News Column

SOUTHWEST BANCORP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

August 7, 2014

EXECUTIVE SUMMARY

Southwest Bancorp, Inc. ("we", "our", "us", or "Southwest") is a financial holding company for Bank SNB, National Association, which has been providing banking services since 1894. Through Bank SNB, we have twenty-one full-service banking offices primarily located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas. We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and consumer banking services, including commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services and products. At June 30, 2014 we had total assets of $1.9 billion, deposits of $1.5 billion, and shareholders' equity of $271.4 million.



On July 28, 2014, we announced that Bank SNB, our wholly owned banking subsidiary, intends to file an application with the State of Oklahoma State Banking Department seeking to convert from a national association to an Oklahoma state-chartered bank (the "Charter Conversion"). The Charter Conversion is expected to be completed in the third or fourth calendar quarter of 2014.

Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. At June 30, 2014, the Oklahoma Banking segment accounted for $773.7 million in loans, the Texas Banking segment accounted for $408.4 million in loans, the Kansas Banking segment accounted for $145.2 million in loans, and the Mortgage Banking segment accounted for $24.4 million in loans. Please see "Financial Condition: Loans" below for additional information. For additional information on our operating segments, please see "Note 9: Operating Segments" in the Notes to Unaudited Consolidated Financial Statements. Our common stock is traded on the NASDAQ Global Select Market under the symbol OKSB. We focus on converting our strategic vision into long-term shareholder value. INDUSTRY FOCUS Our area of expertise focuses on the special financial needs of healthcare and health professionals, commercial real estate borrowers, businesses and their managers and owners, commercial lending, and energy banking. The healthcare and real estate industries make up the majority of our loan and deposit portfolio. We conduct regular reviews of our current and potential healthcare and real estate lending and the appropriate concentrations within those industries based upon economic and regulatory conditions. As of June 30, 2014, approximately $459.7 million, or 34%, of our loans were real estate industry loans. We expect that the real estate recovery should continue to improve in 2014 as the market has progressed further through the economic and real estate cycles. Job growth, solid corporate profits, and recovery in the housing market are all positives for the real estate industry. Conversely, the high unemployment rate, uncertainty over government regulation and fiscal/monetary policy, and a concern about the rising cost of debt capital are all industry risk factors. Our tactical focus on healthcare lending was established in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of June 30, 2014, approximately $398.7 million, or 29%, of our loans were loans to individuals and businesses in the healthcare industry. 29

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FINANCIAL CONDITION Investment Securities The following table shows the composition of the investment portfolio at the dates indicated: June 30, December 31, (Dollars in thousands) 2014 2013 $ Change % Change Federal agency securities $ 112,214$ 120,773$ (8,559) (7.09) % Obligations of state and 44,329 44,356 (27) political subdivisions



(0.06)

Residential mortgage-backed 184,422 183,170 1,252 securities 0.68 Asset-backed securities 9,554 9,482 72 0.76 Other securities 35,354 36,418 (1,064) (2.92) Total $ 385,873$ 394,199$ (8,326) (2.11) % Loans Total loans, including loans held for sale, were $1.4 billion at June 30, 2014. The following table shows the composition of the loan portfolio at the dates indicated: Total Total (Dollars in June 30, 2014 December 31, 2013 $ Change % Change thousands) Real estate mortgage Commercial $ 769,021 $ 752,279 $ 16,742 2.23 % One-to-four family 79,542 83,988 (4,446) (5.29) residential Real estate construction Commercial 166,981 143,848 23,133 16.08 One-to-four family 8,359 4,646 3,713 79.92 residential Commercial 300,163 255,058 45,105 17.68 Installment and consumer Guaranteed student 4,282 4,394 (112) (2.55) loans Other 23,352 26,690 (3,338) (12.51) Total loans $ 1,351,700$ 1,270,903$ 80,797 6.36 %



As further discussed in "Note 2: Disposals" in the Notes to Unaudited Consolidated Financial Statements, approximately $27.9 million of loans were included in disposal of the community bank branches.

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

June 30, December 31, (Dollars in thousands) 2014 2013 $ Change % Change Loans held for sale: One-to-four family residential 6,029 2,235 3,794 169.75 % Government guaranteed commercial 737 769 (32) (4.16) real estate Other loans held for sale 37 56 (19) (33.93) Total loans held for sale 6,803 3,060 3,743 122.32 Portfolio loans 1,344,897 1,267,843 77,054 6.08 Total loans $ 1,351,700$ 1,270,903$ 80,797 6.36 % Allowance for Loan Losses Management determines the appropriate level of the allowance for loan losses using an established methodology. (See "Note 4: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements.)



Management believes the amount of the allowance is appropriate, based on our analysis.

The allowance for loan losses on loans is comprised of two components. Loans deemed to be impaired (loans on nonaccrual status and greater than one-hundred thousand, and all troubled debt restructurings) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific 30 --------------------------------------------------------------------------------



allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

The allowance on the unimpaired loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors, segmented into loan pools by type of loan and market area. The composition of the allowance for loan losses, at the dates indicated, is shown in the following table: As of June 30, 2014 As of December 31, 2013 Allowance



(Dollars in thousands) Loan Balance Allowance % Loan Balance Allowance Allowance % Nonaccrual

$ 14,137$ 3,696 26.1 % $ 18,560$ 4,313 23.2 % Performing TDR 37,912 2,527 6.7 42,692 3,627 8.5 All other 1,292,848 26,860 2.1 1,206,591 28,723 2.4 Total $ 1,344,897$ 33,083 2.5 % $ 1,267,843$ 36,663 2.9 % The decrease in the allowance for nonaccrual loans was the result of current period charge-offs related to nonperforming loans. The decrease in the allowance relating to the other loans resulted from the increase in the loan portfolio, the decrease in the dollar amounts of impaired loans in the loan portfolio, and in consideration of trends and qualitative factors, including portfolio loss trends as well as management's assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans. The amount of the loan loss provision, or negative provision, for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the first six months of 2014 were $2.2 million, a decrease of $3.8 million, from the $6.0 million recorded for the first six months of 2013. The provision for loan losses for the first six months of 2014 was a negative (or credit) of $1.3 million, representing an increase of $0.9 million from the negative provision of $0.4 million recorded for the first six months of 2013. The increase in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs. 31

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Nonperforming Loans / Nonperforming Assets

At June 30, 2014, the allowance for loan losses was 200.77% of nonperforming loans, compared to 184.50% of nonperforming loans, at December 31, 2013. Nonaccrual loans, which comprise the majority of nonperforming loans, were $16.5 million as of June 30, 2014, a decrease of $3.3 million, or 17%, from December 31, 2013. We have taken cumulative net charge-offs related to these nonaccrual loans of $5.3 million as of June 30, 2014. Nonaccrual loans at June 30, 2014 were comprised of 56 relationships and were primarily concentrated in commercial real estate (46%), commercial and industrial (45%). All nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. These loans are believed to have sufficient collateral and are in the process of being collected. (Dollars in thousands) June 30, 2014 December 31, 2013 Nonaccrual loans: Commercial real estate $ 7,613 $ 7,766 One-to-four family residential 1,180 513 Real estate construction 82 2,721 Commercial 7,484 8,769 Other consumer 119 50 Total nonaccrual loans 16,478 19,819 Past due 90 days or more: Commercial - 50 Other consumer - 3 Total past due 90 days or more - 53 Total nonperforming loans 16,478 19,872 Other real estate 4,285 2,654 Total nonperforming assets $ 20,763$ 22,526 Nonperforming assets to portfolio loans receivable and other real estate 1.54 % 1.57 % Nonperforming loans to portfolio loans 1.23



1.22

receivable

Allowance for loan losses to nonperforming 200.77



184.50

loans

Government-guaranteed portion of $ 1,623 $ 875 nonperforming loans



Subsequent to the end of the second quarter, Southwest collected a $1.3 million recovery of a prior period loan loss and a $6.8 million payoff of a related restructured potential problem loan.

At June 30, 2014, nine credit relationships represented 79% of nonperforming loans. These were all commercial or commercial real estate lending relationships and had an aggregate principal balance of $13.1 million and related impairment reserves of $3.5 million. Cumulative net charge-offs for these nine relationships were $5.3 million as of June 30, 2014. 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 $84.2 million at June 30, 2014, compared to $99.8 million at December 31, 2013. Substantially all of these loans were performing in accordance with their present terms at June 30, 2014. Loans may be monitored by management and reported as potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. At June 30, 2014, other real estate was $4.3 million, up from $2.7 million at December 31, 2013 due to the addition of other properties. During the first six months of 2014, there were four sales of other real estate property, which had a principal value of $0.3 million, and resulted in a net loss of $0.02 million. In order to adjust the fair value of property values, there were total other real estate write-downs of $0.3 million during the first six months of 2014 compared to the total other real estate write-downs of $1.5 million at December 31, 2013. At June 30, 2014, the reserve for unfunded loan commitments was $2.9 million, a $0.1 million, or 3%, increase from the amount at December 31, 2013. Management believes the amount of the reserve is appropriate and is included in other liabilities on the unaudited consolidated statements of financial condition. The increase related primarily to an increase in the level of outstanding commitments. 32

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Deposits and Other Borrowings

Our deposits were $1.5 billion at June 30, 2014 and $1.6 billion at December 31, 2013. The following table shows the composition of deposits at the dates indicated: June 30, December 31, (Dollars in thousands) 2014 2013 $ Change % Change Noninterest-bearing demand $ 427,431$ 444,796$ (17,365) (3.90) % Interest-bearing demand 124,712 120,156 4,556 3.79 Money market accounts 430,296 439,981 (9,685) (2.20) Savings accounts 31,187 41,727 (10,540) (25.26) Time deposits of $100,000 or more 209,059 251,185 (42,126) (16.77) Other time deposits 241,170 286,241 (45,071) (15.75) Total deposits $ 1,463,855$ 1,584,086$ (120,231) (7.59) %



We participate in the Certificate of Deposit Account Registry Service ("CDARS") and CDARS deposits totaled $1.3 million at June 30, 2014 and December 31, 2013.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $10.1 million, or 13%, to $90.8 million during the first six months of 2014. The increase primarily reflects the timing of repurchase agreements for the period.



As further discussed in "Note 2: Disposals" in the Notes to the Unaudited Consolidated Financial Statements, approximately $130.6 million of deposits were included in the sale of the community bank branches.

Shareholders' Equity Shareholders' equity increased $12.2 million, or 5%, primarily due to net income of $9.8 million, for the first six months of 2014. At June 30, 2014, the accumulated other comprehensive loss on available for sale investment securities and derivative instruments (net of tax) was $0.2 million, a decrease from $3.0 million at December 31, 2013.



At June 30, 2014, we and Bank SNB continued to exceed all applicable regulatory capital requirements. See "Capital Requirements" on page 42.

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RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2014 and 2013

Net income for the second quarter of 2014 of $6.2 million represented an increase of $1.8 million from the $4.4 million net income recorded for the second quarter of 2013. Diluted earnings per share were $0.31 for the second quarter of 2014, compared to $0.22 for the second quarter of 2013. The increase in quarterly net income was primarily the result of a $1.4 million, or 10%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013, and the $4.8 million increase in noninterest income, primarily driven by the pre-tax net gain on the sale of the community bank branches, offset in part by a $0.5 million decline in the negative provision for loan losses and a $2.5 million increase in noninterest expense. Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See "Note 4: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements and "Provision for Loan Losses" on page 41.) Net Interest Income For the three months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Interest income: Loans $ 16,343$ 16,415$ (72) (0.44) % Investment securities: U.S. government and agency obligations 337 426 (89)



(20.89)

Mortgage-backed securities 937 833 104



12.48

State and political subdivisions 294 302 (8) (2.65) Other securities 60 33 27 81.82 Other interest-earning assets 314 255 59 23.14 Total interest income 18,285 18,264 21 0.11 Interest expense: Interest-bearing demand deposits 40 37 3 8.11 Money market accounts 136 190 (54) (28.42) Savings accounts 11 12 (1) (8.33) Time deposits of $100,000 or more 338 613 (275) (44.86) Other time deposits 406 590 (184) (31.19) Other borrowings 223 222 1 0.45 Subordinated debentures 557 1,466 (909) (62.01) Total interest expense 1,711 3,130 (1,419) (45.34) Net interest income $ 16,574$ 15,134$ 1,440 9.51 % Net interest income is the difference between the interest income we earn on our loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because rates on different types of assets and liabilities may react differently and at different times to changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income. 34

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AVERAGE BALANCES, YIELDS AND RATES The following table shows average interest-earning assets and interest-bearing liabilities and the average yields and rates on them for the periods indicated. For the three months ended June 30, 2014 2013 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Assets Loans (1) (2) $ 1,331,126$ 16,343 4.92 % $ 1,318,950$ 16,415 4.99 % Investment securities (2) 384,395 1,628 1.70 374,353 1,594 1.71 Other interest-earning 183,378 314 0.69 282,067 255 0.36 assets Total interest-earning 1,898,899 18,285 3.86 1,975,370 18,264 3.71 assets Other assets 49,829 63,390 Total assets $ 1,948,728$ 2,038,760 Liabilities and shareholders' equity Interest-bearing demand $ 130,232$ 40 0.12 % $ 126,250$ 37 0.12 % deposits Money market accounts 421,001 136 0.13 420,477 190 0.18 Savings accounts 43,124 11 0.10 38,833 12 0.12 Time deposits 493,805 744 0.60 633,647 1,203 0.76 Total interest-bearing 1,088,162 931 0.34 1,219,207 1,442 0.47 deposits Other borrowings 85,682 223 1.04 71,857 222 1.24 Subordinated debentures 46,393 557 4.80 81,963 1,466 7.15 Total interest-bearing 1,220,237 1,711 0.56 1,373,027 3,130 0.91 liabilities Noninterest-bearing demand 449,364 402,224 deposits Other liabilities 10,751 10,561 Shareholders' equity 268,376 252,948 Total liabilities and $ 1,948,728$ 2,038,760 shareholders' equity Net interest income and $ 16,574 % $ 15,134 % interest rate spread 3.30 2.80 Net interest margin (3) 3.50 % 3.07 % Ratio of average interest-earning assets to average interest-bearing 155.62% 143.87% liabilities (1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material. (2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material. (3) Net interest margin = annualized net interest income / average interest-earning assets Compared to the second quarter of 2013, the second quarter 2014 yields on our interest-earning assets increased 15 basis points, while the rates paid on our interest-bearing liabilities decreased 35 basis points, resulting in an increase in the interest rate spread to 3.30%. During the quarterly periods ended June 30, 2014 and June 30, 2013, annualized net interest margin was 3.50% and 3.07%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities increased to 155.62% from 143.87%. 35

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RATE VOLUME TABLE The following table analyzes changes in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period's rate); and (ii) changes in rates (changes in rate multiplied by the prior period's volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. With the rate environment remaining low in the short to mid-term, earning assets and interest bearing liabilities are repricing at lower rates. The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013. For the three months ended June 30, 2014 vs. 2013 Increase Due to Change Or In Average: (Dollars in thousands) (Decrease) Volume Rate Interest earned on: Loans receivable (1) $ (72)$ 6$ (78) Investment securities (1) 34 42 (8) Other interest-earning assets 59 (111) 170 Total interest income 21 (63) 84 Interest paid on: Interest-bearing demand 3 1 2 Money market accounts (54) - (54) Savings accounts (1) 1 (2) Time deposits (459) (239) (220) Other borrowings 1 39 (38) Subordinated debentures (909) (517) (392) Total interest expense (1,419) (715) (704) Net interest income $ 1,440$ 652$ 788 (1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material. Noninterest Income For the three months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Noninterest income: Other service charges $ 2,306$ 2,408$ (102) (4.24) % Other fees 302 199 103 51.76 Other noninterest income 168 53 115 216.98 Gain on sale of branches, net 4,378 - 4,378 100.00 Gain on sale/call of investment securities 629 - 629 100.00 Gain on sales of mortgage loans: One-to-four family residential 463 818 (355) (43.40) All other loan sales - 13 (13) (100.00) Total noninterest income $ 8,246$ 3,491$ 4,755 136.21 %



Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

Other noninterest income increased primarily as a result of interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014. Gain on sale of branches consisted of $4.4 million recognized as the pre-tax net gain on disposal of the community bank branches in the second quarter of 2014. (See "Note 2: Disposals" in the Notes to Unaudited Consolidated Financial Statements for more details.) 36 --------------------------------------------------------------------------------



The gain on sale/call of investment securities was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession.

Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year. Noninterest Expense For the three months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Noninterest expense: Salaries and employee benefits $ 8,472 $ $ $ 433 5.39 % 8,039 Occupancy 2,783 2,679 104 3.88 FDIC and other insurance 314 400 (86) (21.50) Other real estate (net) 511 (1,394) 1,905 (136.66) Unfunded loan commitment reserve 12 255 (243) (95.29) Other general and administrative 3,240 2,860 380 13.29 Total noninterest expense $ 15,332$ 12,839$ 2,493 19.42 % The number of full-time equivalent employees decreased from 397 at the beginning of the quarter to 364 as of June 30, 2014. The increase in personnel expense from the prior year is primarily the result of restructuring costs and increased benefit expense. Our financial institution subsidiary pays deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and a decrease in the assessment rates.



The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year.

The unfunded loan commitment reserve expense decreased primarily as a result of continued improvement in asset quality and the corresponding decline in historical loss ratios used to calculate the reserve.

The increase in other general and administrative is primarily the result of higher miscellaneous, legal, marketing, and consulting fees, which is partially offset by lower accounting fees.

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FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2014 and 2013

Net income for the six months ended June 30, 2014 of $9.8 million represented an increase of $3.0 million from the $6.8 million net income for the six months ended June 30, 2013. Diluted earnings per share were $0.50 for the six months ended June 30, 2014, compared to $0.34 for the six months ended June 30, 2013. The increase in net income was the result of a $1.8 million, or 6%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest expense due to the redemption of the 10.5% Trust Preferred Securities in third quarter of 2013, a $1.0 million increase in the negative provision for loan losses, resulting from improved asset quality, a $4.2 million increase in noninterest income, primarily the pre-tax net gain on sale of community bank branches, offset in part by a $2.2 million increase in noninterest expense due to decreased gains recognized on sale of other real estate properties and increased employee benefit expenses. Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See "Note 4: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements and "Provision for Loan Losses" on page 41.) Net Interest Income For the six months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Interest income: Loans $ 32,118$ 33,421$ (1,303) (3.90) % Investment securities: U.S. government and agency obligations 764 898 (134) (14.92) Mortgage-backed securities 1,826 1,700 126



7.41

State and political subdivisions 590 606 (16) (2.64) Other securities 98 81 17 20.99 Other interest-earning assets 689 495 194 39.19 Total interest income 36,085 37,201 (1,116) (3.00) Interest expense: Interest-bearing demand deposits 80 82 (2) (2.44) Money market accounts 282 426 (144) (33.80) Savings accounts 22 24 (2) (8.33) Time deposits of $100,000 or more 787 1,311 (524) (39.97) Other time deposits 785 1,251 (466) (37.25) Other borrowings 448 442 6 1.36 Subordinated debentures 1,106 2,925 (1,819) (62.19) Total interest expense 3,510 6,461 (2,951) (45.67) Net interest income $ 32,575$ 30,740$ 1,835 5.97 % Net interest income is the difference between the interest income we earn on our loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because rates on different types of assets and liabilities may react differently and at different times to changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income. 38

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AVERAGE BALANCES, YIELDS AND RATES The following table shows average interest-earning assets and interest-bearing liabilities and the average yields and rates on them for the periods indicated. For the six months ended June 30, (Dollars in thousands) 2014 2013 Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate Assets Loans (1) (2) $ 1,304,876$ 32,118 4.96 % $ 1,337,111$ 33,421 5.04 % Investment securities 386,506 3,278 1.71 377,422 3,285 1.76 Other interest-earning 231,584 689 0.60 275,269 495 0.36 assets Total interest-earning 1,922,966 36,085 3.78 1,989,802 37,201 3.77 assets Other assets 50,036 75,423 Total assets $ 1,973,002$ 2,065,225 Liabilities and shareholders' equity Interest-bearing demand $ 132,483$ 80 0.12 % $ 129,905$ 82 0.13 % deposits Money market accounts 428,839 282 0.13 420,058 426 0.20 Savings accounts 43,939 22 0.10 38,777 24 0.12 Time deposits 512,335 1,572 0.62 658,266 2,562 0.78 Total interest-bearing 1,117,596 1,956 0.35 1,247,006 3,094 0.50 deposits Other borrowings 83,258 448 1.09 70,798 442 1.26 Subordinated debentures 46,393 1,106 4.77 81,963 2,925 7.14 Total interest-bearing 1,247,247 3,510 0.57 1,399,767 6,461 0.93 liabilities Noninterest-bearing demand 449,247 402,882 deposits Other liabilities 10,621 11,418 Shareholders' equity 265,887 251,158 Total liabilities and $ 1,973,002$ 2,065,225 shareholders' equity Net interest income and $ 32,575 % $ 30,740 % interest rate spread 3.21 2.84 Net interest margin (3) 3.42 % 3.12 % Ratio of average interest-earning assets to average interest-bearing 154.18% 142.15% liabilities (1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material. (2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material. (3) Net interest margin = annualized net interest income / average interest-earning assets Compared to the six months ended June 30, 2013, the six months ended June 30, 2014 yields on our interest-earning assets increased 1 basis point, while the rates paid on our interest-bearing liabilities decreased 36 basis points, resulting in an increase in the interest rate spread to 3.21%. During the same periods, annualized net interest margin was 3.42% and 3.12%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 154.18% from 142.15%. 39

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RATE VOLUME TABLE The following table analyzes changes in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period's rate); and (ii) changes in rates (changes in rate multiplied by the prior period's volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. With the rate environment remaining low, earning assets and interest bearing liabilites are repricing at lower rates. The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013. For the six months ended June 30, 2014 vs. 2013 Increase Due to Change Or In Average: (Dollars in thousands) (Decrease) Volume Rate Interest earned on: Loans receivable (1) $ (1,303)$ (1,050)$ (253) Investment securities (1) (7) 78 (85) Other interest-earning assets 194 (89) 283 Total interest income (1,116) (1,061) (55) Interest paid on: Interest-bearing demand (2) 2 (4) Money market accounts (144) 9 (153) Savings accounts (2) 3 (5) Time deposits (990) (509) (481) Other borrowings 6 72 (66) Subordinated debentures (1,819) (1,031) (788) Total interest expense (2,951) (1,454) (1,497) Net interest income $ 1,835$ 393$ 1,442 (1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis, because it is not considered material. Noninterest Income For the six months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Noninterest income: Other service charges $ 4,566$ 4,747$ (181) (3.81) % Other fees 638 520 118 22.69 Other noninterest income 238 116 122 105.17 Gain on sale of branches, net 4,378 - 4,378 100.00 Gain on sale/call of investment securities 764 - 764 100.00 Gain on sales of mortgage loans: One-to-four family residential 687 1,612 (925) (57.38) All other loan sales - 33 (33) (100.00) Total noninterest income $ 11,271$ 7,028$ 4,243 60.37 %



Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

Other noninterest income increased primarily as a result of interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014. 40

-------------------------------------------------------------------------------- Gain on sale of branches consisted of $4.4 million recognized as the pre-tax net gain on disposal of the community bank branches in the second quarter of 2014. See "Note 2: Disposals" for more details. The gain on sale/call of investment securities was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession, and the result of the release of escrowed funds received in association with the sale of an investment that was carried at cost. Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year. Noninterest Expense For the six months ended June 30, (Dollars in thousands) 2014 2013 $ Change % Change Noninterest expense: Salaries and employee benefits $ 16,598$ 16,175$ 423 2.62 % Occupancy 5,552 5,253 299 5.69 FDIC and other insurance 711 891 (180) (20.20) Other real estate (net) 579 (1,041) 1,620 (155.62) Unfunded loan commitment reserve 97 371 (274) (73.85) Other general and administrative 5,902 5,578 324 5.81 Total noninterest expense $ 29,439$ 27,227$ 2,212 8.12 % The number of full-time equivalent employees decreased from 402 at the beginning of the year to 364 as of June 30, 2014. The increase in personnel expense from prior year is primarily the result of restructuring costs and increased employee benefit expense. Our financial institution subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The decrease from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and a decrease in the assessment rates.



The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year.

The unfunded loan commitment reserve expense decreased primarily as a result of continued improvement in asset quality and the corresponding decline in historical loss ratios used to calculate the reserve.

The increase in other general and administrative is primarily the result of higher consulting fees, legal fees, and marketing costs, which is partially offset with lower accounting fees.

Provisions for Loan Losses The provision for loan losses is the amount of expense (or credit) that is required to maintain the allowance for losses at an appropriate level based upon the inherent risks in the loan portfolio after the effects of net charge-offs (or recoveries) for the period. The decline in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs. (See "Note 4: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements and "Loans") Taxes on Income Our income tax expense was $5.9 million for the first six months of 2014 compared to $4.1 million for the first six months of 2013, an increase of $1.8 million, or 43%. The increase in the income tax expense is the result of increased pretax income and fluctuations in permanent book/tax differences. The effective tax rate for the first six months of 2014 was 37.50%. 41

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LIQUIDITY Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of highly marketable assets such as available for sale investments. Additional sources of liquidity, including cash flow from the repayment of loans and the sale of participations in outstanding loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of deposits, reductions in liquid assets, and accessibility to capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization. Southwest and Bank SNB have available various forms of short-term borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank of Topeka ("FHLB"). Bank SNB also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program. There was no outstanding balance of those notes at June 30, 2014. Bank SNB has approved federal funds purchase lines totaling $140.0 million with four banks. There was no outstanding balance on these lines at June 30, 2014. Bank SNB is qualified to borrow funds from the FRB through their Borrower-In-Custody ("BIC") program. Collateral under this program consists of pledged selected commercial and industrial loans. Currently the collateral allows Bank SNB to borrow up to $53 million. As of June 30, 2014, no borrowings were made through the BIC program. In addition, Bank SNB has available a $322 million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At June 30, 2014, Bank SNB's FHLB line of credit had an outstanding balance of $25.0 million. (See also "Deposits and Other Borrowings" on page 33 for funds available and "Note 9: Operating Segments" in the Notes to Unaudited Consolidated Financial Statements for a discussion of our funds management unit.) Bank SNB sells securities under agreements to repurchase with Bank SNB retaining custody of the collateral. Collateral consists of U.S. government agency obligations, which are designated as pledged with Bank SNB's safekeeping agent. These transactions are for one to four day periods. Outstanding balances under this program were $65.8 million and $55.6 million as of June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, $249.9 million of the total carrying value of investment securities of $373.6 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 six months of 2014, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders' equity.

During the first six months of 2014, cash and cash equivalents decreased by $164.7 million, or 59%, to $115.2 million. This decrease was the net result of cash used in investing activities of $192.5 million (primarily from an increase in loans originated, cash outflows from the sale of bank branches, and purchases of available for sale securities offset by repayments of securities), cash provided by financing activities of $19.0 million (primarily from net increases in deposits and other borrowings), and offset in part by cash provided by operating activities of $8.8 million. CAPITAL REQUIREMENTS Financial holding companies are required to maintain capital ratios set by the FRB in its Risk-Based Capital Guidelines. At June 30, 2014, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 21.43%, a Tier I risk-based capital ratio of 20.13%, and a Tier 1 leverage ratio of 15.95%. As of June 30, 2014, Bank SNB met the criteria for classification as "well-capitalized" institutions under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest or Bank SNB by bank regulators. EFFECTS OF INFLATION The unaudited consolidated financial statements and related unaudited consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering fluctuations in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do the effects of general levels of inflation. 42

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CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies followed by Southwest Bancorp, Inc. conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses, the valuation of securities and income taxes, and goodwill and other intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.



There have been no significant changes in our application of critical accounting policies since December 31, 2013.

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