Notice of Assessment from the Oklahoma Tax Commission and filed a formal Notice of Protest. It is possible that a reduction in the unrecognized tax benefits may occur; however, quantification of an estimated range cannot be made at this time.

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NOTE 11: 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 available to common shareholders 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 options using the treasury stock method. Stock options and warrants with exercise prices greater than the average market price of common shares were not included in the computation of earnings per diluted share as they would have been antidilutive. On September 30, 2010 and 2009, there were 240,749 and 375,083 antidilutive stock options to purchase common shares, respectively. An antidilutive warrant to purchase 703,753 shares of common stock was also outstanding on September 30, 2010.

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

	For the three months						For the nine months
	ended September 30,						ended September 30,
(Dollars in thousands, except earnings per share data)	2010			2009			2010			2009
Numerator:
Net income	$	3,873		$	2,134		$	12,656		$	9,408
Preferred dividend		(875	)		(875	)		(2,625	)		(2,625	)
Warrant amortization		(173	)		(162	)		(511	)		(480	)
Net income available to common shareholders	$	2,825		$	1,097		$	9,520		$	6,303
Earnings allocated to participating securities		(7	)		(3	)		(27	)		(18	)
Numerator for basic earnings per common share	$	2,818		$	1,094		$	9,493		$	6,285
Effect of reallocating undistributed earnings of participating securities		(7	)		(2	)		(27	)		(15	)
Numerator for diluted earnings per common share	$	2,811		$	1,092		$	9,466		$	6,270
Denominator:
Denominator for basic earnings per common share -
Weighted average common shares outstanding		19,342,909			14,649,061			17,342,393			14,598,693
Effect of dilutive securities:
Stock options		18,739			49,363			18,257			58,604
Warrant		—			—			—			—
Denominator for diluted earnings per common share		19,361,648			14,698,424			17,360,650			14,657,297
Earnings per common share:
Basic	$	0.15		$	0.07		$	0.55		$	0.43
Diluted	$	0.15		$	0.07		$	0.55		$	0.43

NOTE 12: OPERATING SEGMENTS

Southwest operates six principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, Other States Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment, the Texas Banking segment, and the Kansas Banking segment provide deposit and lending services to customers in the states of Oklahoma, Texas, and Kansas. The Other States Banking segment provides lending services to customers outside Oklahoma, Texas, and Kansas. The Secondary Market segment consists of three operating units: one that provides student lending services to post-secondary students in Oklahoma and several other states, one that provides residential mortgage lending services to customers in Oklahoma, Texas, and Kansas, and one that provides United States Department of Agriculture (“USDA”) government guaranteed commercial real estate lending services to rural healthcare providers. Other Operations includes Southwest’s funds management unit.

The primary purpose of the funds management unit is to manage Southwest’s 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 Federal Home Loan Bank advances.

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The Other Operations segment also includes SNB Wealth Management and corporate investments. These operations are discussed more fully in Southwest’s 2009 Annual Report on Form 10-K.

Southwest identifies reportable segments by type of service provided and geographic location. Operating results are adjusted for borrowings, allocated service costs, and management fees. Portfolio loans are allocated based upon the state of the borrower or the location of the real estate in the case of real estate loans. Loans included in the Other States Banking segment are portfolio loans attributable to thirty-four states other than Oklahoma, Texas, or Kansas and primarily consist of healthcare and commercial real estate credits. These out of state loans are administered by offices in Oklahoma, Texas, or Kansas.

The accounting policies of each reportable segment are the same as those of Southwest. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting, and 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.

Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk.

The following table summarizes financial results by operating segment:

For the Three Months Ended September 30, 2010
	Oklahoma			Texas			Kansas			Other States		Secondary		Other			Total
(Dollars in thousands)	Banking			Banking			Banking			Banking		Market		Operations			Company
Net interest income (loss)	$	10,541		$	10,093		$	3,548		$	1,998	$	411	$	(139	)	$	26,452
Provision for loan losses		(171	)		10,284			1,173			702		—		—			11,988
Noninterest income		2,044			460			873			59		533		2,366			6,335
Noninterest expenses		7,058			3,262			3,636			589		586		287			15,418
Income (loss) before taxes		5,698			(2,993	)		(388	)		766		358		1,940			5,381
Taxes on income		2,074			(1,224	)		(161	)		278		139		402			1,508
Net income (loss)	$	3,624		$	(1,769	)	$	(227	)	$	488	$	219	$	1,538		$	3,873

For the Three Months Ended September 30, 2009
	Oklahoma		Texas		Kansas			Other States		Secondary			Other			Total
(Dollars in thousands)	Banking		Banking		Banking			Banking		Market			Operations			Company
Net interest income (loss)	$	10,736	$	10,586	$	4,107		$	2,279	$	171		$	(2,479	)	$	25,400
Provision for loan losses		2,193		2,956		3,279			1,749		—			—			10,177
Noninterest income		2,170		430		682			49		312			67			3,710
Noninterest expenses		6,390		3,487		3,533			518		815			785			15,528
Income (loss) before taxes		4,323		4,573		(2,023	)		61		(332	)		(3,197	)		3,405
Taxes on income		1,794		1,887		(843	)		4		(131	)		(1,440	)		1,271
Net income (loss)	$	2,529	$	2,686	$	(1,180	)	$	57	$	(201	)	$	(1,757	)	$	2,134

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For the Nine Months Ended September 30, 2010
	Oklahoma		Texas		Kansas		Other States		Secondary		Other			Total
(Dollars in thousands)	Banking		Banking		Banking		Banking		Market		Operations*			Company
Net interest income (loss)	$	32,699	$	31,800	$	11,919	$	6,360	$	1,051	$	(3,468	)	$	80,361
Provision for loan losses		1,258		22,202		3,011		1,824		—		—			28,295
Noninterest income		6,237		1,303		2,826		248		1,637		2,224			14,475
Noninterest expenses		19,993		9,941		11,073		1,987		1,678		2,150			46,822
Income (loss) before taxes		17,685		960		661		2,797		1,010		(3,394	)		19,719
Taxes on income		6,907		376		258		1,094		392		(1,964	)		7,063
Net income (loss)	$	10,778	$	584	$	403	$	1,703	$	618	$	(1,430	)	$	12,656
*   Includes externally generated revenue of $7.6 million, primarily from investing services, and an internally generated loss of $8.8 million from the funds management unit
Fixed asset expenditures	$	98	$	40	$	108	$	—	$	52	$	527		$	825
Total loans at period end		890,598		1,024,863		309,240		248,653		34,868		—			2,508,222
Total assets at period end		918,342		1,008,079		403,147		241,653		37,147		296,907			2,905,275
Total deposits at period end		1,567,186		161,202		270,150		—		4,649		342,461			2,345,648

For the Nine Months Ended September 30, 2009
	Oklahoma		Texas		Kansas		Other States			Secondary			Other			Total
(Dollars in thousands)	Banking		Banking		Banking**		Banking			Market			Operations*			Company
Net interest income (loss)	$	33,470	$	31,625	$	9,258	$	7,142		$	907		$	(11,508	)	$	70,894
Provision for loan losses		5,684		10,114		3,702		9,036			—			—			28,536
Noninterest income		6,677		1,375		5,044		161			1,457			2,734			17,448
Noninterest expenses		19,587		10,524		7,708		1,554			2,605			2,839			44,817
Income (loss) before taxes		14,876		12,362		2,892		(3,287	)		(241	)		(11,613	)		14,989
Taxes on income		5,853		4,895		1,069		(1,292	)		(96	)		(4,848	)		5,581
Net income (loss)	$	9,023	$	7,467	$	1,823	$	(1,995	)	$	(145	)	$	(6,765	)	$	9,408
*   Includes externally generated revenue of $8.1 million, primarily from investing services, and an internally generated loss of $16.9 million from the funds management unit
** Noninterest income includes the $3.3 million gain on acquisition previously described.
Fixed asset expenditures	$	2,026	$	3	$	505	$	—		$	—		$	431		$	2,965
Total loans at period end		943,982		1,042,369		400,710		288,680			36,526			—			2,712,267
Total assets at period end		960,519		1,029,604		508,007		286,020			39,409			205,788			3,029,347
Total deposits at period end		1,578,457		161,455		276,344		—			8,563			448,343			2,473,162

NOTE 13: NEW AUTHORITATIVE ACCOUNTING GUIDANCE

New authoritative accounting guidance under ASC 860,Transfers and Servicing, amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, where companies have continuing exposure to the risks related to transferred financial assets. The new guidance eliminates the concept of a qualifying special-purpose entity (“SPE”) and changes the requirements for derecognizing financial assets. It also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. Southwest adopted the new guidance under ASC 860 effective January 1, 2010. Adoption of the new guidance did not have a significant impact on Southwest’s financial statements.

New authoritative accounting guidance under ASC 810,Consolidation, amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purposes and design and a company’s ability to direct the activities of the entity that most significantly affect the entity’s economic performance. The new guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement, as well as its effect on the

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entity’s financial statements. Southwest adopted the new guidance under ASC 810 effective January 1, 2010. Adoption of the new guidance did not have a significant impact on Southwest’s financial statements.

On January 21, 2010, FASB issued Accounting Standards Update No. 2010-06,Improving Disclosures about Fair Value Measurements(“ASU 2010-06”), which amends ASC 820,Fair Value Measurements and Disclosures,to require a number of additional disclosures regarding fair value measurements. Specifically, entities are required to disclose: the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; the reasons for any transfers in or out of Level 3; and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis. In addition to these new disclosure requirements, ASU 2010-06 also amends ASC 820 to clarify certain existing disclosure requirements. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the amendments to ASC 820 made by ASU 2010-06 were effective for Southwest on January 1, 2010, and the required disclosures are reported in Note 8. The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements is effective for Southwest on January 1, 2011 and is not expected to have a significant impact on Southwest’s financial statements.

On July 21, 2010, FASB issued Accounting Standards Update No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses(“ASU 2010-20”), which amends ASC 830,Receivables,to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses. ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, the activity in the allowance for credit losses as well as information about modified, impaired, nonaccrual, and past due loans and credit quality indicators. ASU 2010-20 will be effective for Southwest’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for Southwest’s financial statements that include periods beginning on or after January 1, 2011.

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SOUTHWEST BANCORP, INC.

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

Caution About Forward-Looking Statements.

We make forward-looking statements in this Form 10-Q and documents incorporated by reference into it that are subject to risks and uncertainties. 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;

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

• Assessments of liquidity, off-balance sheet risk, and interest rate risk; 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; 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, Southwest’s past growth and performance do not necessarily indicate its 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 Southwest’s reports to the Securities and Exchange Commission.

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies followed by Southwest Bancorp, Inc. (“Southwest”) 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 Southwest bases estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates.

Southwest considers 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 Southwest’s financial statements. Accounting policies related to loans acquired through transfer, the allowance for loan losses, and goodwill and other intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

For additional information regarding critical accounting policies, refer to “Note 1: Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements and the sections captioned “Critical Accounting Policies” and “Provision and Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition

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and Results of Operations included in Southwest’s 2009 Annual Report on Form 10-K. There have been no significant changes in Southwest’s application of critical accounting policies since December 31, 2009.

GENERAL

Southwest is the bank holding company for Stillwater National Bank and Trust Company (“Stillwater National”) and Bank of Kansas. Through its subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services, and specialized cash management, and other financial services from offices in Oklahoma, Texas, and Kansas; and on the Internet, throughSNB DirectBanker^®.

Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest has established and pursued a strategy of independent operation for the benefit of all of its shareholders. Southwest became a public company in late 1993. At September 30, 2010, Southwest had total assets of $2.9 billion, deposits of $2.3 billion, and shareholders’ equity of $376.6 million.

Southwest’s banking philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customers’ needs for speed, efficiency, and information and complement more traditional banking products. Southwest has developed a highly automated lockbox, imaging, and information service for commercial customers called “SNB Digital Lockbox” and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds. Other specialized financial services include integrated document imaging and cash management services designed to help our customers in the healthcare industry and other record-intensive enterprises operate more efficiently. Information regarding Southwest is available online at www.oksb.com. Information regarding the products and services of Southwest’s subsidiaries is available online at www.banksnb.com and www.bankofkansas.com. The information on these websites is not a part of this report on Form 10-Q.

Southwest focuses on converting its strategic vision into long-term shareholder value. Our vision includes a commercial banking model and a community banking model focused on more traditional banking operations in our three-state market.

At September 30, 2010, the Texas Banking segment accounted for $1.0 billion in loans, the Oklahoma Banking segment accounted for $890.6 million in loans, the Kansas Banking segment accounted for $309.2 million in loans, and the Other States Banking segment accounted for $248.7 million in loans. Southwest offers products to the student, residential mortgage, and rural healthcare lending markets. These operations comprise the Secondary Market business segment. During the first nine months of 2010, Secondary Market loans decreased $8.3 million, or 19%, to $34.9 million. Southwest engages in residential mortgage lending, but residential mortgages have not been a significant element of Southwest’s strategy. Please see “Financial Condition: Loans” below for additional information.

For additional information on Southwest’s operating segments, please see “Note 12: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements.

FINANCIAL CONDITION

Investment Securities

Southwest’s investment security portfolio decreased $12.2 million, or 5%, from $263.4 million at December 31, 2009, to $251.2 million at September 30, 2010. The decrease is primarily the result of a $25.3 million, or 33%, decrease in U.S. government and agency securities, a $7.1 million, or 46%, decrease in Federal Home Loan Bank and Federal Reserve Bank stocks, and a $1.6 million, or 45%, decrease in other investments, offset in part by a $19.3 million, or 12%, increase in residential mortgage-backed securities and a $2.3 million, or 30%, increase in tax-exempt securities during the first nine months of 2010.

Loans

Total loans, including loans held for sale, were $2.5 billion at September 30, 2010, a 6% decrease from December 31, 2009. One-to-four family residential mortgage and construction, commercial real estate construction, commercial, student, and other consumer loans decreased, while commercial real estate mortgage loans increased, which reflects the movement of finished projects from commercial real estate construction. Southwest has reduced student loan activities as a result of changes in federal regulations.

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The following table presents the trends in the composition of the loan portfolio at the dates indicated:

	September 30, 2010				December 31, 2009				Total			Total
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered		$ Change			% Change
Real estate mortgage
Commercial	$	1,271,278	$	33,428	$	1,212,409	$	39,836	$	52,461			4.19	%
One-to-four family residential		109,980		10,071		114,614		12,630		(7,193	)		(5.65	)
Real estate construction
Commercial		527,773		7,464		618,078		12,515		(95,356	)		(15.12	)
One-to-four family residential		30,527		1,823		41,109		5,324		(14,083	)		(30.33	)
Commercial		463,132		6,816		520,505		13,412		(63,969	)		(11.98	)
Installment and consumer
Guaranteed student loans		5,960		—		36,163		—		(30,203	)		(83.52	)
Other		39,014		956		39,550		1,688		(1,268	)		(3.07	)
Total loans	$	2,447,664	$	60,558	$	2,582,428	$	85,405	$	(159,611	)		(5.98	)%

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

	September 30,		December 31,
(Dollars in thousands)	2010		2009		$ Change			% Change
Loans held for sale:
Student loans	$	5,960	$	36,163	$	(30,203	)		(83.52	)%
One-to-four family residential		8,347		5,612		2,735			48.73
Other loans held for sale		20,561		1,359		19,202			1,412.95
Total loans held for sale		34,868		43,134		(8,266	)		(19.16	)
Noncovered portfolio loans		2,412,796		2,539,294		(126,498	)		(4.98	)
Covered portfolio loans		60,558		85,405		(24,847	)		(29.09	)
Total loans	$	2,508,222	$	2,667,833	$	36,163			1.36	%

Management determines the appropriate level of the allowance for loan losses using an established methodology. (See “Note 5: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses is comprised of two primary components. Loans deemed to be impaired (all loans on nonaccrual or restructured) 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. Loans other than impaired loans are segmented into loan pools by type of loan. The allowance on these other loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors.

At September 30, 2010, the allowance for loan losses was $72.4 million, an increase of $10.0 million, or 16%, from the allowance for loan losses at December 31, 2009. Changes in the amount of the allowance resulted from the application of the methodology, which is designed to estimate inherent losses on total portfolio loans, including nonperforming loans. At September 30, 2010, the allowance on the $135.2 million in noncovered nonaccrual loans was $21.3 million (15.7%), compared with an allowance on $105.9 million in noncovered nonaccrual loans at December 31, 2009 of $13.3 million (12.6%), creating an increase in the allowance of $8.0 million, or 60%. At September 30, 2010, the allowance for other noncovered loans and noncovered performing restructured loans was $51.1 million (2.2%), compared to $49.1 million (2.0%) at December 31, 2009, creating an increase in the allowance of $2.0 million, or 4%. The increase in the allowance related to these other noncovered loans mainly resulted from consideration of certain trends and qualitative factors. These included changes in adjusted loss rates made due to changes in historical net loss ratios, management’s assessment of economic risk (particularly with respect to commercial and commercial real estate loans), and asset quality trends, including the level of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans, which together comprised approximately 75% of our noncovered portfolio loans at September 30, 2010. The total allowance was 3.00% and 2.46% of total noncovered portfolio loans at September 30, 2010 and December 31, 2009, respectively. Management believes the amount of the allowance is appropriate. Covered portfolio loans were $60.6 million as of

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September 30, 2010. These loans are subject to protection under the loss sharing agreements with the FDIC and currently do not have an allowance for loan losses.

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. Net charge-offs for the first nine months of 2010 were $18.3 million, an increase of $7.8 million, or 74%, over the $10.5 million recorded for the first nine months of 2009. The provision for loan losses for the first nine months of 2010 was $28.3 million, representing a decrease of $0.2 million, or less than 1%, from the $28.5 million recorded for the first nine months of 2009.

At September 30, 2010, the allowance for loan losses was 53.38% of noncovered nonperforming loans, compared to 58.77% of noncovered nonperforming loans, at December 31, 2009 (see “Results of Operations-Provision for Loan Losses” on page 36). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $135.2 million as of September 30, 2010, an increase of $29.3 million, or 28%, from December 31, 2009. Noncovered nonaccrual loans at September 30, 2010 were comprised of 61 relationships and were primarily concentrated in real estate construction (66%) and commercial real estate (25%) loans. All noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. Noncovered loans 90 days or more past due, another component of noncovered nonperforming loans, increased $0.1 million, or 46%, from December 31, 2009. These noncovered loans are believed to have sufficient collateral and are in the process of being collected. Covered nonperforming loans of $9.8 million are subject to protection under the loss share agreements with the FDIC.

At September 30, 2010 and December 31, 2009, eleven and seven credit relationships represented 74% and 66% of noncovered nonperforming loans and 58% and 57% of noncovered nonperforming assets, respectively. As of September 30, 2010, these credit relationships were all collateral dependent and included ten commercial real estate lending relationships and one one-to-four family lending relationship with aggregate principal balances of $100.2 million and related impairment reserves of $16.0 million. These impairment reserves were established based on recent appraisal values. These lending relationships include a residential condominium construction project, a retail building project, retail commercial real estate buildings, residential care buildings, four residential land development lending relationships, two commercial land development projects, and townhome complexes. A table showing the composition of noncovered and covered nonperforming loans by category is included in “Note 4: Loans and Other Real Estate” in the Notes to Unaudited Consolidated Financial Statements.

Performing loans considered potential problem loans, loans which are not included in the past due, nonaccrual, or restructured 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 $243.3 million at September 30, 2010, compared to $267.3 million at December 31, 2009. Included are $6.4 million and $8.9 million, respectively, of covered potential problem loans, which are subject to protection under the loss share agreements with the FDIC. 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. These loans are subject to continuing management attention and are considered by management in determining the level of the allowance for loan losses.

At September 30, 2010, the reserve for unfunded loan commitments was $2.2 million, a $1.3 million, or 37%, decrease from the amount at December 31, 2009. Management believes the amount of the reserve is appropriate and the decreased amount is the result of application of our methodology. (See “Note 5: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements.)

Deposits and Other Borrowings

Southwest’s deposits were $2.3 billion and $2.6 billion at September 30, 2010 and December 31, 2009, respectively.

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The following table presents the trends in the composition of deposits at the dates indicated:

	September 30,		December 31,
(Dollars in thousands)	2010		2009		$ Change			% Change
Noninterest-bearing demand	$	329,655	$	324,829	$	4,826			1.49	%
Interest-bearing demand		86,153		74,201		11,952			16.11
Money market accounts		518,422		505,521		12,901			2.55
Savings accounts		25,556		25,730		(174	)		(0.68	)
Time deposits of $100,000 or more		795,303		1,004,439		(209,136	)		(20.82	)
Other time deposits		590,559		658,010		(67,451	)		(10.25	)
Total deposits	$	2,345,648	$	2,592,730	$	(247,082	)		(9.53	)%

Stillwater National has substantial unused borrowing availability in the form of unsecured brokered certificate of deposits from Bank of America Merrill Lynch, Citigroup Global Markets, Inc., Wachovia Bank, NA, UBS Securities, LLC, RBC Capital Markets Corp., and Morgan Stanley & Co., Inc. in connection with its retail certificate of deposit program. At September 30, 2010, $170.0 million in these retail certificates of deposit were included in time deposits of $100,000 or more, a decrease of $160.0 million, or 48%, from December 31, 2009.

Stillwater National has other brokered certificates of deposit totaling $1.7 million and $1.6 million as of September 30, 2010 and December 31, 2009, respectively, included in time deposits of $100,000 or more in the above table.

Other borrowings, which includes federal funds purchased, FHLB borrowings, and repurchase agreements, decreased $20.5 million, or 20%, to $82.5 million during the first nine months of 2010. The decrease reflects the changes in the need for other funding based on lending activities for the period.

Shareholders’ Equity

Shareholders’ equity increased $66.8 million, or 22%, due primarily to the $54.4 million generated from the sale of common stock through a common stock offering, the employee stock purchase plan, and share based compensation plans, including tax benefits realized, and earnings of $12.7 million, offset in part by preferred dividends declared totaling $2.6 million for the first nine months of 2010. Net unrealized holding gains on available for sale investment securities (net of tax) increased to $3.3 million at September 30, 2010, compared to $0.9 million at December 31, 2009.

At September 30, 2010, Southwest, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 37.

RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2010 and 2009

Net income available to common shareholders for the third quarter of 2010 of $2.8 million represented an increase of $1.7 million, or 158%, from the $1.1 million earned in the third quarter of 2009. Diluted earnings per share were $0.15, compared to $0.07, a 114% increase. The increase in quarterly net income available to common shareholders was the result of a $2.6 million, or 71%, increase in noninterest income and a $1.1 million, or 4%, increase in the net interest income, offset in part by a $1.8 million, or 18%, increase in the provision for loan losses and a $0.2 million, or 19%, increase in income tax expense.

Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan losses to an appropriate level at period end after net charge-offs for the period. The necessary provision for third quarter of 2010 was $1.8 million more than the provision required for third quarter of 2009. (See “Note 5: Allowance for Loan Losses and Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses and for Unfunded Loan Commitments” on page 36.)

On an operating segment basis, the increase in net income was the net result of a $3.3 million increase in net income from the Other Operations segment, a $1.1 million increase in net income from the Oklahoma Banking segment, a $1.0 million increase in net income from the Kansas Banking segment, a $0.4 million increase in net income from both the Other States Banking and Secondary Market segments, and a $4.5 million decrease in net income from the Texas Banking segment.

27

Net Interest Income

	For the three months
	ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change
Interest income:
Loans	$	32,824	$	35,607	$	(2,783	)		(7.82	)%
Investment securities:
U.S. government and agency obligations		526		397		129			32.49
Mortgage-backed securities		1,430		1,527		(97	)		(6.35	)
State and political subdivisions		61		70		(9	)		(12.86	)
Other securities		187		128		59			46.09
Other interest-earning assets		55		4		51			1,275.00
Total interest income		35,083		37,733		(2,650	)		(7.02	)
Interest expense:
Interest-bearing demand deposits		111		107		4			3.74
Money market accounts		976		1,220		(244	)		(20.00	)
Savings accounts		15		39		(24	)		(61.54	)
Time deposits of $100,000 or more		3,128		4,822		(1,694	)		(35.13	)
Other time deposits		2,572		3,909		(1,337	)		(34.20	)
Other borrowings		524		960		(436	)		(45.42	)
Subordinated debentures		1,305		1,276		29			2.27
Total interest expense		8,631		12,333		(3,702	)		(30.02	)
Net interest income	$	26,452	$	25,400	$	1,052			4.14	%

Net interest income is the difference between the interest income Southwest earns on its loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because 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.

Yields on Southwest’s interest-earning assets decreased 21 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 51 basis points, resulting in an increase in the interest rate spread to 3.29% for the third quarter of 2010 from 2.99% for the third quarter of 2009. During the same periods, annualized net interest margin was 3.63% and 3.39%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 129.13% from 123.73%. Included in third quarter of 2010 net interest margin is a net reduction of $0.3 million from interest reversals on nonaccrual loans offset in part by the quarterly adjustment of the discount accretion on loans and the loss share receivable. Net interest margin would have been 5 basis points higher without this net reduction.

The decrease in interest income was the result of a decrease in the yield earned on interest-earning assets and an $84.1 million, or 3%, decrease in average interest-earning assets. Southwest’s average loans decreased $176.4 million, or 6%, and the related yield decreased to 5.12% for the third quarter of 2010 from 5.19% for the third quarter of 2009. During the same period, average investment securities increased $17.5 million, or 7%; however, the related yield decreased to 3.35% from 3.46% in 2009. Average other interest earning assets increased $74.8 million and the related yield increased to 0.26% for the third quarter of 2010 from 0.15% for the third quarter of 2009.

The decrease in total interest expense can be attributed to the decrease in rates paid on interest-bearing liabilities and the effects of a $165.6 million, or 7%, decrease in average interest-bearing liabilities. Southwest’s average total interest-bearing deposits decreased $93.4 million, or 4%, and the related rates paid for interest expense decreased to 1.31% for the third quarter of 2010 from 1.86% for the third quarter of 2009. Average other borrowings decreased $72.2 million, or 44%, and the related rates paid for interest expense decreased to 2.23% for the third quarter of 2010 from 2.30% for the third quarter of 2009.

28

UNAUDITED RATE VOLUME TABLE

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

	For the three months ended September 30,
(Dollars in thousands)	2010 vs. 2009
	Increase			Due to Change
	Or			In Average:
	(Decrease)			Volume			Rate
Interest earned on:
Loans receivable (1) (2)	$	(2,783	)	$	(2,283	)	$	(500	)
Investment securities (1)		82			149			(67	)
Other interest-earning assets		51			47			4
Total interest income		(2,650	)		(1,049	)		(1,601	)
Interest paid on:
Interest-bearing demand		4			12			(8	)
Money market accounts		(244	)		40			(284	)
Savings accounts		(24	)		(1	)		(23	)
Time deposits		(3,031	)		(622	)		(2,409	)
Other borrowings		(436	)		(407	)		(29	)
Subordinated debentures		29			—			29
Total interest expense		(3,702	)		(804	)		(2,898	)
Net interest income	$	1,052		$	(245	)	$	1,297

(1)	Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
(2)	Information regarding noncovered and covered loans for the period shown is not readily available.

29

UNAUDITED AVERAGE BALANCES, YIELDS AND RATES

The following table sets forth average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.

	For the three months ended September 30,
(Dollars in thousands)	2010								2009
	Average					Average			Average					Average
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Total loans (1) (2) (4)	$	2,543,412		$	32,824		5.12	%	$	2,719,835		$	35,607		5.19	%
Investment securities (2)		261,124			2,204		3.35			243,604			2,122		3.46
Other interest-earning assets		85,214			55		0.26			10,442			4		0.15
Total interest-earning assets		2,889,750			35,083		4.82			2,973,881			37,733		5.03
Other assets		76,570								62,160
Total assets	$	2,966,320							$	3,036,041
Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	93,481		$	111		0.47	%	$	84,031		$	107		0.51	%
Money market accounts		515,754			976		0.75			498,842			1,220		0.97
Savings accounts		25,306			15		0.24			26,101			39		0.59
Time deposits		1,428,247			5,700		1.58			1,547,192			8,731		2.24
Total interest-bearing deposits		2,062,788			6,802		1.31			2,156,166			10,097		1.86
Other borrowings		93,136			524		2.23			165,327			960		2.30
Subordinated debentures		81,963			1,305		6.37			81,963			1,276		6.23
Total interest-bearing liabilities		2,237,887			8,631		1.53			2,403,456			12,333		2.04
Noninterest-bearing demand deposits		330,321								299,235
Other liabilities		16,960								22,365
Shareholders’ equity		381,152								310,985
Total liabilities and shareholders’ equity	$	2,966,320							$	3,036,041
Net interest income and interest rate spread				$	26,452		3.29	%				$	25,400		2.99	%
Net interest margin (3)							3.63	%							3.39	%
Ratio of average interest-earning assets to average interest-bearing liabilities		129.13	%							123.73	%

(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
(4)	Information regarding noncovered and covered loans for the period shown is not readily available.

30

Noninterest Income

	For the three months
	ended September 30,
(Dollars in thousands)	2010		2009			$ Change			% Change
Noninterest income:
Other service charges	$	2,659	$	2,688		$	(29	)		(1.08	)%
Other fees		335		304			31			10.20
Other noninterest income		83		322			(239	)		(74.22	)
Gain on sales of loans:
Student loan sales		36		(4	)		40			(1,000.00	)
One-to-four family residential		595		390			205			52.56
All other loan sales		22		—			22		NA
Gain on sale/call of investment securities		2,605		10			2,595			25,950.00
Total noninterest income	$	6,335	$	3,710		$	2,625			70.75	%

Other fees increased primarily as a result of increased loan servicing fees, increased brokerage fees, offset in part by increased amortization of mortgage servicing rights. Other noninterest income declined as a result of decreased consulting income.

Gain on sales of loans is a reflection of the activity in the student, mortgage, and commercial lending areas discussed elsewhere in this report.

Gain on sale/call of securities includes a $2.5 million gain recognized as the result of the sale of investment securities during the period.

Noninterest Expense

	For the three months
	ended September 30,
(Dollars in thousands)	2010			2009			$ Change			% Change
Noninterest expense:
Salaries and employee benefits	$	7,183		$	7,824		$	(641	)		(8.19	)%
Occupancy		2,835			2,958			(123	)		(4.16	)
FDIC and other insurance		1,347			1,134			213			18.78
Other real estate (net)		228			90			138			(153.33	)
Unfunded loan commitment reserve		(294	)		(79	)		(215	)		272.15
Other general and administrative		4,119			3,601			518			14.38
Total noninterest expense	$	15,418		$	15,528		$	(110	)		(0.71	)%

Salaries and employee benefits decreased primarily as a result of a decrease in the salary expense and profit sharing contributions, offset in part by increased employee insurance expense. The number of full-time equivalent employees decreased from 447 at the beginning of the quarter to 440 as of September 30, 2010. For the third quarter of 2009, the number of full-time equivalent employees decreased from 478 at the beginning of the quarter to 471 as of September 30, 2009.

Southwest’s financial institution subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The increase from prior year is the result an increase in the assessment rate in 2010.

The unfunded loan commitment reserve expense decreased due to a decline in the level of commitments when compared to the same period of the prior year.

The increase in other general and administrative expenses is the result of increased consulting fees.

31

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009

Net income available to common shareholders for the nine months ended September 30, 2010 of $9.5 million represented an increase of $3.2 million, or 51%, from the $6.3 million earned in the nine months ended September 30, 2009. Diluted earnings per share were $0.55 compared to $0.43, a 28% increase. The increase in net income available to common shareholders was primarily the result of a $9.5 million, or 13%, increase in net interest income and a $0.2 million, or 1%, decrease in the provision for loan losses, offset in part by a $3.0 million, or 17%, decrease in noninterest income, a $2.0 million, or 4%, increase in noninterest expense, and a $1.5 million, or 27%, increase in income taxes.

Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan losses to an appropriate level at period end after charge-offs for the period. The necessary provision as of September 30, 2010 was $0.2 million less than the provision required as of September 30, 2009. (See Note 5: “Allowance for Loan Losses and Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses and for Unfunded Loan Commitments” on page 36.)

On an operating segment basis, the increase in net income was the result of a $5.3 million increase in net income from the Other Operations segment, a $3.7 million increase in net income from the Other States Banking segment, a $1.8 million increase in net income from the Oklahoma Banking segment, and a $0.8 million increase in net income from the Secondary Market segment, offset by a $6.9 million decrease in net income from the Texas Banking segment and a $1.4 million decrease in net income from Kansas Banking segment. The decrease in the Kansas Banking segment net income reflected the $3.3 million gain on the FNBA transaction recorded in the second quarter of 2009 among other factors.

Net Interest Income

	For the nine months
	ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change
Interest income:
Loans	$	101,087	$	104,884	$	(3,797	)		(3.62	)%
Investment securities:
U.S. government and agency obligations		1,675		1,370		305			22.26
Mortgage-backed securities		4,329		4,681		(352	)		(7.52	)
State and political subdivisions		203		234		(31	)		(13.25	)
Other securities		637		428		209			48.83
Other interest-earning assets		190		13		177			1,361.54
Total interest income		108,121		111,610		(3,489	)		(3.13	)
Interest expense:
Interest-bearing demand deposits		383		410		(27	)		(6.59	)
Money market accounts		3,026		3,784		(758	)		(20.03	)
Savings accounts		47		62		(15	)		(24.19	)
Time deposits of $100,000 or more		10,669		16,524		(5,855	)		(35.43	)
Other time deposits		8,222		12,449		(4,227	)		(33.95	)
Other borrowings		1,565		3,424		(1,859	)		(54.29	)
Subordinated debentures		3,848		4,063		(215	)		(5.29	)
Total interest expense		27,760		40,716		(12,956	)		(31.82	)
Net interest income	$	80,361	$	70,894	$	9,467			13.35	%

Net interest income is the difference between the interest income Southwest earns on its loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Because different types of assets owned and liabilities issued by Southwest may react differently, and at different times, to changes in market interest rates, net interest income is affected by changes in market interest rates. When interest-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.

32

Yields on Southwest’s interest-earning assets decreased 27 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 75 basis points, resulting in an increase in the interest rate spread to 3.30% for the first nine months of 2010 from 2.85% for the first nine months of 2009. During the same periods, annualized net interest margin was 3.63% and 3.27%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 126.14% from 122.68%. Included in net interest income for the first nine months of 2010 is $0.5 million in net recoveries from the resolution of nonperforming loans and additional discount accretion on loans and the loss share receivable, offset in part by interest reversals on nonaccrual loans. Included in net interest income for the nine months of 2009 is a recovery of $1.9 million in interest from the resolution of a nonperforming loan. Net interest margin would have been 3 basis points and 9 basis points lower without these recoveries, respectively.

The decrease in interest income was the result of a decrease in the yield earned on interest-earning assets, which was offset in part by earnings on a $63.3 million, or 2%, increase in average interest-earning assets. Southwest’s average loans decreased $49.0 million, or 2% and the related yield decreased to 5.19% for the first nine months of 2010 from 5.28% in 2009. During the same period, average investment securities increased $21.0 million, or 9%; however, the related yield decreased to 3.52% from 3.75% in 2009. Average other interest earning assets increased $91.2 million, yet the related yield decreased to 0.26% for the first nine months of 2010 from 0.30% in 2009.

The decrease in total interest expense can be attributed to the decrease in the rates paid on interest-bearing liabilities and the effects of a $14.7 million, or 1%, decrease in average interest-bearing liabilities. Southwest’s total interest-bearing deposits increased $89.2 million, or 4%; however, the related rates paid for interest expense decreased to 1.38% for the first nine months of 2010 from 2.13% in 2009. Average other borrowings decreased $103.9 million, or 52%, and the related rates paid for interest expense decreased to 2.18% for the first nine months of 2010 from 2.29% for 2009.

UNAUDITED RATE VOLUME TABLE

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

	For the nine months ended September 30,
(Dollars in thousands)	2010 vs. 2009
	Increase			Due to Change
	Or			In Average:
	(Decrease)			Volume			Rate
Interest earned on:
Loans receivable (1) (2)	$	(3,797	)	$	(1,918	)	$	(1,879	)
Investment securities (1)		131			568			(437	)
Other interest-earning assets		177			179			(2	)
Total interest income		(3,489	)		2,397			(5,886	)
Interest paid on:
Interest-bearing demand		(27	)		69			(96	)
Money market accounts		(758	)		218			(976	)
Savings accounts		(15	)		16			(31	)
Time deposits		(10,082	)		663			(10,745	)
Other borrowings		(1,859	)		(1,699	)		(160	)
Subordinated debentures		(215	)		—			(215	)
Total interest expense		(12,956	)		(251	)		(12,705	)
Net interest income	$	9,467		$	2,648		$	6,819

(1)	Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
(2)	Information regarding noncovered and covered loans for the period shown is not readily available.

33

UNAUDITED AVERAGE BALANCES, YIELDS AND RATES

The following table sets forth average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.

	For the nine months ended September 30,
(Dollars in thousands)	2010								2009
	Average					Average			Average					Average
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Total loans (1) (2) (4)	$	2,606,166		$	101,087		5.19	%	$	2,655,156		$	104,884		5.28	%
Investment securities (2)		260,137			6,844		3.52			239,134			6,713		3.75
Other interest-earning assets		97,121			190		0.26			5,877			13		0.30
Total interest-earning assets		2,963,424			108,121		4.88			2,900,167			111,610		5.15
Other assets		74,199								66,254
Total assets	$	3,037,623							$	2,966,421
Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	102,843		$	383		0.50	%	$	86,576		$	410		0.63	%
Money market accounts		508,742			3,026		0.80			479,700			3,784		1.05
Savings accounts		25,515			47		0.25			19,535			62		0.42
Time deposits		1,534,135			18,891		1.65			1,496,193			28,973		2.59
Total interest-bearing deposits		2,171,235			22,347		1.38			2,082,004			33,229		2.13
Other borrowings		96,099			1,565		2.18			199,982			3,424		2.29
Subordinated debentures		81,963			3,848		6.26			81,963			4,063		6.61
Total interest-bearing liabilities		2,349,297			27,760		1.58			2,363,949			40,716		2.30
Noninterest-bearing demand deposits		318,609								274,535
Other liabilities		17,629								20,877
Shareholders’ equity		352,088								307,060
Total liabilities and shareholders’ equity	$	3,037,623							$	2,966,421
Net interest income and interest rate spread				$	80,361		3.30	%				$	70,894		2.85	%
Net interest margin (3)							3.63	%							3.27	%
Ratio of average interest-earning assets to average interest-bearing liabilities		126.14	%							122.68	%

(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
(4)	Information regarding noncovered and covered loans for the period shown is not readily available.

34

Noninterest Income

	For the nine months
	ended September 30,
(Dollars in thousands)	2010		2009		$ Change			% Change
Noninterest income:
Other service charges	$	8,140	$	7,859	$	281			3.58	%
Other fees		1,120		550		570			103.64
Other noninterest income		515		806		(291	)		(36.10	)
Gain on acquisition		—		3,281		(3,281	)		(100.00	)
Gain on sales of loans:
Student loan sales		709		172		537			312.21
Mortgage loan sales		1,228		1,858		(630	)		(33.91	)
All other loan sales		117		—		117		NA
Gain on sale/call of investment securities		2,646		2,922		(276	)		(9.45	)
Total noninterest income	$	14,475	$	17,448	$	(2,973	)		(17.04	)%

The increase in other service charges is the result of increases in overdraft and interchange service charges. The increase in other fees is the result of increased loan servicing fees, increased brokerage fees, and decreased amortization of mortgage servicing rights, which includes the impairments that occurred in the first and second quarters of 2009.

Other noninterest income decreased primarily as a result of decreased consulting income.

The gain on acquisition is the result of the FDIC-assisted transaction which took place in second quarter 2009.

Gain on sales of loans is a reflection of the activity in the student, mortgage, and commercial lending areas discussed elsewhere in this report.

Gain on sale/call of securities includes a $2.5 million and a $2.9 million gain recognized as the result of the sale of investment securities during the third quarter of 2010 and the first quarter of 2009, respectively.

Noninterest Expense

	For the nine months
	ended September 30,
(Dollars in thousands)	2010			2009			$ Change			% Change
Noninterest expense:
Salaries and employee benefits	$	22,400		$	21,950		$	450			2.05	%
Occupancy		8,454			8,478			(24	)		(0.28	)
FDIC and other insurance		4,455			4,444			11			0.25
Other real estate (net)		963			91			872			958.24
Unfunded loan commitment reserve		(1,271	)		(377	)		(894	)		237.14
Other general and administrative		11,821			10,231			1,590			15.54
Total noninterest expense	$	46,822		$	44,817		$	2,005			4.47	%

Salaries and employee benefits increased primarily as a result of increased employee insurance expense. The number of full-time equivalent employees for the first nine months decreased from 466 at the beginning of the year to 440 as of September 30, 2010. For the first nine months of 2009, the number of full-time equivalent employees increased from 442 at the beginning of the year to 471 as of September 30, 2009, primarily as a result of the acquisition of FNBA at the end of the second quarter of 2009.

Southwest’s bank subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates.

The unfunded loan commitment reserve expense decreased due to a decline in the level of commitments when compared to the same period of the prior year.

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The increase in other general and administrative expenses is primarily the result of increased consulting fees and increased legal fees.

Provisions for Loan Losses and for Unfunded Loan Commitments

Southwest records provisions for loan losses and unfunded commitments in amounts necessary to maintain the allowance for loan losses and the reserve for unfunded loan commitments at the levels Southwest determines are appropriate. (See “Note 5: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements.)

The allowance for loan losses of $72.4 million increased $10.0 million, or 16%, from year-end 2009. A provision for loan losses of $28.3 million was recorded in the first nine months of 2010, a decrease of $0.2 million, or 1%, from the first nine months of 2009. The decrease in the provision for loan losses was the result of the calculations of the appropriate allowance at each period end. (See “Note 5: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements and “Loans” on page 24.)

At September 30, 2010, the reserve for unfunded loan commitments was $2.2 million, a $1.3 million decrease from the amount reported at December 31, 2009. This reserve is included in other liabilities. The related provision for unfunded loan commitments is a component of general and administrative expense. (See “Note 5: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments” in the Notes to Unaudited Consolidated Financial Statements.)

Taxes on Income

Southwest’s income tax expense was $7.1 million and $5.6 million for the first nine months of 2010 and 2009, respectively, an increase of $1.5 million, or 27%. The effective tax rate for the first nine months of 2010 was 35.82% while the effective tax rate for the first nine months of 2009 was 37.23%. The decrease in the effective tax rate is the result of a state tax refund received in third quarter 2010.

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, Stillwater National, and Bank of Kansas 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”).

Stillwater National also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program; the outstanding balance of those notes was $1.7 million at September 30, 2010. Stillwater National has approved federal funds purchase lines totaling $331.3 million with ten banks; $60,000 was outstanding on these lines at September 30, 2010. Stillwater National 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 will allow Stillwater National to borrow up to $97.0 million. As of September 30, 2010, no borrowings were made through the BIC program. In addition, Stillwater National has available a $424.0 million line of credit and Bank of Kansas has a $73.5 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At September 30, 2010, the Stillwater National FHLB line of credit had an outstanding balance of $51.5 million, and the Bank of Kansas line of credit had an outstanding balance of $7.0 million.

In response to pressures in the short-term funding markets the Federal Reserve established the Term Auction Facility (“TAF”) in December 2007. The TAF allowed sound financial institutions to borrow from the Federal Reserve at favorable rates for terms of up to 84 days. TAF borrowings were secured by loans and other collateral held by the borrowing banks. Southwest elected to qualify for TAF in connection with its contingency funding plan, and participated in three auctions, all in 2008, to ensure that the process worked and to take advantage of favorable rates. The last TAF auction occurred in March 2010.

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(See also “Deposits and Other Borrowings” on page 26 for funds available on brokered certificate of deposit lines of credit and “Note 12: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for a discussion on Southwest’s funds management unit.)

Stillwater National sells securities under agreements to repurchase with Stillwater National retaining custody of the collateral. Collateral consists of U.S. government agency obligations, which are designated as pledged with Stillwater National’s safekeeping agent. These transactions are for one to four day periods. Outstanding balances under this program were $22.2 million and $26.5 million as of September 30, 2010 and 2009, respectively.

At September 30, 2010, $191.1 million of the total carrying value of available for sale investment securities of $231.8 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 nine months of 2010, no category of other borrowings had an average balance that exceeded 30% of ending shareholders’ equity.

During the first nine months of 2010, cash and cash equivalents decreased by $29.4 million, or 25%, to $89.5 million. This decrease was the net result of cash used in financing activities of $216.4 million (primarily from decreases in deposits) offset by cash provided by investing activities of $112.6 million (primarily from proceeds from sales and repayments of securities and loan origination and repayments) and cash provided by operating activities of $74.4 million.

During the first nine months of 2009, cash and cash equivalents increased by $4.8 million, or 18%, to $32.1 million. This increase was the net result of cash provided by operating activities of $53.9 million, offset by cash used in investing activities of $33.5 million (primarily from purchases of available for sale securities and loans originations and repayments offset by proceeds from sales of available for sale securities) and cash used in financing activities of $15.7 million (primarily from decreases in other borrowings offset in part by increases in deposits).

CAPITAL REQUIREMENTS

Bank holding companies are required to maintain capital ratios in accordance with regulations adopted by the Federal Reserve Bank. The guidelines are commonly known as Risk-Based Capital Guidelines. At September 30, 2010, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 18.45%, a Tier I risk-based capital ratio of 17.17%, and a leverage ratio of 14.96%. As of September 30, 2010, Stillwater National and Bank of Kansas 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, Stillwater National, or Bank of Kansas by bank regulators.

On January 27, 2010, Stillwater National informally agreed with the Office of the Comptroller of the Currency, its primary federal regulator, to maintain a ratio of capital to risk weighted assets of at least 12.5% and a Tier 1 leverage ratio of at least 8.5%. As of September 30, 2010, Stillwater National had a capital to risk weighted assets ratio of 16.57% and a Tier 1 leverage ratio of 13.22%.

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.

* * * * * * *

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

The balance sheet is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, and 300 basis points (“bp”), although Southwest may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at 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. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

On December 16, 2008, the Federal Open Market Committee established the overnight rate as a range of 0% to 0.25%. Southwest believes that all down rate scenarios are impractical since they would result in an overnight rate of less than 0%. As a result, the down 100 bp, down 200 bp, and down 300 bp scenarios have been excluded.

Changes in Interest Rates:	+ 300 bp			+200 bp			+100 bp
Policy Limit		(18.00	)%		(10.00	)%		(5.00	)%
September 30, 2010		(0.38	)%		(4.24	)%		(3.94	)%
December 31, 2009		1.98	%		(2.33	)%		(1.91	)%

The net interest income at risk position improved in each of the increasing rate scenarios when compared to the December 31, 2009 risk position. Southwest’s largest exposure to changes in interest rate is in the +200 bp scenario with a measure of (4.24%) at September 30, 2010, a decline of 1.91 percentage points from the December 31, 2009 level of (2.33%). All of the above measures of net interest income at risk remain well within prescribed policy limits.

The measures of equity value at risk indicate the ongoing economic value of Southwest by considering the effects of changes in interest rates on all of Southwest’s 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,

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approximates the fair value of Southwest’s net assets.

Changes in Interest Rates:	+300 bp			+200 bp			+100 bp
Policy Limit		(35.00	)%		(20.00	)%		(10.00	)%
September 30, 2010		(3.40	)%		(1.14	)%		(0.30	)%
December 31, 2009		(9.55	)%		(4.78	)%		(0.27	)%

As of September 30, 2010, the economic value of equity measure improved in two of the three increasing rate scenarios when compared to the December 31, 2009 percentages. Southwest’s largest economic value of equity exposure is the +300 bp scenario which improved 6.15 percentage points to (3.40%) on September 30, 2010 from the December 31, 2009 value of (9.55%). The economic value of equity ratio in all scenarios remains well within Southwest’s asset/liability management policy limits.

* * * * * * *

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by SEC rules, Southwest’s management evaluated the effectiveness of Southwest’s disclosure controls and procedures as of September 30, 2010. Southwest’s Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwest’s Chief Executive Officer and Chief Financial Officer concluded that Southwest’s disclosure controls and procedures were effective as of September 30, 2010.

First Nine Months of 2010 Changes in Internal Control over Financial Reporting

No change occurred during the first nine months of 2010 that has materially affected, or is reasonably likely to materially affect, Southwest’s internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1:     Legal proceedings

None

Item 1A:Risk Factors

Southwest amended and replaced the risk factors contained in its Annual Report on Form 10-K for the year ended December 31, 2009 in Item 1.A of its Form 10-Q for the quarter ended March 31, 2010, which item is incorporated herein by reference.

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

There were no unregistered sales of equity securities by Southwest during the quarter ended September 30, 2010.

There were no purchases of Southwest’s common stock by or on behalf of Southwest or any affiliated purchasers of Southwest (as defined in Securities and Exchange Commission Rule 10b-18) during the nine months ended September 30, 2010.

Item 3:    Defaults upon senior securities

None

Item 4:    (removed and reserved)

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

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SIGNATURES

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

SOUTHWEST BANCORP, INC.
(Registrant)

By:	/s/ Rick Green	November 5, 2010
	Rick Green	Date
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Kerby Crowell	November 5, 2010
	Kerby Crowell	Date
	Executive Vice President, Chief Financial
	Officer and Secretary
	(Principal Financial Officer)

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