Southwest Bancorp (OKSB) 10-Q 2012 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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	74074
(Address of principal executive office)	(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “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.

19,447,987 (8/01/12)

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	28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 4. CONTROLS AND PROCEDURES	44
PART II: OTHER INFORMATION	45
SIGNATURES	53

2

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Financial Condition

	June 30,			December 31,
(Dollars in thousands)	2012			2011
Assets:
Cash and due from banks	$	39,539		$	30,247
Interest-bearing deposits		236,336			199,642
Cash and cash equivalents		275,875			229,889
Securities held to maturity (fair values of $13,735 and $15,885, respectively)		12,962			15,252
Securities available for sale (amortized cost $320,929 and $253,869, respectively)		327,416			260,100
Loans held for sale		23,996			38,695
Noncovered loans receivable		1,498,708			1,687,178
Less: Allowance for loan losses		(43,807	)		(44,233	)
Net noncovered loans receivable		1,454,901			1,642,945
Covered loans receivable (includes loss share of $8,096 and $10,073, respectively)		30,712			37,615
Less: Allowance for loan losses		(91	)		(451	)
Net covered loans receivable		30,621			37,164
Net loans receivable		1,485,522			1,680,109
Accrued interest receivable		7,014			7,176
Income tax receivable		24,974			28,666
Premises and equipment, net		22,436			22,700
Noncovered other real estate		17,263			19,844
Covered other real estate		3,825			4,529
Goodwill		6,811			6,811
Other intangible assets, net		4,760			4,857
Other assets		56,866			64,245
Total assets	$	2,269,720		$	2,382,873
Liabilities:
Deposits:
Noninterest-bearing demand	$	421,083		$	400,985
Interest-bearing demand		119,929			105,905
Money market accounts		361,839			423,181
Savings accounts		35,610			33,406
Time deposits of $100,000 or more		431,317			487,907
Other time deposits		418,601			469,998
Total deposits		1,788,379			1,921,382
Accrued interest payable		831			3,689
Other liabilities		15,470			12,174
Other borrowings		68,477			56,479
Subordinated debentures		81,963			81,963
Total liabilities		1,955,120			2,075,687
Shareholders’ equity:
Serial preferred stock - $1,000 par value; 2,000,000 shares authorized; 70,000 shares issued and outstanding		68,837			68,455
Common stock - $1 par value; 40,000,000 shares authorized; 19,447,202 and 19,444,213 shares issued and outstanding, respectively		19,447			19,444
Paid in capital		98,899			98,932
Retained earnings		125,373			118,244
Accumulated other comprehensive income		2,044			2,111
Total shareholders’ equity		314,600			307,186
Total liabilities & shareholders’ equity	$	2,269,720		$	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					For the six months
	ended June 30,					ended June 30,
(Dollars in thousands, except earnings per share data)	2012		2011			2012		2011
Interest income:
Interest and fees on loans	$	21,708	$	29,478		$	45,085	$	60,017
Investment securities:
U.S. Government and agency obligations		411		410			804		786
Mortgage-backed securities		1,319		1,325			2,638		2,570
State and political subdivisions		257		99			469		179
Other securities		152		30			174		75
Other interest-earning assets		193		130			377		270
Total interest income		24,040		31,472			49,547		63,897
Interest expense:
Interest-bearing demand		59		103			129		227
Money market accounts		234		582			520		1,259
Savings accounts		13		10			26		26
Time deposits of $100,000 or more		1,185		2,077			2,505		4,426
Other time deposits		1,051		1,759			2,258		3,726
Other borrowings		222		494			446		991
Subordinated debentures		1,529		1,462			3,067		2,836
Total interest expense		4,293		6,487			8,951		13,491
Net interest income		19,747		24,985			40,596		50,406
Provision for loan losses		32		20,140			1,748		29,190
Net interest income after provision for loan losses		19,715		4,845			38,848		21,216
Noninterest income:
Service charges and fees		2,931		3,231			5,858		6,109
Other noninterest income (loss)		53		(28	)		105		149
Gain on sales of loans, net		582		401			1,117		595
Gain on sale/call of investment securities, net		35		—			35		—
Total noninterest income		3,601		3,604			7,115		6,853
Noninterest expense:
Salaries and employee benefits		7,354		6,974			14,601		14,489
Occupancy		2,635		2,703			5,180		5,507
FDIC and other insurance		699		937			1,482		2,180
Other real estate, net		2,059		2,602			2,431		3,038
General and administrative		4,022		1,764			7,384		5,391
Total noninterest expense		16,769		14,980			31,078		30,605
Income (loss) before taxes		6,547		(6,531	)		14,885		(2,536	)
Taxes on income		2,430		(3,561	)		5,557		(2,027	)
Net income (loss)	$	4,117	$	(2,970	)	$	9,328	$	(509	)
Net income (loss) available to common shareholders	$	3,011	$	(4,027	)	$	7,130	$	(2,619	)
Basic earnings per common share	$	0.15	$	(0.21	)	$	0.37	$	(0.13	)
Diluted earnings per common share		0.15		(0.21	)		0.37		(0.13	)
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						For the six months
	ended June 30,						ended June 30,
(Dollars in thousands)	2012			2011			2012			2011
Net income (loss)	$	4,117		$	(2,970	)	$	9,328		$	(509	)
Other comprehensive income:
Unrealized holding gain on available for sale securities		177			2,892			291			3,158
Reclassification adjustment for net gains arising during the period		(35	)		—			(35	)		—
Change in fair value of derivative used for cash flow hedge		(547	)		(667	)		(322	)		(1,180	)
Other comprehensive income (loss), before tax		(405	)		2,225			(66	)		1,978
Tax benefit (expense) related to items of other comprehensive income		153			(813	)		(1	)		(729	)
Other comprehensive income (loss), net of tax		(252	)		1,412			(67	)		1,249
Comprehensive income (loss)	$	3,865		$	(1,558	)	$	9,261		$	740

The accompanying notes are an integral part of this statement.

5

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statement of Cash Flows

	For the six months
	ended June 30,
(Dollars in thousands)	2012			2011
Operating activities:
Net income (loss)	$	9,328		$	(509	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		1,748			29,190
Provision and adjustments to other real estate		1,337			1,452
Deferred tax expense		5,411			4,113
Asset depreciation		1,209			1,351
Securities premium amortization, net of discount accretion		1,385			1,123
Amortization of intangibles		719			582
Stock based compensation expense		28			179
Net gain on sales/calls of investment securities		(35	)		—
Net gain on sales of available for sale loans		(1,117	)		(595	)
Net (gain) loss on sales of premises/equipment		(3	)		13
Net gain on sales of other real estate		(65	)		(167	)
Proceeds from sales of held for sale loans		58,064			28,064
Held for sale loans originated for resale		(60,001	)		(29,284	)
Net changes in assets and liabilities:
Accrued interest receivable		162			617
Other assets		1,185			1,922
Income taxes receivable / payable		3,637			(14,394	)
Excess tax expense from share-based payment arrangements		55			123
Accrued interest payable		(2,858	)		(3	)
Other liabilities		667			(1,124	)
Net cash provided by operating activities		20,856			22,653
Investing activities:
Proceeds from sales of available for sale securities		6,588			—
Proceeds from principal repayments, calls and maturities:
Held to maturity securities		2,250			2,345
Available for sale securities		35,541			31,177
Redemptions (purchases) of other investments		133			(28	)
Purchases of available for sale securities		(110,500	)		(37,116	)
Principal repayments, net of loans originated		209,847			128,091
Purchases of premises and equipment		(1,081	)		(773	)
Proceeds from sales of premises and equipment		139			48
Proceeds from sales of other real estate		3,248			12,452
Net cash provided by investing activities		146,165			136,196
Financing activities:
Net decrease in deposits		(133,003	)		(158,492	)
Net increase in other borrowings		11,998			2,080
Net proceeds from issuance of common stock		25			41
Excess tax expense from share-based payment arrangements		(55	)		(123	)
Preferred stock dividends paid		—			(1,750	)
Net cash used in financing activities		(121,035	)		(158,244	)
Net increase in cash and cash equivalents		45,986			605
Cash and cash equivalents:
Beginning of period		229,889			67,496
End of period	$	275,875		$	68,101

The accompanying notes are an integral part of this statement.

6

SOUTHWEST BANCORP, INC.

Unaudited Consolidated Statements of Shareholders’ Equity

													Accumulated
							Additional						Other			Total
	Preferred		Common Stock				Paid in			Retained			Comprehensive			Shareholders’
(Dollars in thousands)	Stock		Shares		Amount		Capital			Earnings			Income			Equity
Balance, December 31, 2010	$	67,724		19,421,900	$	19,422	$	98,894		$	190,793		$	979		$	377,812
Dividends (paid and /or accrued):
Preferred		—		—		—		—			(1,750	)		—			(1,750	)
Warrant amortization		360		—		—		—			(360	)		—			—
Common stock issued		—		15,400		15		210			—			—			225
Net common stock issued under employee plans and related tax expense		—		1,867		2		(99	)		—			—			(97	)
Other comprehensive loss, net of tax		—		—		—		—			—			1,249			1,249
Net income (loss)		—		—		—		—			(509	)		—			(509	)
Balance, June 30, 2011	$	68,084		19,439,167	$	19,439	$	99,005		$	188,174		$	2,228		$	376,930
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		—		—		—		—			(1,817	)		—			(1,817	)
Warrant amortization		382		—		—		—			(382	)		—			—
Net common stock issued under employee plans and related tax expense		—		2,989		3		(33	)		—			—			(30	)
Other comprehensive income, net of tax		—		—		—		—			—			(67	)		(67	)
Net income (loss)		—		—		—		—			9,328			—			9,328
Balance, June 30, 2012	$	68,837		19,447,202	$	19,447	$	98,899		$	125,373		$	2,044		$	314,600

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 and six months ended June 30, 2012, and the cash flows for the six months ended June 30, 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 June 30, 2012 and December 31, 2011 follows:

	Amortized		Gross Unrealized					Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
At June 30, 2012:
Held to Maturity:
Obligations of state and political subdivisions	$	12,962	$	773	$	—		$	13,735
Total	$	12,962	$	773	$	—		$	13,735
Available for Sale:
Federal agency securities	$	83,628	$	1,294	$	(6	)	$	84,917
Obligations of state and political subdivisions		25,543		565		(51	)		26,057
Residential mortgage-backed securities		210,555		4,471		(210	)		214,816
Equity securities		1,203		423		—			1,626
Total	$	320,929	$	6,753	$	(267	)	$	327,416
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 $9.9 million and $10.5 million at June 30, 2012 and December 31, 2011, respectively. During the second quarter other-than-temporary impairment analysis, one investment incurred a write-down of $0.4 million. There are no other identified events or changes in circumstances that may have a significant adverse effect on the investments carried at cost.

A comparison of the amortized cost and approximate fair value of Southwest’s investment securities by maturity date at June 30, 2012 follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
One year or less	$	17,218	$	17,506	$	1,128	$	1,133
More than one year through five years		209,161		213,750		1,947		1,985
More than five years through ten years		80,271		81,518		6,435		6,736
More than ten years		14,279		14,642		3,452		3,881
Total	$	320,929	$	327,416	$	12,962	$	13,735

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

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

	For the three months					For the six months
	ended June 30,					ended June 30,
(Dollars in thousands)	2012			2011		2012			2011
Proceeds from sales	$	6,588		$	—	$	6,588		$	—
Gross realized gains		45			—		45			—
Gross realized losses		(10	)		—		(10	)		—

The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011. Securities whose market values exceed cost are excluded from this table.

					Continuous Unrealized Loss Existing for:
(Dollars in thousands)	Number  of Securities		Amortized cost of securities with unrealized losses		Less Than 12  Months			More Than 12  Months		Fair value of securities  with unrealized losses
At June 30, 2012:
Available for Sale:
Federal agency securities		2	$	4,191	$	(6	)	$	—	$	4,185
Obligations of state and political subdivisions		3		4,740		(51	)		—		4,689
Residential mortgage-backed securities		20		35,972		(210	)		—		35,762
Total		25	$	44,903	$	(267	)	$	—	$	44,636
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.

9

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 June 30, 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 June 30, 2012, management believes the impairment of these investments is not deemed to be other-than-temporary.

As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $258.4 million and $212.3 million were pledged to meet such requirements at June 30, 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 June 30, 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:

	At June 30, 2012						At December 31, 2011
(Dollars in thousands)	Noncovered			Covered			Noncovered			Covered
Real estate mortgage:
Commercial	$	931,239		$	21,472		$	1,028,561		$	23,686
One-to-four family residential		74,390			5,432			80,375			7,072
Real estate construction:
Commercial		211,098			1,627			227,098			3,746
One-to-four family residential		4,184			—			4,987			—
Commercial		263,085			2,033			346,266			2,841
Installment and consumer:
Guaranteed student loans		5,153			—			5,396			—
Other		33,555			148			33,190			270
		1,522,704			30,712			1,725,873			37,615
Less: Allowance for loan losses		(43,807	)		(91	)		(44,233	)		(451	)
Total loans, net	$	1,478,897		$	30,621		$	1,681,640		$	37,164

Concentrations of Credit. At June 30, 2012, $536.1 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 $24.0 million and $38.7 million at June 30, 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 $305.5 million and $283.1 million at June 30, 2012 and June 30, 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.

10

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.

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 covered 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 June 30, 2012, Bank of Kansas has identified $20.2 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 and six months ended June 30, 2012 and June 30, 2011.

	For the three months ended June 30,
	2012						2011
				Carrying						Carrying
	Accretable			amount			Accretable			amount
(Dollars in thousands)	Yield			of loans			Yield			of loans
Balance at beginning of period	$	1,918		$	33,315		$	2,644		$	49,117
Payments received		—			(2,568	)		—			(69	)
Transfers to other real estate / repossessed assets		(3	)		(173	)		—			—
Charge-offs		(1	)		(40	)		(3	)		(2,963	)
Net reclassifications to / from nonaccretable amount		—			—			—			—
Accretion		(156	)		178			(68	)		68
Balance at end of period	$	1,758		$	30,712		$	2,573		$	46,153
	For the six months ended June 30,
	2012						2011
				Carrying						Carrying
	Accretable			amount			Accretable			amount
(Dollars in thousands)	Yield			of loans			Yield			of loans
Balance at beginning of period	$	2,402		$	37,615		$	2,688		$	53,628
Payments received		—			(5,860	)		—			(3,265	)
Transfers to other real estate / repossessed assets		6			(1,163	)		4			(1,008	)
Charge-offs		(5	)		(112	)		4			(3,325	)
Net reclassifications to / from nonaccretable amount		(271	)		—			—			—
Accretion		(374	)		232			(123	)		123
Balance at end of period	$	1,758		$	30,712		$	2,573		$	46,153

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,

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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 nonperforming loans also may be returned to accrual status without becoming fully current. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance.

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

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

	At June 30, 2012				At December 31, 2011
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered
Real estate mortgage:
Commercial	$	4,932	$	4,286	$	4,667	$	3,554
One-to-four family residential		919		105		1,468		188
Real estate construction:
Commercial		3,608		1,329		3,877		3,009
Commercial		10,878		343		3,371		370
Other consumer		137		4		123		7
Total nonaccrual loans	$	20,474	$	6,067	$	13,506	$	7,128

During the first six months of 2012, less than $0.1 million of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the six months ended June 30, 2012, additional interest income of $0.7 million would have been recorded.

Cumulative charge-offs against noncovered nonaccrual loans at June 30, 2012 and December 31, 2011 were $15.1 million and $13.6 million, respectively.

As of June 30, 2012 and December 31, 2011, included in noncovered nonaccrual loans are five collateral dependent lending relationships with aggregate principal balances of approximately $16.2 million and $9.3 million, respectively, and related impairment reserves of $2.1 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. Three of these lending relationships are secured by commercial real estate and include a retail building project with one loan outstanding, two commercial building lending relationships, one with one loan outstanding and the other with three loans outstanding. The remaining consists of two commercial relationships, one with one loan outstanding and the other with four loans outstanding.

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The following table shows an age analysis of past due loans at June 30, 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 June 30, 2012
Noncovered:
Real estate mortgage:
Commercial	$	1,713	$	4,932	$	6,645	$	924,594	$	931,239	$	—
One-to-four family residential		86		1,125		1,211		73,179		74,390		206
Real estate construction:
Commercial		13,073		3,608		16,681		194,417		211,098		—
One-to-four family residential		—		—		—		4,184		4,184		—
Commercial		8,452		10,878		19,330		243,755		263,085		—
Other		450		176		626		38,082		38,708		39
Total - noncovered		23,774		20,719		44,493		1,478,211		1,522,704		245
Covered:
Real estate mortgage:
Commercial		674		4,286		4,960		16,512		21,472		—
One-to-four family residential		26		105		131		5,301		5,432		—
Real estate construction:
Commercial		—		1,329		1,329		298		1,627		—
Commercial		268		343		611		1,422		2,033		—
Other		—		4		4		144		148		—
Total - covered		968		6,067		7,035		23,677		30,712		—
Total	$	24,742	$	26,786	$	51,528	$	1,501,888	$	1,553,416	$	245
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		—		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. Smaller balance, homogeneous loans, including mortgage, student, and consumer, are collectively evaluated for impairment.

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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 shown in the following table:

	With No Specific Allowance				With A Specific Allowance
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Investment		Balance		Allowance
At June 30, 2012
Noncovered:
Commercial real estate	$	19,063	$	19,282	$	13,693	$	14,115	$	3,706
One-to-four family residential		423		515		496		623		59
Real estate construction		4,250		7,939		240		259		50
Commercial		7,712		11,217		6,031		7,154		2,965
Other		38		39		99		113		99
Total noncovered	$	31,486	$	38,992	$	20,559	$	22,264	$	6,879
Covered:
Commercial real estate	$	3,960	$	4,942	$	326	$	371	$	2
One-to-four family residential		55		104		50		70		3
Real estate construction		130		309		1,199		2,106		36
Commercial		343		1,890		—		—		—
Other		4		8		—		—		—
Total covered	$	4,492	$	7,253	$	1,575	$	2,547	$	41
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

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The average recorded investment and interest income recognized on impaired loans as of June 30, 2012 and June 30, 2011 is shown in the following table:

	As of and for the six months ended June 30,
	2012				2011
	Average				Average
	Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income
Noncovered:
Commercial real estate	$	28,174	$	—	$	83,325	$	—
One-to-four family residential		859		25		1,399		3
Real estate construction		4,667		9		61,368		—
Commercial		9,312		5		16,698		55
Other		148		—		60		1
Total noncovered	$	43,160	$	39	$	162,850	$	59
Covered:
Commercial real estate	$	22,464	$	20	$	28,940	$	10
One-to-four family residential		6,168		—		8,360		—
Real estate construction		2,718		38		6,595		—
Commercial		2,376		—		4,975		—
Other		194		1		541		—
Total covered	$	33,920	$	59	$	49,411	$	10

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), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.

Troubled debt restructured loans outstanding as of June 30, 2012 and December 31, 2011 are as follows:

	At June 30, 2012				At December 31, 2011
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	29,524	$	3,027	$	17,034	$	2,816
One-to-four family residential		—		153		—		—
Real estate construction		881		130		8,106		—
Commercial		2,866		578		7,119		1,371
Consumer		—		99		—		112
Total	$	33,271	$	3,987	$	32,259	$	4,299

At June 30, 2012 and December 31, 2011, Southwest had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring.

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Loans modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2012 and June 30, 2011 are shown in the following tables:

	For the three months ended June 30,
	2012				2011
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		2	$	232		1	$	942
Commercial		—		—		2		373
Total		2	$	232		3	$	1,315
	For the six months ended June 30,
	2012				2011
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		4	$	12,454		2	$	4,642
One-to-four family residential		1		95		—		—
Real estate construction		1		881		—		—
Commercial		2		341		6		3,726
Total		8	$	13,771		8	$	8,368

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.

The following tables present the recorded investment and the number of loans modified as a troubled debt restructuring which subsequently defaulted during the three and six month periods ended June 30, 2012 and June 30, 2011. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.

	For the three months ended June 30,
	2012				2011
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		Investment		Contracts		Investment
Commercial		2	$	115		—	$	—
Total		2	$	115		—	$	—
	For the six months ended June 30,
	2012				2011
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		Investment		Contracts		Investment
Commercial		2	$	115		—	$	—
Total		2	$	115		—	$	—

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 problem or nonperforming loans depending on the accrual status of the loans.

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

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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 June 30, 2012 and December 31, 2011, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows:

	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At June 30, 2012
Grade:
Pass	$	798,224	$	76,725	$	119,341	$	233,444	$	38,525	$	1,266,259
Special Mention		72,553		616		67,190		7,759		150		148,268
Substandard		80,082		2,481		30,378		23,100		181		136,222
Doubtful		1,852		—		—		815		—		2,667
Total	$	952,711	$	79,822	$	216,909	$	265,118	$	38,856	$	1,553,416
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 the provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on 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

17

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 shows 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.

	Commercial			1-4 Family			Real Estate
(Dollars in thousands)	Real Estate			Residential			Construction			Commercial			Other			Total
At June 30, 2012
Balance at beginning of period	$	21,749		$	1,016		$	11,177		$	9,827		$	915		$	44,684
Loans charged-off		(129	)		(213	)		—			(3,404	)		(419	)		(4,165	)
Recoveries		23			195			128			966			319			1,631
Provision for loan losses		720			(138	)		(668	)		1,812			22			1,748
Balance at end of period	$	22,363		$	860		$	10,637		$	9,201		$	837		$	43,898
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	3,706		$	59		$	50		$	2,965		$	99		$	6,879
Collectively evaluated for impairment		18,617			786			10,551			6,236			738			36,928
Acquired with deteriorated credit quality		40			15			36			—			—			91
Total ending allowance balance	$	22,363		$	860		$	10,637		$	9,201		$	837		$	43,898
Loans receivable ending balance:
Individually evaluated for impairment	$	32,756		$	919		$	4,490		$	13,743		$	137		$	52,045
Collectively evaluated for impairment		898,483			73,471			210,792			249,342			38,571			1,470,659
Acquired with deteriorated credit quality		21,472			5,432			1,627			2,033			148			30,712
Total ending loans balance	$	952,711		$	79,822		$	216,909		$	265,118		$	38,856		$	1,553,416

	Commercial			1-4 Family			Real Estate
(Dollars in thousands)	Real Estate			Residential			Construction			Commercial			Other			Total
At June 30, 2011
Balance at beginning of period	$	32,508		$	1,597		$	19,605		$	10,605		$	914		$	65,229
Loans charged-off		(14,962	)		(267	)		(12,209	)		(12,903	)		(613	)		(40,954	)
Recoveries		79			44			350			567			70			1,110
Provision for loan losses		5,805			(97	)		10,126			12,726			630			29,190
Balance at end of period	$	23,430		$	1,277		$	17,872		$	10,995		$	1,001		$	54,575
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	3,141		$	14		$	7,860		$	3,344		$	144		$	14,503
Collectively evaluated for impairment		20,289			1,263			10,012			7,651			857			40,072
Acquired with deteriorated credit quality		—			—			—			—			—			—
Total ending allowance balance	$	23,430		$	1,277		$	17,872		$	10,995		$	1,001		$	54,575
Loans receivable ending balance:
Individually evaluated for impairment	$	100,019		$	1,417		$	78,486		$	20,119		$	153		$	200,194
Collectively evaluated for impairment		1,162,734			85,990			320,490			384,110			39,782			1,993,106
Acquired with deteriorated credit quality		26,976			8,113			6,173			4,461			430			46,153
Total ending loans balance	$	1,289,729		$	95,520		$	405,149		$	408,690		$	40,365		$	2,239,453

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.

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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.
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 six months ended June 30, 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 June 30, 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.

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The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011.

				Fair Value Measurement at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
(Dollars in thousands)	Total			(Level 1)		(Level 2)			(Level 3)
At June 30, 2012
Loans held for sale:
Student loans	$	5,153		$	—	$	5,153		$	—
One-to-four family residential		6,411			—		6,411			—
Government guaranteed commercial real estate		12,321			—		12,321			—
Other loans held for sale		111			—		111			—
Available for sale securities:
Federal agency securities		84,917			—		84,917			—
Obligations of state and political subdivisions		26,057			—		26,057			—
Residential mortgage-backed securities		214,816			—		214,816			—
Equity securities		1,626			95		1,531			—
Derivative instrument		(3,156	)		—		(3,156	)		—
Total	$	348,256		$	95	$	348,161		$	—
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

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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 June 30, 2012 and December 31, 2011 are summarized below.

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Gains
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)		(Losses)
At June 30, 2012
Noncovered impaired loans at fair value :
Commercial real estate	$	15,845	$	—	$	15,845	$	—	$	(3,247	)
One-to-four family residential		515		—		515		—		85
Real estate construction		240		—		240		—		3,531
Commercial		13,558		—		13,558		—		(3,649	)
Other consumer		99		—		99		—		13
Noncovered other real estate		17,263		—		17,263		—		(997	)
Covered other real estate		3,825		—		3,825		—		(45	)
Mortgage loan servicing rights		1,975		—		—		1,975		(141	)
Total	$	53,320	$	—	$	51,345	$	1,975	$	(4,450	)
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	$	—	$	31,392	$	1,817	$	(10,837	)

Noncovered impaired loans measured at fair value with a carrying amount of $39.8 million were written down to a fair value of $30.3 million, resulting in a life-to-date impairment of $9.5 million, of which $3.3 million was included in the provision for loan losses for the six months ended June 30, 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.

As of June 30, 2012, noncovered and covered other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $1.0 million and $45,000, respectively, which was included in noninterest expense for the six months ended June 30, 2012. In the prior year, only 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.

For the six months ended June 30, 2012 and for the year ended December 31, 2011, mortgage loan servicing rights were written down to their fair values, resulting in impairment charges of $0.1 million and $0.3 million, respectively, which were included in noninterest income for each period.

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.

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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.

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 June 30, 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 June 30, 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	$	275,875	$	275,875	$	30,247	$	30,247
Securities held to maturity		12,962		13,735		15,252		15,885
Accrued interest receivable		7,014		7,014		7,176		7,176
Investments included in other assets		9,949		9,949		10,454		10,454
Level 3 inputs:
Total loans, net of allowance		1,509,518		1,492,740		1,718,804		1,708,894
Financial liabilities:
Level 2 inputs:
Deposits		1,788,379		1,751,025		1,921,382		1,883,196
Accrued interest payable		831		831		3,689		3,689
Other liabilities		12,314		12,314		9,340		9,340
Derivative instrument		3,156		3,156		2,834		2,834
Other borrowings		68,477		72,541		56,479		60,688
Subordinated debentures		81,963		82,584		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 June 30, 2012 was 3.32%.

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The estimated fair value of the interest rate derivative contract outstanding as of June 30, 2012 and December 31, 2011 resulted in a pre-tax loss of $3.2 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 June 30, 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 loss and a $0.7 million loss for the six months ended June 30, 2012 and June 30, 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.

Net cash flows as a result of the interest rate swap agreement were $0.3 million for both the six months ended June 30, 2012 and June 30, 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 $3.9 million and $3.8 million at June 30, 2012 and December 31, 2011, respectively.

NOTE 6: TAXES ON INCOME

Net deferred tax assets totaled $35.5 million at June 30, 2012 and $40.9 million 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 June 30, 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 the fourth quarter of 2011.

Southwest conducted an interim analysis to assess the need for a valuation allowance at June 30, 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 six 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 June 30, 2012 and 2011, there were 14,500 and 141,266 antidilutive stock options to purchase common shares, respectively. An antidilutive warrant to purchase 703,753 shares of common stock was also outstanding on June 30, 2012.

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

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands, except earnings per share data)	2012			2011			2012			2011
Numerator:
Net income (loss)	$	4,117		$	(2,970	)	$	9,328		$	(509	)
Preferred dividend		(914	)		(875	)		(1,817	)		(1,750	)
Warrant amortization		(193	)		(182	)		(382	)		(360	)
Net income (loss) available to common shareholders	$	3,010		$	(4,027	)	$	7,129		$	(2,619	)
Earnings allocated to participating securities		—			—			—			—
Numerator for basic earnings per common share	$	3,010		$	(4,027	)	$	7,129		$	(2,619	)
Effect of reallocating undistributed earnings of participating securities		—			—			—			—
Numerator for diluted earnings per common share	$	3,010		$	(4,027	)	$	7,129		$	(2,619	)
Denominator:
Denominator for basic earnings per common share - Weighted average common shares outstanding		19,446,086			19,414,658			19,445,392			19,412,002
Effect of dilutive securities:
Stock options		—			—			—			—
Warrant		—			—			—			—
Denominator for diluted earnings per common share		19,446,086			19,414,658			19,445,392			19,412,002
Earnings per common share:
Basic	$	0.15		$	(0.21	)	$	0.37		$	(0.13	)
Diluted	$	0.15		$	(0.21	)	$	0.37		$	(0.13	)

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.

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

The following table summarizes financial results by operating segment:

For the Three Months Ended June 30, 2012
(Dollars in thousands)	Oklahoma Banking			Texas Banking		Kansas Banking			Out of Market			Secondary Market		Other Operations*			Total Company
Net interest income	$	9,637		$	7,841	$	2,894		$	1,316		$	288	$	(2,229	)	$	19,747
Provision for loan losses		(1,879	)		2,229		(62	)		(256	)		—		—			32
Noninterest income		1,856			406		488			69			475		307			3,601
Noninterest expenses		6,210			3,740		4,124			533			567		1,595			16,769
Income (loss) before taxes		7,162			2,278		(680	)		1,108			196		(3,517	)		6,547
Taxes on income		2,665			843		(256	)		415			72		(1,309	)		2,430
Net income (loss)	$	4,497		$	1,435	$	(424	)	$	693		$	124	$	(2,208	)	$	4,117

For the Six Months Ended June 30, 2012
(Dollars in thousands)	Oklahoma Banking			Texas Banking		Kansas Banking			Out of Market		Secondary Market		Other Operations*			Total Company
Net interest income	$	19,577		$	16,181	$	6,157		$	2,712	$	677	$	(4,708	)	$	40,596
Provision for loan losses		(1,996	)		2,916		(1,045	)		1,873		—		—			1,748
Noninterest income		3,602			857		1,002			116		1,025		513			7,115
Noninterest expenses		12,960			6,786		6,902			759		1,048		2,623			31,078
Income (loss) before taxes		12,215			7,336		1,302			196		654		(6,818	)		14,885
Taxes on income		4,560			2,739		486			73		244		(2,545	)		5,557
Net income (loss)	$	7,655		$	4,597	$	816		$	123	$	410	$	(4,273	)	$	9,328

* Includes externally generated revenue of $1.3 million, primarily from investing services, and an internally generated loss of $5.5 million from the funds management unit

Fixed asset expenditures	$	153	$	63	$	34	$	—	$	—	$	831	$	1,081
Total loans at period end		597,506		596,262		198,404		137,248		23,996		—		1,553,416
Total assets at period end		637,205		594,652		208,862		135,458		26,654		666,889		2,269,720
Total deposits at period end		1,327,514		154,818		274,233		—		3,921		27,893		1,788,379

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For the Three Months Ended June 30, 2011
(Dollars in thousands)	Oklahoma Banking		Texas Banking		Kansas Banking			Out of Market			Secondary Market		Other Operations*			Total Company
Net interest income	$	11,995	$	9,400	$	3,663		$	1,928		$	357	$	(2,358	)	$	24,985
Provision for loan losses		1,733		4,283		(96	)		14,220			—		—			20,140
Noninterest income		1,941		535		404			55			369		300			3,604
Noninterest expenses		5,706		3,719		2,944			1,179			539		893			14,980
Income (loss) before taxes		6,497		1,933		1,219			(13,416	)		187		(2,951	)		(6,531	)
Taxes on income		1,207		358		248			(4,377	)		60		(1,057	)		(3,561	)
Net income (loss)	$	5,290	$	1,575	$	971		$	(9,039	)	$	127	$	(1,894	)	$	(2,970	)

For the Six Months Ended June 30, 2011
(Dollars in thousands)	Oklahoma Banking		Texas Banking		Kansas Banking		Other States Banking			Secondary Market		Other Operations*			Total Company
Net interest income	$	22,992	$	19,491	$	7,032	$	3,810		$	668	$	(3,587	)	$	50,406
Provision for loan losses		1,958		9,291		719		17,222			—		—			29,190
Noninterest income		3,814		959		933		108			514		525			6,853
Noninterest expenses		12,704		7,446		5,814		1,634			1,017		1,990			30,605
Income (loss) before taxes		12,144		3,713		1,432		(14,938	)		165		(5,052	)		(2,536	)
Taxes on income		3,419		1,058		329		(4,975	)		51		(1,909	)		(2,027	)
Net income (loss)	$	8,725	$	2,655	$	1,103	$	(9,963	)	$	114	$	(3,143	)	$	(509	)

* Includes externally generated revenue of $2.2 million, primarily from investing services, and an internally generated loss of $5.2 million from the funds management unit

Fixed asset expenditures	$	57	$	—	$	144	$	—	$	4	$	568	$	773
Total loans at period end		834,189		911,134		260,431		196,495		37,204		—		2,239,453
Total assets at period end		852,777		913,757		286,518		192,968		39,349		375,126		2,660,495
Total deposits at period end		1,473,732		167,790		272,615		—		3,236		176,863		2,094,236

NOTE 9: REGULATORY AGREEMENTS

Effective May 17, 2012, Stillwater National is no longer subject to the written formal agreement (the “Agreement”) that was entered into on January 27, 2010 with the Office of the Comptroller of the Currency (“OCC”). The Agreement primarily related to levels of commercial real estate lending and problem assets, and included a requirement for Stillwater National to submit written plans to the OCC and to take required actions related to improving credit risk management.

Further, Stillwater National is no longer subject to the informal Individual Minimum Capital Agreement also entered into on January 27, 2010, which required Stillwater National to maintain a ratio of total capital to risk weighted assets of at least 12.5% and a Tier 1 leverage ratio of at least 8.5%. At June 30, 2012, Stillwater National had a total risk based capital ratio of 21.42% and a leverage ratio of 15.23%, and remained well capitalized for regulatory purposes. The general regulatory minimums to be well-capitalized are a total risk based capital ratio of 10.00%, a Tier 1 risk based capital ratio of 6.00%, and a leverage ratio of 5.00%.

Like all national banks, Stillwater National remains subject to legal and regulatory limitations on the amount of dividends that it may pay without prior approval of the OCC. Under these regulations, the total amount of dividends that may be paid in any calendar year by Stillwater National to Southwest without OCC approval is limited to the current year’s net profits, combined with the retained profits of the preceding two years. Losses experienced in 2011, primarily attributable to the fourth quarter sale of approximately $300 million in loans and other real estate, affect Stillwater National’s ability to pay dividends without prior approval. In July 2012, with the consent of the Federal Reserve Bank of Kansas City (“Federal Reserve”), Southwest terminated the supervisory resolution that was adopted at the request of the Federal Reserve in July 2009. This resolution included providing prior notice to the Federal Reserve of planned dividends to security holders and planned receipts of dividends from its banking subsidiaries.

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NOTE 10: RESUMPTION OF INTEREST & DIVIDENDS

On May 24, 2012, Southwest announced the planned resumption of payments of interest on its three issues of outstanding debentures, dividends on the related trust preferred securities, and dividends on its Series B Preferred Securities issued under the U.S. Treasury Department’s Capital Purchase Program that had all been deferred since August 1, 2011.

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.

Payments of deferred and arrears interest and dividends were completed in July 2012, and all payments are now current.

NOTE 11: 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 June 30, 2012, Southwest had total assets of $2.3 billion, deposits of $1.8 billion, and shareholders’ equity of $314.6 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 June 30, 2012, the Oklahoma Banking segment accounted for $597.5 million in loans, the Texas Banking segment accounted for $596.3 million in loans, the Kansas Banking segment accounted for $198.4 million in loans, and the Out of Market segment accounted for $137.2 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 June 30, 2012, Secondary Market loans accounted for $24.0 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 $65.0 million, or 24%, from $275.4 million at December 31, 2011, to $340.4 million at June 30, 2012. The increase is primarily the result of a $31.5 million, or 17%, increase in government agency guaranteed residential mortgage-backed securities, a $19.4 million, or 30%, increase in U.S. government and agency securities, a $12.7 million, or 48%, increase in municipal securities and $1.2 million in other mortgaged-backed securities.

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Loans

Total loans, including loans held for sale, were $1.6 billion at June 30, 2012. The following table shows the composition of the loan portfolio at the dates indicated:

	June 30,				December 31,
	2012				2011				Total			Total
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered		$ Change			% Change
Real estate mortgage
Commercial	$	931,239	$	21,472	$	1,028,561	$	23,686	$	(99,536	)		(9.46	)%
One-to-four family residential		74,390		5,432		80,375		7,072		(7,625	)		(8.72	)
Real estate construction
Commercial		211,098		1,627		227,098		3,746		(18,119	)		(7.85	)
One-to-four family residential		4,184		—		4,987		—		(803	)		(16.10	)
Commercial		263,085		2,033		346,266		2,841		(83,989	)		(24.06	)
Installment and consumer
Guaranteed student loans		5,153		—		5,396		—		(243	)		(4.50	)
Other		33,555		148		33,190		270		243			0.73
Total loans	$	1,522,704	$	30,712	$	1,725,873	$	37,615	$	(210,072	)		(11.91	)%

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

(Dollars in thousands)	June 30, 2012		December 31, 2011		$ Change			% Change
Loans held for sale:
Student loans	$	5,153	$	5,396	$	(243	)		(4.50	)%
One-to-four family residential		6,411		3,547		2,864			80.74
Government guaranteed commercial real estate		12,321		29,624		(17,303	)		(58.41	)
Other loans held for sale		111		128		(17	)		(13.28	)
Total loans held for sale		23,996		38,695		(14,699	)		(37.99	)
Noncovered portfolio loans		1,498,708		1,687,178		(188,470	)		(11.17	)
Covered portfolio loans		30,712		37,615		(6,903	)		(18.35	)
Total loans	$	1,553,416	$	1,763,488	$	(210,072	)		(11.91	)%

Allowance for Loan Losses

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

The allowance for loan losses on noncovered loans is comprised of two 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.

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

At June 30, 2012, the allowance for loan losses on total noncovered loans was $43.8 million, $0.4 million, or 1%, less than the allowance for loan losses on noncovered loans at December 31, 2011.

At June 30, 2012, the allowance on the $20.5 million in noncovered nonaccrual loans was $3.1 million (15%), compared with an allowance on $13.5 million in noncovered nonaccrual loans at December 31, 2011 of $0.9 million (7%). At June 30, 2012, the allowance on the $31.6 million noncovered performing troubled debt restructured loans was $3.8 million (12%), 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.

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At June 30, 2012, the allowance for the remaining noncovered loans was $36.9 million (2%), compared to $43.3 million (3%) at December 31, 2011. The decrease in the allowance relating to these other noncovered loans resulted from the decrease in the loan portfolio and consideration of trends and qualitative factors, including portfolio loss trends as well as management’s assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans.

Covered loans were $30.7 million and $37.6 million as of June 30, 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, respectively.

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 six months of 2012 were $2.5 million, a decrease of $37.3 million, or 94%, from the $39.8 million recorded for the first six months of 2011. The provision for loan losses for the first six months of 2012 was $1.7 million, representing a decrease of $27.4 million, or 94%, from the $29.2 million recorded for the first six months of 2011.

Nonperforming Loans

At June 30, 2012, the allowance for loan losses was 211.43% of noncovered nonperforming loans, compared to 326.47% of noncovered nonperforming loans, at December 31, 2011 (see “Provision for Loan Losses” on page 40). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $20.5 million as of June 30, 2012, an increase of $7.0 million, or 52%, from December 31, 2011. We have taken cumulative charge-offs related to these noncovered nonaccrual loans of $15.1 million as of June 30, 2012. Noncovered nonaccrual loans at June 30, 2012 were comprised of 35 relationships and were primarily concentrated in commercial and industrial (53%), commercial real estate (24%) and real estate construction (18%) 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 June 30, 2012 of $6.1 million are subject to protection under the loss share agreements with the FDIC.

	June 30, 2012						December 31, 2011
(Dollars in thousands)	Noncovered			Covered			Noncovered			Covered
Nonaccrual loans:
Commercial real estate	$	4,932		$	4,286		$	4,667		$	3,554
One-to-four family residential		919			105			1,468			188
Real estate construction		3,608			1,329			3,877			3,009
Commercial		10,878			343			3,371			370
Other consumer		137			4			123			7
Total nonaccrual loans		20,474			6,067			13,506			7,128
Past due 90 days or more:
One-to-four family residential		206			—			23			—
Commercial		—			—			3			—
Other consumer		39			—			17			—
Total past due 90 days or more		245			—			43			—
Total nonperforming loans		20,719			6,067			13,549			7,128
Other real estate		17,263			3,825			19,844			4,529
Total nonperforming assets	$	37,982		$	9,892		$	33,393		$	11,657
Performing restructured	$	328		$	1,701		$	1,017		$	—
Nonperforming assets to portfolio loans receivable and other real estate		2.51	%		28.64	%		1.96	%		27.66	%
Nonperforming loans to portfolio loans receivable		1.38			19.75			0.80			18.95
Allowance for loan losses to nonperforming loans		211.43			1.50			326.47			6.33
Government-guaranteed portion of nonperforming loans	$	76		$	4,026		$	76		$	4,764

At June 30, 2012, five credit relationships represented 79% of noncovered nonperforming loans and 43% of noncovered nonperforming assets. These were all collateral dependent and commercial or commercial real estate lending relationships and had an aggregate principal balance of $16.2 million and related impairment reserves of $2.1 million. Aggregate charge-offs for these five relationships were $13.4 million as of June 30, 2012.

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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 $111.1 million at June 30, 2012, compared to $133.0 million at December 31, 2011. Substantially all of these loans were performing in accordance with their present terms at June 30, 2012. Included in this total are $31.2 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 $1.6 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.

At June 30, 2012, the reserve for unfunded loan commitments was $2.7 million, a $0.5 million, or 22%, 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 June 30, 2012 and December 31, 2011, respectively. The following table shows the composition of deposits at the dates indicated:

(Dollars in thousands)	June 30, 2012		December 31, 2011		$ Change			% Change
Noninterest-bearing demand	$	421,083	$	400,985	$	20,098			5.01	%
Interest-bearing demand		119,929		105,905		14,024			13.24
Money market accounts		361,839		423,181		(61,342	)		(14.50	)
Savings accounts		35,610		33,406		2,204			6.60
Time deposits of $100,000 or more		431,317		487,907		(56,590	)		(11.60	)
Other time deposits		418,601		469,998		(51,397	)		(10.94	)
Total deposits	$	1,788,379	$	1,921,382	$	(133,003	)		(6.92	)%

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 June 30, 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 June 30, 2012.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, decreased $12.0 million, or 21%, to $68.5 million during the first six months of 2012. The decrease reflects the reduced need for funding for lending activities in the period.

Shareholders’ Equity

Shareholders’ equity increased $7.4 million, or 2%, due to income of $9.3 million, offset in part by preferred dividends accrued totaling $1.8 million for the first six months of 2012. Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax) decreased to $2.0 million at June 30, 2012, compared to $2.1 million at December 31, 2011.

At June 30, 2012, Southwest, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 42.

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RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2012 and 2011

Net income available to common shareholders for the second quarter of 2012 of $3.0 million represented an increase of $7.0 million from the ($4.0) million net loss recorded for the second quarter of 2011. Diluted earnings per share were $0.15, compared to ($0.21). The increase in quarterly net income available to common shareholders was the result of a $20.1 million, or 100%, decrease in the provision for loan losses, offset in part by a $5.2 million, or 21%, decrease in net interest income, a $6.0 million, or 168%, increase in income tax expense, and a $1.8 million, or 12%, increase in noninterest expense.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 40.)

On an operating segment basis, the increase in net income was the net result of a $9.7 million increase in net income from the Out of Market segment, offset in part by a $1.4 million decrease in net income from the Kansas Banking segment, a $0.8 million decrease in net income from the Oklahoma Banking segment, a $0.3 million increase in the net loss from the Other Operations segment, and a $0.1 million decrease in net income from the Texas Banking segment.

Net Interest Income

	For the three months ended June 30,
(Dollars in thousands)	2012		2011		$ Change			% Change
Interest income:
Loans	$	21,708	$	29,478	$	(7,770	)		(26.36	)%
Investment securities:
U.S. government and agency obligations		411		410		1			0.24
Mortgage-backed securities		1,319		1,325		(6	)		(0.45	)
State and political subdivisions		257		99		158			159.60
Other securities		152		30		122			406.67
Other interest-earning assets		193		130		63			48.46
Total interest income		24,040		31,472		(7,432	)		(23.61	)
Interest expense:
Interest-bearing demand deposits		59		103		(44	)		(42.72	)
Money market accounts		234		582		(348	)		(59.79	)
Savings accounts		13		10		3			30.00
Time deposits of $100,000 or more		1,185		2,077		(892	)		(42.95	)
Other time deposits		1,051		1,759		(708	)		(40.25	)
Other borrowings		222		494		(272	)		(55.06	)
Subordinated debentures		1,529		1,462		67			4.58
Total interest expense		4,293		6,487		(2,194	)		(33.82	)
Net interest income	$	19,747	$	24,985	$	(5,238	)		(20.96	)%

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 rates on different types of assets and liabilities may react differently and at different times to changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income.

Compared to the second quarter of 2011, the second quarter 2012 yields on Southwest’s interest-earning assets decreased 25 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 19 basis points, resulting in a decrease in the interest rate spread to 3.39%. During the same periods, annualized net interest margin was 3.71% and 3.79%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 139.44% from 134.50%. Included in both the second quarter of 2012 and the second quarter of 2011 were immaterial adjustments of the discount accretion on loans and the loss share receivable, offset in part by immaterial interest reversal on nonaccrual loans.

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The decrease in total interest income was primarily the result of the decrease in average loans, which was anticipated due in part to the change in our lending focus away from larger average size loans. The effect of Southwest’s $700.9 million (30%) decline in average loans more than offset the 33 basis point increase in average yield on loans to 5.47% for the second quarter of 2012 from 5.14% for the second quarter of 2011. During the same period, average investment securities increased $73.1 million, or 27%; however, the related yield decreased to 2.53% from 2.81% in 2011. Average other interest earning assets increased $119.1 million, or 144% and the related yield decreased to 0.38% for the second quarter of 2012 from 0.63% for the second quarter of 2011.

The decrease in total interest expense can be attributed to the effects of a $434.5 million, or 22%, decrease in average interest-bearing liabilities and a decrease in rates paid on interest-bearing liabilities. Southwest’s average total interest-bearing deposits decreased $406.2 million, or 23%, and the related rates paid for interest expense decreased to 0.73% for the second quarter of 2012 from 1.01% for the second quarter of 2011. Average other borrowings decreased $28.2 million, or 32%, and the related rates paid for interest expense decreased to 1.49% for the second quarter of 2012 from 2.25% for the second 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 June 30, 2012 vs. 2011
	Increase Or (Decrease)			Due to Change In Average:
				Volume			Rate
Interest earned on:
Noncovered loans receivable (1)	$	(7,426	)	$	(9,153	)	$	1,727
Covered loans receivable		(344	)		(288	)		(56	)
Investment securities (1)		275			474			(199	)
Other interest-earning assets		63			129			(66	)
Total interest income		(7,432	)		(5,791	)		(1,641	)
Interest paid on:
Interest-bearing demand		(44	)		7			(51	)
Money market accounts		(348	)		(132	)		(216	)
Savings accounts		3			2			1
Time deposits		(1,600	)		(836	)		(763	)
Other borrowings		(272	)		(132	)		(140	)
Subordinated debentures		67			—			67
Total interest expense		(2,194	)		(1,304	)		(890	)
Net interest income	$	(5,238	)	$	(4,487	)	$	(751	)

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

34

AVERAGE BALANCES, YIELDS AND RATES

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

	For the three months ended June 30,
(Dollars in thousands)	2012								2011
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Assets
Noncovered loans (1) (2)	$	1,565,342		$	21,125		5.43	%	$	2,250,678		$	28,551		5.14	%
Covered loans (1)		31,853			583		7.36			47,427			927		7.93
Investment securities (2)		339,435			2,139		2.53			266,344			1,864		2.81
Other interest-earning assets		202,040			193		0.38			82,898			130		0.63
Total interest-earning assets		2,138,670			24,040		4.52			2,647,347			31,472		4.77
Other assets		147,822								99,803
Total assets	$	2,286,492							$	2,747,150
Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	120,648		$	59		0.20	%	$	112,942		$	103		0.37	%
Money market accounts		356,758			234		0.26			490,559			582		0.48
Savings accounts		34,632			13		0.15			29,154			10		0.14
Time deposits		880,007			2,236		1.02			1,165,606			3,836		1.32
Total interest-bearing deposits		1,392,045			2,542		0.73			1,798,261			4,531		1.01
Other borrowings		59,754			222		1.49			87,991			494		2.25
Subordinated debentures		81,963			1,529		7.46			81,963			1,462		7.13
Total interest-bearing liabilities		1,533,762			4,293		1.13			1,968,215			6,487		1.32
Noninterest-bearing demand deposits		387,057								369,700
Other liabilities		50,696								25,066
Shareholders’ equity		314,977								384,169
Total liabilities and shareholders’ equity	$	2,286,492							$	2,747,150
Net interest income and interest rate spread				$	19,747		3.39	%				$	24,985		3.45	%
Net interest margin (3)							3.71	%							3.79	%
Ratio of average interest-earning assets to average interest-bearing liabilities		139.44	%							134.50	%

(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

35

Noninterest Income

	For the three months ended June 30,
(Dollars in thousands)	2012		2011			$ Change			% Change
Noninterest income:
Other service charges	$	2,504	$	2,624		$	(120	)		(4.57	)%
Other fees		427		607			(180	)		(29.65	)
Other noninterest income		53		(28	)		81			(289.29	)
Gain on sales of loans:
One-to-four family residential		582		277			305			110.11
All other loan sales		—		124			(124	)		(100.00	)
Gain on sale/call of investment securities		35		—			35			100.00
Total noninterest income	$	3,601	$	3,604		$	(3	)		(0.08	)%

Other fees decreased as a result of the decrease in the fair market value of mortgage servicing rights during the second quarter of 2012. Other noninterest income increased as a result of prior year including a loss share adjustment that was nonrecurring.

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 June 30,
(Dollars in thousands)	2012		2011		$ Change			% Change
Noninterest expense:
Salaries and employee benefits	$	7,354	$	6,974	$	380			5.45	%
Occupancy		2,635		2,703		(68	)		(2.52	)
FDIC and other insurance		699		937		(238	)		(25.40	)
Other real estate (net)		2,059		2,602		(543	)		(20.87	)
Unfunded loan commitment reserve		395		128		267			208.59
Other general and administrative		3,627		1,636		1,991			121.70
Total noninterest expense	$	16,769	$	14,980	$	1,789			11.94	%

The number of full-time equivalent employees decreased from 435 at the beginning of the quarter to 430 as of June 30, 2012. For the second quarter of 2011, the number of full-time equivalent employees increased from 424 at the beginning of the quarter to 437 as of June 30, 2011.

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 the decrease in assets, which are the basis for the premium calculation.

Other real estate net expenses declined primarily due to decreased expenses, offset in part by the fair market value impairment during the quarter.

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

The increase in other general and administrative expense is primarily the result of the prior year settlement of Oklahoma state tax claims for less than the amount accrued.

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FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2012 and 2011

Net income available to common shareholders for the six months ended June 30, 2012 of $7.1 million represented an increase of $9.7 million from the ($2.6) million net loss available to common shareholders incurred in the six months ended June 30, 2011. Diluted earnings per share were $0.37, compared to ($0.13). The increase in net income available to common shareholders was the result of a $27.4 million, or 94%, decrease in the provision for loan losses and a $0.3 million, or 4% increase in noninterest income, offset in part by a $9.8 million, or 19%, decrease in net interest income, a $7.6 million, or 372% increase in income tax expense, and a $0.5 million or 2%, increase in noninterest expense.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 40.)

On an operating segment basis, the increase in net income was the net result of a $10.1 million increase in net income from the Out of Market segment, offset in part by a $1.1 million decrease in net income from the Oklahoma Banking segment, a $1.1 million increase in the net loss from the Other Operations segment, and a $0.3 million decrease in net income from the Kansas Banking segment.

Net Interest Income

	For the six months ended June 30,
(Dollars in thousands)	2012		2011		$ Change			% Change
Interest income:
Loans	$	45,085	$	60,017	$	(14,932	)		(24.88	)%
Investment securities:
U.S. government and agency obligations		804		786		18			2.29
Mortgage-backed securities		2,638		2,570		68			2.65
State and political subdivisions		469		179		290			162.01
Other securities		174		75		99			131.68
Other interest-earning assets		377		270		107			39.72
Total interest income		49,547		63,897		(14,350	)		(22.46	)
Interest expense:
Interest-bearing demand deposits		129		227		(98	)		(43.17	)
Money market accounts		520		1,259		(739	)		(58.70	)
Savings accounts		26		26		—			—
Time deposits of $100,000 or more		2,505		4,426		(1,921	)		(43.40	)
Other time deposits		2,258		3,726		(1,468	)		(39.40	)
Other borrowings		446		991		(545	)		(54.99	)
Subordinated debentures		3,067		2,836		231			8.15
Total interest expense		8,951		13,491		(4,540	)		(33.65	)
Net interest income	$	40,596	$	50,406	$	(9,810	)		(19.46	)%

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 20 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 21 basis points, resulting in an increase in the interest rate spread to 3.46% for the first six months of 2012 from 3.45% for the first six months of 2011. During the same periods, annualized net interest margin was 3.77% and 3.78%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 137.59% from 133.71%. Included in net interest income as of June 30, 2012 and June 30, 2011 were immaterial adjustments of the discount accretion on loans and the loss share receivable, offset in part by immaterial interest reversals on nonaccrual loans.

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The decrease in total interest income was primarily the result of the decrease in average loans. The effect of Southwest’s $689.1 million (29%) decline in average loans more than offset the 32 basis point increase in average yield on loans to 5.50% for the first six months of 2012 from 5.18% for the first six months of 2011. During the same period, average investment securities increased $65.8 million, or 25%; however, the related yield decreased to 2.51% from 2.79% in 2011. Average other interest earning assets increased $104.1 million, or 119% and the related yield decreased to 0.40% for the first six months of 2012 from 0.62% for the first six months of 2011.

The decrease in total interest expense was the result of the effects of a $434.1 million, or 22%, decrease in average interest-bearing liabilities and a decrease in rates paid on interest-bearing liabilities. Southwest’s average total interest-bearing deposits decreased $402.3 million, or 22%, and the related rates paid for interest expense decreased to 0.76% for the first six months of 2012 from 1.06% for the first six months of 2011. Average other borrowings decreased $31.8 million, or 36%, and the related rates paid for interest expense decreased to 1.57% for the first six months of 2012 from 2.24% for the first six months 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.

	For the six months ended June 30,
(Dollars in thousands)	2012 vs. 2011
	Increase			Due to Change
	Or			In Average:
	(Decrease)			Volume			Rate
Interest earned on:
Noncovered loans receivable (1)	$	(14,358	)	$	(18,073	)	$	3,715
Covered loans receivable		(574	)		(565	)		(9	)
Investment securities (1)		475			845			(371	)
Other interest-earning assets		107			232			(124	)
Total interest income		(14,350	)		(11,947	)		(2,403	)
Interest paid on:
Interest-bearing demand		(98	)		15			(113	)
Money market accounts		(739	)		(250	)		(489	)
Savings accounts		—			5			(5	)
Time deposits		(3,389	)		(1,809	)		(1,580	)
Other borrowings		(545	)		(296	)		(249	)
Subordinated debentures		231			—			231
Total interest expense		(4,540	)		(2,652	)		(1,888	)
Net interest income	$	(9,810	)	$	(9,295	)	$	(515	)

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

	For the six months ended June 30,
(Dollars in thousands)	2012								2011
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
Assets
Noncovered loans (1) (2)	$	1,614,980		$	43,848		5.46	%	$	2,288,570		$	58,206		5.16	%
Covered loans (1)		33,951			1,237		7.33			49,449			1,811		7.43
Investment securities		327,180			4,085		2.51			261,391			3,610		2.79
Other interest-earning assets		191,839			377		0.40			87,770			270		0.62
Total interest-earning assets		2,167,950			49,547		4.60			2,687,180			63,897		4.80
Other assets		153,370								95,825
Total assets	$	2,321,320							$	2,783,005
Liabilities and shareholders’ equity
Interest-bearing demand deposits	$	120,626		$	129		0.22	%	$	112,693		$	227		0.41	%
Money market accounts		375,289			520		0.28			490,931			1,259		0.52
Savings accounts		34,609			26		0.15			28,451			26		0.18
Time deposits		905,900			4,763		1.06			1,206,650			8,152		1.36
Total interest-bearing deposits		1,436,424			5,438		0.76			1,838,725			9,664		1.06
Other borrowings		57,301			446		1.57			89,088			991		2.24
Subordinated debentures		81,963			3,067		7.48			81,963			2,836		6.92
Total interest-bearing liabilities		1,575,688			8,951		1.14			2,009,776			13,491		1.35
Noninterest-bearing demand deposits		383,008								367,444
Other liabilities		49,692								22,445
Shareholders’ equity		312,932								383,340
Total liabilities and shareholders’ equity	$	2,321,320							$	2,783,005
Net interest income and interest rate spread				$	40,596		3.46	%				$	50,406		3.45	%
Net interest margin (1)							3.77	%							3.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities		137.59	%							133.71	%

(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 six months
	ended June 30,
(Dollars in thousands)	2012		2011		$ Change			% Change
Noninterest income:
Other service charges	$	4,925	$	5,102	$	(177	)		(3.47	)%
Other fees		933		1,007		(74	)		(7.35	)
Other noninterest income		105		149		(44	)		(29.53	)
Gain on sales of loans:
Mortgage loan sales		1,117		470		647			137.66
All other loan sales		—		125		(125	)		(100.00	)
Gain on investment securities		35		—		35			100.00
Total noninterest income	$	7,115	$	6,853	$	262			3.82	%

Other service charges decreased primarily as a result of decreased overdraft fees.

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 six months
	ended June 30,
(Dollars in thousands)	2012		2011		$ Change			% Change
Noninterest expense:
Salaries and employee benefits	$	14,601	$	14,489	$	112			0.77	%
Occupancy		5,180		5,507		(327	)		(5.94	)
FDIC and other insurance		1,482		2,180		(698	)		(32.02	)
Other real estate (net)		2,431		3,038		(607	)		(19.98	)
Unfunded loan commitment reserve		490		73		417			571.23
Other general and administrative		6,894		5,318		1,576			29.64
Total noninterest expense	$	31,078	$	30,605	$	473			1.55	%

The number of full-time equivalent employees for the first six months decreased from 435 at the beginning of the year to 430 as of June 30, 2012. For the first six months of 2011, the number of full-time equivalent employees increased from 432 at the beginning of the year to 437 as of June 30, 2011.

The decrease in occupancy expense is the result of decreased 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 increase in other general and administrative expense is primarily the result of the prior year settlement of Oklahoma state tax claims for less than the amount accrued.

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 $43.9 million at June 30, 2012 decreased $0.8 million, or 2%, from year-end 2011. The decrease in the allowance for loan losses is a result of the calculation of the appropriate allowance at period end. Net charge-offs incurred in the first six months of 2012 were $2.5 million and the provision for loan losses recorded in the first six months was $1.7 million. The provision for loan losses is the amount of expense that is required to maintain the allowance

40

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 30.)

Taxes on Income

Southwest’s income tax expense was $5.6 million for the first six months of 2012 compared to a tax benefit of $2.0 million for the first six months of 2011, an increase of $7.6 million, or 374%. The increase in the income tax expense is the result of increased income. The effective tax rate for the first six months of 2012 was 37.33%.

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 June 30, 2012. Stillwater National has approved federal funds purchase lines totaling $118.0 million with three banks. There was no outstanding balance on these lines at June 30, 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 $43.6 million. As of June 30, 2012, no borrowings were made through the BIC program. In addition, Stillwater National has available a $369.2 million line of credit and Bank of Kansas has a $57.3 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At June 30, 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 32 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 $43.5 million and $31.5 million as of June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012, $258.4 million of the total carrying value of investment securities of $340.4 million were pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Any amount over pledged can be released at any time.

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

During the first six months of 2012, cash and cash equivalents increased by $46.0 million, or 20%, to $275.9 million. This increase was the net results of cash provided from investing activities of $146.2 million (primarily from net repayments of loans offset by purchases of available for sale securities) and cash provided by operating activities of $20.9 million, offset in part by cash used in financing activities of $121.0 million (primarily from decreases in deposits).

During the first six months of 2011, cash and cash equivalents increased by $0.6 million, or 1%, to $68.1 million. This increase was the net result of cash provided from investing of $136.2 million (primarily net repayments of loans and proceeds from repayments, calls and maturities of securities) and cash provided by operating activities of $22.6 million, offset in part by cash used in financing activities of $158.2 million (primarily from decreases in deposits).

41

As of June 30, 2012, the holding company has $22.3 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 June 30, 2012, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 23.52%, a Tier I risk-based capital ratio of 22.24%, and a leverage ratio of 16.84%. As of June 30, 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.

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	)%
June 30, 2012		2.56	%		(1.22	)%		(2.93	)%
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 experienced a modest decline in each of the three rising interest rate scenarios 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 (2.93%) on June 30, 2012, a 0.79% reduction 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	)%
June 30, 2012		4.44	%		3.37	%		1.95	%
December 31, 2011		9.96	%		7.33	%		3.75	%

As of June 30, 2012, the economic value of equity measure declined 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 result of a +300 bp scenario was 4.44% on June 30, 2012, a 5.52 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 and Capital Management policy limits.

*    *    *    *    *    *     *

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by SEC rules, Southwest’s management evaluated the effectiveness of Southwest’s disclosure controls and procedures as of June 30, 2012. Southwest’s Chief Executive Officer and Interim Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwest’s Chief Executive Officer and Interim Chief Financial Officer concluded that Southwest’s disclosure controls and procedures were effective as of June 30, 2012.

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

No change occurred during the first six 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

The following disclosures are provided in order to update and replace Southwest’s risk factors disclosures.

RISK FACTORS

Investing in our common stock involves risks. You should carefully consider the following risk factors before you decide to make an investment decision regarding our stock. The risk factors may cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, or which we do not believe are material, may cause earnings to be lower or may hurt our financial condition. You should also consider the other information included in our filings with the Securities and Exchange Commission as well as in the documents incorporated by reference into them.

Risks Relating to our Business

Difficult and unsettled market conditions have affected our profits and loan quality and may continue to do so for an unknown period.

Unsettled market conditions may increase the likelihood and the severity of adverse effects discussed in the following risk factors, in particular:

• there may be less demand for our products and services;

• competition in our industry could intensify as a result of increased consolidation of the banking industry;

• it may become more difficult to estimate losses inherent in our loan portfolio;

• loan delinquencies and problem assets may increase;

• collateral for loans may decline in value, increasing loan to value ratios and reducing our customers’ borrowing power and the security for our loans;

• deposits and borrowings may become even more expensive relative to yields on loans and securities, reducing our net interest margin, and making it more difficult to maintain adequate sources of liquidity;

• asset based liquidity, which depends upon the marketability of assets such as student loans and mortgages, may be reduced; and

• compliance with banking regulations enacted in connection with stimulus legislation and other legislation may increase our costs, limit our ability to pursue business opportunities, and impair our ability to hire and retain talented managers.

Changes in interest rates and other factors beyond our control may adversely affect our earnings and financial condition.

Our net income depends to a great extent upon the level of our net interest income. Changes in interest rates can increase or decrease net interest income and net income. Net interest income is the difference between the interest income we earn on loans, investments, and other interest-earning assets, and the interest we pay 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 market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.

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Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in world financial markets. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. Changes in the market interest rates for types of products and services in our various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors. The results of our interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that we will be able to successfully manage our interest rate risk.

Changes in local economic conditions could adversely affect our business.

Our commercial and commercial real estate lending operations are concentrated in the metropolitan areas of Oklahoma City, Stillwater, Edmond, and Tulsa, Oklahoma; Dallas, Austin, San Antonio, and Houston, Texas; and Hutchinson, Wichita, and Kansas City, Kansas. Our success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase our problem loans and charge-offs and otherwise negatively affect our performance and financial condition.

Adverse changes in healthcare-related businesses could lead to slower loan growth and higher levels of problem loans and charge-offs.

We have a substantial amount of loans to individuals and businesses involved in the healthcare industry, including business and personal loans to physicians, dentists, and other healthcare professionals, and loans to for-profit hospitals, nursing homes, suppliers and other healthcare-related businesses. Our strategy calls for continued growth in healthcare lending. This concentration exposes us to the risk that adverse developments in the healthcare industry could hurt our profitability and financial condition as a result of increased levels of nonperforming loans and charge-offs and reduced loan demand and deposit growth.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Educations Reconciliations Act of 2010, is expected to have profound effects on the provision of healthcare in the United States. We have assessed its potential effects on the market for healthcare and our services for the healthcare industry, and believe it will have a net positive effect on them. However, the law is complex and implementation requires the adoption of significant regulations. As a result, our assessment may be wrong, which could have adverse effects on the growth and profitability of our healthcare business.

Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.

We maintain an allowance for loan losses in an amount that we believe is appropriate to provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the allowance. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations.

Commercial and commercial real estate loans comprise a significant portion of our total loan portfolio. These types of loans typically are larger than residential real estate loans and other consumer loans.

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Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

The results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy’s performance is worse than we expect.

We perform internal assessments of our capital as part of our planning process. Our process includes stress testing using alternative credit quality assumptions in order to estimate their effects on loan loss provisions, net income, and regulatory capital ratios. The alternative assumptions include baseline credit quality assumptions and more adverse credit quality assumptions.

The results of these stress tests involve assumptions about the economy and future loan losses and default rates and may not accurately reflect the impact on our earnings or financial condition or actual future conditions. Actual future economic conditions may result in significantly higher credit losses than we assume in our stress tests, with a corresponding negative impact on our earnings, financial condition, and capital than those predicted by our internal stress test.

We may not realize our deferred tax assets.

We may experience negative or unforeseen tax consequences. We reviewed the probability of the realization of our deferred tax assets based on forecasts of taxable income. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of a valuation allowance to reduce our deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on Southwest’s results of operations and financial condition.

Our earnings and financial condition may be adversely affected by changes in accounting principles and in tax laws, or the interpretation of them.

Changes in U.S. generally accepted accounting principles could have negative effects on our reported earnings and financial condition.

Changes in tax laws, rules, and regulations, including changes in the interpretation or implementation of tax laws, rules, and regulations by the Internal Revenue Service or other governmental bodies, could affect us in significant and unpredictable ways. Such changes could subject us to additional costs, among other things. Failure to comply with tax laws, rules, and regulations could result in sanctions by regulatory agencies, civil money penalties, and reputation damage.

Additionally, we conduct quarterly assessments of our deferred tax assets. The carrying value of these assets is dependent upon earnings forecasts and prior period changes, among other things. A significant change in our assumptions could affect the carrying value of our deferred tax assets on our balance sheet.

Government regulation significantly affects our business.

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Stillwater National is subject to regulation and supervision by the OCC. Bank of Kansas is subject to regulation and supervision by the FDIC and Kansas Banking authorities. We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies.

Changes in the laws, regulations, and regulatory practices affecting the banking industry may limit our ability to increase or assess fees for services provided, increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial

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services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and monetary policy may also affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads.

The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Economic conditions in the past several years have increased bank failures. The FDIC may increase our deposit insurance costs by increasing regular assessment rates and levying special assessments, which may in the future significantly and adversely affect our net income.

The Dodd-Frank Act will continue to increase our regulatory compliance burden and costs, may place restrictions on certain products and services, and limits our future capital raising alternatives.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) made significant, wide-ranging changes in the regulation of the financial services industry that affect all financial institutions, including Southwest. The Dodd-Frank Act is likely to continue to increase Southwest’s regulatory compliance burden, increase the costs associated with regulatory examinations and compliance measures, and increase other operating costs.

Among other things, the Dodd-Frank Act eliminated the prohibition of paying interest on commercial demand deposits, which may increase Southwest’s funding costs, and limits the use of new trust preferred securities as regulatory capital. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau, whose regulations may adversely affect the business operations of financial institutions offering consumer financial products or services, including Southwest. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to Southwest through the adoption of similar policies by the Federal Reserve, OCC, FDIC or Kansas banking authorities.

Significant elements of the Dodd-Frank Act have been implemented, but implementation of other elements of the Act requires additional regulations, many of which have not yet been established.

Examination reports may include significant findings and assessments about our condition and operations that are not publicly disclosed. Assessments by bank examiners may cause us to increase our publicly reported problem assets and potential problem loans, charge-offs, or provisions for loan losses.

Examinations by federal and state bank regulatory agencies include assessments of risk, financial health, capital adequacy, loan risk, and other factors that federal banking laws do not allow to be publicly disclosed. The assignment of loans to credit risk categories involves judgment and the application of credit policies. In their examinations, federal and state banking examiners may assign different risk categories to loans than those assigned by our third party loan review firms or management. In that case, Southwest must amend its risk categorizations to match those assigned by the bank examiners, which may result in increases in publicly reported problem and potential problem loans, charge-offs, or provisions for loan losses.

Our decisions regarding the fair value of assets acquired could be inaccurate and our estimated loss share receivable in FDIC-assisted acquisitions may be inadequate, which could adversely affect our business, financial condition, results of operations, and future prospects.

In accordance with generally accepted accounting principles, we record assets acquired and liabilities assumed in business combinations at their fair values. The determination of the initial fair values can be complex and involves a high degree of judgment. Goodwill is initially recorded as the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination, and thereafter is tested for impairment at least annually. If the current fair value is determined to be less than the carrying value, an impairment loss is recorded. Our impairment testing of goodwill has not resulted in any losses to date.

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Management makes various assumptions and judgments about the collectability of acquired loan portfolios, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss share agreements, we may record a loss share receivable that we consider adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss share receivable, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information.

If our assumptions are incorrect, our current loss share receivable may be insufficient to cover future loan losses, and increased loss reserves may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses could have a negative effect on our operating results.

The acquisition of banks, bank branches, and other businesses involve risks.

In the future we may acquire additional banks, branches or other financial institutions, or other businesses. We cannot assure you that we will be able to adequately or profitably manage any such acquisitions. The acquisition of banks, bank branches, and other businesses involves risk, including exposure to unknown or contingent liabilities, the uncertainties of asset quality assessment, the difficulty and expense of integrating the operations and personnel of the acquired companies with ours, the potential negative effects on our other operations of the diversion of management’s time and attention, and the possible loss of key employees and customers of the banks, businesses, or branches we acquire. Our failure to execute our internal growth strategy or our acquisition strategy could adversely affect our business, results of operations, financial condition, and future prospects.

We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.

We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial condition. Banking regulations adopted in connection with federal stimulus legislation may make it more difficult to retain and recruit senior managers.

Competition may decrease our growth or profits.

We compete for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than ours. Credit unions have federal tax exemptions, which they may take advantage of to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably.

Risks Related to Ownership of Our Common Stock

The market price for our common stock may be highly volatile, which may make it difficult for investors to resell shares of common stock at times or prices they find attractive.

The overall market and the price of our common stock may continue to be volatile as a result of a variety of factors, many of which are beyond our control. These factors include, in addition to those described in these Risk Factors:

• actual or anticipated quarterly fluctuations in our operating results and financial condition;

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• changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;

• speculation in the press or investment community generally or relating to our reputation or the financial services industry;

• the size of the public float of our common stock;

• strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings;

• fluctuations in the stock price and operating results of our competitors;

• future sales of our equity or equity-related securities;

• proposed or adopted regulatory changes or developments;

• anticipated or pending investigations, proceedings, or litigation that involve or affect us;

• domestic and international economic factors unrelated to our performance; and

• general market conditions and, in particular, developments related to market conditions for the financial services industry.

In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations as a result of general economic instability and recession. This volatility has had a significant effect on the market price of securities issued by many companies, including market price effects resulting from reasons unrelated to their operations performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our future operating results. We expect that the market price of our common stock will continue to fluctuate, and there can be no assurance about the levels of the market prices for our common stock.

There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.

Although our common shares are listed for trading on the NASDAQ Global Select Market, the trading in our common shares has less liquidity than many other companies quoted on the NASDAQ Global Select Market. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the market of willing buyers and sellers for our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common shares will increase in the future. Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically.

Future sales of our common stock or other securities may dilute the value of our common stock.

In many situations, our board of directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued stock, including shares authorized and unissued under our stock option plans. In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms.

Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

The sale, or availability for sale, of a substantial number of shares of common stock in the public market could adversely affect the price of our common stock and could impair our ability to raise additional capital through the sale of equity securities. On December 5, 2008, we sold to the Treasury Department a warrant to purchase up to 703,753 shares of our common stock at a price of $14.92 per common share. Our warrant and common shares issued upon the exercise of our warrant may be sold in the public market or in private transactions.

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Our ability to pay dividends is limited by law, contract, and banking agency discretion.

No dividends on our common stock were declared during 2011 or 2012 through June 30, 2012. Our Board of Directors has not determined whether to declare dividends on our common stock in the future, and there can be no assurance that our regulators will allow us to pay dividends.

Our ability to pay dividends to our shareholders in the past and over the long term largely depends on our receipt of dividends from Stillwater National and Bank of Kansas. The amount of dividends that Stillwater National and Bank of Kansas may pay to us is limited by federal laws and regulations.

We are prohibited from paying dividends on our common stock if the required payments on our Series B Preferred Stock issued to the Treasury Department and our subordinated debentures have not been made. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.

Our participation in the Treasury Department’s Capital Purchase Program subjects us to additional restrictions, oversight, and costs, and has other potential consequences that could materially affect our business, results of operations, and prospects.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA, was signed into law. Under EESA, the Treasury Department has the authority to, among other things, invest in financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to this authority, the Treasury Department announced its Capital Purchase Program, under which it has purchased preferred stock and warrants in eligible institutions, including us, to increase the flow of credit to businesses and consumers and to support the overall United States economy.

On December 5, 2008, we issued 70,000 shares of Series B Preferred Stock and a warrant to purchase up to 703,753 shares of common stock at an exercise price of $14.92 per share to the Treasury Department for an aggregate price of $70.0 million. As a result of our participation in the Capital Purchase Program:

• We are subject to complex restrictions, oversight, and costs that may have an adverse impact on our financial condition, results of operations, and the price of our common stock. For example, the American Recovery and Reinvestment Act of 2009 and related regulations contain significant, complex limitations on the amount and form of bonus, retention, and other incentive compensation that participants in the Capital Purchase Program may pay to executive officers and highly compensated employees. These provisions may adversely affect our ability to attract and retain executive officers and other key personnel.

• The Capital Purchase Program imposes restrictions on our ability to pay cash dividends on, and to repurchase, our common stock.

• The Treasury Department has the right to appoint two persons to our board of directors if we miss dividend payments for six dividend periods, whether or not consecutive, on the Series B Preferred Stock.

• Future federal statutes may adversely affect the terms of the Capital Purchase Program that are applicable to us, and the Treasury Department may amend the terms of our agreement with them unilaterally if required by future statutes, including in a manner materially adverse to us.

• Compliance with current and potential regulatory initiatives applicable to Capital Purchase Program participants as well as additional scrutiny from regulatory authorities may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

The Special Inspector General for the Troubled Asset Relief Program, or TARP, has requested information from Capital Purchase Program and other TARP participants, including a description of past and anticipated uses of the TARP funds and compensation paid to management. We, like other Capital Purchase Program participants, are required to submit monthly reports about our lending and activities to the Treasury Department. It is unclear at this point what the ramifications of such disclosure are or may be in the future.

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The holders of our Series B Preferred Stock have rights that are senior to those of our common shareholders.

On December 5, 2008, we sold $70.0 million of our Series B Preferred Stock issued to the Treasury Department under the Capital Purchase Program, which ranks senior to common stock in the payment of dividends and on liquidation. The liquidation amount of the Series B Preferred Stock is $1,000 per share.

Restrictions on unfriendly acquisitions could prevent a takeover.

Our certificate of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by the board of directors. The Oklahoma General Corporation Act includes provisions that make an acquisition of Southwest more difficult. These provisions may prevent a future takeover attempt in which our shareholders otherwise might receive a substantial premium for their shares over then-current market prices. These provisions include supermajority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. Our certificate of incorporation also authorizes the issuance of additional shares without shareholder approval on terms or in circumstances that could deter a future takeover attempt. In addition, the Oklahoma General Corporation Act now requires public companies chartered under Oklahoma law to have a classified board of directors with two or three year terms if they have 1,000 or more shareholders of record. We currently elect all directors to one-year terms, and have substantially fewer than 1,000 shareholders of record since many owners hold their shares through third parties.

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 June 30, 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 six months ended June 30, 2012.

Item 3: Defaults upon senior securities

None

Item 4: (removed and reserved)

Item 5: Other information

On August 3, 2012, Southwest Bancorp, Inc. (the “Company”) entered into a Change in Control Agreement (the “Agreement”) with Priscilla Barnes (the “Executive”), its Senior Executive Vice President and Chief Operating Officer. Following is a brief description of the terms and conditions of the Agreement, which is qualified in its entirety by reference to the copy of the Agreement attached as Exhibit 10.1 to this Form 10-Q and incorporated herein by reference. Payments under the Agreement currently are subject to prohibitions and limitations imposed on participants in the United States Treasury’s Troubled Asset Relief Program (“TARP”) and Federal Income Tax limits on “parachute payments”.

In general, the Agreement calls for the payment of two times the Executive’s highest annual base salary in effect during the three years prior to (i) a change in control, and (ii) the termination of the Executive’s employment without cause by the Company or with good reason by the Executive, and for the continuation of medical, dental, and hospitalization programs for the twelve following months. The payments are subject to a “double trigger”, that is, there must be both a change in control and a termination of employment.

The Agreement has an initial term of three years, but after two years the Agreement is automatically extended each year for an additional year unless the Company provides at least sixty days notice that it will not be extended. In general, the Agreement does not provide for payments relating to any change in control after the Executive’s 65^th birthday.

Item 6: Exhibits

Exhibit 10.1	Change of Control Agreement by and between Southwest Bancorp, Inc. and Priscilla Barnes dated August 3, 2012.
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	August 6, 2012
	Rick Green	Date
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Randy Waldrup	August 6, 2012
	Randy Waldrup	Date
	Executive Vice President, Interim Chief
	Financial Officer
	(Principal Financial Officer)

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