Southwest Bancorp (OKSB) 10-Q 2012 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

OR

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

For the transition period from                    to                    

Commission File Number: 001-34110

SOUTHWEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Oklahoma	73-1136584
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
608 South Main Street Stillwater, Oklahoma (Address of principal executive office)	74074 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    ¨  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    ¨  NO

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

Large Accelerated Filer	¨	Accelerated Filer	x
Non-Accelerated Filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  YES    x  NO

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.

19,446,800 (5/04/12)

SOUTHWEST BANCORP, INC.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTSOF FINANCIAL CONDITION	3
UNAUDITED CONSOLIDATED STATEMENTSOF OPERATIONS	4
UNAUDITED CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME	5
UNAUDITED CONSOLIDATED STATEMENTOF CASH FLOWS	6
UNAUDITED CONSOLIDATED STATEMENTSOF SHAREHODERS’ EQUITY	7
NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS	26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
ITEM 4. CONTROLS AND PROCEDURES	38
PART II: OTHER INFORMATION	39
SIGNATURES	40

2

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Financial Condition

(Dollars in thousands)	March 31, 2012			December 31, 2011
Assets:
Cash and due from banks	$	24,458		$	30,247
Interest-bearing deposits		167,005			199,642
Cash and cash equivalents		191,463			229,889
Securities held to maturity (fair values of $13,564 and $15,885, respectively)		12,981			15,252
Securities available for sale (amortized cost $314,534 and $253,869, respectively)		320,879			260,100
Loans held for sale		38,765			38,695
Noncovered loans receivable		1,570,866			1,687,178
Less: Allowance for loan losses		(45,023	)		(44,233	)
Net noncovered loans		1,525,843			1,642,945
Covered loans receivable (includes loss share of $8,638 and $10,073, respectively)		33,314			37,615
Less: Allowance for loan losses		(60	)		(451	)
Net covered loans receivable		33,254			37,164
Net loans receivable		1,559,097			1,680,109
Accrued interest receivable		7,408			7,176
Income tax receivable		24,544			28,666
Premises and equipment, net		22,587			22,700
Noncovered other real estate		19,329			19,844
Covered other real estate		4,694			4,529
Goodwill		6,811			6,811
Other intangible assets, net		4,858			4,857
Other assets		60,445			64,245
Total assets	$	2,273,861		$	2,382,873
Liabilities:
Deposits:
Noninterest-bearing demand	$	395,141		$	400,985
Interest-bearing demand		119,759			105,905
Money market accounts		349,419			423,181
Savings accounts		34,679			33,406
Time deposits of $100,000 or more		464,876			487,907
Other time deposits		442,906			469,998
Total deposits		1,806,780			1,921,382
Accrued interest payable		5,016			3,689
Other liabilities		13,320			12,174
Other borrowings		55,139			56,479
Subordinated debentures		81,963			81,963
Total liabilities		1,962,218			2,075,687
Shareholders’ equity:
Serial preferred stock - $1,000 par value; 2,000,000 shares authorized; 70,000 shares issued and outstanding		68,644			68,455
Common stock - $1 par value; 40,000,000 shares authorized; 19,445,913 and 19,444,213 shares issued and outstanding, respectively		19,446			19,444
Paid in capital		98,895			98,932
Retained earnings		122,362			118,244
Accumulated other comprehensive income		2,296			2,111
Total shareholders’ equity		311,643			307,186
Total liabilities & shareholders’ equity	$	2,273,861		$	2,382,873

The accompanying notes are an integral part of this statement.

3

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Operations

	For the three months ended March 31,
(Dollars in thousands, except earnings per share data)	2012		2011
Interest income:
Interest and fees on loans	$	23,377	$	30,539
Investment securities:
U.S. Government and agency obligations		393		376
Mortgage-backed securities		1,319		1,245
State and political subdivisions		212		80
Other securities		22		45
Other interest-earning assets		184		140
Total interest income		25,507		32,425
Interest expense:
Interest-bearing demand		70		124
Money market accounts		286		677
Savings accounts		13		16
Time deposits of $100,000 or more		1,320		2,349
Other time deposits		1,207		1,967
Other borrowings		224		497
Subordinated debentures		1,538		1,374
Total interest expense		4,658		7,004
Net interest income		20,849		25,421
Provision for loan losses		1,716		9,050
Net interest income after provision for loan losses		19,133		16,371
Noninterest income:
Service charges and fees		2,927		2,878
Other noninterest income		52		177
Gain on sales of loans, net		535		194
Total noninterest income		3,514		3,249
Noninterest expense:
Salaries and employee benefits		7,247		7,515
Occupancy		2,545		2,804
FDIC and other insurance		783		1,243
Other real estate, net		372		436
General and administrative		3,362		3,627
Total noninterest expense		14,309		15,625
Income before taxes		8,338		3,995
Taxes on income		3,127		1,534
Net income	$	5,211	$	2,461
Net income available to common shareholders	$	4,119	$	1,408
Basic earnings per common share	$	0.21	$	0.07
Diluted earnings per common share		0.21		0.07
Cash dividends declared per share		—		—

The accompanying notes are an integral part of this statement.

4

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

	For the three months ended March 31,
(Dollars in thousands)	2012			2011
Net income	$	5,211		$	2,461
Other comprehensive income:
Unrealized holding gain on available for sale securities		114			266
Change in fair value of derivative used for cash flow hedge		225			(513	)
Other comprehensive income (loss), before tax		339			(247	)
Tax (expense) benefit related to items of other comprehensive income		(154	)		84
Other comprehensive income (loss), net of tax		185			(163	)
Comprehensive income	$	5,396		$	2,298

The accompanying notes are an integral part of this statement.

5

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statement of Cash Flows

	For the three months ended March 31,
(Dollars in thousands)	2012			2011
Operating activities:
Net income	$	5,211		$	2,461
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,716			9,050
Deferred tax expense		3,050			1,155
Asset depreciation		597			689
Securities premium amortization, net of discount accretion		656			632
Amortization of intangibles		296			360
Stock based compensation expense		26			103
Net gain on sales of available for sale loans		(535	)		(194	)
Net loss on sales of premises/equipment		—			16
Net loss (gain) on sales of other real estate		(100	)		146
Proceeds from sales of held for sale loans		28,223			12,457
Held for sale loans originated for resale		(27,916	)		(12,173	)
Net changes in assets and liabilities:
Accrued interest receivable		(232	)		(199	)
Other assets		276			711
Income taxes receivable / payable		4,073			509
Excess tax expense from share-based payment arrangements		49			123
Accrued interest payable		1,327			228
Other liabilities		373			(942	)
Net cash provided by operating activities		17,090			15,132
Investing activities:
Proceeds from principal repayments, calls and maturities:
Held to maturity securities		2,250			1,250
Available for sale securities		15,426			18,945
Purchases of other investments		(3	)		(14	)
Purchases of available for sale securities		(76,726	)		(16,472	)
Principal repayments, net of loans originated		118,464			74,562
Purchases of premises and equipment		(575	)		(507	)
Proceeds from sales of premises and equipment		91			31
Proceeds from sales of other real estate		1,535			1,537
Net cash provided by investing activities		60,462			79,332
Financing activities:
Net decrease in deposits		(114,602	)		(34,157	)
Net decrease in other borrowings		(1,340	)		(9,270	)
Net proceeds from issuance of common stock		14			29
Excess tax expense from share-based payment arrangements		(49	)		(123	)
Preferred stock dividends paid		(1	)		(876	)
Net cash used in financing activities		(115,978	)		(44,397	)
Net (decrease) increase in cash and cash equivalents		(38,426	)		50,067
Cash and cash equivalents:
Beginning of period		229,889			67,496
End of period	$	191,463		$	117,563

The accompanying notes are an integral part of this statement.

6

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity

(Dollars in thousands)	Preferred Stock						Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
			Common Stock
			Shares		Amount
Balance, December 31, 2010	$	67,724		19,421,900	$	19,422	$	98,894		$	190,793		$	979		$	377,812
Dividends (paid and /or accrued):
Preferred		—		—		—		—			(876	)		—			(876	)
Warrant amortization		178		—		—		—			(178	)		—			—
Common stock issued		—		15,400		15		210			—			—			225
Net common stock issued under employee plans and related tax expense		—		990		1		(110	)		—			—			(109	)
Other comprehensive loss, net of tax		—		—		—		—			—			(163	)		(163	)
Net income		—		—		—		—			2,461			—			2,461
Balance, March 31, 2011	$	67,902		19,438,290	$	19,438	$	98,994		$	192,200		$	816		$	379,350
Balance, December 31, 2011	$	68,455		19,444,213	$	19,444	$	98,932		$	118,244		$	2,111		$	307,186
Dividends (paid and /or accrued):
Preferred		—		—		—		—			(904	)		—			(904	)
Warrant amortization		189		—		—		—			(189	)		—			—
Net common stock issued under employee plans and related tax expense		—		1,700		2		(37	)		—			—			(35	)
Other comprehensive income, net of tax		—		—		—		—			—			185			185
Net income		—		—		—		—			5,211			—			5,211
Balance, March 31, 2012	$	68,644		19,445,913	$	19,446	$	98,895		$	122,362		$	2,296		$	311,643

The accompanying notes are an integral part of this statement.

7

SOUTHWEST BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1: SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, shareholders’ equity, cash flows, and comprehensive income in conformity with accounting principles generally accepted in the United States. However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. Those adjustments consist of normal recurring adjustments. The results of operations for the three months ended March 31, 2012, and the cash flows for the three months ended March 31, 2012, 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, 2011.

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. All significant intercompany transactions and balances have been eliminated in consolidation.

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 2: INVESTMENT SECURITIES

A summary of the amortized cost and fair values of investment securities at March 31, 2012 and December 31, 2011 follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
At March 31, 2012:
Held to Maturity:
Obligations of state and political subdivisions	$	12,981	$	583	$	—		$	13,564
Total	$	12,981	$	583	$	—		$	13,564
Available for Sale:
Federal agency securities	$	76,085	$	877	$	(178	)	$	76,784
Obligations of state and political subdivisions		23,213		330		(149	)		23,394
Residential mortgage-backed securities		214,167		5,135		(161	)		219,141
Equity securities		1,069		491		—			1,560
Total	$	314,534	$	6,833	$	(488	)	$	320,879
At December 31, 2011:
Held to Maturity:
Obligations of state and political subdivisions	$	15,252	$	633	$	—		$	15,885
Total	$	15,252	$	633	$	—		$	15,885
Available for Sale:
Federal agency securities	$	64,524	$	1,051	$	(22	)	$	65,553
Obligations of state and political subdivisions		10,926		196		(19	)		11,103
Residential mortgage-backed securities		177,365		4,889		(107	)		182,147
Equity securities		1,054		243		—			1,297
Total	$	253,869	$	6,379	$	(148	)	$	260,100

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”).

8

Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments, are carried at cost and included in other assets on the unaudited consolidated statement of financial condition. Total investments carried at cost were $10.5 million at both March 31, 2012 and December 31, 2011. 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 March 31, 2012 follows:

	Available for Sale				Held to Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	13,134	$	13,366	$	1,129	$	1,137
More than one year through five years		192,418		197,622		1,948		1,989
More than five years through ten years		89,000		89,614		6,443		6,698
More than ten years		19,982		20,277		3,461		3,740
Total	$	314,534	$	320,879	$	12,981	$	13,564

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. There were no sales of investment securities for the three months ended March 31, 2012 or March 31, 2011.

The following table presents securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011. Securities whose market values exceed cost are excluded from this table.

(Dollars in thousands)	Number  of Securities		Amortized cost  of securities with unrealized losses		Continuous Unrealized Loss Existing for:					Fair value  of securities with unrealized losses
					Less Than 12  Months			More Than 12 Months
At March 31, 2012:
Available for Sale:
Federal agency securities		11	$	21,888	$	(178	)	$	—	$	21,710
Obligations of state and political subdivisions		5		7,435		(149	)		—		7,286
Residential mortgage-backed securities		18		30,096		(161	)		—		29,935
Total		34	$	59,419	$	(488	)	$	—	$	58,931
At December 31, 2011:
Available for Sale:
Federal agency securities		3	$	5,461	$	(22	)	$	—	$	5,439
Obligations of state and political subdivisions		3		3,853		(19	)		—		3,834
Residential mortgage-backed securities		22		19,666		(107	)		—		19,558
Total		28	$	28,980	$	(148	)	$	—	$	28,831

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 March 31, 2012, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not more likely than not that Southwest will have to sell any such securities before a recovery of cost. The declines in fair value were 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 March 31, 2012, management believes the impairment of these investments is not deemed to be other-than-temporary.

9

As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $254.6 million and $212.3 million were pledged to meet such requirements at March 31, 2012 and December 31, 2011, respectively. Any amount over-pledged can be released at any time.

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

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 collectability of Southwest’s loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see Note 8: Operating Segments for more detail regarding loans by market. At March 31, 2012 and December 31, 2011, 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’s loan classifications were as follows:

	March 31, 2012						December 31, 2011
(Dollars in thousands)	Noncovered			Covered			Noncovered			Covered
Real estate mortgage:
Commercial	$	996,486		$	22,607		$	1,028,561		$	23,686
One-to-four family residential		76,287			5,766			80,375			7,072
Real estate construction:
Commercial		222,678			2,344			227,098			3,746
One-to-four family residential		3,814			—			4,987			—
Commercial		273,324			2,401			346,266			2,841
Installment and consumer:
Guaranteed student loans		5,276			—			5,396			—
Other		31,766			196			33,190			270
		1,609,631			33,314			1,725,873			37,615
Less: Allowance for loan losses		(45,023	)		(60	)		(44,233	)		(451	)
Total loans, net	$	1,564,608		$	33,254		$	1,681,640		$	37,164

Concentrations of Credit. At March 31, 2012, approximately $562.5 million, or 35%, of Southwest’s noncovered 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.

Loans Held for Sale. Southwest had loans which were held for sale of $38.8 million and $38.7 million at March 31, 2012 and December 31, 2011, respectively. These loans are carried at the lower of cost or market value. Guaranteed student loans are generally sold to a single servicer. A substantial portion of the one-to-four family residential loans and loan servicing rights are primarily sold to one investor. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. Southwest also provides United States Department of Agriculture (“USDA”) government guaranteed commercial real estate lending services to rural healthcare providers. These loans are available for sale in the secondary market.

Loan Servicing. 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 $301.4 million and $281.3 million at March 31, 2012 and March 31, 2011, respectively. 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.

Acquired Loans. 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 for 80% of net losses up to $35.0 million on covered assets, primarily acquired loans and other real estate, and for 95% of any net losses above $35.0 million. Bank of Kansas services the covered assets.

10

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. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.

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 March 31, 2012, Bank of Kansas has identified $19.4 million in cumulative net losses that have been submitted to the FDIC under such loss sharing agreements.

Changes in the carrying amounts and accretable yields for ASC 310.30 loans were as follows for the three months ended March 31, 2012 and March 31, 2011.

	For the three months ended March 31,
	2012						2011
(Dollars in thousands)	Accretable Yield			Carrying amount of loans			Accretable Yield			Carrying amount of loans
Balance at beginning of period	$	2,402		$	37,615		$	2,688		$	53,628
Payments received		—			(3,291	)		—			(3,196	)
Transfers to other real estate / repossessed assets		9			(990	)		4			(1,008	)
Charge-offs		(4	)		(73	)		7			(362	)
Net reclassifications to / from nonaccretable amount		(271	)		—			—			—
Amortization		(218	)		53			(55	)		55
Balance at end of period	$	1,918		$	33,314		$	2,644		$	49,117

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

Under generally accepted accounting principles and instructions to reports of condition and income of federal banking regulators, a nonaccrual loan may be returned to accrual status: 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 financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance.

Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to 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.

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

	At March 31, 2012				At December 31, 2011
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered
Real estate mortgage:
Commercial	$	6,821	$	4,870	$	4,667	$	3,554
One-to-four family residential		1,508		151		1,468		188
Real estate construction:
Commercial		3,768		1,647		3,877		3,009
Commercial		2,109		343		3,371		370
Other consumer		118		4		123		7
Total nonaccrual loans	$	14,324	$	7,015	$	13,506	$	7,128

During the first three months of 2012, $51,000 of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the three months ended March 31, 2012, additional interest income of $0.3 million would have been recorded.

Cumulative charge-offs against noncovered nonaccrual loans at March 31, 2012 and December 31, 2011 were $14.9 million and $13.6 million, respectively.

As of March 31, 2012 and December 31, 2011, included in noncovered nonaccrual loans are five collateral dependent lending relationships with aggregate principal balances of approximately $9.6 million and $9.3 million, respectively, and related impairment reserves of $0.6 million and $0.4 million, respectively, which were established either based on recent appraisal values obtained for the respective properties or the discounted present value of expected cash flows using the loan’s initial effective interest rate. Four of these lending relationships are secured by commercial real estate and include a retail building project with one loan outstanding, three commercial building lending relationships, two with one loan outstanding and the other with three loans outstanding, and a commercial relationship with one loan outstanding.

The following table presents an age analysis of past due loans at March 31, 2012 and December 31, 2011.

(Dollars in thousands)	30-89 days past due		90 days  and greater past due		Total past due		Current		Total loans		Recorded loans > 90 days and accruing
At March 31, 2012
Noncovered:
Real estate mortgage:
Commercial	$	6,455	$	6,821	$	13,276	$	983,210	$	996,486	$	—
One-to-four family residential		326		1,508		1,834		74,453		76,287		—
Real estate construction:
Commercial		1,346		3,768		5,114		217,564		222,678		—
One-to-four family residential		—		—		—		3,814		3,814		—
Commercial		12,512		2,209		14,721		258,603		273,324		100
Other		426		118		544		36,498		37,042		—
Total - noncovered		21,065		14,424		35,489		1,574,142		1,609,631		100
Covered:
Real estate mortgage:
Commercial		—		4,870		4,870		17,737		22,607		—
One-to-four family residential		43		151		194		5,572		5,766		—
Real estate construction:
Commercial		—		1,647		1,647		697		2,344		—
Commercial		—		343		343		2,058		2,401		—
Other		—		4		4		192		196		—
Total - covered		43		7,015		7,058		26,256		33,314		—
Total	$	21,108	$	21,439	$	42,547	$	1,600,398	$	1,642,945	$	100

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(Dollars in thousands)	30-89 days past due		Greater than 90 days past due		Total past due		Current		Total loans		Recorded loans > 90 days and accruing
At December 31, 2011
Noncovered:
Real estate mortgage:
Commercial	$	2,567	$	4,667	$	7,234	$	1,021,327	$	1,028,561	$	—
One-to-four family residential		1,206		1,491		2,697		77,678		80,375		23
Real estate construction:
Commercial		1,825		3,877		5,702		221,396		227,098		—
One-to-four family residential		—		—		—		4,987		4,987		—
Commercial		8,331		3,374		11,705		334,561		346,266		3
Other		362		140		502		38,084		38,586		17
Total - noncovered		14,291		13,549		27,840		1,698,033		1,725,873		43
Covered:
Real estate mortgage:
Commercial real estate		2,243		3,554		5,797		17,889		23,686		—
One-to-four family residential		—		188		188		6,884		7,072		—
Real estate construction
Commercial real estate		—		3,009		3,009		737		3,746		—
Commercial		—		370		370		2,471		2,841		—
Other		—		7		7		263		270		—
Total - covered		2,243		7,128		9,371		28,244		37,615		—
Total	$	16,534	$	20,677	$	37,211	$	1,726,277	$	1,763,488	$	43

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

Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

Impaired loans are presented in the following tables:

	With No Specific Allowance				With A Specific Allowance
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At March 31, 2012
Noncovered:
Commercial real estate	$	16,939	$	17,104	$	17,917	$	19,609	$	4,240
One-to-four family residential		304		388		1,169		1,300		40
Real estate construction		12,380		15,979		244		260		75
Commercial		640		865		2,672		5,486		824
Other		10		11		108		120		108
Total noncovered	$	30,273	$	34,347	$	22,110	$	26,775	$	5,287
Covered:
Commercial real estate	$	4,256	$	4,868	$	614	$	702	$	18
One-to-four family residential		115		174		36		105		1
Real estate construction		135		309		1,512		2,106		35
Commercial		311		1,890		32		345		6
Other		4		8		—		—		—
Total covered	$	4,821	$	7,249	$	2,194	$	3,258	$	60

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	With No Specific Allowance				With A Specific Allowance
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
At December 31, 2011
Noncovered:
Commercial real estate	$	17,985	$	18,142	$	3,716	$	5,366	$	411
One-to-four family residential		984		1,130		484		611		21
Real estate construction		11,735		15,244		248		262		73
Commercial		7,283		7,710		3,207		4,958		349
Other		11		12		112		123		112
Total noncovered	$	37,998	$	42,238	$	7,767	$	11,320	$	966
Covered:
Commercial real estate	$	2,486	$	2,670	$	1,068	$	1,271	$	140
One-to-four family residential		118		190		70		138		5
Real estate construction		758		1,071		2,251		3,102		258
Commercial		338		542		32		350		32
Other		7		29		—		—		—
Total covered	$	3,707	$	4,502	$	3,421	$	4,861	$	435

The average recorded investment and interest income recognized on impaired loans as of March 31, 2012 and March 31, 2011 is shown in the following table:

	At March 31,
	2012				2011
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Noncovered:
Commercial real estate	$	25,414	$	—	$	84,934	$	—
One-to-four family residential		1,475		9		2,298		1
Real estate construction		12,950		—		82,695		—
Commercial		3,659		4		17,543		44
Other		118		—		18		—
Total noncovered	$	43,616	$	13	$	187,488	$	45
Covered:
Commercial real estate	$	21,267	$	38	$	29,998	$	—
One-to-four family residential		6,681		—		8,643		—
Real estate construction		5,244		—		6,988		—
Commercial		2,602		—		5,245		—
Other		224		—		600		—
Total covered	$	36,018	$	38	$	51,474	$	—

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

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

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Troubled debt restructurings of loans that occurred during the three months ended March 31, 2012 and March 31, 2011 are shown in the following table:

(Dollars in thousands)	Number of Modifications		Recorded Investment
For the three months ended March 31, 2012
Commercial real estate		1	$	12,035
One-to-four family residential		1		99
Real estate construction		1		973
Commercial		2		343
Total		5	$	13,450
For the three months ended March 31, 2011
Commercial real estate		1	$	3,721
Commercial		4		3,978
Total		5	$	7,699

The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant. Southwest has no significant commitments to lend additional amounts with respect to these performing troubled debt restructured loans.

For the three months ended March 31, 2012, two commercial loans that were modified as troubled debt restructurings with a total recorded investment of $0.1 million have subsequently defaulted. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring. For the three months ended March 31, 2011, there were no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months.

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

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

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

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

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Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed as of those dates, the risk category of loans by class of loans is as follows:

(Dollars in thousands)	Commercial Real Estate		1-4 Family Residential		Real Estate Construction		Commercial		Other		Total
At March 31, 2012
Grade:
Pass	$	853,902	$	76,714	$	149,498	$	236,691	$	36,889	$	1,353,694
Special Mention		85,674		2,393		40,141		13,136		225		141,569
Substandard		77,723		2,946		39,197		24,878		124		144,868
Doubtful		1,794		—		—		1,020		—		2,814
Total	$	1,019,093	$	82,053	$	228,836	$	275,725	$	37,238	$	1,642,945

(Dollars in thousands)	Commercial Real Estate		1-4 Family Residential		Real Estate Construction		Commercial		Other		Total
At December 31, 2011
Grade:
Pass	$	927,652	$	84,475	$	139,431	$	301,636	$	38,202	$	1,491,396
Special Mention		60,000		564		46,126		11,345		642		118,677
Substandard		62,790		2,408		50,136		35,164		12		150,510
Doubtful		1,805		—		138		962		—		2,905
Total	$	1,052,247	$	87,447	$	235,831	$	349,107	$	38,856	$	1,763,488

Allowance for Loan Losses. 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 loan and lease portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate after the effects of net charge-offs for the period.

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

The specific allowance is recorded based on the result of an evaluation consistent with ASC 310.10.35,Receivables: Subsequent Measurement, for each impaired loan. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated value of the collateral. Charge-offs against the allowance for impaired loans are made when and to the extent loans are deemed uncollectible. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

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

Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed

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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.

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

(Dollars in thousands)	Commercial Real Estate			1-4 Family Residential			Real Estate Construction			Commercial			Other			Total
At March 31, 2012
Balance at beginning of period	$	21,749		$	1,016		$	11,177		$	9,827		$	915		$	44,684
Loans charged-off		(25	)		(158	)		—			(1,483	)		(270	)		(1,936	)
Recoveries		11			35			42			272			259			619
Provision for loan losses		2,052			60			73			(419	)		(50	)		1,716
Balance at end of period	$	23,787		$	953		$	11,292		$	8,197		$	854		$	45,083
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	4,240		$	40		$	75		$	824		$	108		$	5,287
Collectively evaluated for impairment		19,529			912			11,182			7,367			746			39,736
Acquired with deteriorated credit quality		18			1			35			6			—			60
Total ending allowance balance	$	23,787		$	953		$	11,292		$	8,197		$	854		$	45,083
Loans receivable ending balance:
Individually evaluated for impairment	$	34,856		$	1,473		$	12,624		$	3,312		$	118		$	52,383
Collectively evaluated for impairment		961,630			74,814			213,868			270,012			36,924			1,557,248
Acquired with deteriorated credit quality		22,607			5,766			2,344			2,401			196			33,314
Total ending loans balance	$	1,019,093		$	82,053		$	228,836		$	275,725		$	37,238		$	1,642,945
At March 31, 2011
Balance at beginning of period	$	32,508		$	1,597		$	19,605		$	10,605		$	914		$	65,229
Loans charged-off		(7,325	)		(83	)		(1,134	)		(4,526	)		(324	)		(13,392	)
Recoveries		35			25			122			189			27			398
Provision for loan losses		4,850			(122	)		(1,174	)		5,234			262			9,050
Balance at end of period	$	30,068		$	1,417		$	17,419		$	11,502		$	879		$	61,285
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	8,971		$	197		$	5,297		$	5,977		$	7		$	20,449
Collectively evaluated for impairment		21,097			1,220			12,122			5,525			872			40,836
Acquired with deteriorated credit quality		—			—			—			—			—			—
Total ending allowance balance	$	30,068		$	1,417		$	17,419		$	11,502		$	879		$	61,285
Loans receivable ending balance:
Individually evaluated for impairment	$	94,403		$	2,634		$	83,183		$	24,664		$	27		$	204,911
Collectively evaluated for impairment		1,207,761			84,652			347,210			391,728			42,166			2,073,517
Acquired with deteriorated credit quality		28,929			8,192			6,425			5,021			550			49,117
Total ending loans balance	$	1,331,093		$	95,478		$	436,818		$	421,413		$	42,743		$	2,327,545

NOTE 4: FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, 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:

Level 1      Quoted prices in active markets for identical instruments.

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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 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.

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 could have a material effect on the estimated fair value amounts. There were no changes in valuation methods used to estimate fair value during the three months ended March 31, 2012.

A description of the valuation methodologies used for instruments 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. Southwest obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. Southwest reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.

The fair value of a certain private equity investment is estimated based on Southwest’s proportionate share of the net asset value, $1.5 million and $1.2 million as of March 31, 2012 and December 31, 2011, respectively. The investee invests in small and mid-sized U.S. financial institutions and other financial-related companies. This investment has a quarterly redemption with sixty-five days’ notice.

Derivative instrument – Southwest utilizes an interest rate swap agreement to convert one of its variable-rate subordinated debentures to a fixed rate (cash flow hedge). The fair value of the interest rate swap agreement is obtained from dealer quotes.

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

				Fair Value Measurement at Reporting Date Using
(Dollars in thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
At March 31, 2012
Loans held for sale:
Student loans	$	5,276		$	—	$	5,276		$	—
One-to-four family residential		3,890			—		3,890			—
Government guaranteed commercial real estate		29,477			—		29,477			—
Other loans held for sale		122			—		122			—
Available for sale securities:
Federal agency securities		76,784			—		76,784			—
Obligations of state and political subdivisions		23,394			—		23,394			—
Residential mortgage-backed securities		219,141			—		219,141			—
Equity securities		1,560			102		1,458			—
Derivative instrument		(2,609	)		—		(2,609	)		—
Total	$	357,035		$	102	$	356,933		$	—

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				Fair Value Measurement at Reporting Date Using
(Dollars in thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
At December 31, 2011
Loans held for sale:
Student loans	$	5,396		$	—	$	5,396		$	—
One-to-four family residential		3,547			—		3,547			—
Government guaranteed commercial real estate		29,624			—		29,624			—
Other loans held for sale		128			—		128			—
Available for sale securities:
Federal agency securities		65,553			—		65,553			—
Obligations of state and political subdivisions		11,103			—		11,103			—
Residential mortgage-backed securities		182,147			—		182,147			—
Equity securities		1,297			80		1,217			—
Derivative instrument		(2,834	)		—		(2,834	)		—
Total	$	295,961		$	80	$	295,881		$	—

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

Impaired loans – Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on third-party appraisals 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 less the estimated costs to sell the asset.

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 2012 or 2011; 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 2012 or 2011; 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.

Assets that are measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011 are summarized below.

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			Fair Value Measurements Using
(Dollars in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
At March 31, 2012
Noncovered impaired loans at fair value :
Commercial real estate	$	17,917	$	—	$	17,917	$	—	$	(2,375	)
One-to-four family residential		1,169		—		1,169		—		94
Real estate construction		244		—		244		—		3,507
Commercial		2,672		—		2,672		—		184
Other consumer		108		—		108		—		5
Covered other real estate		4,694		—		4,694		—		(25	)
Total	$	26,804	$	—	$	26,804	$	—	$	1,390
At December 31, 2011
Noncovered impaired loans at fair value :
Commercial real estate	$	3,716	$	—	$	3,716	$	—	$	(1,727	)
One-to-four family residential		604		—		604		—		(55	)
Real estate construction		3,877		—		3,877				(3,569	)
Commercial		3,239		—		3,239		—		(1,964	)
Other consumer		112		—		112		—		(103	)
Noncovered other real estate		19,844		—		19,844		—		(3,104	)
Mortgage loan servicing rights		1,817		—		1,817		—		(315	)
Total	$	33,209	$	—	$	33,209	$	—	$	(10,837	)

Noncovered impaired loans measured at fair value with a carrying amount of $27.9 million were written down to a fair value of $21.7 million, resulting in a life-to-date impairment of $6.3 million, of which $1.4 million was included in the provision for loan losses for the three months ended March 31, 2012. As of December 31, 2011, noncovered impaired loans measured at fair value with a carrying amount of $19.7 million were written down to the fair value of $11.5 million at December 31, 2011, resulting in a life-to-date impairment charge of $8.1 million, of which $7.4 million was included in the provision for loan losses for the year ended December 31, 2011.

During the quarter, covered other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $25,000, which was included in noninterest expense for the three months ended March 31, 2012. In the prior year, noncovered other real estate assets were written down to their respective fair values, resulting in impairment charges of $3.1 million, which was included in noninterest expense for the year ended December 31, 2011 and mortgage loan servicing rights were written down to their fair value, resulting in impairment charges of $0.3 million, which was included in noninterest income for the year ended December 31, 2011.

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

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

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

Loans – 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.

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

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

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.

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

Subordinated debentures – Two subordinated debentures have floating rates that reset quarterly and the third subordinated debenture has a fixed rate. The fair value of the fixed rate subordinated debenture is based on market price. The fair value of the floating rate subordinated debentures approximates carrying value at March 31, 2012. The fair value of the floating rate subordinated debentures at December 31, 2011 was estimated by taking into consideration the liquidity discount implied by the market price of the fixed rate subordinated debenture at December 31, 2011.

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

	At March 31, 2012				At December 31, 2011
(Dollars in thousands)	Carrying Values		Fair Values		Carrying Values		Fair Values
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	191,463	$	191,463	$	30,247	$	30,247
Securities held to maturity		12,981		13,564		15,252		15,885
Accrued interest receivable		7,408		7,408		7,176		7,176
Investments included in other assets		10,457		10,457		10,454		10,454
Level 3 inputs:
Total loans, net of allowance		1,597,862		1,548,701		1,718,804		1,708,894
Financial liabilities:
Level 2 inputs:
Deposits		1,806,780		1,759,513		1,921,382		1,883,196
Accrued interest payable		5,016		5,016		3,689		3,689
Other liabilities		10,711		10,711		9,340		9,340
Derivative instrument		2,609		2,609		2,834		2,834
Other borrowings		55,139		59,139		56,479		60,688
Subordinated debentures		81,963		82,791		81,963		72,423

NOTE 5: DERIVATIVE INSTRUMENTS

Southwest has an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap contract was designated as a hedging instrument in cash flow hedges with the objective of protecting the overall cash flow from Southwest’s quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”). Under the swap, Southwest will pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by Southwest as of March 31, 2012 was 3.42%.

The estimated fair value of the interest rate derivative contract outstanding as of March 31, 2012 and December 31, 2011 resulted in a pre-tax loss of $2.6 million and $2.8 million, respectively, and was included in other liabilities in the unaudited consolidated statement of financial condition. Southwest obtained the counterparty valuation to validate its interest rate derivative contract as of March 31, 2012 and December 31, 2011.

The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.2 million gain and a $0.3 million loss for the three months ended March 31, 2012 and March 31, 2011, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.

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Net cash flows as a result of the interest rate swap agreement were $0.2 million and $0.1 million for the three months ended March 31, 2012 and March 31, 2011, respectively, and were included in interest expense on subordinated debentures.

Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by Southwest’s asset/liability management committee. Southwest’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with Southwest’s derivative contract.

The fair value of cash and securities posted as collateral by Southwest related to the derivative contract was $3.8 million at both March 31, 2012 and December 31, 2011.

NOTE 6: TAXES ON INCOME

Net deferred tax assets totaled $37.7 million at March 31, 2012 and $43.7 at December 31, 2011. Net deferred tax assets are included in other assets and no valuation allowance is recorded.

Southwest is in a cumulative pretax loss position for the trailing three-year period ended March 31, 2012. Under current accounting guidance, this represents significant negative evidence in the determination of the need for a valuation allowance. Included in the three-year pretax loss position is $101.0 million related to the nonrecurring sale of nonperforming assets and potential problem loans that occurred in fourth quarter 2011.

Southwest conducted an interim analysis to assess the need for a valuation allowance at March 31, 2012. As part of this analysis management considered negative evidence associated with the trailing cumulative loss position against positive evidence associated with the taxable income generated in the first three months of 2012, a long history of taxable income, the projected current federal income tax receivable, and projected pre-tax income in future years. While realization of the deferred tax benefit is not assured, it is management’s judgment, after review of all available evidence and based on the weight of such evidence, that a valuation allowance is not required as realization of these benefits meets the “more likely than not” standard under generally accepted accounting principles.

Southwest and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Southwest is no longer subject to U.S. federal or state tax examinations for years before 2009. On February 15, 2012, Southwest was notified by the Internal Revenue Service that it was under audit for the 2009 income tax filing.

NOTE 7: 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 March 31, 2012 and 2011, there were 19,500 and 135,166 antidilutive stock options to purchase common shares, respectively. An antidilutive warrant to purchase 703,753 shares of common stock was also outstanding on March 31, 2012.

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

	For the three months ended March 31,
(Dollars in thousands, except earnings per share data)	2012			2011
Numerator:
Net income	$	5,211		$	2,461
Preferred dividend		(903	)		(875	)
Warrant amortization		(189	)		(178	)
Net income available to common shareholders	$	4,119		$	1,408
Earnings allocated to participating securities		—			(2	)
Numerator for basic earnings per common share	$	4,119		$	1,406
Effect of reallocating undistributed earnings of participating securities		—			—
Numerator for diluted earnings per common share	$	4,119		$	1,406
Denominator:
Denominator for basic earnings per common share - Weighted average common shares outstanding		19,444,698			19,409,317
Effect of dilutive securities:
Stock options		—			3,967
Warrant		—			—
Denominator for diluted earnings per common share		19,444,698			19,413,284
Earnings per common share:
Basic	$	0.21		$	0.07
Diluted	$	0.21		$	0.07

NOTE 8: OPERATING SEGMENTS

Southwest operates six principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, Out of Market, 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 Out of Market 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, SNB Wealth Management and corporate investments.

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.

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 Out of Market segment are portfolio loans attributable to thirty-two 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.

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The following table summarizes financial results by operating segment:

For the Three Months Ended March 31, 2012
(Dollars in thousands)	Oklahoma Banking			Texas Banking		Kansas Banking			Out of Market			Secondary Market		Other Operations			Total Company
Net interest income	$	9,940		$	8,340	$	3,263		$	1,396		$	389	$	(2,479	)	$	20,849
Provision for loan losses		(117	)		687		(983	)		2,129			—		—			1,716
Noninterest income		1,746			451		514			47			550		206			3,514
Noninterest expenses		6,750			3,046		2,778			226			481		1,028			14,309
Income (loss) before taxes		5,053			5,058		1,982			(912	)		458		(3,301	)		8,338
Taxes on income		1,895			1,897		743			(342	)		172		(1,238	)		3,127
Net income (loss)	$	3,158		$	3,161	$	1,239		$	(570	)	$	286	$	(2,063	)	$	5,211
Fixed asset expenditures	$	139		$	63	$	7		$	—		$	—	$	366		$	575
Total loans at period end		642,700			636,540		202,050			122,890			38,765		—			1,642,945
Total assets at period end		679,457			636,395		215,985			120,527			41,112		580,385			2,273,861
Total deposits at period end		1,367,160			151,856		267,630			—			3,274		16,860			1,806,780

For the Three Months Ended March 31, 2011
(Dollars in thousands)	Oklahoma Banking		Texas Banking		Kansas Banking		Out of Market			Secondary Market			Other Operations			Total Company
Net interest income	$	10,997	$	10,091	$	3,369	$	1,882		$	311		$	(1,229	)	$	25,421
Provision for loan losses		225		5,008		815		3,002			—			—			9,050
Noninterest income		1,873		424		529		53			145			225			3,249
Noninterest expenses		6,998		3,727		2,870		455			478			1,097			15,625
Income (loss) before taxes		5,647		1,780		213		(1,522	)		(22	)		(2,101	)		3,995
Taxes on income		2,212		701		82		(598	)		(9	)		(854	)		1,534
Net income (loss)	$	3,435	$	1,079	$	131	$	(924	)	$	(13	)	$	(1,247	)	$	2,461
Fixed asset expenditures	$	19	$	—	$	28	$	—		$	3		$	457		$	507
Total loans at period end		838,006		953,123		272,685		226,383			37,348			—			2,327,545
Total assets at period end		862,907		946,457		296,567		221,007			39,139			412,951			2,779,028
Total deposits at period end		1,527,731		166,734		275,381		—			2,394			246,331			2,218,571

NOTE 9: DEFERRAL OF INTEREST & DIVIDENDS

In July 2011, Southwest determined to suspend payments of interest on its three issues of outstanding debentures and dividends on the related trust preferred securities effective August 1, 2011.

The terms of the debentures allow Southwest to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. These terms also allow Southwest to resume payments at the end of any deferral period, or to extend the deferral up to the maximum 20 quarters in total. No deferral can extend past the maturity date of the debenture.

Interest will continue to accrue on the debentures, and dividends will continue to accrue on the related trust preferred securities.

Southwest’s trust preferred securities were issued by the following subsidiary trusts: Southwest Capital Trust II, which trades on the NASDAQ Global Select Market under the symbol “OKSBP”; OKSB Statutory Trust I; and SBI Capital Trust II. At March 31, 2012, $82.0 million of debentures were outstanding.

In addition, Southwest determined to defer payment of dividends on its Series B Preferred Securities issued under the U.S. Treasury Department’s Capital Purchase Program, effective for the dividend payments, beginning August 15, 2011. Dividends on the Preferred Securities may not be paid while interest on Southwest’s debentures has been deferred, but will continue to accrue. At March 31, 2012, $70.0 million of Preferred Securities were outstanding.

The deferrals on interest and dividends are intended to preserve liquidity at the holding company level, which may be used to inject funds in its bank subsidiaries or for other corporate purposes. Because the interest on the debentures, the dividends on the related trust preferred securities, and the dividends on the Preferred Securities will continue to accrue, these deferrals are

24

not expected to have any significant effect on the net income or net income available to common shareholders of Southwest. As of March 31, 2012, $4.3 million was accrued for interest on the debentures and $3.1 million was accrued for dividends on the Series B Preferred Securities and included in accrued interest payable and other liabilities on the unaudited consolidated statement of financial condition, respectively.

NOTE 10: NEW AUTHORITATIVE ACCOUNTING GUIDANCE

In May 2011, FASB issued Accounting Standards Update No. 2011-04,Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 was effective for Southwest beginning January 1, 2012 and did not have a significant impact on the financial statements. Southwest incorporated the required disclosures. See Note 4.

In June 2011, FASB issued Accounting Standards Update No. 2011-05,Comprehensive Income – Presentation of Comprehensive Income(“ASU 2011-05”). ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of stockholders’ equity was eliminated. ASU 2011-05 was effective for Southwest retrospectively for fiscal years, and interim periods within those years, beginning January 1, 2012 with the exception of the disclosure of the reclassification adjustments on the face of the financial statements, which was deferred. These disclosure requirements did not have a significant impact on Southwest’s consolidated financial statements.

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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;

• Expectations regarding regulatory actions;

• Expectations regarding our ability to utilize tax loss benefits;

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

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

• Statements of our ability to achieve financial and other goals.

These forward-looking statements are subject to significant uncertainties because they are based upon: the amount and timing of future changes in interest rates, market behavior, and other economic conditions; future laws, regulations and accounting principles; changes in regulatory standards and examination policies; and a variety of other matters. These other matters include, among other things, the direct and indirect effects of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and supervisory policies of banking regulators. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, 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 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.

There have been no significant changes in Southwest’s application of critical accounting policies since December 31, 2011.

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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 March 31, 2012, Southwest had total assets of $2.3 billion, deposits of $1.8 billion, and shareholders’ equity of $311.6 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 March 31, 2012, the Oklahoma Banking segment accounted for $642.7 million in loans, the Texas Banking segment accounted for $636.5 million in loans, the Kansas Banking segment accounted for $202.1 million in loans, and the Out of Market segment accounted for $122.9 million in loans. Southwest offers products to the student, residential mortgage, and rural healthcare lending markets. These operations comprise the Secondary Market business segment. At March 31, 2012, Secondary Market loans accounted for $38.8 million in loans. 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 8: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements.

FINANCIAL CONDITION

Investment Securities

Southwest’s investment security portfolio increased $58.5 million, or 21%, from $275.4 million at December 31, 2011, to $333.9 million at March 31, 2012. The increase is primarily the result of a $37.0 million, or 20%, increase in residential mortgage-backed securities that includes government agency guaranteed securities, an $11.2 million, or 17%, increase in U.S. government and agency securities, and a $10.0 million, or 38%, increase in municipal securities.

Loans

Total loans, including loans held for sale, were $1.6 billion at March 31, 2012, a 7% decrease from December 31, 2011. All loan categories decreased.

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

	March 31, 2012				December 31, 2011				Total $ Change			Total %  Change
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered
Real estate mortgage
Commercial	$	996,486	$	22,607	$	1,028,561	$	23,686	$	(33,154	)		(3.15	)%
One-to-four family residential		76,287		5,766		80,375		7,072		(5,394	)		(6.17	)
Real estate construction
Commercial		222,678		2,344		227,098		3,746		(5,822	)		(2.52	)
One-to-four family residential		3,814		—		4,987		—		(1,173	)		(23.52	)
Commercial		273,324		2,401		346,266		2,841		(73,382	)		(21.02	)
Installment and consumer
Guaranteed student loans		5,276		—		5,396		—		(120	)		(2.22	)
Other		31,766		196		33,190		270		(1,498	)		(4.48	)
Total loans	$	1,609,631	$	33,314	$	1,725,873	$	37,615	$	(120,543	)		(6.84	)%

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

(Dollars in thousands)	March 31, 2012		December 31, 2011		$ Change			% Change
Loans held for sale:
Student loans	$	5,276	$	5,396	$	(120	)		(2.22	)%
One-to-four family residential		3,890		3,547		343			9.67
Government guaranteed commercial real estate		29,477		29,624		(147	)		(0.50	)
Other loans held for sale		122		128		(6	)		(4.69	)
Total loans held for sale		38,765		38,695		76			0.20
Noncovered portfolio loans		1,570,866		1,687,178		(116,312	)		(6.89	)
Covered portfolio loans		33,314		37,615		(4,301	)		(11.43	)
Total loans	$	1,642,945	$	1,763,488	$	(120,537	)		(6.84	)%

Allowance for Loan Losses

Management determines the appropriate level of the allowance for loan losses using an established methodology. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses is comprised of two primary components. Loans deemed to be impaired (all loans on nonaccrual status and troubled debt restructurings) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off. Loans other than impaired loans are segmented into loan pools by type of loan. The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is based. Our primary markets are Oklahoma, Texas, and Kansas and loans secured by real estate within these markets are included in the “in-market” pool, with the remaining loans defaulting to the “out-of-market” pool. The allowance on the other loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors.

At March 31, 2012, the noncovered allowance for loan losses was $45.0 million, an increase of $0.8 million, or 2%, from the allowance for loan losses at December 31, 2011. 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 March 31, 2012, the allowance on the $14.3 million in noncovered nonaccrual loans was $1.3 million (10%), compared with an allowance on $13.5 million in noncovered nonaccrual loans at December 31, 2011 of $0.9 million (7%), an increase in the allowance of $0.4 million. At March 31, 2012, the allowance on the $38.1 million noncovered performing troubled debt restructured loans was $4.0 million (10%), compared with an allowance on $32.3 million in noncovered performing troubled debt restructured loans of less than $0.1 million at December 31, 2011, an increase in the allowance of $3.9 million.

Excluding the impaired loans mentioned above, at March 31, 2012, the allowance for the remaining other noncovered loans was $39.7 million (3%), compared to $43.3 million (3%) at December 31, 2011, a decrease in the allowance of $3.6 million.

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The decrease in the allowance related to these other noncovered loans resulted from the decrease in the loan portfolio and consideration of certain trends and qualitative factors. These included management’s assessment of economic risk, asset quality trends, levels of potential problem loans, loan concentrations in commercial real estate mortgage and construction loans, which together comprised approximately 76% of our noncovered loans at March 31, 2012, and portfolio loss trends. Based on its analysis, management believes the amount of the allowance is appropriate.

Covered loans were $33.3 million and $37.6 million as of March 31, 2012 and December 31, 2011, respectively. These loans are subject to protection under the loss sharing agreements with the FDIC and had an allowance for loan losses of $0.1 million and $0.5 million based on analysis of expected future cash flows as of each respective date.

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 three months of 2012 were $1.3 million, a decrease of $11.7 million, or 90%, from the $13.0 million recorded for the first three months of 2011. The provision for loan losses for the first three months of 2012 was $1.7 million, representing a decrease of $7.3 million, or 81%, from the $9.1 million recorded for the first three months of 2011.

Nonperforming Loans

At March 31, 2012, the allowance for loan losses was 312.14% of noncovered nonperforming loans, compared to 326.47% of noncovered nonperforming loans, at December 31, 2011 (see “Provision for Loan Losses” on page 34). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $14.3 million as of March 31, 2012, an increase of $0.8 million, or 6%, from December 31, 2011. We have taken cumulative charge-offs related to these noncovered nonaccrual loans of $14.9 million as of March 31, 2012. Noncovered nonaccrual loans at March 31, 2012 were comprised of 38 relationships and were primarily concentrated in commercial real estate (48%) and real estate construction (27%) loans. All noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. These noncovered loans are believed to have sufficient collateral and are in the process of being collected. Covered nonperforming loans at March 31, 2012 of $7.0 million are subject to protection under the loss share agreements with the FDIC.

	March 31, 2012						December 31, 2011
(Dollars in thousands)	Noncovered			Covered			Noncovered			Covered
Nonaccrual loans:
Commercial real estate	$	6,821		$	4,870		$	4,667		$	3,554
One-to-four family residential		1,508			151			1,468			188
Real estate construction		3,768			1,647			3,877			3,009
Commercial		2,109			343			3,371			370
Other consumer		118			4			123			7
Total nonaccrual loans		14,324			7,015			13,506			7,128
Past due 90 days or more:
One-to-four family residential		—			—			23			—
Commercial		100			—			3			—
Other consumer		—			—			17			—
Total past due 90 days or more		100			—			43			—
Total nonperforming loans		14,424			7,015			13,549			7,128
Other real estate		19,329			4,694			19,844			4,529
Total nonperforming assets	$	33,753		$	11,709		$	33,393		$	11,657
Performing restructured	$	1,700		$	—		$	1,017		$	—
Nonperforming assets to portfolio loans receivable and other real estate		2.12	%		30.81	%		1.96	%		27.66	%
Nonperforming loans to portfolio loans receivable		0.92			21.06			0.80			18.95
Allowance for loan losses to nonperforming loans		312.14			0.86			326.47			6.33
Government-guaranteed portion of nonperforming loans	$	76		$	4,695		$	76		$	4,764

At March 31, 2012 and December 31, 2011, five credit relationships represented 67% and 69% of noncovered nonperforming loans, respectively and 28% of noncovered nonperforming assets. As of March 31, 2012, these credit relationships were all collateral dependent and commercial or commercial real estate lending relationships with aggregate principal balances of $9.6 million and related impairment reserves of $0.6 million. Aggregate charge-offs for these five relationships were $13.2 million and $12.3 million as of March 31, 2012 and December 31, 2011, respectively.

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Noncovered performing loans considered potential problem loans, loans which are not included in the past due or nonaccrual categories but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, amounted to approximately $126.3 million at March 31, 2012, compared to $133.0 million at December 31, 2011. Substantially all of these loans were performing in accordance with their present terms at March 31, 2012. Included in this total are $38.1 million loans that are considered performing troubled debt restructured loans as a result of a modification in terms due to a weakening in the financial position of the borrower. Additionally, there are $0.6 million and $0.9 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 March 31, 2012, the reserve for unfunded loan commitments was $2.3 million, a $0.1 million, or 4%, increase from the amount at December 31, 2011. Management believes the amount of the reserve is appropriate. The increased amount is primarily the result of an increased level of commitments.

Deposits and Other Borrowings

Southwest’s deposits were $1.8 billion and $1.9 billion at March 31, 2012 and December 31, 2011, respectively. The following table presents the trends in the composition of deposits at the dates indicated:

(Dollars in thousands)	March 31, 2012		December 31, 2011		$ Change			% Change
Noninterest-bearing demand	$	395,141	$	400,985	$	(5,844	)		(1.46	)%
Interest-bearing demand		119,759		105,905		13,854			13.08
Money market accounts		349,419		423,181		(73,762	)		(17.43	)
Savings accounts		34,679		33,406		1,273			3.81
Time deposits of $100,000 or more		464,876		487,907		(23,031	)		(4.72	)
Other time deposits		442,906		469,998		(27,092	)		(5.76	)
Total deposits	$	1,806,780	$	1,921,382	$	(114,602	)		(5.96	)%

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., Wells Fargo Bank, NA, UBS Securities, LLC, RBC Capital Markets Corp., and Morgan Stanley & Co., Inc. in connection with its retail certificate of deposit program. There were no retail certificates of deposit as of March 31, 2012 or December 31, 2011.

As of December 31, 2011, Stillwater National has other brokered certificates of deposit totaling $0.2 million included in time deposits of $100,000 or more in the above table. There were no other brokered certificates of deposit as of March 31, 2012.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, decreased $1.3 million, or 2%, to $55.1 million during the first three months of 2012. The decrease reflects the reduced need for funding for lending activities in the period.

Shareholders’ Equity

Shareholders’ equity increased $4.5 million, or 1%, due to income of $5.2 million, offset in part by preferred dividends accrued totaling $0.9 million for the first three months of 2012. Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax) increased to $2.3 million at March 31, 2012, compared to $2.1 million at December 31, 2011.

At March 31, 2012, Southwest, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 36.

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RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2012 and 2011

Net income available to common shareholders for the first quarter of 2012 of $4.1 million represented an increase of $1.4 million from the $2.7 million net income available to common shareholders earned in the first quarter of 2011. Diluted earnings per share were $0.21, compared to $0.07. The increase in quarterly net income available to common shareholders was the result of a $7.3 million, or 81%, decrease in the provision for loan losses, a $1.3 million, or 8%, decrease in noninterest expense, and a $0.3 million, or 8%, increase in noninterest income, offset in part by a $4.6 million, or 18%, decrease in net interest income, and a $1.6 million, or 104% increase in income taxes.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. The necessary provision for first quarter of 2012 was $7.3 million less than the provision required for first quarter of 2011. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 34.)

On an operating segment basis, the increase in net income was the net result of a $2.1 million increase in net income from the Texas Banking segment, a $1.1 million increase in net income from the Kansas Banking segment, a $0.4 million decrease in net loss from the Out of Market segment, a $0.3 million increase in net income from the Secondary Market, offset in part by a $0.3 million decrease in net income from the Oklahoma Banking segment and a $0.8 million increase in the net loss from the Other Operations segment.

Net Interest Income

	For the three months ended March 31,
(Dollars in thousands)	2012		2011		$ Change			% Change
Interest income:
Loans	$	23,377	$	30,539	$	(7,162	)		(23.45	)%
Investment securities:
U.S. government and agency obligations		393		376		17			4.52
Mortgage-backed securities		1,319		1,245		74			5.94
State and political subdivisions		212		80		132			165.00
Other securities		22		45		(23	)		(51.11	)
Other interest-earning assets		184		140		44			31.43
Total interest income		25,507		32,425		(6,918	)		(21.34	)
Interest expense:
Interest-bearing demand deposits		70		124		(54	)		(43.55	)
Money market accounts		286		677		(391	)		(57.75	)
Savings accounts		13		16		(3	)		(18.75	)
Time deposits of $100,000 or more		1,320		2,349		(1,029	)		(43.81	)
Other time deposits		1,207		1,967		(760	)		(38.64	)
Other borrowings		224		497		(273	)		(54.93	)
Subordinated debentures		1,538		1,374		164			11.94
Total interest expense		4,658		7,004		(2,346	)		(33.50	)
Net interest income	$	20,849	$	25,421	$	(4,572	)		(17.99	)%

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 15 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 23 basis points, resulting in an increase in the interest rate spread to 3.51% for the first quarter of 2012 from 3.44% for the first quarter of 2011. During the same periods, annualized net interest margin was 3.83% and 3.78%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 135.83% from

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132.93%. Included in both the first quarter of 2012 and the first quarter of 2011 were immaterial adjustments of the discount accretion on loans and the loss share receivable, offset by immaterial interest reversal on nonaccrual loans. The net effects of these adjustments on net interest margin were a 1 basis point increase for first quarter of 2012 and the first quarter of 2011.

The decrease in total interest income was primarily the result of the decrease in average loans. The effect of Southwest’s $677.7 million (28%) decline in average loans more than offset the 32 basis point increase in average yield on loans to 5.49% for the first quarter of 2012 from 5.17% for the first quarter of 2011. During the same period, average investment securities increased $58.5 million, or 23%; however, the related yield decreased to 2.49% from 2.76% in 2011. Average other interest earning assets increased $88.9 million, or 96% and the related yield decreased to 0.41% for the first quarter of 2012 from 0.61% for the first quarter of 2011.

The decrease in total interest expense can be attributed to the decrease in rates paid on interest-bearing liabilities and the effects of a $434.2 million, or 21%, decrease in average interest-bearing liabilities. Southwest’s average total interest-bearing deposits decreased $398.8 million, or 21%, and the related rates paid for interest expense decreased to 0.79% for the first quarter of 2012 from 1.11% for the first quarter of 2011. Average other borrowings decreased $35.4 million, or 39%, and the related rates paid for interest expense decreased to 1.64% for the first quarter of 2012 from 2.23% for the first quarter of 2011.

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.

(Dollars in thousands)	For the three months ended March 31, 2012 vs. 2011
	Increase Or (Decrease)			Due to Change In Average:
				Volume			Rate
Interest earned on:
Noncovered loans receivable (1)	$	(6,932	)	$	(8,920	)	$	1,988
Covered loans receivable		(230	)		(278	)		48
Investment securities (1)		200			372			(172	)
Other interest-earning assets		44			101			(57	)
Total interest income		(6,918	)		(6,171	)		(747	)
Interest paid on:
Interest-bearing demand		(54	)		8			(62	)
Money market accounts		(391	)		(116	)		(275	)
Savings accounts		(3	)		3			(6	)
Time deposits		(1,789	)		(975	)		(814	)
Other borrowings		(273	)		(164	)		(109	)
Subordinated debentures		164			—			164
Total interest expense		(2,346	)		(1,349	)		(997	)
Net interest income	$	(4,572	)	$	(4,822	)	$	250

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

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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 March 31,
(Dollars in thousands)	2012								2011
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Assets
Noncovered loans (1) (2)	$	1,664,615		$	22,723		5.49	%	$	2,326,882		$	29,655		5.17	%
Covered loans (1)		36,050			654		7.30			51,494			884		6.96
Investment securities (2)		314,925			1,946		2.49			256,384			1,746		2.76
Other interest-earning assets		181,637			184		0.41			92,692			140		0.61
Total interest-earning assets		2,197,227			25,507		4.67			2,727,452			32,425		4.82
Other assets		158,921								91,807
Total assets	$	2,356,148							$	2,819,259
Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	120,605		$	70		0.23	%	$	112,441		$	124		0.45	%
Money market accounts		393,820			286		0.29			491,306			677		0.56
Savings accounts		34,587			13		0.15			27,741			16		0.23
Time deposits		931,792			2,527		1.09			1,248,152			4,316		1.40
Total interest-bearing deposits		1,480,804			2,896		0.79			1,879,640			5,133		1.11
Other borrowings		54,848			224		1.64			90,198			497		2.23
Subordinated debentures		81,963			1,538		7.51			81,969			1,374		6.70
Total interest-bearing liabilities		1,617,615			4,658		1.16			2,051,807			7,004		1.38
Noninterest-bearing demand deposits		378,959								365,161
Other liabilities		48,688								19,789
Shareholders’ equity		310,886								382,502
Total liabilities and shareholders’ equity	$	2,356,148							$	2,819,259
Net interest income and interest rate spread				$	20,849		3.51	%				$	25,421		3.44	%
Net interest margin (3)							3.83	%							3.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities		135.83	%							132.93	%

(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

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Noninterest Income

	For the three months ended March 31,
(Dollars in thousands)	2012		2011		$ Change			% Change
Noninterest income:
Other service charges	$	2,421	$	2,478	$	(57	)		(2.30	)%
Other fees		506		400		106			26.50
Other noninterest income		52		177		(125	)		(70.62	)
Gain on sales of loans:
One-to-four family residential		535		193		342			177.20
All other loan sales		—		1		(1	)		—
Total noninterest income	$	3,514	$	3,249	$	265			8.16	%

Other fees increased as a result of increased brokerage fees and decreased amortization of mortgage servicing rights as a result of decreased prepayment speeds. Other noninterest income declined as a result of withdrawal from investments that took place in first quarter of 2011.

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

Noninterest Expense

	For the three months ended March 31,
(Dollars in thousands)	2012		2011			$ Change			% Change
Noninterest expense:
Salaries and employee benefits	$	7,247	$	7,515		$	(268	)		(3.57	)%
Occupancy		2,545		2,804			(259	)		(9.24	)
FDIC and other insurance		783		1,243			(460	)		(37.01	)
Other real estate (net)		372		436			(64	)		(14.68	)
Unfunded loan commitment reserve		95		(55	)		150			(272.73	)
Other general and administrative		3,267		3,682			(415	)		(11.27	)
Total noninterest expense	$	14,309	$	15,625		$	(1,316	)		(8.42	)%

Salaries and employee benefits decreased primarily as a result of decreased profit sharing contributions. The number of full-time equivalent employees did not change from 435 at the beginning of the first quarter of 2012. For the first quarter of 2011, the number of full-time equivalent employees decreased from 432 at the beginning of the quarter to 424 as of March 31, 2011.

The decrease in occupancy expense is the result of decreased building rental expense, maintenance renewal expense, and depreciation expense as a result of controlling capital expenditures.

Southwest’s financial institution subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is the result of a change in premium calculation methodology from a deposit basis to an asset basis.

The unfunded loan commitment reserve expense increased as a result of the application of our methodology to calculate the reserve.

The decrease in other general and administrative expense is primarily the result of reduced legal fees and the elimination of Southwest’s obligation to accrue for estimated interest and penalties on unrecognized tax benefits.

Provisions for Loan Losses

Southwest records provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the levels Southwest determines are appropriate. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.)

The allowance for loan losses of $45.1 million at March 31, 2012 increased $0.4 million, or 1%, from year-end 2011. The increase in the allowance for loan losses is a result of the calculation of the appropriate allowance at period end. Net charge-offs

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incurred in the first three months of 2012 were $1.3 million and the provision for loan losses recorded in the first quarter was $1.7 million. The provision for loan losses is the amount of expense that is required to maintain the allowance for losses at an appropriate level based upon the inherent risks in the loan portfolio after the effects of net charge-offs for the period. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Loans” on page 27.)

Taxes on Income

Southwest’s income tax expense was $3.1 million for the first three months of 2012 compared to $1.5 million for the first three months of 2011, an increase of $1.6 million, or 104%. The increase in the income tax expense is the result of increased income. The effective tax rate for the first three months of 2012 was 37.50% while the effective tax rate for the first three months of 2011 was 38.40%.

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. There was no outstanding balance of those notes at March 31, 2012. Stillwater National has approved federal funds purchase lines totaling $93.0 million with three banks; there was no outstanding balance on these lines at March 31, 2012. 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 allows Stillwater National to borrow up to $39.7 million. As of March 31, 2012, no borrowings were made through the BIC program. In addition, Stillwater National has available a $386.1 million line of credit and Bank of Kansas has a $65.7 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At March 31, 2012, the Stillwater National FHLB line of credit had an outstanding balance of $20.0 million, and the Bank of Kansas line of credit had an outstanding balance of $5.0 million.

(See also “Deposits and Other Borrowings” on page 30 for funds available on brokered certificate of deposit lines of credit and “Note 8: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for a discussion of 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 $30.1 million and $31.5 million as of March 31, 2012 and December 31, 2011, respectively.

At March 31, 2012, $254.6 million of the total carrying value of investment securities of $320.9 million were pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Any amount over pledged can be released at any time.

During the first three months of 2012, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity.

During the first three months of 2012, cash and cash equivalents decreased by $38.4 million, or 17%, to $191.5 million. This decrease was the net result of $116.0 million in cash used in financing activities (primarily from decreases in deposits), offset in part by cash provided from investing activities of $60.5 million (primarily from net repayments of loans offset in part by purchases of available for sale securities) and cash provided by operating activities of $17.1 million.

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During the first three months of 2011, cash and cash equivalents increased by $50.1 million, or 74%, to $117.6 million. This increase was the net result of cash provide from investing of $79.3 million (primarily net repayments of loans and proceeds from repayments, calls and maturities of securities) and cash provided by operating activities of $15.1 million, offset in part by cash used in financing activities of $44.4 million (primarily from decreases in deposits).

As of March 31, 2012, the holding company has $30.8 million in available cash.

CAPITAL REQUIREMENTS

Bank holding companies are required to maintain capital ratios set by the Federal Reserve Bank in its Risk-Based Capital Guidelines. At March 31, 2012, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 22.49%, a Tier I risk-based capital ratio of 21.21%, and a leverage ratio of 16.20%. As of March 31, 2012, 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 March 31, 2012, Stillwater National had a capital to risk weighted assets ratio of 20.16% and a Tier 1 leverage ratio of 14.32%.

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 forecast net income. Actual results differ from simulated results due to timing of cash flows, the magnitude and frequency of interest rate changes, and 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.

Changes in Interest Rates:	+ 300 bp			+200 bp			+100 bp
Policy Limit		(18.00	)%		(10.00	)%		(5.00	)%
March 31, 2012		4.43	%		0.11	%		(2.01	)%
December 31, 2011		4.84	%		0.18	%		(2.14	)%

The current overnight rate as established by the Federal Open Market Committee is in the 0% to 0.25% range. 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. Net interest income at risk improved in the +100 bp scenario; however, the +200 bp and +300 bp scenarios experienced a modest decline when compared to the December 31, 2011 risk position. Southwest’s greatest exposure to changes in interest rate is in the +100 bp scenario with a decline in net interest income of (2.01%) at March 31, 2012, a 0.13 percentage point improvement from the December 31, 2011 level of (2.14%). 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, approximates the fair value of Southwest’s net assets.

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Changes in Interest Rates:	+300 bp			+200 bp			+100 bp
Policy Limit		(35.00	)%		(20.00	)%		(10.00	)%
March 31, 2012		6.73	%		4.99	%		2.39	%
December 31, 2011		9.96	%		7.33	%		3.75	%

As of March 31, 2012, the economic value of equity improved in each of the three rising interest rate scenarios when compared to the December 31, 2011 percentages. Southwest’s largest economic value of equity exposure is the +300 bp scenario. The +300 bp scenario was 6.73% on March 31, 2012, a 3.23 percentage point reduction from the December 31, 2011 value of 9.96%. The economic value of equity ratio in all scenarios remains well within Southwest’s asset/liability management policy limits.

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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 March 31, 2012. 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 March 31, 2012.

First Three Months of 2012 Changes in Internal Control over Financial Reporting

No change occurred during the first three months of 2012 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

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

Item 1A: Risk Factors

There were no material changes in risk factors during the first three months of 2012 from those disclosed in Southwest’s Form 10-K for the year ended December 31, 2011.

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 March 31, 2012.

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 three months ended March 31, 2012.

Item 3: Defaults upon senior securities

See current Report on Form 8-K dated July 25, 2011 with respect to planned arrearage on Southwest Bancorp Inc.’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B. As of the date of filing of this Report on Form 10-Q, total arrearages on this stock were $3.1 million.

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	May 4, 2012
	Rick Green	Date
	President and Chief Executive Officer
	(Principal Executive Officer)

By:	/s/ Laura Robertson	May 4, 2012
	Laura Robertson	Date
	Executive Vice President, Chief Financial
	Officer
	(Principal Financial Officer)

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