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Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
Oklahoma
(State or other jurisdiction of
incorporation or organization)
  73-1136584
(I.R.S. Employer
Identification Number)
     
608 South Main Street
Stillwater, Oklahoma
(Address of principal executive office)
  74074
(Zip Code)
Registrant’s telephone number, including area code: (405) 742-1800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ YES o 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).
þ YES o 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 o   Accelerated Filer þ   Non-Accelerated Filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o YES þ NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
19,443,800 (11/04/11)
 
 

 


 

SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
         
       
       
    3  
    4  
    5  
    6  
    7  
    8  
    29  
    44  
    45  
    46  
    47  
 EX-31.A
 EX-31.B
 EX-32.A
 EX-32.B
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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SOUTHWEST BANCORP, INC.
Unaudited Consolidated Statements of Financial Condition
                 
    September 30,     December 31,  
(Dollars in thousands)   2011     2010  
 
Assets:
               
Cash and due from banks
  $ 27,501     $ 26,478  
Interest-bearing deposits
    89,099       41,018  
 
Cash and cash equivalents
    116,600       67,496  
Securities held to maturity (fair values of $15,805 and $14,029, respectively)
    15,398       14,304  
Securities available for sale (amortized cost $247,094 and $246,649, respectively)
    254,201       248,221  
Loans held for sale
    39,902       35,194  
Noncovered loans receivable
    1,993,694       2,331,293  
Less: Allowance for loan losses
    (64,698 )     (65,229 )
 
Net noncovered loans
    1,928,996       2,266,064  
Covered loans receivable (includes loss share of $10,976 and $14,370, respectively)
    41,209       53,628  
 
Net loans receivable
    1,970,205       2,319,692  
Accrued interest receivable
    8,035       8,590  
Income tax receivable
    12,509        
Premises and equipment, net
    22,706       23,772  
Noncovered other real estate
    70,785       37,722  
Covered other real estate
    5,350       4,187  
Goodwill
    6,811       6,811  
Other intangible assets, net
    4,966       5,371  
Other assets
    45,024       49,181  
 
Total assets
  $ 2,572,492     $ 2,820,541  
 
 
               
Liabilities:
               
 
Deposits:
               
Noninterest-bearing demand
  $ 388,365     $ 377,182  
Interest-bearing demand
    98,270       92,584  
Money market accounts
    461,546       495,253  
Savings accounts
    31,319       26,665  
Time deposits of $100,000 or more
    551,914       694,565  
Other time deposits
    490,839       566,479  
 
Total deposits
    2,022,253       2,252,728  
Accrued interest payable
    2,507       1,577  
Income tax payable
          2,878  
Other liabilities
    12,162       8,981  
Other borrowings
    86,583       94,602  
Subordinated debentures
    81,963       81,963  
 
Total liabilities
    2,205,468       2,442,729  
Shareholders’ equity:
               
Serial preferred stock — $1,000 par value; 2,000,000 shares authorized; 70,000 shares issued and outstanding
    68,268       67,724  
Common stock — $1 par value; 40,000,000 shares authorized; 19,441,577 and 19,421,900 shares issued and outstanding, respectively
    19,442       19,422  
Paid in capital
    98,981       98,894  
Retained earnings
    177,584       190,793  
Accumulated other comprehensive income
    2,749       979  
 
Total shareholders’ equity
    367,024       377,812  
 
Total liabilities & shareholders’ equity
  $ 2,572,492     $ 2,820,541  
 
The accompanying notes are an integral part of this statement.

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SOUTHWEST BANCORP, INC.
Unaudited Consolidated Statements of Operations
                                 
    For the three months     For the nine months  
    ended September 30,     ended September 30,  
(Dollars in thousands, except earnings per share data)   2011     2010     2011     2010  
 
Interest income:
                               
Interest and fees on loans
  $ 27,873     $ 32,824     $ 87,890     $ 101,087  
Investment securities:
                               
U.S. Government and agency obligations
    366     $ 526       1,152       1,675  
Mortgage-backed securities
    1,298       1,430       3,868       4,329  
State and political subdivisions
    103       61       282       203  
Other securities
    12       62       87       217  
Other interest-earning assets
    131       180       401       610  
 
Total interest income
    29,783       35,083       93,680       108,121  
 
                               
Interest expense:
                               
Interest-bearing demand
    102       111       329       383  
Money market accounts
    507       976       1,766       3,026  
Savings accounts
    11       15       37       47  
Time deposits of $100,000 or more
    1,680       3,128       6,106       10,669  
Other time deposits
    1,511       2,572       5,237       8,222  
Other borrowings
    469       524       1,460       1,565  
Subordinated debentures
    1,478       1,305       4,314       3,848  
 
Total interest expense
    5,758       8,631       19,249       27,760  
 
 
                               
Net interest income
    24,025       26,452       74,431       80,361  
 
                               
Provision for loan losses
    24,626       11,988       53,816       28,295  
 
Net interest income (loss) after provision for loan losses
    (601 )     14,464       20,615       52,066  
 
 
                               
Noninterest income:
                               
Service charges and fees
    3,117       2,994       9,226       9,260  
Other noninterest income
    46       83       195       515  
Gain on sales of loans, net
    426       653       1,021       2,054  
Gain on sale/call of investment securities, net
          2,605             2,646  
 
Total noninterest income
    3,589       6,335       10,442       14,475  
 
                               
Noninterest expense:
                               
Salaries and employee benefits
    7,734       7,183       22,223       22,400  
Occupancy
    2,694       2,835       8,201       8,454  
FDIC and other insurance
    824       1,347       3,004       4,455  
Other real estate, net
    1,445       228       4,483       963  
General and administrative
    4,996       3,825       10,387       10,550  
 
Total noninterest expense
    17,693       15,418       48,298       46,822  
 
Income (loss) before taxes
    (14,705 )     5,381       (17,241 )     19,719  
Taxes on income
    (5,180 )     1,508       (7,207 )     7,063  
 
Net income (loss)
  $ (9,525 )   $ 3,873     $ (10,034 )   $ 12,656  
 
Net income (loss) available to common shareholders
  $ (10,589 )   $ 2,825     $ (13,208 )   $ 9,520  
 
 
                               
Basic earnings per common share
  $ (0.54 )   $ 0.15     $ (0.68 )   $ 0.55  
Diluted earnings per common share
    (0.54 )     0.15       (0.68 )     0.55  
Cash dividends declared per share
                       
 
The accompanying notes are an integral part of this statement.

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SOUTHWEST BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
                 
    For the nine months  
    ended September 30,  
(Dollars in thousands)   2011     2010  
 
Operating activities:
               
Net income (loss)
  $ (10,034 )   $ 12,656  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Provision for loan losses
    53,816       28,295  
Provision for other real estate and adjustments to other real estate
    2,301       590  
Deferred tax benefit
    (39 )     (4,959 )
Asset depreciation
    1,971       2,135  
Securities premium amortization, net of discount accretion
    1,640       1,361  
Amortization of intangibles
    887       1,101  
Stock based compensation expense
    256       283  
Net gain on sales/calls of investment securities
          (2,646 )
Net gain on sales of available for sale loans
    (1,021 )     (2,054 )
Net loss on sales of premises/equipment
    1       138  
Net gain on sales of other real estate
    (123 )     (189 )
Proceeds from sales of held for sale loans
    48,295       122,783  
Held for sale loans originated for resale
    (48,290 )     (93,463 )
Net changes in assets and liabilities:
               
Accrued interest receivable
    555       1,143  
Other assets
    2,665       8,427  
Income taxes receivable / payable
    (15,547 )     2,131  
Excess tax expense (benefit) from share-based payment arrangements
    160       (14 )
Accrued interest payable
    930       (734 )
Other liabilities
    (792 )     (1,978 )
 
Net cash provided by operating activities
    37,631       75,006  
 
Investing activities:
               
Proceeds from sales of available for sale securities
          57,783  
Proceeds from principal repayments, calls and maturities:
               
Held to maturity securities
    2,345       2,700  
Available for sale securities
    42,419       53,286  
Proceeds from sales of other investments
          9,761  
Purchases of other investments
    (42 )     (1,100 )
Purchases of held to maturity securities
          (5,134 )
Purchases of available for sale securities
    (47,944 )     (99,880 )
Principal repayments, net of loans originated
    239,894       86,686  
Purchases of premises and equipment
    (977 )     (825 )
Proceeds from sales of premises and equipment
    108       50  
Proceeds from sales of other real estate
    16,021       8,669  
 
Net cash provided from investing activities
    251,824       111,996  
 
Financing activities:
               
Net decrease in deposits
    (230,475 )     (247,082 )
Net decrease in other borrowings
    (8,019 )     (20,516 )
Net proceeds from issuance of common stock
    53       54,169  
Excess tax (expense) benefit from share-based payment arrangements
    (160 )     14  
Preferred stock dividends paid
    (1,750 )     (2,625 )
Common stock dividends paid
          (351 )
 
Net cash used in financing activities
    (240,351 )     (216,391 )
 
Net increase (decrease) in cash and cash equivalents
    49,104       (29,389 )
Cash and cash equivalents:
               
Beginning of period
    67,496       118,847  
 
End of period
  $ 116,600     $ 89,458  
 
The accompanying notes are an integral part of this statement.

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SOUTHWEST BANCORP, INC.
Unaudited Consolidated Statement 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, 2009
  $ 67,037       14,750,713     $ 14,751     $ 49,029     $ 178,016     $ 945     $ 309,778  
 
                                                       
Dividends (paid and/or accrued):
                                                       
Preferred
                            (2,626 )           (2,626 )
Warrant amortization
    511                         (511 )            
Common stock issued
          4,626,281       4,626       49,601                   54,227  
Net common stock issued under employee plans and related tax expense
          18,681       19       120                   139  
Other comprehensive income, net of tax
                                  2,402       2,402  
Net income
                            12,656             12,656  
 
 
                                                       
Balance, September 30, 2010
  $ 67,548       19,395,675     $ 19,396     $ 98,750     $ 187,535     $ 3,347     $ 376,576  
 
 
                                                       
 
Balance, December 31, 2010
  $ 67,724       19,421,900     $ 19,422     $ 98,894     $ 190,793     $ 979     $ 377,812  
 
                                                       
Dividends (paid and/or accrued):
                                                       
Preferred
                            (2,631 )           (2,631 )
Warrant amortization
    544                         (544 )            
Common stock issued
          16,100       16       214                   230  
Net common stock issued under employee plans and related tax expense
          3,577       4       (127 )                 (123 )
Other comprehensive income, net of tax
                                  1,770       1,770  
Net income (loss)
                            (10,034 )           (10,034 )
 
 
                                                       
Balance, September 30, 2011
  $ 68,268       19,441,577     $ 19,442     $ 98,981     $ 177,584     $ 2,749     $ 367,024  
 
The accompanying notes are an integral part of this statement.

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SOUTHWEST BANCORP, INC.
Unaudited Consolidated Statements of Comprehensive Income
                                 
    For the three months     For the nine months  
    ended September 30,     ended September 30,  
(Dollars in thousands)   2011     2010     2011     2010  
 
Net income (loss)
  $ (9,525 )   $ 3,873     $ (10,034 )   $ 12,656  
 
                               
Other comprehensive income:
                               
Unrealized holding gain (loss) on available for sale securities
    2,377       (309 )     5,535       6,569  
Reclassification adjustment for losses arising during the period
          (2,605 )           (2,646 )
Change in fair value of derivative used for cash flow hedge
    (1,535 )           (2,715 )      
 
Other comprehensive income (loss), before tax
    842       (2,914 )     2,820       3,923  
Tax benefit (expense) related to items of other comprehensive income (loss)
    (321 )     1,128       (1,050 )     (1,521 )
 
Other comprehensive income (loss), net of tax
    521       (1,786 )     1,770       2,402  
 
Comprehensive income (loss)
  $ (9,004 )   $ 2,087     $ (8,264 )   $ 15,058  
 
The accompanying notes are an integral part of this statement.

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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 nine months ended September 30, 2011, and the cash flows for the nine months ended September 30, 2011, 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, 2010.
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.
Certain reclassifications have been made to prior year amounts on the statement of financial condition and statement of cash flows to conform to current year presentation.
In accordance with Accounting Standards Codification (“ASC”) 855, Subsequent Events, Southwest has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.
NOTE 2: INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities at September 30, 2011 and December 31, 2010 follows:
                                 
    Amortized     Gross Unrealized     Fair  
(Dollars in thousands)   Cost     Gains     Losses     Value  
 
At September 30, 2011:
                               
Held to Maturity:
                               
Obligations of state and political subdivisions
  $ 15,398     $ 407     $     $ 15,805  
 
Total
  $ 15,398     $ 407     $     $ 15,805  
 
Available for Sale:
                               
U.S. Government obligations
  $ 1,100     $ 2     $     $ 1,102  
Federal agency securities
    67,508       942       (63 )     68,387  
Obligations of state and political subdivisions
    994       24             1,018  
Residential mortgage-backed securities
    176,364       6,071       (38 )     182,397  
Equity securities
    1,128       169             1,297  
 
Total
  $ 247,094     $ 7,208     $ (101 )   $ 254,201  
 

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    Amortized     Gross Unrealized     Fair  
(Dollars in thousands)   Cost     Gains     Losses     Value  
 
At December 31, 2010:
                               
Held to Maturity:
                               
Obligations of state and political subdivisions
  $ 14,304     $ 43     $ (318 )   $ 14,029  
 
Total
  $ 14,304     $ 43     $ (318 )   $ 14,029  
 
Available for Sale:
                               
U.S. Government obligations
  $ 1,099     $ 9     $     $ 1,108  
Federal agency securities
    65,522       545       (693 )     65,374  
Obligations of state and political subdivisions
    231       2             233  
Residential mortgage-backed securities
    178,695       3,535       (2,213 )     180,017  
Equity securities
    1,102       387             1,489  
 
Total
  $ 246,649     $ 4,478     $ (2,906 )   $ 248,221  
 
Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”).
Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments, are carried at cost and included in other assets on the statement of condition. Total investments carried at cost were $10.4 million at both September 30, 2011 and December 31, 2010. There are no identified events or changes in circumstances that may have a significant adverse effect on these investments carried at cost.
A comparison of the amortized cost and approximate fair value of Southwest’s investment securities by maturity date at September 30, 2011 follows:
                                 
    Available for Sale     Held to Maturity  
    Amortized     Fair     Amortized     Fair  
(Dollars in thousands)   Cost     Value     Cost     Value  
 
One year or less
  $ 13,653     $ 13,784     $ 2,377     $ 2,388  
M ore than one year through five years
    173,494       179,605       3,081       3,128  
M ore than five years through ten years
    45,713       46,395       6,463       6,609  
M ore than ten years
    14,234       14,417       3,477       3,680  
 
Total
  $ 247,094     $ 254,201     $ 15,398     $ 15,805  
 
The foregoing analysis assumes that Southwest’s residential mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to Southwest’s investment securities for this analysis.
Gain or loss on sale of investments is based upon the specific identification method. There were no sales of investment securities for the three or nine months ended September 30, 2011. For the three and nine months ended September 30, 2010, there were $57.8 million in proceeds from sales of investment securities with $2.5 million in gains recorded.
The following table presents securities with gross unrealized losses and fair value by length of time that the individual securities had been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010. Securities whose market values exceed cost are excluded from this table.
                                         
                    Continuous Unrealized        
            Amortized cost of     Loss Existing for:     Fair value of  
    Number of     securities with     Less Than     More Than     securities with  
(Dollars in thousands)   Securities     unrealized losses     12 Months     12 Months     unrealized losses  
 
At September 30, 2011:
                                       
Available for Sale:
                                       
Federal agency securities
    5     $ 9,142     $ (63 )   $     $ 9,079  
Residential mortgage-backed securities
    7       7,044       (38 )           7,006  
 
Total
    12     $ 16,186     $ (101 )   $     $ 16,085  
 

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                    Continuous Unrealized        
                    Loss Existing for:        
    Number of     Amortized     Less Than     More Than     Fair  
(Dollars in thousands)   Securities     Cost     12 Months     12 Months     Value  
 
At December 31, 2010:
                                       
Held to Maturity:
                                       
Obligations of state and political subdivisions
    6     $ 6,490     $ (318 )   $     $ 6,172  
 
 
    6     $ 6,490     $ (318 )   $     $ 6,172  
 
 
                                       
Available for Sale:
                                       
Federal agency securities
    11     $ 26,645     $ (693 )   $     $ 25,952  
Obligations of state and political subdivisions
    1       55                   55  
Residential mortgage-backed securities
    27       62,197       (2,213 )           59,984  
 
Total
    39     $ 88,897     $ (2,906 )   $     $ 85,991  
 
Southwest evaluates all securities on an individual basis for other-than-temporary impairment on at least a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of Southwest to retain its investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time Southwest expects to receive full value for the securities. Furthermore, as of September 30, 2011, 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 September 30, 2011, 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 $215.5 million and $216.4 million were pledged to meet such requirements at September 30, 2011 and December 31, 2010, 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 of loans by market. At September 30, 2011 and December 31, 2010, 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.

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Southwest’s loan categories were as follows:
                                 
    September 30, 2011     December 31, 2010  
(Dollars in thousands)   Noncovered     Covered     Noncovered     Covered  
 
Real estate mortgage:
                               
Commercial
  $ 1,169,010     $ 23,201     $ 1,310,464     $ 30,997  
One-to-four family residential
    85,272       7,378       89,800       9,122  
Real estate construction:
                               
Commercial
    348,053       5,987       441,265       6,840  
One-to-four family residential
    25,527             27,429       439  
Commercial
    367,241       4,286       452,626       5,554  
Installment and consumer:
                               
Guaranteed student loans
    5,547             5,843        
Other
    32,946       357       39,060       676  
 
 
    2,033,596       41,209       2,366,487       53,628  
Less: Allowance for loan losses
    (64,698 )           (65,229 )      
 
Total loans, net
  $ 1,968,898     $ 41,209     $ 2,301,258     $ 53,628  
 
Concentrations of Credit. At September 30, 2011, approximately $624.1 million, or 31%, 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.
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 $285.9 million and $261.3 million at September 30, 2011 and September 30, 2010, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized on an individual loan by loan basis over the period of estimated net servicing income.
Acquired Loans. On June 19, 2009, Bank of Kansas entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire substantially all loans as well as certain other related assets of First National Bank of Anthony, Anthony, Kansas (“FNBA”) in an FDIC-assisted transaction. Bank of Kansas and the FDIC entered into loss sharing agreements that provide Bank of Kansas with significant protection against credit losses from loans and related assets acquired in the transaction. Under these agreements, the FDIC will reimburse Bank of Kansas 80% of net losses up to $35.0 million on covered assets, primarily acquired loans and other real estate, and 95% of any net losses above $35.0 million. Bank of Kansas services the covered assets.
Loans covered under the loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported in loans and are referred to as “covered” loans. Covered loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Subsequent decreases in expected cash flows are recognized as impairments.
The expected payments from the FDIC under the loss sharing agreements are recorded as part of the covered loans in the Unaudited Consolidated Statement of Financial Condition. As of September 30, 2011, Bank of Kansas has identified $17.7 million in cumulative net losses that have been submitted to the FDIC under such loss sharing agreements.

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Changes in the carrying and net accretable amounts for ASC 310.30 loans were as follows for the three and nine months ended September 30, 2011 and September 30, 2010.
                                 
            For the three months ended September 30,          
    2011     2010  
    Net     Carrying     Net     Carrying  
    accretable     amount     accretable     amount  
(Dollars in thousands)   amount     of loans     amount     of loans  
 
Fair value of acquired loans at beginning of period
  $ 2,573     $ 46,153     $ 2,956     $ 68,006  
Payments received
          (1,727 )           (6,616 )
Transfers to other real estate / repossessed assets
          (2,261 )     (35 )     (638 )
Charge-offs
    (88 )     (979 )     (125 )     (241 )
Amortization
    (23 )     23       (47 )     47  
 
Balance at end of period
  $ 2,462     $ 41,209     $ 2,749     $ 60,558  
 
                                 
    For the nine months ended September 30,  
    2011     2010  
    Net     Carrying     Net     Carrying  
    accretable     amount     accretable     amount  
(Dollars in thousands)   amount     of loans     amount     of loans  
 
Fair value of acquired loans at beg inning of period
  $ 2,688     $ 53,628     $ 3,074     $ 85,405  
Payments received
          (7,925 )           (21,048 )
Transfers to other real estate / repossessed assets
    4       (3,534 )     (87 )     (3,778 )
Charge-offs
    (85 )     (1,105 )     (18 )     (241 )
Amortization
    (145 )     145       (220 )     220  
 
Balance at end of period
  $ 2,462     $ 41,209     $ 2,749     $ 60,558  
 
Nonperforming / Past Due Loans. Southwest identifies past due loans based on contractual terms on a loan by loan basis and generally places loans, except for consumer loans, on nonaccrual when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. Interest accrual may also be discontinued earlier if, in management’s opinion, collection is unlikely. Generally, consumer installment loans are not placed on nonaccrual but are charged-off when they are four months past due. Accrued interest is written off when a loan is placed on nonaccrual status. Subsequent interest income is recorded when cash receipts are received from the borrower and collectability of the principal amount is reasonably assured.
Under generally accepted accounting principles and instructions to reports of condition and income of federal banking regulators, a nonaccrual loan may be returned to accrual status: when none of its principal and interest is due and unpaid, repayment is expected, and there has been a sustained period (at least six months) of repayment performance; when the loan is not brought current, but there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or when the loan otherwise becomes well-secured and in the process of collection. Purchased impaired loans also may be returned to accrual status without becoming fully current. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance.
Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to Southwest but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods.

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The following table presents the recorded investment in loans on nonaccrual status.
                                 
    At September 30, 2011     At December 31, 2010  
(Dollars in thousands)   Noncovered     Covered     Noncovered     Covered  
 
Real estate mortgage:
                               
Commercial
  $ 56,234     $ 1,953     $ 29,996     $ 4,391  
One-to-four family residential
    1,433       200       1,984       932  
Real estate construction:
                               
Commercial
    49,775       4,293       53,269       4,744  
One-to-four family residential
    18,779             14,302       153  
Commercial
    5,895       608       6,977       581  
Other consumer
    152       11       38       5  
 
Total nonaccrual loans
  $ 132,268     $ 7,065     $ 106,566     $ 10,806  
 
During the first nine months of 2011, $0.2 million of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the nine months ended September 30, 2011, additional interest income of $4.5 million would have been recorded.
Charge-offs against noncovered nonaccrual loans were $34.9 million and $14.3 million as of September 30, 2011 and December 31, 2010, respectively.
Included in noncovered nonaccrual loans as of September 30, 2011 and December 31, 2010, respectively, are twelve and nine collateral dependent lending relationships with aggregate principal balances of approximately $90.3 million and $75.4 million and related impairment reserves of $12.3 million and $5.9 million, 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. At September 30, 2011, all of these lending relationships are in the commercial real estate industry and include: two residential condominium construction projects, one with one loan outstanding and the other with two loans outstanding; two residential apartment complex relationships, one with two loans outstanding and the other with one loan outstanding; a retail building project with one loan outstanding; a residential land relationship with two loans outstanding; one lending relationship for residential care buildings with three loans outstanding; three commercial building lending relationships, two with one loan outstanding and the other with two loans outstanding; and two commercial land development relationships each with one loan outstanding.

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The following table presents an age analysis of past due loans at September 30, 2011 and December 31, 2010.
                                                 
            90 days and                             Recorded loans  
    30-89 days     greater     Total past             Total     > 90 days and  
(Dollars in thousands)   past due     past due     due     Current     loans     accruing  
 
At September 30, 2011
                                               
Noncovered:
                                               
Real estate mortgage:
                                               
Commercial
  $ 173     $ 56,234     $ 56,407     $ 1,112,603     $ 1,169,010     $  
One-to-four family residential
    394       1,706       2,100       83,172       85,272       273  
Real estate construction
                                               
Commercial
    192       49,775       49,967       298,086       348,053        
One-to-four family residential
          18,779       18,779       6,748       25,527        
Commercial
    1,325       6,080       7,405       359,836       367,241       185  
Other
    127       152       279       38,214       38,493        
 
Total — noncovered
    2,211       132,726       134,937       1,898,659       2,033,596       458  
 
                                               
Covered:
                                               
Real estate mortgage:
                                               
Commercial
  $ 74     $ 1,953     $ 2,027     $ 21,174     $ 23,201     $  
One-to-four family residential
          200       200       7,178       7,378        
Real estate construction
                                               
Commercial
          4,903       4,903       1,084       5,987       610  
One-to-four family residential
                                   
Commercial
    38       608       646       3,640       4,286        
Other
          11       11       346       357        
 
Total — covered
    112       7,675       7,787       33,422       41,209       610  
 
Total
  $ 2,323     $ 140,401     $ 142,724     $ 1,932,081     $ 2,074,805     $ 1,068  
 
 
                                               
At December 31, 2010
                                               
Noncovered:
                                               
Real estate mortgage:
                                               
Commercial
  $ 3,793     $ 30,510     $ 34,303     $ 1,276,161     $ 1,310,464     $ 514  
One-to-four family residential
    1,438       1,984       3,422       86,378       89,800        
Real estate construction
                                               
Commercial
    7,569       53,269       60,838       380,427       441,265        
One-to-four family residential
          14,302       14,302       13,127       27,429        
Commercial
    10,707       6,977       17,684       434,942       452,626        
Other
    1,236       41       1,277       43,626       44,903       3  
 
Total — noncovered
    24,743       107,083       131,826       2,234,661       2,366,487       517  
 
                                               
Covered:
                                               
Real estate mortgage:
                                               
Commercial real estate
  $ 227     $ 4,391     $ 4,618     $ 26,379     $ 30,997     $  
One-to-four family residential
    142       932       1,074       8,048       9,122        
Real estate construction
                                               
Commercial real estate
          4,744       4,744       2,096       6,840        
One-to-four family residential
    108       153       261       178       439        
Commercial
          581       581       4,973       5,554        
Other
    14       5       19       657       676        
 
Total — covered
    491       10,806       11,297       42,331       53,628        
 
Total
  $ 25,234     $ 117,889     $ 143,123     $ 2,276,992     $ 2,420,115     $ 517  
 
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 or restructured) 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

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value of the loan, and a specific allowance is recorded. Smaller balance, homogeneous loans, including mortgage, student, and consumer, are collectively evaluated for impairment.
Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.
Impaired loans are presented in the following tables.
                                                 
    With No Specific Allowance     With A Specific Allowance  
            Unpaid                     Unpaid        
    Recorded     Principal     Related     Recorded     Principal     Related  
(Dollars in thousands)   Investment     Balance     Allowance     Investment     Balance     Allowance  
 
At September 30, 2011
                                               
Noncovered:
                                               
Commercial real estate
  $ 30,073     $ 32,056     $       82,732       88,318       10,037  
One-to-four family residential
    1,301       1,548             132       154       2  
Real estate construction
    51,411       65,486             25,249       28,893       4,504  
Commercial
    6,201       6,480             7,275       7,536       1,974  
Other
    22       26             130       136       130  
 
Total noncovered
  $ 89,008     $ 105,596     $     $ 115,518     $ 125,037     $ 16,647  
 
 
                                               
Covered:
                                               
Commercial real estate
  $ 1,953     $ 2,323     $     $     $     $  
One-to-four family residential
    200       348                          
Real estate construction
    4,293       5,162                          
Commercial
    608       1,325                          
Other
    11       29                          
 
Total covered
  $ 7,065     $ 9,187     $     $     $     $  
 
 
                                               
At December 31, 2010
                                               
Noncovered:
                                               
Commercial real estate
  $ 30,064     $ 30,534     $     $ 42,732     $ 46,192     $ 10,813  
One-to-four family residential
    323       368             1,660       1,909       197  
Real estate construction
    46,978       51,644             35,579       37,667       5,313  
Commercial
    3,790       5,039             8,464       8,728       3,643  
Other
                      38       48       28  
 
Total noncovered
  $ 81,155     $ 87,585     $     $ 88,473     $ 94,544     $ 19,994  
 
 
                                               
Covered:
                                               
Commercial real estate
  $ 4,391     $ 6,120     $     $     $     $  
One-to-four family residential
    932       1,104                          
Real estate construction
    4,897       6,179                          
Commercial
    581       1,092                          
Other
    5       14                          
 
Total covered
  $ 10,806     $ 14,509     $     $     $     $  
 
The average recorded investment and interest income recognized on impaired loans as of September 30, 2011 and September 30, 2010 is shown in the following table.

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    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
    Average             Average             Average             Average        
    Recorded     Interest     Recorded     Interest     Recorded     Interest     Recorded     Interest  
(Dollars in thousands)   Investment     Income     Investment     Income     Investment     Income     Investment     Income  
 
Noncovered:
                                                               
Commercial real estate
  $ 97,136     $     $ 27,663     $     $ 86,544     $     $ 24,878     $ 14  
One-to-four family residential
    1,371       3       7,086       14       1,335       5       7,007       15  
Real estate construction
    71,096             76,268             62,516             57,156       267  
Commercial
    10,816       83       3,772       (87 )     8,745       139       3,195       (66 )
Other
    152       1       31             91       1       35        
 
Total noncovered
  $ 180,571     $ 87     $ 114,820     $ (73 )   $ 159,231     $ 145     $ 92,271     $ 230  
 
 
                                                               
Covered:
                                                               
Commercial real estate
  $ 25,195     $     $ 34,198     $ 14     $ 27,676     $ 10     $ 37,007     $ 14  
One-to-four family residential
    7,840             10,337             8,183             11,286       43  
Real estate construction
    6,149             10,561             6,449             13,281        
Commercial
    4,411       1       7,877       6       4,786       1       9,788       8  
Other
    385             1,027             489             1,265        
 
Total covered
  $ 43,980     $ 1     $ 64,000     $ 20     $ 47,583     $ 11     $ 72,627     $ 65  
 
Troubled Debt Restructurings. The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as impaired at the time of restructuring and typically 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 TDR, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all TDRs are evaluated, including those that have payment defaults, for possible impairment.
Effective July 1, 2011, Southwest adopted Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. As such, Southwest reassessed all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings.
Loans classified as troubled debt restructurings during the three and nine months ended September 30, 2011 are shown in the following table.
                 
             
    Number of     Recorded  
(Dollars in thousands)   Modifications     Investment  
 
For the three months ended September 30, 2011
               
Commercial real estate
    5     $ 33,879  
Commercial
    8       5,904  
Consumer
    1       130  
 
Total
    14     $ 39,913  
 
 
               
For the nine months ended September 30, 2011
               
Commercial real estate
    10     $ 51,097  
Real estate construction
    1       8,106  
Commercial
    13       6,805  
Consumer
    1       130  
 
Total
    25     $ 66,138  
 

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The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rates. Financial impact of TDRs is not significant. Southwest has no significant commitments to lend additional amounts to these performing troubled debt restructured loans.
As of September 30, 2011, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.
Credit Quality Indicators. To assess the credit quality of loans, Southwest categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. Southwest uses the following definitions for risk ratings:
Special mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.
Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Southwest will sustain some loss if the deficiencies are not corrected. These loans are considered potential nonperforming or nonperforming loans depending on the accrual status of the loans.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans are considered nonperforming.
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 September 30, 2011 and December 31, 2010, and based on the most recent analysis performed as of those dates, the risk category of loans by class of loans is as follows:
                                                 
    Commercial     1-4 Family     Real Estate                    
(Dollars in thousands)   Real Estate     Residential     Construction     Commercial     Other     Total  
 
At September 30, 2011
                                               
Grade:
                                               
Pass
  $ 915,628     $ 89,827     $ 200,599     $ 315,474     $ 38,704     $ 1,560,232  
Special Mention
    55,207       443       29,909       11,530       128       97,217  
Substandard
    212,129       2,380       142,043       42,216       18       398,786  
Doubtful
    9,247             7,016       2,307             18,570  
 
Total
  $ 1,192,211     $ 92,650     $ 379,567     $ 371,527     $ 38,850     $ 2,074,805  
 

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    Commercial     1-4 Family     Real Estate                    
(Dollars in thousands)   Real Estate     Residential     Construction     Commercial     Other     Total  
     
At December 31, 2010
                                               
Grade:
                                               
Pass
  $ 1,190,587     $ 93,961     $ 276,613     $ 399,344     $ 44,161     $ 2,004,666  
Special Mention
    13,854       1,840       24,023       13,436       1,340       54,493  
Substandard
    132,148       2,644       168,220       41,906       54       344,972  
Doubtful
    4,872       477       7,117       3,494       24       15,984  
 
Total
  $ 1,341,461     $ 98,922     $ 475,973     $ 458,180     $ 45,579     $ 2,420,115  
 
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan and lease portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate after the effects of net charge-offs for the period.
Management believes the level of the allowance is appropriate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components. 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.
A specific allowance is recorded based on the result 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 remaining portion of the allowance is calculated based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into loan pools by type of loan. 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 promptly upon receipt and considered in the determination of the allowance for loan losses. Southwest is not aware of any significant time lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method.

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    Commercial     1-4 Family     Real Estate                    
(Dollars in thousands)   Real Estate     Residential     Construction     Commercial     Other     Total  
 
At September 30, 2011
                                               
Balance at beginning of period
  $ 32,508     $ 1,597     $ 19,605     $ 10,605     $ 914     $ 65,229  
Loans charged-off
    (20,870 )     (334 )     (19,662 )     (15,419 )     (736 )     (57,021 )
Recoveries
    285       56       626       1,614       93       2,674  
Provision for loan losses
    25,030       (286 )     14,610       13,851       611       53,816  
 
Balance at end of period
  $ 36,953     $ 1,033     $ 15,179     $ 10,651     $ 882     $ 64,698  
 
 
                                               
Period-end amount allocated to:
                                               
Individually evaluated for impairment
  $ 10,037     $ 2     $ 4,504     $ 1,974     $ 130     $ 16,647  
Collectively evaluated for impairment
    26,916       1,031       10,675       8,677       752       48,051  
Acquired with deteriorated credit quality
                                   
 
Total ending allowance balance
  $ 36,953     $ 1,033     $ 15,179     $ 10,651     $ 882     $ 64,698  
 
 
                                               
Loans receivable ending balance:
                                               
Individually evaluated for impairment
  $ 112,805     $ 1,433     $ 76,660     $ 13,476     $ 152     $ 204,526  
Collectively evaluated for impairment
    1,056,205       83,839       296,920       353,765       38,341       1,829,070  
Acquired with deteriorated credit quality
    23,201       7,378       5,987       4,286       357       41,209  
 
Total ending loans balance
  $ 1,192,211     $ 92,650     $ 379,567     $ 371,527     $ 38,850     $ 2,074,805  
 
 
                                               
At September 30, 2010
                                               
Allowance for loan losses ending balances:
                                               
Balance at beginning of period
  $ 26,670     $ 2,454     $ 22,241     $ 10,052     $ 996     $ 62,413  
Loans charged-off
    (3,162 )     (2,465 )     (9,285 )     (3,890 )     (916 )     (19,718 )
Recoveries
    146       199       598       343       142       1,428  
Provision for loan losses
    3,400       1,627       19,857       2,686       725       28,295  
 
Balance at end of period
  $ 27,054     $ 1,815     $ 33,411     $ 9,191     $ 947     $ 72,418  
 
 
                                               
Period-end amount allocated to:
                                               
Individually evaluated for impairment
  $ 5,047     $ 207     $ 13,832     $ 2,147     $ 27     $ 21,260  
Collectively evaluated for impairment
    22,007       1,608       19,579       7,044       920       51,158  
Acquired with deteriorated credit quality
                                   
 
Total ending allowance balance
  $ 27,054     $ 1,815     $ 33,411     $ 9,191     $ 947     $ 72,418  
 
 
                                               
Loans receivable ending balance:
                                               
Individually evaluated for impairment
  $ 34,448     $ 6,353     $ 88,591     $ 5,789     $ 30       135,211  
Collectively evaluated for impairment
    1,236,830       103,627       469,709       457,343       44,944       2,312,453  
Acquired with deteriorated credit quality
    33,428       10,071       9,287       6,816       956       60,558  
 
Total ending loans balance
  $ 1,304,706     $ 120,051     $ 567,587     $ 469,948     $ 45,930     $ 2,508,222  
 
NOTE 4: FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, Southwest utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.
ASC 820, Fair Value Measurements and Disclosure, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1     Quoted prices in active markets for identical assets or liabilities: Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

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Level 2     Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments. This category includes U.S. Government and agency securities, residential mortgage-backed debt securities, municipal obligation securities, loans held for sale, certain private equity investments, and other real estate.
 
Level 3     Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes certain impaired loans, certain other real estate, goodwill, and other intangible assets.
The estimated fair value amounts have been determined by Southwest using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount Southwest could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
A description of the valuation methodologies used for assets measured at fair value on a recurring basis is as follows:
     Loans held for sale — Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. Guaranteed student loans held for sale are carried at the lower of cost or market, which is determined on an aggregate basis.
     Available for sale securities — The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices. The fair value of a certain private equity investment is estimated based on Southwest’s proportionate share of the net asset value, $1.2 million and $1.3 million as of September 30, 2011 and December 31, 2010, respectively. The investee invests in small and mid-sized U.S. financial institutions and other financial-related companies. This investment has a quarterly redemption with sixty-five days’ notice.
     Derivative instrument — Southwest utilizes an interest rate swap agreement to convert one of its variable-rate subordinated debentures to a fixed rate (cash flow hedge). The fair value of the interest rate swap agreement is obtained from dealer quotes.
The following table summarizes financial assets measured at fair value on a recurring basis.
                                 
            Fair Value Measurement at Reporting Date Using  
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
            for Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(Dollars in thousands)   Total     (Level 1)     (Level 2)     (Level 3)  
 
At September 30, 2011
                               
Loans held for sale:
                               
Student loans
  $ 5,547     $     $ 5,547     $  
One-to-four family residential
    4,258             4,258        
Government guaranteed commercial real estate
    29,958             29,958        
Government guaranteed commercial
    139             139        
 
                               
Available for sale securities:
                               
U.S. Government obligations
    1,102       1,102              
Federal agency securities
    68,387             68,387        
Obligations of state and political subdivisions
    1,018             1,018        
Residential mortgage-backed securities
    182,397             182,397        
Equity securities
    1,297       76       1,221        
 
                               
Derivative instrument
    (2,715 )           (2,715 )      
 
Total
  $ 291,388     $ 1,178     $ 290,210     $  
 

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            Fair Value Measurement at Reporting Date Using  
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
            for Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(Dollars in thousands)   Total     (Level 1)     (Level 2)     (Level 3)  
 
At December 31, 2010
                               
Loans held for sale:
                               
Student loans
  $ 5,843     $     $ 5,843     $  
One-to-four family residential
    2,300             2,300        
Government guaranteed commercial real estate
    26,718             26,718        
Government guaranteed commercial
    333             333        
 
                               
Available for sale securities:
                               
U.S. Government obligations
    1,108       1,108              
Federal agency securities
    65,374             65,374        
Obligations of state and political subdivisions
    233             233        
Residential mortgage-backed securities
    180,017             180,017        
Equity securities
    1,489       222       1,267        
 
Total
  $ 283,415     $ 1,330     $ 282,085     $  
 
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 2011 or 2010; therefore, no fair value adjustment was recorded through earnings.
     Core deposit premiums — The fair value of core deposit premiums are based on third-party appraisals. There has been no impairment during 2011 or 2010; therefore, no fair value adjustment was recorded through earnings.
     Mortgage loan servicing rights — There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.

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Assets measured at fair value on a nonrecurring basis are summarized below.
                                         
            Fair Value Measurements Using        
            Quoted Prices in     Significant              
            Active Markets     Other     Significant        
            for Identical     Observable     Unobservable        
    Fair Value     Assets     Inputs     Inputs     Total Gains  
(Dollars in thousands)   Total     (Level 1)     (Level 2)     (Level 3)     (Losses)  
 
At Septeber 30, 2011
                                       
Noncovered impaired loans at fair value:
                                       
Commercial real estate
  $ 83,652     $     $ 83,652             $ (8,246 )
One-to-four family residential
    488             488             (115 )
Real estate construction
    44,933             31,428       13,505       (11,215 )
Commercial
    7,624             7,624             (1,734 )
Other consumer
    130             130             (130 )
 
                                       
Noncovered other real estate
    70,785             70,785             (1,846 )
Mortgage loan servicing rights
    1,801             1,801             (78 )
 
Total
  $ 209,413     $     $ 195,908     $ 13,505     $ (23,364 )
 
 
                                       
At December 31, 2010
                                       
Noncovered impaired loans at fair value:
                                       
Commercial real estate
  $ 43,349     $     $ 43,349     $     $ (5,003 )
One-to-four family residential
    1,660             1,660             1,819  
Real estate construction
    42,577             29,072       13,505       (4,144 )
Commercial
    9,727             9,727             (1,214 )
Other consumer
    38             38             86  
 
                                       
Noncovered other real estate
    37,722             37,722             (360 )
 
Total
  $ 135,073     $     $ 121,568     $ 13,505     $ (8,816 )
 
Noncovered impaired loans measured at fair value with a carrying amount of $172.0 million were written down to a fair value of $136.8 million, resulting in a life-to-date impairment of $35.2 million, of which $21.4 million was included in the provision for loan losses for the nine months ended September 30, 2011. As of December 31, 2010, noncovered impaired loans measured at fair value with a carrying amount of $125.2 million were written down to the fair value of $97.4 million at December 31, 2010, resulting in a life-to-date impairment charge of $27.9 million, of which $8.5 million was included in the provision for loan losses for the year ended December 31, 2010.
As of September 30, 2011, noncovered other real estate assets were written down to their respective fair values, resulting in impairment charges of $1.8 million, which was included in noninterest expense for the nine months ended September 30, 2011. As of December 31, 2010, noncovered other real estate assets were written down to their respective fair values, resulting in impairment charges of $0.4 million, which was included in noninterest expense for the year ended December 31, 2010.
Mortgage loan servicing rights were written down to their fair value, resulting in impairment charges of $0.1 million, which was included in noninterest income for the nine months ended September 30, 2011.
ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:
     Cash and cash equivalents — For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
     Investment securities — 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

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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.
     Other assets — The estimated fair value of other assets, which primarily consists of investments carried at cost, prepaids, and deferred taxes, 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 — 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. Included in other borrowings are federal funds purchased, FHLB advances, securities sold under agreements to repurchase, and treasury tax and loan demand notes.
     Subordinated debentures — Two subordinated debentures have floating rates that reset quarterly and the third subordinated debenture has a fixed rate. The fair value of the floating rate subordinated debentures approximates current book value. The fair value of the fixed rate subordinated debenture is based on market price.
The carrying values and estimated fair values of Southwest’s financial instruments follow:
                                 
    At September 30, 2011     At December 31, 2010  
    Carrying     Fair     Carrying     Fair  
(Dollars in thousands)   Values     Values     Values     Values  
 
Cash and cash equivalents
  $ 116,600     $ 116,600     $ 67,496     $ 67,496  
Securities held to maturity
    15,398       15,805       14,304       14,029  
Securities available for sale
    254,201       254,201       248,221       248,221  
Total loans, net of allowance
    2,010,107       1,940,928       2,354,886       2,279,605  
Accrued interest receivable
    8,035       8,035       8,590       8,590  
Other assets
    45,024       45,024       49,181       49,181  
Deposits
    2,022,253       1,983,253       2,252,728       2,119,840  
Accrued interest payable
    2,507       2,507       1,577       1,577  
Other liabilities
    14,877       14,877       8,981       8,981  
Derivative instrument
    (2,715 )     (2,715 )            
Other borrowings
    86,583       144,299       94,602       100,550  
Subordinated debentures
    81,963       72,303       81,963       84,654  
NOTE 5: DERIVATIVE INSTRUMENTS
On February 11, 2011, Southwest entered into 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 September 30, 2011 was 3.10%.
The estimated fair value of the interest rate derivative contract outstanding as of September 30, 2011 resulted in a loss of $2.7 million and was included in other liabilities in the statement of condition. Southwest obtained the counterparty valuation to validate its interest rate derivative contract as of September 30, 2011.
The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, $1.7 million for the nine months ended September 30, 2011, 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 the reporting period.

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Net cash flows as a result of the interest rate swap agreement were $0.5 million for the nine months ended September 30, 2011 and were included in interest expense on subordinated debentures.
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by Southwest’s asset/liability management committee. Southwest’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with Southwest’s derivative contract.
The fair value of cash and securities posted as collateral by Southwest related to the derivative contract was $3.8 million at September 30, 2011.
NOTE 6: TAXES ON INCOME
Southwest entered into a Settlement Agreement (“the Agreement”) with the Oklahoma Tax Commission (“OTC”) on June 28, 2011 with respect to certain claims made by the OTC. The multi-year claims were protested by Southwest and as a result of settlement of that protest, a previously recorded reserve against those claims was released. As a result of the Agreement, Southwest paid $3.6 million of state tax expense for the years under audit and an additional $1.2 million for tax years 2008 through 2010.
The settlement of this outstanding audit closes the examination period for the years in question and removes the need for Southwest to further reserve for uncertain tax positions in accordance with ASC 740, Income Taxes. A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows:
         
(Dollars in thousands)        
 
Balance at January 1, 2011
  $ 5,333  
Increases as a result of tax positions taken during current period
    206  
Increases as a result of tax positions taken during prior period
     
Decreases relating to settlements with taxing authorities
    (5,539 )
Reductions due to lapse of the applicable statute of limitations
     
 
Balance at September 30, 2011
  $  
 
When analyzing the effective tax rate of a corporation, the derecognition of a reserve specific to a prior tax year(s) is treated as a discrete item in the period in which the change occurs. For the first nine months of 2011, the calculated year-to-date effective tax rate is 41.80% and results in a tax benefit.
Southwest and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
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 September 30, 2011 and 2010, there were 97,526 and 240,749 antidilutive stock options to purchase common shares, respectively. An antidilutive warrant to purchase 703,753 shares of common stock was also outstanding on September 30, 2011.

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The following table sets forth the computation of basic and diluted earnings per common share:
                                 
    For the three months     For the nine months  
    ended September 30,     ended September 30,  
(Dollars in thousands, except earnings per share data)   2011     2010     2011     2010  
 
Numerator:
                               
Net income (loss)
  $ (9,525 )   $ 3,873     $ (10,034 )   $ 12,656  
Preferred dividend
    (880 )     (875 )     (2,631 )     (2,625 )
Warrant amortization
    (184 )     (173 )     (544 )     (511 )
 
Net income (loss) available to common shareholders
  $ (10,589 )   $ 2,825     $ (13,209 )   $ 9,520  
Loss (earnings) allocated to participating securities
          (7 )           (27 )
 
Numerator for basic earnings per common share
  $ (10,589 )   $ 2,818     $ (13,209 )   $ 9,493  
Effect of reallocating undistributed earnings of participating securities
                       
 
Numerator for diluted earnings per common share
  $ (10,589 )   $ 2,818     $ (13,209 )   $ 9,493  
Denominator:
                               
Denominator for basic earnings per common share -
                               
Weighted average common shares outstanding
    19,416,460       19,342,909       19,413,505       17,342,393  
Effect of dilutive securities:
                               
Stock options
          18,739             18,257  
Warrant
                       
 
Denominator for diluted earnings per common share
    19,416,460       19,361,648       19,413,505       17,360,650  
 
                               
Earnings per common share:
                               
Basic
  $ (0.54 )   $ 0.15     $ (0.68 )   $ 0.55  
 
Diluted
  $ (0.54 )   $ 0.15     $ (0.68 )   $ 0.55  
 
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.
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.
The Other Operations segment also includes SNB Wealth Management and corporate investments.
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-four states other than Oklahoma, Texas, or Kansas and primarily consist of healthcare and commercial real estate credits. These out of state loans are administered by offices in Oklahoma, Texas, or Kansas.
The accounting policies of each reportable segment are the same as those of Southwest. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting, and audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile to the consolidated financial statements.

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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.
Beginning January 1, 2011, all segments of Southwest’s subsidiaries reported results using organizational profitability. Prior to January 1, 2011, only the segments of Stillwater National reported results using organizational profitability, while the segments of Bank of Kansas reported results using a direct profitability approach. The change in method did not materially affect segment reporting and had no impact on the consolidated results of Southwest. The amounts for the three and nine months ending September 30, 2010 have been restated using consolidated organizational profitability.
The following table summarizes financial results by operating segment:
                                                         
For the Three Months Ended September 30, 2011  
    Oklahoma     Texas     Kansas     Out of     Secondary     Other     Total  
(Dollars in thousands)   Banking     Banking     Banking     Market     Market     Operations     Company  
 
Net interest income
  $ 11,127     $ 8,876     $ 3,256     $ 1,393     $ 370     $ (997 )   $ 24,025  
Provision for loan losses
    3,917       14,949       498       5,262                   24,626  
Noninterest income
    1,990       443       490       53       327       286       3,589  
Noninterest expenses
    7,087       4,307       3,923       943       525       908       17,693  
 
Income (loss) before taxes
    2,113       (9,937 )     (675 )     (4,759 )     172       (1,619 )     (14,705 )
Taxes on income
    2,106       (3,482 )     (63 )     (2,812 )     82       (1,011 )     (5,180 )
 
Net income (loss)
  $ 7     $ (6,455 )   $ (612 )   $ (1,947 )   $ 90     $ (608 )   $ (9,525 )
 
                                                         
For the Three Months Ended September 30, 2010  
    Oklahoma     Texas     Kansas     Out of     Secondary     Other     Total  
(Dollars in thousands)   Banking     Banking     Banking     Market     Market     Operations     Company  
 
Net interest income
  $ 10,449     $ 10,089     $ 3,233     $ 2,052     $ 391     $ 238     $ 26,452  
Provision for loan losses
    (172 )     10,284       1,173       703                   11,988  
Noninterest income
    2,035       517       583       64       505       2,631       6,335  
Noninterest expenses
    7,080       3,305       3,141       617       598       677       15,418  
 
Income (loss) before taxes
    5,576       (2,983 )     (498 )     796       298       2,192       5,381  
Taxes on income
    2,177       (1,181 )     (192 )     302       125       277       1,508  
 
Net income (loss)
  $ 3,399     $ (1,802 )   $ (306 )   $ 494     $ 173     $ 1,915     $ 3,873  
 
                                                         
For the Nine Months Ended September 30, 2011  
    Oklahoma     Texas     Kansas     Out of     Secondary     Other     Total  
(Dollars in thousands)   Banking     Banking     Banking     Market     Market     Operations     Company  
 
Net interest income
  $ 34,119     $ 28,367     $ 10,288     $ 5,203     $ 1,038     $ (4,584 )   $ 74,431  
Provision for loan losses
    5,875       24,240       1,217       22,484                   53,816  
Noninterest income
    5,804       1,402       1,423       161       841       811       10,442  
Noninterest expenses
    19,791       11,753       9,737       2,577       1,542       2,898       48,298  
 
Income (loss) before taxes
    14,257       (6,224 )     757       (19,697 )     337       (6,671 )     (17,241 )
Taxes on income
    5,525       (2,424 )     266       (7,787 )     133       (2,920 )     (7,207 )
 
Net income (loss)
  $ 8,732     $ (3,800 )   $ 491     $ (11,910 )   $ 204     $ (3,751 )   $ (10,034 )
 
 
                                                       
Fixed asset expenditures
  $ 81     $     $ 167     $     $ 5     $ 724     $ 977  
Total loans at period end
    770,306       845,485       252,302       166,810       39,902             2,074,805  
Total assets at period end
    802,503       858,391       274,688       173,692       42,065       421,153       2,572,492  
Total deposits at period end
    1,437,524       152,506       275,440             4,919       151,864       2,022,253  

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For the Nine Months Ended September 30, 2010  
    Oklahoma     Texas     Kansas     Out of     Secondary     Other     Total  
(Dollars in thousands)   Banking     Banking     Banking     Market     Market     Operations     Company  
 
Net interest income
  $ 32,548     $ 31,821     $ 11,275     $ 6,552     $ 1,016     $ (2,851 )   $ 80,361  
Provision for loan losses
    1,258       22,202       3,011       1,824                   28,295  
Noninterest income
    6,218       1,309       1,897       254       1,611       3,186       14,475  
Noninterest expenses
    19,999       9,875       9,680       2,077       1,659       3,532       46,822  
 
Income (loss) before taxes
    17,509       1,053       481       2,905       968       (3,197 )     19,719  
Taxes on income
    6,866       412       169       1,138       402       (1,924 )     7,063  
 
Net income (loss)
  $ 10,643     $ 641     $ 312     $ 1,767     $ 566     $ (1,273 )   $ 12,656  
 
 
                                                       
Fixed asset expenditures
  $ 98     $ 40     $ 108     $     $ 52     $ 527     $ 825  
Total loans at period end
    890,598       1,024,863       309,240       248,653       34,868             2,508,222  
Total assets at period end
    918,342       1,008,079       326,699       241,653       37,147       373,355       2,905,275  
Total deposits at period end
    1,567,186       161,202       269,090             4,650       343,520       2,345,648  
NOTE 9: DEFERRAL OF INTEREST & DIVIDENDS
In July 2011, Southwest determined to suspend payments of interest on its three issues of outstanding debentures effective August 1, 2011 and dividends on the related trust preferred securities.
The terms of the debentures allow Southwest to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. These terms also allow Southwest to resume payments at the end of any deferral period, or to extend the deferral up to the maximum 20 quarters in total. No deferral can extend past the maturity date of the debenture.
Interest will continue to accrue on the debentures, and dividends will continue to accrue on the related trust preferred securities.
Southwest’s trust preferred securities were issued by the following subsidiary trusts: Southwest Capital Trust II, which trades on the NASDAQ Global Select Market under the symbol “OKSBP”; OKSB Statutory Trust I; and SBI Capital Trust II. At September 30, 2011, $82.0 million of debentures were outstanding.
In addition, Southwest determined to defer payment of dividends on its Series B Preferred Securities issued under the U.S. Treasury Department’s Capital Purchase Program, effective for the dividend payments, beginning August 15, 2011. Dividends on the Preferred Securities may not be paid while interest on Southwest’s debentures has been deferred, but will continue to accrue. At September 30, 2011, $70.0 million of Preferred Securities were outstanding.
The deferrals on interest and dividends are intended to preserve liquidity at the holding company level, which may be used to inject funds in its bank subsidiaries or for other corporate purposes. Because the interest on the debentures, the dividends on the related trust preferred securities, and the dividends on the Preferred Securities will continue to accrue, these deferrals are not expected to have any significant effect on the net income or net income available to common shareholders of Southwest. During the year ended December 31, 2010, total interest expense on the debentures, which is deductible for income tax purposes, totaled $5.1 million, and dividends on the Preferred Securities, which are not deductible for income tax purposes, totaled $3.5 million.
NOTE 10: SUBSEQUENT EVENT
Southwest and its banking subsidiary, Stillwater National, are considering a bulk sale of loans and real estate with a carrying value of approximately $300 million. The loans and assets which may be sold are primarily nonperforming assets and potential problem loans. The process includes submission of preliminary bids by potential buyers, which were due November 1, 2011, followed by submission of binding bids later this year. Southwest and its subsidiaries are not bound to complete such a sale, and may choose not to seek binding bids, or to reject all binding bids based upon the terms of the bids received. Overall, bids are expected to reflect discounts from current asset carrying values. The amount actually sold may be substantially less than $300 million.
NOTE 11: NEW AUTHORITATIVE ACCOUNTING GUIDANCE
On January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which amends ASC 820, Fair Value Measurements and Disclosures, to require a number of additional disclosures regarding fair value measurements. Specifically, entities are required to disclose: the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; the reasons for any transfers in or out of Level 3; and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis. In addition to these new disclosure requirements, ASU 2010-06 also amends ASC 820 to clarify certain existing disclosure requirements. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the amendments to ASC 820 made by ASU 2010-06 were effective for Southwest on January 1, 2010, and the required disclosures are reported in Note 4. The requirement to

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separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements became effective for Southwest on January 1, 2011 and did not have a significant impact on Southwest’s financial statements.
On July 21, 2010, FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”), which amends ASC 830, Receivables, to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses. ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, the activity in the allowance for credit losses as well as information about modified, impaired, nonaccrual, and past due loans and credit quality indicators. ASU 2010-20, as it relates to disclosures required as of the end of a reporting period was effective for Southwest’s financial statements as of December 31, 2010. Disclosures that relate to activity during a reporting period are required for Southwest’s financial statements issued after January 1, 2011. Southwest has incorporated the required disclosures. See Note 3.
On April 5, 2011, FASB issued Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 2011-02”). ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for Southwest’s financial statements ending September 30, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Southwest has incorporated the required disclosures. See Note 3.
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 is effective for Southwest prospectively during interim and annual periods beginning January 1, 2012. Early application by public entities is not permitted. Southwest is assessing the impact of ASU 2011-04 on our fair value disclosures.
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 is effective for Southwest retrospectively for fiscal years, and interim periods within those years, beginning January 1, 2012, and is not expected to have a significant impact on its consolidated financial statements and disclosures.

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SOUTHWEST BANCORP, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Caution About Forward-Looking Statements.
We make forward-looking statements in this Form 10-Q and documents incorporated by reference into it that are subject to risks and uncertainties. We intend these statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include:
    Statements of our goals, intentions, and expectations:
 
    Estimates of risks and of future costs and benefits;
 
    Expectations regarding our future financial performance and the financial performance of our operating segments;
 
    Assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs;
 
    Assessments of liquidity, off-balance sheet risk, and interest rate risk;
 
    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.
For additional information regarding critical accounting policies, refer to “Note 1: Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements and the sections captioned “Critical Accounting Policies” and “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of

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Operations included in Southwest’s 2010 Annual Report on Form 10-K. There have been no significant changes in Southwest’s application of critical accounting policies since December 31, 2010.
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, through SNB DirectBanker®.
Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest has established and pursued a strategy of independent operation for the benefit of all of its shareholders. Southwest became a public company in late 1993. At September 30, 2011, Southwest had total assets of $2.6 billion, deposits of $2.0 billion, and shareholders’ equity of $367.0 million.
Southwest’s banking philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customers needs for speed, efficiency, and information and complement more traditional banking products. Southwest has developed a highly automated lockbox, imaging, and information service for commercial customers called “SNB Digital Lockbox” and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds. Other specialized financial services include integrated document imaging and cash management services designed to help our customers in the healthcare industry and other record-intensive enterprises operate more efficiently. Information regarding Southwest is available online at www.oksb.com. Information regarding the products and services of Southwest’s subsidiaries is available online at www.banksnb.com and www.bankofkansas.com. The information on these websites is not a part of this report on Form 10-Q.
Southwest focuses on converting its strategic vision into long-term shareholder value. Our vision includes a commercial banking model and a community banking model focused on more traditional banking operations in our three-state market.
At September 30, 2011, the Texas Banking segment accounted for $845.5 million in loans, the Oklahoma Banking segment accounted for $770.3 million in loans, the Kansas Banking segment accounted for $252.3 million in loans, and the Out of Market segment accounted for $166.8 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 September 30, 2011, Secondary Market loans accounted for $39.9 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 $7.1 million, or 3%, from $262.5 million at December 31, 2010, to $269.6 million at September 30, 2011. The increase is primarily the result of a $3.0 million, or 5%, increase in U.S. government and agency securities, a $1.9 million, or 13%, increase in tax-exempt securities, and a $2.4 million, or 1%, increase in residential mortgage-backed securities.
Loans
Total loans, including loans held for sale, were $2.1 billion at September 30, 2011, a 14% decrease from December 31, 2010. All loan categories decreased.

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The following table presents the trends in the composition of the loan portfolio at the dates indicated:
                                                 
    September 30, 2011     December 31, 2010     Total     Total  
(Dollars in thousands)   Noncovered     Covered     Noncovered     Covered     $ Change     % Change  
 
Real estate mortgage
                                               
Commercial
  $ 1,169,010     $ 23,201     $ 1,310,464     $ 30,997     $ (149,250 )     (11.13 )%
One-to-four family residential
    85,272       7,378       89,800       9,122       (6,272 )     (6.34 )
Real estate construction
                                               
Commercial
    348,053       5,987       441,265       6,840       (94,065 )     (20.99 )
One-to-four family residential
    25,527             27,429       439       (2,341 )     (8.40 )
Commercial
    367,241       4,286       452,626       5,554       (86,653 )     (18.91 )
Installment and consumer
                                               
Guaranteed student loans
    5,547             5,843             (296 )     (5.07 )
Other
    32,946       357       39,060       676       (6,433 )     (16.19 )
         
Total loans
  $ 2,033,596     $ 41,209     $ 2,366,487     $ 53,628     $ (345,310 )     (14.27 )%
         
The composition of loans held for sale and reconciliation to total loans is shown in the following table:
                                 
    September 30,     December 31,                
(Dollars in thousands)   2011     2010     $ Change     % Change  
 
Loans held for sale:
                               
Student loans
  $ 5,547     $ 5,843     $ (296 )     (5.07 )%
One-to-four family residential
    4,258       2,300       1,958       85.13  
Government guaranteed commercial real estate
    29,958       26,718       3,240       12.13  
Government guaranteed commercial
    139       333       (194 )     (58.26 )
         
Total loans held for sale
    39,902       35,194       4,708       13.38  
Noncovered portfolio loans
    1,993,694       2,331,293       (337,599 )     (14.48 )
Covered portfolio loans
    41,209       53,628       (12,419 )     (23.16 )
         
Total loans
  $ 2,074,805     $ 2,420,115     $ (345,310 )     (14.27 )%
         
Allowance for Loan Losses
Management determines the appropriate level of the allowance for loan losses using an established methodology. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan losses is comprised of two primary components. Loans deemed to be impaired (all loans on nonaccrual or restructured) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off. Loans other than impaired loans are segmented into loan pools by type of loan. The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is based. Our primary markets are Oklahoma, Texas, and Kansas and loans secured by real estate within these markets are included in the “in-market” pool, with the remaining loans defaulting to the “out-of-market” pool. The allowance on the other loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors.
At September 30, 2011, the allowance for loan losses was $64.7 million, a decrease of $0.5 million, or less than 1%, from the allowance for loan losses at December 31, 2010. The amount of the allowance resulted from the application of the methodology, which is designed to estimate inherent losses on total portfolio loans, including nonperforming loans.
At September 30, 2011, the allowance on the $132.3 million in noncovered nonaccrual loans was $15.5 million (12%), compared with an allowance on $106.6 million in noncovered nonaccrual loans at December 31, 2010 of $12.9 million (12%), an increase in the allowance of $2.6 million. At September 30, 2011, the allowance on the $72.3 million noncovered performing troubled debt restructured loans was $1.1 million (2%), compared with an allowance on $63.1 million in noncovered performing troubled debt restructured loans of $7.0 million (11%) at December 31, 2010, a decrease in the allowance of $5.9 million, or 84%.

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Excluding the impaired loans mentioned above, at September 30, 2011, the allowance for the remaining other noncovered loans was $48.1 million (3%), compared to $45.3 million (2%) at December 31, 2010, an increase in the allowance of $2.8 million, or 6%. The increase in the allowance related to these other noncovered loans mainly resulted from increased losses and consideration of certain trends and qualitative factors. These included management’s assessment of economic risk (particularly with respect to commercial and commercial real estate loans), and asset quality trends, including levels of potential problem loans and loan concentrations in commercial real estate mortgage and construction loans, which together comprised approximately 75% of our noncovered loans at September 30, 2011, and portfolio loss trends. Based on its analysis, management believes the amount of the allowance is appropriate. Covered loans were $41.2 million and $53.6 million as of September 30, 2011 and December 31, 2010, respectively. These loans are subject to protection under the loss sharing agreements with the FDIC and as a result of discounts on these loans; therefore they currently do not have an allowance for loan losses.
The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the first nine months of 2011 were $54.3 million, an increase of $36.1 million, or 197%, over the $18.3 million recorded for the first nine months of 2010. The provision for loan losses for the first nine months of 2011 was $53.8 million, representing an increase of $25.5 million, or 90%, from the $28.3 million recorded for the first nine months of 2010.
Nonperforming Loans
At September 30, 2011, the allowance for loan losses was 48.75% of noncovered nonperforming loans, compared to 60.91% of noncovered nonperforming loans, at December 31, 2010 (see “Provision for Loan Losses” on page 79). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $132.3 million as of September 30, 2011, an increase of $25.7 million, or 24%, from December 31, 2010. We have taken cumulative charge-offs related to these noncovered nonaccrual loans of $34.9 million as of September 30, 2011. Noncovered nonaccrual loans at September 30, 2011 were comprised of 58 relationships and were primarily concentrated in real estate construction (52%) and commercial real estate (43%) 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 September 30, 2011 of $7.7 million are subject to protection under the loss share agreements with the FDIC.
                                 
    September 30, 2011     December 31, 2010  
(Dollars in thousands)   Noncovered     Covered     Noncovered     Covered  
 
Nonaccrual loans:
                               
Commercial real estate
  $ 56,234     $ 1,953     $ 29,996     $ 4,391  
One-to-four family residential
    1,433       200       1,984       932  
Real estate construction
    68,554       4,293       67,571       4,897  
Commercial
    5,895       608       6,977       581  
Other consumer
    152       11       38       5  
     
Total nonaccrual loans
    132,268       7,065       106,566       10,806  
 
                               
Past due 90 days or more:
                               
Commercial real estate
                514        
One-to-four family residential
    273                    
Real estate construction
          610              
Commercial
    185                    
Other consumer
                3        
     
Total past due 90 days or more
    458       610       517        
     
Total nonperforming loans
    132,726       7,675       107,083       10,806  
Other real estate
    70,785       5,350       37,722       4,187  
     
Total nonperforming assets
  $ 203,511     $ 13,025     $ 144,805     $ 14,993  
     
Performing restructured
  $ 1,026     $     $ 2,177     $  
     
 
                               
Nonperforming assets to portfolio loans receivable and other real estate
    9.86 %     27.98 %     6.11 %     25.93 %
Nonperforming loans to portfolio loans receivable
    6.66 %     18.62 %     4.59 %     20.15 %
Allowance for loan losses to nonperforming loans
    48.75 %           60.91 %      

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At September 30, 2011 and December 31, 2010, twelve and nine credit relationships represented 68% and 70% of noncovered nonperforming loans and 44% and 52% of noncovered nonperforming assets, respectively. As of September 30, 2011, these credit relationships were all collateral dependent and commercial real estate lending relationships with aggregate principal balances of $90.3 million and related impairment reserves of $12.3 million. Aggregate charge-offs for these twelve and nine relationships were $12.3 million and $7.1 million as of September 30, 2011 and December 31, 2010, respectively.
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 $276.7 million at September 30, 2011, compared to $233.1 million at December 31, 2010. Substantially all of these loans were performing in accordance with their present terms at September 30, 2011. Included in this total are $72.1 million loans that are considered performing troubled debt restructured loans as a result of a modification in terms due to a weakening in the financial position of the borrower. Additionally, there are $2.0 million and $3.5 million, respectively, of covered potential problem loans, which are subject to protection under the loss share agreements with the FDIC. Loans may be monitored by management and reported as potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. These loans are subject to continuing management attention and are considered by management in determining the level of the allowance for loan losses.
At September 30, 2011, the reserve for unfunded loan commitments was $2.2 million, a $0.4 million, or 20%, increase from the amount at December 31, 2010. Management believes the amount of the reserve is appropriate. The increased amount is the result of consideration of increased losses and certain trends and qualitative factors.
Deposits and Other Borrowings
Southwest’s deposits were $2.0 billion and $2.3 billion at September 30, 2011 and December 31, 2010, respectively. The following table presents the trends in the composition of deposits at the dates indicated:
                                 
    September 30,   December 31,        
(Dollars in thousands)   2011   2010   $ Change   % Change
 
Noninterest-bearing demand
  $ 388,365     $ 377,182     $ 11,183       2.96 %
Interest-bearing demand
    98,270       92,584       5,686       6.14  
Money market accounts
    461,546       495,253       (33,707 )     (6.81 )
Savings accounts
    31,319       26,665       4,654       17.45  
Time deposits of $100,000 or more
    551,914       694,565       (142,651 )     (20.54 )
Other time deposits
    490,839       566,479       (75,640 )     (13.35 )
         
Total deposits
  $ 2,022,253     $ 2,252,728     $ (230,475 )     (10.23 )%
         
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. At September 30, 2011, $25 million in these retail certificates of deposit were included in time deposits of $100,000 or more, a decrease of $85 million, or 77%, from December 31, 2010.
Stillwater National has other brokered certificates of deposit totaling $0.7 million and $1.0 million as of September 30, 2011 and December 31, 2010, respectively, included in time deposits of $100,000 or more in the above table.
Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, decreased $8.0 million, or 8%, to $86.6 million during the first nine months of 2011. The decrease reflects the changes in the need for other funding based on lending activities for the period.
Shareholders’ Equity
Shareholders’ equity decreased $10.8 million, or 3%, due to a loss of $10.0 million and preferred dividends declared totaling $2.6 million for the first nine months of 2011. Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax) increased to $2.7 million at September 30, 2011, compared to $1.0 million at December 31, 2010.

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At September 30, 2011, Southwest, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See “Capital Requirements” on page 81.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2011 and 2010
Net loss available to common shareholders for the third quarter of 2011 of $10.6 million represented a decrease of $13.4 million from the $2.8 million net income available to common shareholders earned in the third quarter of 2010. Diluted earnings per share were $(0.54), compared to $0.15. The decrease in quarterly net income available to common shareholders was the result of a $12.6 million, or 105%, increase in the provision for loan losses, a $2.4 million, or 9%, decrease in net interest income, a $2.7 million, or 43%, decrease in noninterest income, and a $2.3 million, or 15%, increase in noninterest expense, offset in part by a $6.7 million, or 444% decrease in income taxes.
Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan losses to an appropriate level at period end after net charge-offs for the period. The necessary provision for third quarter of 2011 was $12.6 million more than the provision required for third quarter of 2010. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 79.)
On an operating segment basis, the decrease in net income was the net result of a $4.7 million decrease in net income from the Texas Banking segment, a $3.4 million decrease in net income from the Oklahoma Banking segment, a $2.4 million increase in net loss from the Out of Market segment, a $2.5 million increase in net loss from the Other Operations segment, and a $0.3 million increase in net loss from the Kansas Banking segment.
Net Interest Income
                                 
    For the three months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change     % Change  
 
Interest income:
                               
Loans
  $ 27,873     $ 32,824     $ (4,951 )     (15.08 )%
Investment securities:
                               
U.S. government and agency obligations
    366       526       (160 )     (30.42 )
Mortgage-backed securities
    1,298       1,430       (132 )     (9.23 )
State and political subdivisions
    103       61       42       68.85  
Other securities
    12       62       (50 )     (80.65 )
Other interest-earning assets
    131       180       (49 )     (27.22 )
         
Total interest income
    29,783       35,083       (5,300 )     (15.11 )
 
                               
Interest expense:
                               
Interest-bearing demand deposits
    102       111       (9 )     (8.11 )
Money market accounts
    507       976       (469 )     (48.05 )
Savings accounts
    11       15       (4 )     (26.67 )
Time deposits of $100,000 or more
    1,680       3,128       (1,448 )     (46.29 )
Other time deposits
    1,511       2,572       (1,061 )     (41.25 )
Other borrowings
    469       524       (55 )     (10.50 )
Subordinated debentures
    1,478       1,305       173       13.26  
         
Total interest expense
    5,758       8,631       (2,873 )     (33.29 )
         
Net interest income
  $ 24,025     $ 26,452     $ (2,427 )     (9.18 )%
         
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.

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Yields on Southwest’s interest-earning assets decreased 15 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 30 basis points, resulting in an increase in the interest rate spread to 3.44% for the third quarter of 2011 from 3.29% for the third quarter of 2010. During the same periods, annualized net interest margin was 3.77% and 3.63%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 135.92% from 129.13%. Included in both the third quarter of 2011 and the third quarter of 2010 was a net reduction of $0.3 million resulting from interest reversal on nonaccrual loans offset by the quarterly adjustment of the discount accretion on loans and the loss share receivable. The net effects of these reductions on net interest margin were a 3 basis point decrease for third quarter of 2011 and the third quarter of 2010.
The decrease in total interest income was primarily the result of the decrease in average loans. Southwest’s average loans decreased $372.1 million, or 15%, and the related yield decreased to 5.09% for the third quarter of 2011 from 5.12% for the third quarter of 2010. During the same period, average investment securities increased $22.3 million, or 9%; however, the related yield decreased to 2.62% from 3.34% in 2010. Average other interest earning assets decreased $11.9 million, or 12% and the related yield decreased to 0.59% for the third quarter of 2011 from 0.72% for the third quarter of 2010.
The decrease in total interest expense can be attributed to the decrease in rates paid on interest-bearing liabilities and the effects of a $377.9 million, or 17%, decrease in average interest-bearing liabilities. Southwest’s average total interest-bearing deposits decreased $374.7 million, or 18%, and the related rates paid for interest expense decreased to 0.93% for the third quarter of 2011 from 1.31% for the third quarter of 2010. Average other borrowings decreased $3.2 million, or 3%, and the related rates paid for interest expense decreased to 2.07% for the third quarter of 2011 from 2.23% for the third quarter of 2010.
RATE VOLUME TABLE
The following table analyzes changes in interest income and interest expense of Southwest for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
                         
    For the three months ended September 30,  
(Dollars in thousands)   2011 vs. 2010  
    Increase     Due to Change  
    Or     In Average:  
    (Decrease)     Volume     Rate  
 
Interest earned on:
                       
Noncovered loans receivable (1)
  $ (4,631 )   $ (5,191 )   $ 560  
Covered loans receivable
    (320 )     (442 )     122  
Investment securities (1)
    (300 )     235       (535 )
Other interest-earning assets
    (49 )     (61 )     12  
                 
Total interest income
    (5,300 )     (5,272 )     (28 )
 
                       
Interest paid on:
                       
Interest-bearing demand
    (9 )     19       (28 )
M oney market accounts
    (469 )     (62 )     (407 )
Savings accounts
    (4 )     3       (7 )
Time deposits
    (2,509 )     (1,272 )     (1,237 )
Other borrowings
    (55 )     (17 )     (38 )
Subordinated debentures
    173             173  
                 
Total interest expense
    (2,873 )     (1,325 )     (1,548 )
 
Net interest income
  $ (2,427 )   $ (3,947 )   $ 1,520  
 
 
(1)   Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material

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AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.
                                                 
    For the three months ended September 30,  
(Dollars in thousands)   2011   2010  
    Average             Average     Average             Average  
    Balance     Interest     Yield/Rate     Balance     Interest     Yield/Rate  
         
Assets
                                               
Noncovered loans (1) (2)
  $ 2,127,291     $ 27,160       5.07 %   $ 2,477,413     $ 31,791       5.09 %
Covered loans (1)
    44,018       713       6.43       65,999       1,033       6.21  
Investment securities (2)
    269,143       1,779       2.62       246,838       2,079       3.34  
Other interest-earning assets
    87,649       131       0.59       99,500       180       0.72  
                     
Total interest-earning assets
    2,528,101       29,783       4.67       2,889,750       35,083       4.82  
Other assets
    121,115                       76,570                  
 
Total assets
  $ 2,649,216                     $ 2,966,320                  
 
 
                                               
Liabilities and shareholders’ equity
                                               
Interest-bearing demand deposits
  $ 111,805     $ 102       0.36 %   $ 93,481     $ 111       0.47 %
M oney market accounts
    480,817       507       0.42       515,754       976       0.75  
Savings accounts
    30,467       11       0.14       25,306       15       0.24  
Time deposits
    1,065,019       3,191       1.19       1,428,247       5,700       1.58  
                     
Total interest-bearing deposits
    1,688,108       3,811       0.93       2,062,788       6,802       1.31  
Other borrowings
    89,964       469       2.07       93,136       524       2.23  
Subordinated debentures
    81,963       1,478       7.21       81,963       1,305       6.37  
         
Total interest-bearing liabilities
    1,860,035       5,758       1.23       2,237,887       8,631       1.53  
 
                                             
Noninterest-bearing demand deposits
    375,465                       330,321                  
Other liabilities
    32,447                       16,960                  
Shareholders’ equity
    381,269                       381,152                  
 
Total liabilities and shareholders’ equity
  $ 2,649,216                     $ 2,966,320                  
 
 
                                               
Net interest income and interest rate spread
          $ 24,025       3.44 %           $ 26,452       3.29 %
 
Net interest margin (3)
                    3.77 %                     3.63 %
 
Ratio of average interest-earning assets to average interest-bearing liabilities
    135.92 %                     129.13 %                
 
 
(1)   Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material.
 
(2)   Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
 
(3)   Net interest margin = annualized net interest income / average interest-earning assets

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Noninterest Income
                                 
    For the three months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change%     Change  
 
Noninterest income:
                               
Other service charges
  $ 2,588     $ 2,659     $ (71 )     (2.67 )%
Other fees
    529       335       194       57.91  
Other noninterest income
    46       83       (37 )     (44.58 )
Gain on sales of loans:
                               
Student loan sales
    318       595       (277 )     (46.55 )
One-to-four family residential
    (1 )     36       (37 )     (102.78 )
All other loan sales
    109       22       87       395.45  
Gain on sale/call of investment securities
          2,605       (2,605 )     (100.00 )
         
Total noninterest income
  $ 3,589     $ 6,335     $ (2,746 )     (43.35 )%
         
The decrease in other service charges is primarily the result of decreased overdraft service charges. Other fees increased as a result of increased brokerage fees and decreased amortization of mortgage servicing rights as a result of decreased prepayment speeds. Other noninterest income declined as a result of loss share adjustments of prior recoveries related to acquired loans.
Gain on sales of loans is a reflection of the activity in the student, mortgage, and commercial lending areas discussed elsewhere in this report.
Gain on sale/call of investment securities includes a $2.5 million gain recognized as the result of the sale of investment securities during the third quarter of 2010.
Noninterest Expense
                                 
    For the three months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change     % Change  
 
Noninterest expense:
                               
Salaries and employee benefits
  $ 7,734     $ 7,183     $ 551       7.67 %
Occupancy
    2,694       2,835       (141 )     (4.97 )
FDIC and other insurance
    824       1,347       (523 )     (38.83 )
Other real estate (net)
    1,445       228       1,217       533.77  
Unfunded loan commitment reserve
    305       (294 )     599       (203.74 )
Other general and administrative
    4,691       4,119       572       13.89  
         
Total noninterest expense
  $ 17,693     $ 15,418     $ 2,275       14.76 %
         
Salaries and employee benefits increased primarily as a result of increased salary expense. The number of full-time equivalent employees did not change from 437 at the beginning of the third quarter of 2011. For the third quarter of 2010, the number of full-time equivalent employees decreased from 447 at the beginning of the quarter to 440 as of September 30, 2010.
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 average deposits.
The increase in other real estate net expenses is the result of $1.2 million in current period write-downs to fair market values of noncovered other real estate.
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 increased collection costs of $0.9 million, offset by decreased consulting fees of $0.4 million.

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FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
Net loss available to common shareholders for the nine months ended September 30, 2011 of $13.2 million represented a decrease of $22.7 million, or 239%, from the $9.5 million of net income available to common shareholders earned in the nine months ended September 30, 2010. Diluted earnings per share were $(0.68) compared to $0.55, a 224% decrease. The decrease in net income available to common shareholders was primarily the result of a $25.5 million, or 90%, increase in the provision for loan losses, a $5.9 million, or 7%, decrease in net interest income, a $4.0 million, or 28%, decrease in noninterest income, and a $1.5 million, or 3%, increase in noninterest expense, offset in part by a $14.3 million, or 202%, decrease in income tax expense.
Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan losses to an appropriate level at period end after charge-offs for the period. The necessary provision as of September 30, 2011 was $25.5 million more than the provision required as of September 30, 2010. (See Note 3: “Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 79.)
On an operating segment basis, the decrease in net income was the result of a $13.7 million decrease in income from the Out of Market segment, a $4.4 million decrease in net income from the Texas Banking segment, a $2.5 million increase in net loss from the Other Operation segment, a $1.9 million decrease in net income from the Oklahoma Banking segment, and a $0.4 million decrease in income from the Secondary Market segment, offset in part by a $0.2 million increase in net income from the Kansas Banking segment.
Net Interest Income
                                 
    For the nine months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change%     Change  
 
Interest income:
                               
Loans
  $ 87,890     $ 101,087     $ (13,197 )     (13.06 )%
Investment securities:
                               
U.S. government and agency obligations
    1,152       1,675       (523 )     (31.22 )
Mortgage-backed securities
    3,868       4,329       (461 )     (10.65 )
State and political subdivisions
    282       203       79       38.92  
Other securities
    87       217       (130 )     (59.91 )
Other interest-earning assets
    401       610       (209 )     (34.26 )
         
Total interest income
    93,680       108,121       (14,441 )     (13.36 )
 
                               
Interest expense:
                               
Interest-bearing demand deposits
    329       383       (54 )     (14.10 )
Money market accounts
    1,766       3,026       (1,260 )     (41.64 )
Savings accounts
    37       47       (10 )     (21.28 )
Time deposits of $100,000 or more
    6,106       10,669       (4,563 )     (42.77 )
Other time deposits
    5,237       8,222       (2,985 )     (36.31 )
Other borrowings
    1,460       1,565       (105 )     (6.71 )
Subordinated debentures
    4,314       3,848       466       12.11  
         
Total interest expense
    19,249       27,760       (8,511 )     (30.66 )
         
Net interest income
  $ 74,431     $ 80,361     $ (5,930 )     (7.38 )%
         
Net interest income is the difference between the interest income Southwest earns on its loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Because different types of assets owned and liabilities issued by Southwest may react differently, and at different times, to changes in market interest rates, net interest income is affected by changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income.
Yields on Southwest’s interest-earning assets decreased 12 basis points, while the rates paid on Southwest’s interest-bearing liabilities decreased 27 basis points, resulting in an increase in the interest rate spread to 3.45% for the first nine months of

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2011 from 3.30% for the first nine months of 2010. During the same periods, annualized net interest margin was 3.78% and 3.63%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 134.41% from 126.14%. Included in net interest income for the first nine months of 2011 was a net reduction of $0.4 million resulting from interest reversals on nonaccrual loans offset by the year-to-date adjustments of the discount accretion on loans and the loss share receivable. Included in net interest income for the first nine months of 2010 was a recovery of $0.5 million in interest from the resolution of nonperforming loans and additional discount accretion on loans and loss share receivable, offset in part by interest reversals on nonaccrual loans. The net effects of these adjustments on net interest margin were a 2 basis point decrease and a 3 basis point increase, respectively.
The decrease in interest income was primarily the result of the decrease in average loans. Southwest’s average loans decreased $324.3 million, or 12%, and the related yield decreased to 5.15% for the first nine months of 2011 from 5.19% in 2010. During the same period, average investment securities increased $21.4 million, or 9%; however, the related yield decreased to 2.73% from 3.54% in 2010. Average other interest earning assets decreased $26.9 million, and the related yield decreased to 0.61% for the first nine months of 2011 from 0.71% in 2010.
The decrease in total interest expense can be attributed to the decrease in the rates paid on interest-bearing liabilities and the effects of a $390.0 million, or 17%, decrease in average interest-bearing liabilities. Southwest’s total interest-bearing deposits decreased $383.3 million, or 18%, and the related rates paid for interest expense decreased to 1.05% for the first nine months of 2011 from 1.38% in 2010. Average other borrowings decreased $6.7 million, or 7%; however, the related rates paid for interest expense remained flat at 2.18% for first nine months of 2011 and the first nine months of 2010.
RATE VOLUME TABLE
The following table analyzes changes in interest income and interest expense of Southwest for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
                         
    For the nine months ended September 30,  
(Dollars in thousands)   2011 vs. 2010  
    Increase     Due to Change  
    Or     In Average:  
    (Decrease)     Volume     Rate  
 
Interest earned on:
                       
Noncovered loans receivable (1)
    $(12,015 )   $ (11,438 )   $ (577)  
Covered loans receivable
    (1,182 )     (1,323 )     141  
Investment securities (1)
    (1,035 )     530       (1,565 )
Other interest-earning assets
    (209 )     (131 )     (78 )
                 
Total interest income
    (14,441 )     (11,789 )     (2,652 )
Interest paid on:
                       
Interest-bearing demand
    (54 )     33       (87 )
Money market accounts
    (1,260 )     (121 )     (1,139 )
Savings accounts
    (10 )           (16 )
Time deposits
    (7,548 )     (4,126 )     (3,422 )
Other borrowings
    (105 )     (110 )     5  
Subordinated debentures
    466             466  
                 
Total interest expense
    (8,511 )     (4,223 )     (4,288 )
 
Net interest income
  $ (5,930 )   $ (7,566 )     $1,636  
 
 
(1)   Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.

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AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.
                                                 
    For the nine months ended September 30,  
(Dollars in thousands)           2011                     2010        
    Average             Average     Average             Average  
    Balance     Interest     Yield/Rate     Balance     Interest     Yield/Rate  
 
Assets
                                               
Noncovered loans (1) (2)
  $ 2,234,219     $ 85,366       5.11 %   $ 2,533,490     $ 97,381       5.14 %
Covered loans (1)
  $ 47,619     $ 2,524       7.09       72,676       3,706       6.82  
Investment securities (2)
    264,004       5,389       2.73       242,629       6,424       3.54  
Other interest-earning assets
    87,729       401       0.61       114,629       610       0.71  
                     
Total interest-earning assets
    2,633,571       93,680       4.76       2,963,424       108,121       4.88  
Other assets
    102,042                       74,199                  
 
Total assets
  $ 2,735,613                     $ 3,037,623                  
 
 
                                               
Liabilities and shareholders’ equity
                                               
Interest-bearing demand deposits
  $ 112,394     $ 329       0.39 %   $ 102,843     $ 383       0.50 %
Money market accounts
    487,522       1,766       0.48       508,742       3,026       0.80  
Savings accounts
    29,131       37       0.17       25,515       47       0.25  
Time deposits
    1,158,922       11,343       1.31       1,534,135       18,891       1.65  
                     
Total interest-bearing deposits
    1,787,969       13,475       1.05       2,171,235       22,347       1.38  
Other borrowings
    89,384       1,460       2.18       96,099       1,565       2.18  
Subordinated debentures
    81,963       4,314       7.02       81,963       3,848       6.26  
                     
Total interest-bearing liabilities
    1,959,316       19,249       1.31       2,349,297       27,760       1.58  
 
                                           
Noninterest-bearing demand deposits
    370,145                       318,609                  
Other liabilities
    23,510                       17,629                  
Shareholders’ equity
    382,642                       352,088                  
 
Total liabilities and shareholders’ equity
  $ 2,735,613                     $ 3,037,623                  
 
 
                                               
Net interest income and interest rate spread
          $ 74,431       3.45 %           $ 80,361       3.30 %
 
Net interest margin (3)
                    3.78 %                     3.63 %
 
Ratio of average interest-earning assets to average interest-bearing liabilities
    134.41 %                     126.14 %                
 
 
(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 nine months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change     % Change  
 
Noninterest income:
                               
Other service charges
  $ 7,690     $ 8,140     $ (450 )     (5.53 )%
Other fees
    1,536       1,120       416       37.14  
Other noninterest income
    195       515       (320 )     (62.14 )
Gain on sales of loans:
                               
Student loan sales
    788       1,228       (440 )     (35.83 )
One-to-four family residential
    (1 )     709       (710 )     (100.14 )
All other loan sales
    234       117       117       100.00  
Gain on sale/call of investment securities
          2,646       (2,646 )     (100.00 )
         
Total noninterest income
  $ 10,442     $ 14,475     $ (4,033 )     (27.86 )%
         
The decrease in other service charges is primarily the result of decreases in overdraft service charges of $0.5 million. Other fees increased primarily as a result of increased loan servicing fees of $0.2 million, increased brokerage fees of $0.1 million, and decreased amortization of mortgage servicing rights of $0.2 million as a result of decreased prepayment speeds. Other noninterest income decreased as a result of decreased loss share adjustment of recoveries related to acquired loans and the prior year income included $0.2 million from the sale of trust operations.
Gain on sales of loans is a reflection of the activity in the student, mortgage, and commercial lending areas discussed elsewhere in this report.
Gain on sale/call of investment securities includes a $2.5 million gain recognized as the result of the sale of investment securities during the first nine months of 2010.
Noninterest Expense
                                 
    For the nine months              
    ended September 30,              
(Dollars in thousands)   2011     2010     $ Change     % Change  
 
Noninterest expense:
                               
Salaries and employee benefits
  $ 22,223     $ 22,400     $ (177 )     (0.79 )%
Occupancy
    8,201       8,454       (253 )     (2.99 )
FDIC and other insurance
    3,004       4,455       (1,451 )     (32.57 )
Other real estate (net)
    4,483       963       3,520       365.52  
Unfunded loan commitment reserve
    378       (1,271 )     1,649       (129.74 )
Other general and administrative
    10,009       11,821       (1,812 )     (15.33 )
         
Total noninterest expense
  $ 48,298     $ 46,822     $ 1,476       3.15 %
         
Salaries and employee benefits decreased primarily as a result of a decrease in the profit sharing contribution. The number of full-time equivalent employees for the first nine months increased from 432 at the beginning of the year to 437 as of September 30, 2011. For the first nine months of 2010, the number of full-time equivalent employees decreased from 466 at the beginning of the year to 432 as of September 30, 2010.
Southwest’s bank subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is the result of the decrease in average deposits.
The increase in other real estate net expenses is includes a provision for other real estate of $0.5 million and $1.8 million in current period write-downs to fair market values of noncovered other real estate.
The increase in the unfunded loan commitment reserve expense resulted from the application of our reserve methodology.
The decrease in other general and administrative expense is primarily the result of the settlement of Oklahoma state tax claims for less than the amount accrued, of $2.5 million, offset by increased loan collection costs of $0.9 million.

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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 $64.7 million at September 30, 2011 decreased $0.5 million, or less than 1%, from year-end 2010. The decrease in the allowance for loan losses is a result of the $54.3 million in net charge-offs incurred in the first nine months of 2011, offset by the $53.8 million provision for loan losses recorded in the first nine months of 2011. The year-to-date provision for loan losses increased $25.5 million, or 90%, from the first nine months of 2010. The increase in the provision for loan losses was the result of the calculations of the appropriate allowance at each period end. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Loans” on page 56.)
Taxes on Income
Southwest entered into a Settlement Agreement (“the Agreement”) with the Oklahoma Tax Commission (“OTC”) on June 28, 2011 with respect to certain claims made by the OTC. For additional information, please see “Note 6: Taxes on Income” in the Notes to the Unaudited Consolidated Financial Statements on page 47.
Southwest’s income tax benefit was $7.2 million for the first nine months of 2011 compared to tax expense of $7.1 million for the first nine months of 2010, a decrease of $14.3 million, or 202%. The decrease in the income tax expense is the result of decreased income.
LIQUIDITY
Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of highly marketable assets such as available for sale investments. Additional sources of liquidity, including cash flow from the repayment of loans and the sale of participations in outstanding loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of deposits, reductions in liquid assets, and accessibility to capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization.
Southwest, Stillwater National, and Bank of Kansas have available various forms of short-term borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Topeka (“FHLB”).
Stillwater National also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program. The outstanding balance of those notes was $1.3 million at September 30, 2011. Stillwater National has approved federal funds purchase lines totaling $211.5 million with six banks; there was no outstanding balance on these lines at September 30, 2011. Stillwater National is qualified to borrow funds from the FRB through their Borrower-In-Custody (“BIC”) program. Collateral under this program consists of pledged selected commercial and industrial loans. Currently the collateral will allow Stillwater National to borrow up to $84.5 million. As of September 30, 2011, no borrowings were made through the BIC program. In addition, Stillwater National has available a $413.9 million line of credit and Bank of Kansas has a $57.8 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At September 30, 2011, the Stillwater National FHLB line of credit had an outstanding balance of $40.0 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 61 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 on Southwest’s funds management unit.)
Stillwater National sells securities under agreements to repurchase with Stillwater National retaining custody of the collateral. Collateral consists of U.S. government agency obligations, which are designated as pledged with Stillwater National’s safekeeping agent. These transactions are for one to four day periods. Outstanding balances under this program were $40.3 million and $22.2 million as of September 30, 2011 and September 30, 2010, respectively.

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At September 30, 2011, $215.5 million of the total carrying value of investment securities of $269.6 million were pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Any amount over pledged can be released at any time.
During the first nine months of 2011, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity.
During the first nine months of 2011, cash and cash equivalents increased by $49.1 million, or 73%, to $116.6 million. This increase was the net result of cash provided from investing activities of $251.8 million (primarily from net repayments of loans and proceeds from repayments, call and maturities of securities) and cash provided by operating activities of $37.6 million, offset in part by cash used in financing activities of $240.3 million (primarily from decreases in deposits).
During the first nine months of 2010, cash and cash equivalents decreased by $29.4 million, or 25%, to $89.5 million. This decrease was the net result of cash used in financing activities of $216.4 million (primarily from decreases in deposits), offset in part by cash provided from investing activities of $112.0 million (primarily net repayments of loans and proceeds from repayments, calls and maturities of available for sale securities) and cash provided by operating activities of $75.0 million.
As of September 30, 2011, the holding company has $29.2 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 September 30, 2011, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 20.81%, a Tier I risk-based capital ratio of 19.54%, and a leverage ratio of 16.47%. As of September 30, 2011, Stillwater National and Bank of Kansas met the criteria for classification as “well-capitalized” institutions under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest, Stillwater National, or Bank of Kansas by bank regulators.
On January 27, 2010, Stillwater National informally agreed with the Office of the Comptroller of the Currency, its primary federal regulator, to maintain a ratio of capital to risk weighted assets of at least 12.5% and a Tier 1 leverage ratio of at least 8.5%. As of September 30, 2011, Stillwater National had a capital to risk weighted assets ratio of 19.14% and a Tier 1 leverage ratio of 14.88%.
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 )%
September 30, 2011
    (1.31 )%     (4.29 )%     (4.25 )%
December 31, 2010
    1.58 %     (2.77 )%     (3.30 )%
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 increased in each of the rising interest rate scenarios when compared to the December 31, 2010 risk position. Southwest’s greatest exposure to changes in interest rate is in the +200 bp scenario with a decline in net interest income of (4.29%) at September 30, 2011, a 1.52 percentage point decline from the December 31, 2010 level of (2.77%). 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 )%
September 30, 2011
    2.40 %     1.64 %     0.57 %
December 31, 2010
    (2.15 )%     (1.35 )%     (0.47 )%
As of September 30, 2011, the economic value of equity measure improved in each of the three rising interest rate scenarios when compared to the December 31, 2010 percentages. Southwest’s greatest improvement to economic value of equity can be found in the +300 bp scenario. The +300 bp scenario was 2.40% on September 30, 2011, a 4.55 percentage point increase over the December 31, 2010 value of (2.15%). The economic value of equity ratio in all scenarios remains well within Southwest’s asset/liability management policy limits.
* * * * * * *
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, Southwest’s management evaluated the effectiveness of Southwest’s disclosure controls and procedures as of September 30, 2011. Southwest’s Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwest’s Chief Executive Officer and Chief Financial Officer concluded that Southwest’s disclosure controls and procedures were effective as of September 30, 2011.
First Nine Months of 2011 Changes in Internal Control over Financial Reporting
No change occurred during the first nine months of 2011 that has materially affected, or is reasonably likely to materially affect, Southwest’s internal control over financial reporting.

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PART II: OTHER INFORMATION
     
Item 1:
  Legal proceedings
 
   
 
  None
 
   
Item 1A:
  Risk Factors
 
   
 
  There were no material changes in risk factors during the first nine months of 2011 from those disclosed in Southwest’s Form 10-K for the year ended December 31, 2010.
 
   
Item 2:
  Unregistered sales of equity securities and use of proceeds
 
   
 
  There were no unregistered sales of equity securities by Southwest during the quarter ended September 30, 2011.
 
   
 
  There were no purchases of Southwest’s common stock by or on behalf of Southwest or any affiliated purchasers of Southwest (as defined in Securities and Exchange Commission Rule 10b-18) during the three months ended September 30, 2011.
 
   
Item 3:
  Defaults upon senior securities
 
   
 
  See current Report on Form 8-K dated July 25, 2011 with respect to planned arrearage on Southwest Bancorp Inc.’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B.
 
   
Item 4:
  (removed and reserved)
 
   
Item 5:
  Other information
 
   
 
  None
 
   
Item 6:
  Exhibits
 
   
 
  Exhibit 31(a), (b)            Rule 13a-14(a)/15d-14(a) Certifications

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

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOUTHWEST BANCORP, INC.
(Registrant)
           
By:
  /s/ Rick Green   November 4, 2011  
 
         
 
  Rick Green   Date  
 
  President and Chief Executive Officer      
 
  (Principal Executive Officer)      
 
         
By:
  /s/ Laura Robertson   November 4, 2011  
 
         
 
  Laura Robertson   Date  
 
  Executive Vice President,      
 
  Chief Financial Officer      
 
  (Principal Financial Officer)      

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