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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2010

 

¨ 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: 000-53629

 

 

PLAINSCAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Texas   75-2182440

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2323 Victory Avenue, Suite 1400, Dallas, Texas 75219

(Address of principal executive offices, including zip code)

(214) 252-4000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or 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.    Yes  x    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of April 30, 2010, there were 33,985,737 shares of the registrant’s Original Common Stock, $0.001 par value, and no shares of the registrant’s Common Stock, $0.001 par value, outstanding, including 2,507,469 shares that participate in dividends but are not defined as outstanding under generally accepted accounting principles.

 


Table of Contents

PlainsCapital Corporation

Quarterly Report on Form 10-Q for the period ended March 31, 2010

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   

Unaudited Consolidated Interim Financial Statements

  

Consolidated Balance Sheets, March 31, 2010 and December 31, 2009

   3

Consolidated Statements of Income, Three Months Ended March 31, 2010 and 2009

   4

Consolidated Statements of Shareholders’ Equity, Three Months Ended March 31, 2010 and 2009

   5

Consolidated Statements of Cash Flows, Three Months Ended March 31, 2010 and 2009

   6

Notes to Consolidated Financial Statements

   7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    51
Item 4T.    Controls and Procedures    54
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    54
Item 1A.    Risk Factors    55
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    57
Item 3.    Defaults Upon Senior Securities    57
Item 4.    (Removed and Reserved)    57
Item 5.    Other Information    57
Item 6.    Exhibits    57
Signatures    58

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets

 

     March 31, 2010     December 31,  
     (Unaudited)     2009  
     (in thousands)  

Assets

    

Cash and due from banks

   $ 207,704      $ 148,274   

Federal funds sold

     12,500        12,044   

Loans held for sale

     488,206        432,202   

Securities

    

Held to maturity, fair market value $274,813 and $294,887, respectively

     277,427        294,013   

Available for sale, amortized cost $314,059 and $228,651, respectively

     313,551        227,541   

Trading, at fair market value

     72,944        24,183   
                
     663,922        545,737   

Loans, net of unearned income

     3,011,283        3,071,769   

Allowance for loan losses

     (49,971     (52,092
                

Loans, net

     2,961,312        3,019,677   

Broker-dealer and clearing organization receivables

     129,890        82,714   

Fee award receivable

     20,184        20,504   

Investment in unconsolidated subsidiaries

     2,012        2,012   

Premises and equipment, net

     76,992        75,602   

Accrued interest receivable

     15,032        15,876   

Other real estate owned

     19,112        17,531   

Goodwill, net

     35,880        35,880   

Other intangible assets, net

     15,073        15,616   

Other assets

     187,036        147,051   
                

Total assets

   $ 4,834,855      $ 4,570,720   
                

Liabilities and Shareholders’ Equity

    

Deposits

    

Noninterest-bearing

   $ 236,172      $ 223,551   

Interest-bearing

     3,098,328        3,054,488   
                

Total deposits

     3,334,500        3,278,039   

Broker-dealer and clearing organization payables

     209,128        108,272   

Short-term borrowings

     611,011        488,078   

Capital lease obligation

     12,022        12,128   

Notes payable

     67,607        68,550   

Junior subordinated debentures

     67,012        67,012   

Other liabilities

     109,617        124,531   
                

Total liabilities

     4,410,897        4,146,610   

Commitments and contingencies

    

Shareholders’ equity

    

PlainsCapital Corporation shareholders’ equity

    

Preferred stock, $1.00 par value per share, authorized 50,000,000 shares;

    

Series A, 87,631 shares issued

     83,811        83,595   

Series B, 4,382 shares issued

     4,782        4,805   

Original Common Stock, $0.001 par value per share, authorized 50,000,000 shares; 31,754,135 and 31,613,010 shares issued, respectively

     32        32   

Common Stock, $0.001 par value per share, authorized 150,000,000 shares; zero shares issued

     —          —     

Surplus

     151,146        150,626   

Retained earnings

     185,359        186,743   

Accumulated other comprehensive income (loss)

     232        (300
                
     425,362        425,501   

Unearned ESOP shares (275,867 shares)

     (3,001     (3,001
                

Total PlainsCapital Corporation shareholders’ equity

     422,361        422,500   

Noncontrolling interest

     1,597        1,610   
                

Total shareholders’ equity

     423,958        424,110   
                

Total liabilities and shareholders’ equity

   $ 4,834,855      $ 4,570,720   
                

See accompanying notes.

 

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Table of Contents

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income - Unaudited

(In thousands, except per share amounts)

 

     Three Months Ended March 31,  
     2010    2009  

Interest income:

     

Loans, including fees

   $ 44,624    $ 42,336   

Securities

     

Taxable

     3,804      2,408   

Tax-exempt

     2,451      1,713   

Federal funds sold

     9      7   

Interest-bearing deposits with banks

     243      12   

Other

     1,177      1,158   
               

Total interest income

     52,308      47,634   

Interest expense

     

Deposits

     7,144      8,784   

Short-term borrowings

     778      557   

Capital lease obligation

     141      109   

Notes payable

     881      814   

Junior subordinated debentures

     613      865   

Other

     78      148   
               

Total interest expense

     9,635      11,277   
               

Net interest income

     42,673      36,357   

Provision for loan losses

     22,955      14,013   
               

Net interest income after provision for loan losses

     19,718      22,344   

Noninterest income

     

Service charges on depositor accounts

     2,118      2,212   

Net realized gains on sale of securities

     1,612      301   

Income from loan origination and net gains from sale of loans

     47,402      48,419   

Trust fees

     1,073      894   

Investment advisory fees and commissions

     15,536      13,856   

Securities brokerage fees and commissions

     5,713      4,950   

Other

     1,978      (66
               

Total noninterest income

     75,432      70,566   

Noninterest expense

     

Employees’ compensation and benefits

     56,795      48,508   

Occupancy and equipment, net

     13,837      11,372   

Professional services

     5,791      4,040   

Deposit insurance premiums

     1,275      561   

Repossession and foreclosure, net of recoveries

     1,452      1,034   

Other

     13,669      11,749   
               

Total noninterest expense

     92,819      77,264   
               

Income before income taxes

     2,331      15,646   

Income tax provision

     580      5,620   
               

Net income

     1,751      10,026   

Less: Net income attributable to noncontrolling interest

     65      23   
               

Net income attributable to PlainsCapital Corporation

     1,686      10,003   

Dividends on preferred stock and other

     1,388      1,559   
               

Income applicable to PlainsCapital Corporation common shareholders

   $ 298    $ 8,444   
               

Earnings per share

     

Basic

   $ 0.01    $ 0.27   
               

Diluted

   $ 0.01    $ 0.26   
               

See accompanying notes.

 

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PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity - Unaudited

 

           PlainsCapital Corporation Shareholders              
           Preferred Stock    Common Stock                Accumulated
Other
    Unearned              
     Comprehensive                                Retained     Comprehensive     ESOP     Noncontrolling        
     Income     Shares    Amount    Shares     Amount    Surplus     Earnings     Income (Loss)     Shares     Interest     Total  
     (Dollars in thousands)  

Balance, January 1, 2009

     92,013    $ 87,631    31,573,518      $ 32    $ 147,445      $ 167,865      $ 331      $ (3,489   $ 1,709      $ 401,524   

Stock option plans’ activity, including compensation expense

     —        —      2,424        —        67        —          —          —          —          67   

Adjustment to stock issued in business combination

     —        —      (63     —        (1     —          —          —          —          (1

Stock-based compensation expense

     —        —      —          —        214        —          —          —          —          214   

ESOP activity

     —        —      —          —        —          16        —          —          —          16   

Dividends on common stock ($0.05 per share)

     —        —      —          —        —          (1,664     —          —          —          (1,664

Dividends on preferred stock

     —        —      —          —        —          (1,353     —          —          —          (1,353

Preferred stock discount and accretion

     —        206    —          —        —          (206     —          —          —          —     

Cash distributions to noncontrolling interest

     —        —      —          —        —          —          —          —          (319     (319

Comprehensive income:

                         

Net income

   $ 10,026      —        —      —          —        —          10,003        —          —          23        10,026   

Other comprehensive income (loss):

                         

Unrealized gains on securities available for sale, net of tax of $60.9

     118                          

Unrealized losses on securities held in trust for the Supplemental Executive Retirement Plan, net of tax of $67.0

     (130                       

Unrealized losses on customer-related cash flow hedges, net of tax of $1.7

     (3                       
                               

Other comprehensive loss

     (15   —        —      —          —        —          —          (15     —          —          (15
                               

Total comprehensive income

   $ 10,011                          
                                                                                 

Balance, March 31, 2009

     92,013    $ 87,837    31,575,879      $ 32    $ 147,725      $ 174,661      $ 316      $ (3,489   $ 1,413      $ 408,495   
                                                                           

Balance, January 1, 2010

     92,013    $ 88,400    31,613,010      $ 32    $ 150,626      $ 186,743      $ (300   $ (3,001   $ 1,610      $ 424,110   

Stock option plans’ activity, including compensation expense

     —        —      65,706        —        303        —          —          —          —          303   

Vesting of stock-based compensation

     —        —      75,419        —        —          —          —          —          —          —     

Stock-based compensation expense

     —        —      —          —        217        —          —          —          —          217   

ESOP activity

     —        —      —          —        —          14        —          —          —          14   

Dividends on common stock ($0.05 per share)

     —        —      —          —        —          (1,697     —          —          —          (1,697

Dividends on preferred stock

     —        —      —          —        —          (1,194     —          —          —          (1,194

Preferred stock discount and accretion

     —        193    —          —        —          (193     —          —          —          —     

Cash distributions to noncontrolling interest

     —        —      —          —        —          —          —          —          (78     (78

Comprehensive income:

                         

Net income

   $ 1,751      —        —      —          —        —          1,686        —          —          65        1,751   

Other comprehensive income (loss):

                         

Unrealized gains on securities available for sale, net of tax of $210.4

     391                          

Unrealized gains on securities held in trust for the Supplemental Executive Retirement Plan, net of tax of $82.9

     144                          

Unrealized losses on customer-related cash flow hedges, net of tax of $1.6

     (3                       
                               

Other comprehensive income

     532      —        —      —          —        —          —          532        —          —          532   
                               

Total comprehensive income

   $ 2,283                          
                                                                                 

Balance, March 31, 2010

     92,013    $ 88,593    31,754,135      $ 32    $ 151,146      $ 185,359      $ 232      $ (3,001   $ 1,597      $ 423,958   
                                                                           

See accompanying notes.

 

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PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In thousands)

 

     Three Months Ended March 31,  
     2010     2009  

Operating Activities

    

Net income

   $ 1,751      $ 10,026   

Adjustments to reconcile net income to net cash used in operating activities

    

Provision for loan losses

     22,955        14,013   

Net losses on other real estate owned

     712        725   

Depreciation and amortization

     2,630        2,597   

Stock-based compensation expense

     253        269   

Net realized gains on sale of securities

     (1,612     (301

Loss on sale of premises and equipment

     18        1   

Stock dividends received on securities

     (16     (25

Deferred income taxes

     (366     2,920   

Changes in prepaid FDIC assessments

     1,116        —     

Changes in assets segregated for regulatory purposes

     —          (18,500

Changes in trading securities

     (48,761     (5,183

Changes in broker-dealer and clearing organization receivables

     (47,176     (23,443

Changes in fee award receivable

     320        319   

Changes in broker-dealer and clearing organization payables

     100,856        24,214   

Changes in other assets

     (38,941     10,583   

Changes in other liabilities

     (26,385     (1,644

Net gains from loan origination and sale of loans

     (47,402     (48,419

Loans originated for sale

     (1,152,337     (1,305,074

Proceeds from loans sold

     1,143,368        1,278,601   
                

Net cash used in operating activities

     (89,017     (58,321
                

Investing Activities

    

Proceeds from maturities and principal reductions of securities held to maturity

     23,187        1,092   

Proceeds from sales, maturities and principal reductions of securities available for sale

     83,689        42,219   

Purchases of securities held to maturity

     (4,911     (40,131

Purchases of securities available for sale

     (167,760     (55,111

Net (increase) decrease in loans

     31,271        (49,792

Purchases of premises and equipment and other assets

     (4,649     (5,192

Proceeds from sales of premises and equipment and other real estate owned

     1,542        1,986   

Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock

     (326     2,606   
                

Net cash used in investing activities

     (37,957     (102,323
                

Financing Activities

    

Net increase (decrease) in deposits

     67,678        (191,493

Net increase in short-term borrowings

     122,933        445,763   

Proceeds from notes payable

     1,200        —     

Payments on notes payable

     (2,143     (79,733

Proceeds from issuance of common stock

     267        12   

Dividends paid

     (2,891     (3,017

Cash distributions to noncontrolling interest

     (78     (319

Other, net

     (106     (69
                

Net cash provided by financing activities

     186,860        171,144   
                

Net increase in cash and cash equivalents

     59,886        10,500   

Cash and cash equivalents at beginning of period

     160,318        114,571   
                

Cash and cash equivalents at end of period

   $ 220,204      $ 125,071   
                

Supplemental Disclosures of Cash Flow Information

    

Cash paid during the period for:

    

Interest

   $ 9,355      $ 13,075   
                

Supplemental Schedule of Noncash Activities

    

Conversion of loans to other real estate owned

   $ 4,115      $ 4,546   
                

See accompanying notes.

 

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PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements – Unaudited

March 31, 2010

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

The unaudited consolidated financial statements of PlainsCapital Corporation, a Texas corporation, and its subsidiaries (“we,” “us,” “our,” “our company,” or “PlainsCapital”) for the three month periods ended March 31, 2010 and 2009 have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

PlainsCapital is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Graham-Leach-Bliley Act of 1999, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing, fixed income sales and trading, asset management and correspondent clearing services.

PlainsCapital owns 100% of the outstanding stock of PlainsCapital Bank (the “Bank”) and 100% of the membership interest in PlainsCapital Equity, LLC. PlainsCapital owns a 60.9% interest in Hester Capital Management, LLC (“Hester Capital”). The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”), PNB Aero Services, Inc., PCB-ARC, Inc. and 90% of the outstanding stock of Plains Financial Corporation (“PFC”). The Bank has a 100% interest in First Southwest Holdings, LLC (“First Southwest”), PlainsCapital Leasing, LLC and PlainsCapital Securities, LLC, as well as a 51% voting interest in PlainsCapital Insurance Services, LLC.

After the close of business on December 31, 2008, First Southwest Holdings, Inc., a diversified, private investment banking corporation headquartered in Dallas, Texas merged into FSWH Acquisition LLC, a wholly owned subsidiary of the Bank. Following the merger, FSWH Acquisition LLC changed its name to “First Southwest Holdings, LLC.” The principal subsidiaries of First Southwest are First Southwest Company (“FSC”), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

The acquisition cost of First Southwest Holdings, Inc. was approximately $62.2 million. In addition, PlainsCapital placed approximately 1.7 million shares of PlainsCapital Original Common Stock, valued at approximately $19.2 million as of December 31, 2008, into escrow. The percentage of shares to be released from escrow and distributed to former First Southwest stockholders will be determined based upon, among other factors, the valuation of certain auction rate bonds held by First Southwest prior to the merger (or repurchased from investors following the closing of the merger) as of the last day of December 2012 or, if applicable, the aggregate sales price of such auction rate bonds prior to such date. Any shares issued out of the escrow will be accounted for as additional acquisition cost.

PlainsCapital used a third-party valuation specialist to assist in the determination of the fair value of assets acquired, including intangibles, and liabilities assumed in the acquisition. The purchase price allocation resulted in net assets acquired in excess of consideration paid of approximately $12.8 million. That amount has been recorded in other liabilities until the contingent consideration issue described previously is settled. Upon resolution of the contingent consideration issue the acquisition cost of First Southwest may increase, resulting in a smaller excess of net assets acquired over consideration paid, or in certain circumstances, an excess of consideration paid over net assets acquired that would result in recording goodwill from the transaction. Any remaining excess of net assets acquired over consideration paid will be allocated pro-rata to reduce the carrying value of purchased assets.

The consolidated interim financial statements include the accounts of the above-named entities. All significant intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

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PlainsCapital also owns 100% of the outstanding common stock of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which are not included in the consolidated financial statements under the requirements of the Variable Interest Entities Subsections of the ASC, because the primary beneficiaries of the Trusts are not within the consolidated group.

The consolidated interim financial statements of PlainsCapital and subsidiaries are unaudited, but in the opinion of management, contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results of the interim periods presented. The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q adopted by the SEC. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 26, 2010. Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses is particularly subject to change.

Common Stock

On August 27, 2009, PlainsCapital shareholders authorized a change to the name of our existing class of common stock to “Original Common Stock” and the creation of a new class of common stock with 150 million authorized shares. In addition, shareholders authorized a three-for-one split of PlainsCapital Original Common Stock and a change in the par value of the Original Common Stock from $10 per share to $0.001 per share. These changes became effective August 28, 2009 when PlainsCapital filed its Third Amended and Restated Certificate of Formation with the Texas Secretary of State. PlainsCapital has retrospectively adjusted previously reported share and per share amounts to reflect the stock split and the change in the par value of the Original Common Stock for all periods presented.

Comprehensive Income (Loss)

PlainsCapital’s comprehensive income (loss) consists of its net income and unrealized holding gains (losses) on its available for sale securities, investments held in trust for the Supplemental Executive Retirement Plan and derivative instruments designated as cash flow hedges.

The components of accumulated other comprehensive income (loss), net of taxes, at March 31, 2010 and December 31, 2009 are shown in the following table (in thousands):

 

     March 31,
2010
    December 31,
2009
 

Unrealized loss on securities available for sale

   $ (330   $ (721

Unrealized gain on securities held in trust for the Supplemental Executive Retirement Plan

     438        294   

Unrealized gain on customer-related cash flow hedges

     124        127   
                
   $ 232      $ (300
                

Subsequent Events

PlainsCapital has applied the provisions of the Subsequent Events Topic of the ASC to its consolidated interim financial statements for periods ended after June 15, 2009. The Subsequent Event Topic establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or available to be issued.

 

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1. Summary of Significant Accounting and Reporting Policies (continued)

 

Reclassification

Certain items in the 2009 financial statements have been reclassified to conform to the 2010 presentation.

2. Securities

The amortized cost and fair value of securities, excluding trading securities, as of March 31, 2010, and December 31, 2009 are summarized as follows (in thousands):

 

     Held to Maturity
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair Value

As of March 31, 2010

          

U. S. government agencies

          

Mortgage-backed securities

   $ 15,202    $ 834    $ (8   $ 16,028

Collateralized mortgage obligations

     48,695      440      (1,061     48,074

States and political subdivisions

     124,136      2,587      (1,116     125,607

Auction rate bonds

     89,394      —        (4,290     85,104
                            

Totals

   $ 277,427    $ 3,861    $ (6,475   $ 274,813
                            

As of December 31, 2009

          

U. S. government agencies

          

Mortgage-backed securities

   $ 16,963    $ 831    $ (8   $ 17,786

Collateralized mortgage obligations

     50,533      764      (1,042     50,255

States and political subdivisions

     120,818      2,626      (948     122,496

Auction rate bonds

     105,699      1,735      (3,084     104,350
                            

Totals

   $ 294,013    $ 5,956    $ (5,082   $ 294,887
                            
     Available for Sale
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair Value

As of March 31, 2010

          

U. S. government agencies

          

Mortgage-backed securities

   $ 14,270    $ 403    $ (220   $ 14,453

Collateralized mortgage obligations

     266,925      2,273      (2,972     266,226

States and political subdivisions

     9,977      172      —          10,149

Auction rate bonds

     22,887      —        (164     22,723
                            

Totals

   $ 314,059    $ 2,848    $ (3,356   $ 313,551
                            

As of December 31, 2009

          

U. S. government agencies

          

Mortgage-backed securities

   $ 27,696    $ 587    $ (269   $ 28,014

Collateralized mortgage obligations

     146,765      1,679      (3,083     145,361

States and political subdivisions

     9,568      44      —          9,612

Auction rate bonds

     44,622      66      (134     44,554
                            

Totals

   $ 228,651    $ 2,376    $ (3,486   $ 227,541
                            

 

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2. Securities (continued)

Information regarding securities that were in an unrealized loss position as of March 31, 2010, is shown in the following tables (dollars in thousands):

 

     As of March 31, 2010
     Number of
Securities
   Fair Value    Unrealized
Losses

Held to maturity

        

U. S. government agencies

        

Mortgage-backed securities

        

Unrealized loss for less than twelve months

   —      $ —      $ —  

Unrealized loss for more than twelve months

   1      495      8
                  
   1      495      8

Collateralized mortgage obligations

        

Unrealized loss for less than twelve months

   7      35,024      1,061

Unrealized loss for more than twelve months

   —        —        —  
                  
   7      35,024      1,061

States and political subdivisions

        

Unrealized loss for less than twelve months

   45      24,090      402

Unrealized loss for more than twelve months

   27      11,923      714
                  
   72      36,013      1,116

Auction rate bonds

        

Unrealized loss for less than twelve months

   2      25,813      189

Unrealized loss for more than twelve months

   3      59,291      4,101
                  
   5      85,104      4,290

Total held to maturity

        

Unrealized loss for less than twelve months

   54      84,927      1,652

Unrealized loss for more than twelve months

   31      71,709      4,823
                  
   85    $ 156,636    $ 6,475
                  

Available for sale

        

U. S. government agencies

        

Mortgage-backed securities

        

Unrealized loss for less than twelve months

   —      $ —      $ —  

Unrealized loss for more than twelve months

   1      4,970      220
                  
   1      4,970      220

Collateralized mortgage obligations

        

Unrealized loss for less than twelve months

   12      137,232      2,972

Unrealized loss for more than twelve months

   —        —        —  
                  
   12      137,232      2,972

Auction rate bonds

        

Unrealized loss for less than twelve months

   —        —        —  

Unrealized loss for more than twelve months

   1      22,723      164
                  
   1      22,723      164

Total available for sale

        

Unrealized loss for less than twelve months

   12      137,232      2,972

Unrealized loss for more than twelve months

   2      27,693      384
                  
   14    $ 164,925    $ 3,356
                  

 

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2. Securities (continued)

Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Bank expects to receive full value for the securities. As of March 31, 2010, management does not intend to sell any of the securities classified as available for sale in the previous table and it believes that it is more likely than not that PlainsCapital will not have to sell any such securities before a recovery of cost. As of March 31, 2010, management believes the impairments detailed in the table are temporary and relate primarily to changes in interest rates. Accordingly, no other-than-temporary impairment loss has been recognized in PlainsCapital’s consolidated statements of income.

The amortized cost and fair value of securities, excluding trading securities, as of March 31, 2010, are shown by contractual maturity below (in thousands).

 

     Securities Held to Maturity    Securities Available for Sale
     Amortized
Cost
   Fair Value    Amortized
Cost
   Fair Value

Due in one year or less

   $ 1,784    $ 1,816    $ —      $ —  

Due after one year through five years

     3,005      3,096      —        —  

Due after five years through ten years

     15,885      16,193      —        —  

Due after ten years

     192,856      189,606      32,864      32,872
                           
     213,530      210,711      32,864      32,872

Mortgage-backed securities

     15,202      16,028      14,270      14,453

Collateralized mortgage obligations

     48,695      48,074      266,925      266,226
                           
   $ 277,427    $ 274,813    $ 314,059    $ 313,551
                           

For the three months ended March 31, 2010, the Bank received proceeds from the sale of available for sale securities of $54.3 million and realized gross gains of $1.6 million. The Bank determines the cost of securities sold by specific identification. For the three months ended March 31, 2009, the Bank received proceeds from the sale of available for sale securities of $21.3 million and recognized gross gains of $0.3 million.

FSC realized net gains from its trading operations of $0.5 million and $0.4 million for the three months ended March 31, 2010 and 2009, respectively.

During the first quarter of 2010, auction rate bonds with a par value of approximately $13.4 million and an unaccreted discount of approximately $1.2 million were called by the issuer. In order to address a change in the interpretation of the regulatory requirements regarding the maximum level of investments in certain securities, the Bank agreed to reimburse the issuer approximately $1.0 million for costs the issuer incurred related to the call. As a result of the accelerated discount accretion and the reimbursement to the issuer, the Bank realized a gain on the call transaction of approximately $0.2 million. In addition, the Bank tendered $24.0 million par value of available for sale auction rate bonds of a second issuer, receiving $21.6 million of gross proceeds. No gain or loss resulted from the transaction.

Also in the first quarter of 2010, auction rate bonds with a par value of $4.5 million and an unaccreted discount of approximately $0.4 million were called at par by the issuer. Since First Southwest provides related financing to the issuer, the Bank began accreting the discount over the expected term of financing in the first quarter of 2010.

In the aggregate, the par value of the Bank’s holdings of auction rate bonds decreased by $41.9 million from December 31, 2009 to March 31, 2010.

Securities with a carrying amount of approximately $355.6 million and $365.2 million (fair value of approximately $355.5 million and $366.5 million) at March 31, 2010 and December 31, 2009, respectively, were pledged to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. In addition, the Bank had secured a letter of credit from the Federal Home Loan Bank (“FHLB”) in the amount of $149.0 million at both March 31, 2010 and December 31, 2009, in lieu of pledging securities to secure certain public deposits.

 

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3. Loans and Allowance for Loan Losses

Loans summarized by category as of March 31, 2010 and December 31, 2009, are as follows (in thousands):

 

     March 31,
2010
    December 31,
2009
 

Commercial and industrial

   $ 1,197,949      $ 1,264,735   

Lease financing

     67,196        78,088   

Construction and land development

     397,602        402,876   

Real estate

     1,114,641        1,125,134   

Securities (primarily margin loans)

     187,472        152,145   

Consumer

     46,423        48,791   
                
     3,011,283        3,071,769   

Allowance for loan losses

     (49,971     (52,092
                
   $ 2,961,312      $ 3,019,677   
                

Impaired (non-accrual) loans totaled approximately $80.1 million and $69.0 million at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010, an allowance for loan loss of approximately $12.1 million was associated with $71.2 million of impaired loans. At December 31, 2009, an allowance for loan loss of approximately $9.2 million was associated with $63.7 million of impaired loans. The average aggregate balance of impaired loans for the three months ended March 31, 2010 and 2009 was approximately $79.4 million and $50.2 million, respectively. Interest income recorded on impaired loans for the three months ended March 31, 2010 and 2009 was nominal.

At March 31, 2010 and December 31, 2009, the Bank had loans of approximately $0.1 million and $0.1 million, respectively that were more than 90 days past due, but upon which the Bank continued to accrue interest.

Net investment in lease financing at March 31, 2010 and December 31, 2009 is shown in the following table (in thousands).

 

     March 31,
2010
    December 31,
2009
 

Future minimum lease payments

   $ 71,670      $ 83,390   

Unguaranteed residual value

     268        580   

Guaranteed residual value

     2,189        2,310   

Initial direct costs, net of amortization

     285        348   

Unearned income

     (7,216     (8,540
                
   $ 67,196      $ 78,088   
                

 

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Table of Contents

3. Loans and Allowance for Loan Losses (continued)

Changes in the allowance for loan losses for the three months ended March 31, 2010 and 2009 were as follows (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Balance at beginning of period

   $ 52,092      $ 40,672   

Provision charged to operations

     22,955        14,013   

Loans charged-off

     (25,347     (25,773

Recoveries on charged-off loans

     271        211   
                

Balance at end of period

   $ 49,971      $ 29,123   
                

4. Deposits

Deposits at March 31, 2010 and December 31, 2009 are summarized as follows (in thousands):

 

     March 31,
2010
   December 31,
2009

Noninterest-bearing demand

   $ 236,172    $ 223,551

Interest-bearing:

     

NOW accounts

     54,291      56,697

Money market

     1,648,458      1,638,763

Demand

     60,001      46,156

Savings

     139,775      135,962

In foreign branches

     160,569      166,746

Time - $100,000 and over

     693,238      684,939

Time - brokered

     122,169      106,790

Time - other

     219,827      218,435
             
   $ 3,334,500    $ 3,278,039
             

 

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5. Short-Term Borrowings

Short-term borrowings at March 31, 2010 and December 31, 2009 were as follows (in thousands):

 

     March 31,
2010
   December 31,
2009

Federal funds purchased

   $ 145,050    $ 150,075

Securities sold under agreements to repurchase

     69,526      59,927

Federal Home Loan Bank notes

     350,000      275,000

Treasury tax and loan note option account

     3,035      3,076

Short-term bank loans

     43,400      —  
             
     $611,011      $488,078
             

Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand or on some other short-term basis. The Bank and FSC execute transactions to sell securities under agreements to repurchase with both their customers and broker-dealers. Securities involved in these transactions are held by the Bank, FSC or the dealer. Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following table (dollar amounts in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Average balance during the period

   $ 237,276      $ 244,731   

Average interest rate during the period

     0.22     0.36
     March 31,
2010
    December 31,
2009
 

Average interest rate at end of period

     0.24     0.21

Securities underlying the agreements at end of period

    

Carrying value

   $ 71,478      $ 65,838   

Estimated fair value

   $ 71,337      $ 67,075   

FHLB notes mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB notes is shown in the following table (dollar amounts in thousands).

 

     Three Months Ended March 31,  
     2010     2009  

Average balance during the period

   $ 331,111      $ 7,778   

Average interest rate during the period

     0.70     0.55
     March 31,
2010
    December 31,
2009
 

Average interest rate at end of period

     0.68     0.75

FSC uses short-term bank loans periodically to finance securities owned, customers’ margin accounts, and other short-term operating activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at March 31, 2010 was 1.32%. No short-term bank loans were outstanding at December 31, 2009.

 

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6. Notes Payable

Notes payable at March 31, 2010 and December 31, 2009 consisted of the following (in thousands):

 

     March 31,
2010
   December 31,
2009

Federal Home Loan Bank Dallas advances

   $ 1,505    $ 1,534

Revolving credit line with JPMorgan Chase not to exceed $20 million. Facility matures July 31, 2010, with interest payable quarterly

     17,200      17,000

Revolving credit line with JPMorgan Chase not to exceed $10 million. Advances under the facility are related to PlainsCapital Equity, LLC. Facility matures July 31, 2010, with interest payable quarterly

     7,650      7,650

Term note with JPMorgan Chase, due July 31, 2010, with interest payable semi-annually

     3,000      3,500

Term note with JPMorgan Chase, due October 27, 2015, with interest payable quarterly

     500      500

Subordinated note with JPMorgan Chase, not to exceed $20 million. Facility matures October 27, 2015 with interest payable quarterly

     20,000      20,000

First Southwest nonrecourse notes, due January 25, 2035 with interest payable quarterly

     17,752      18,366
             
   $ 67,607    $ 68,550
             

In the second quarter of 2010, PlainsCapital secured an amendment of the covenant regarding the Bank’s non-performing asset ratio that is included in the agreements underlying the JPMorgan Chase revolving credit lines. The amendment increased the acceptable non-performing asset ratio for the Bank to 3.50% from 2.50%, effective for compliance as of March 31, 2010. The amendment will remain in effect for the remainder of the term of the revolving credit agreements. As a result of the amendment, PlainsCapital was in compliance with all the covenants included in the revolving credit line agreements at March 31, 2010.

7. Income Taxes

PlainsCapital’s effective tax rate was 24.9% and 35.9% for the three months ended March 31, 2010 and 2009, respectively. The reduction in the effective tax rate relates to higher levels of tax-exempt income for the three months ended March 31, 2010, compared to the corresponding period in 2009.

PlainsCapital files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. PlainsCapital is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2007.

 

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Table of Contents

8. Commitments and Contingencies

The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $7.4 million and $8.5 million at March 31, 2010 and December 31, 2009, respectively.

Legal Matters

In November 2006, FSC received subpoenas from the SEC and the U.S. Department of Justice (the “DOJ”) in connection with an investigation of possible antitrust and securities law violations, including bid-rigging, in the procurement of guaranteed investment contracts and other investment products for the reinvestment of bond proceeds by municipalities. The investigation is industry-wide and includes approximately 30 or more firms, including some of the largest U.S. investment firms. To the extent that its participation is requested, FSC will continue to cooperate with these investigations.

As a result of these SEC and DOJ investigations into industry-wide practices, FSC was named as a co-defendant in a series of civil lawsuits filed during 2008 in several different federal courts by various state and local governmental entities suing on behalf of themselves and a purported class of similarly situated governmental entities. A similar set of lawsuits were filed in California state courts by various local governmental entities suing only on behalf of themselves and not on behalf of a putative class. The California state court suits were removed to federal court, and all of the cases have been transferred to federal court in New York. On April 29, 2009, the federal court judge dismissed all claims asserted against FSC and nearly all other defendants from the consolidated putative class action case and granted the lead class plaintiffs until June 18, 2009 to file an amended complaint citing specific instances of alleged anti-competitive behavior by specific individuals at specific defendants.

On June 18, 2009, the lead class plaintiffs filed a second consolidated amended class action complaint. This amended complaint did not name FSC as a defendant and did not make any specific allegations of misconduct against FSC or any of its employees. As a result, FSC is no longer a party to the putative class action case. However, FSC is identified in this consolidated amended class action complaint as an alleged co-conspirator with the named defendants. The remaining defendants filed motions to dismiss the second consolidated amended class action complaint, but on March 25, 2010, the Court denied those motions, thus allowing the consolidated class action to proceed against the remaining defendants.

With respect to putative class actions filed in federal court by California plaintiffs that opted not to join in the consolidated class action case, the federal court judge granted those plaintiffs until September 15, 2009 to file an amended complaint. In their amended complaint, these California putative class plaintiffs also did not name FSC as a defendant and did not make any specific allegations of misconduct against FSC or any of its employees. As a result, FSC is no longer a party to these California putative class actions. However, FSC is identified in this complaint as an alleged co-conspirator with the named defendants. The remaining defendants filed motions to dismiss the amended complaint in the California class action. On April 26, 2010, the Court granted those motions in part and denied them in part, allowing certain claims to proceed against the remaining defendants.

With respect to the removed California suits that do not seek class action status, the federal court judge gave the plaintiffs until September 15, 2009 to file an amended complaint. These California plaintiffs, all of which are represented by the Cotchett, Pitre, and McCarthy law firm, filed amended complaints continuing to identify FSC as a named defendant. The few allegations against FSC are very limited in scope.

On November 12, 2009, Sacramento Municipal Utility District, City of Riverside, The Redevelopment Agency of the City of Riverside, and The Public Financing Authority of the City of Riverside filed new lawsuits on behalf of themselves, but not on behalf of a putative class, in federal court. Additionally, on December 10, 2009, The Redevelopment Agency of the City of Stockton and The Public Financing Authority of the City of Stockton, County of Tulare, Los Angeles World Airports and Sacramento Suburban Water District filed new lawsuits on behalf of themselves, but not on behalf of a putative class, in federal court. Similar to the other five cases previously brought by California public entities that do not seek to certify a class, FSC is named as a defendant, the plaintiffs are represented by the Cotchett, Pitre, and McCarthy law firm, and the few allegations against FSC are very limited in scope. The eleven individual California actions are referred to herein as the “Cotchett Complaints.”

On February 9, 2010, the defendants in the Cotchett Complaints, except Bank of America, The Goldman Sachs Group, Inc., Goldman Sachs Mitsui Marine Derivative Products, L.P. and Goldman Sachs Bank USA, filed a Joint Motion to Dismiss the Cotchett Complaints along with a Memorandum in Support of Defendants’ Joint Motion to Dismiss the Cotchett Complaints. Additionally, FSC filed a Supplemental Memorandum in Support of the Motion to Dismiss the Cotchett Complaints setting forth specific reasons why the Cotchett Complaints should be dismissed as to FSC.

 

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Table of Contents

8. Commitments and Contingencies (continued)

 

On March 26, 2010, the California plaintiffs filed a response to the motion to dismiss. On April 16, 2010, the moving defendants filed a joint reply in support of the motion to dismiss, and FSC filed a Supplemental Reply Memorandum in Support of its Motion to Dismiss. On April 28, 2010, the court denied the motion to dismiss as to FSC and nearly every other defendant named in the Cotchett Complaints. The Court is expected to hold a case management conference in the near future to discuss scheduling and discovery issues.

As part of an industry-wide inquiry by FINRA into sales practices related to auction rate bonds, FSC executed a term sheet in 2008 in which it agreed to pay a fine and to buy back $41.6 million of auction rate bonds at par from a defined class of customers. The fine was paid in 2008, and the auction rate bonds were purchased from these customers in February 2009. FSC recorded a liability of $3.8 million as of December 31, 2008 representing the loss relating to this settlement. In addition, for a 60-day period commencing June 16, 2009, FSC agreed to use its best efforts to provide liquidity to certain other customers not otherwise part of the defined class referenced above. This 60-day period expired on August 14, 2009, and on September 11, 2009, FSC certified to FINRA the results of its best efforts obligation.

PlainsCapital and subsidiaries are defendants in various other legal matters arising in the normal course of business. Management believes that the ultimate liability, if any, arising from these matters will not materially affect the consolidated financial statements.

8. Commitments and Contingencies (continued)

Other Contingencies

PlainsCapital and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under noncancelable operating leases with remaining terms, including renewal options, of 1 to 19 years and under capital leases with remaining terms of 12 to 19 years. Future minimum payments under these leases have not changed significantly from the amounts reported at December 31, 2009 in the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 26, 2010. Rental expense under the operating leases was approximately $5.2 million and $4.1 million for the three months ended March 31, 2010 and 2009, respectively.

9. Financial Instruments with Off-Balance Sheet Risk

The Bank and PrimeLending are parties to financial instruments with off-balance sheet risk that are used in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank and PrimeLending have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

The Bank and PrimeLending had in the aggregate outstanding unused commitments to extend credit of $849.1 million at March 31, 2010. The Bank had outstanding standby letters of credit of $48.6 million at March 31, 2010.

The Bank and PrimeLending use the same credit policies in making commitments and standby letters of credit as they do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

 

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Table of Contents

9. Financial Instruments with Off-Balance Sheet Risk (continued)

 

In the normal course of business, FSC executes, settles and finances various securities transactions that may expose FSC to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of First Southwest, clearing agreements between First Southwest and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

10. Stock-Based Compensation

PlainsCapital and subsidiaries have four stock option plans (the “Stock Option Plans”) that provide for the granting of stock options to officers and key employees. In addition, PlainsCapital has granted restricted stock to a group of officers and key employees.

On March 18, 2010, PlainsCapital’s board of directors adopted the PlainsCapital Corporation 2010 Long-Term Incentive Plan (the “2010 Plan”). The 2010 Plan allows for the granting of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of PlainsCapital, its subsidiaries and outside directors of PlainsCapital. In the aggregate, 1.0 million shares of Original Common Stock may be delivered pursuant to awards granted under the 2010 Plan.

Following the adoption of the 2010 Plan, 8,281 shares of restricted stock were granted to outside directors of PlainsCapital as a component of their annual directors’ fees. The restricted stock grants vest in one year.

Compensation cost related to the Stock Option Plans and the 2010 Plan was approximately $0.3 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively.

At March 31, 2010, unrecognized cost related to the Stock Option Plans was approximately $0.1 million. At March 31, 2010, PlainsCapital had 460,862 shares of unvested restricted stock. Unrecognized cost related to the restricted stock was $5.0 million at March 31, 2010. Substantially all of the unrecognized cost will be recognized as compensation cost ratably over the next six years. Except for those restricted shares granted to outside directors, the vesting of the restricted stock will automatically accelerate in full upon a change in control or the date upon which our common stock is listed and traded on an exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the restricted stock vests on an accelerated basis, the entire unrecognized cost related to the restricted stock would be recognized in noninterest expense immediately.

At March 31, 2010, a total of 81,258 shares were available for grant under the Stock Option Plans and 991,719 shares were available for grant under the 2010 Plan. PlainsCapital typically issues new shares upon exercise of option grants.

Information regarding the stock option plans for the three months ended March 31, 2010 is as follows:

 

     2010
     Shares     Weighted
Average
Exercise
Price

Outstanding, January 1

   943,515      $ 8.50

Exercised

   (87,606     3.06

Cancellations and expirations

   (75,477     3.66
        

Outstanding, March 31

   780,432        9.58
        

Following adoption of the 2010 Plan, certain PrimeLending employees were granted, effective April 1, 2010, an aggregate of 50,000 shares of restricted stock. The grants to the PrimeLending employees vest in five years. In addition, certain employees of PlainsCapital and its subsidiaries were granted, effective April 1, 2010, an aggregate of 278,057 restricted stock units. The restricted stock units vest in five years.

 

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11. Regulatory Matters

The Bank and PlainsCapital are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require the companies to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). A comparison of the Bank’s and PlainsCapital’s actual capital amounts and ratios to the minimum requirements is as follows (dollar amounts in thousands):

 

     At March 31, 2010  
     Required     Actual  
     Amount    Ratio     Amount    Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 184,348    4   $ 458,945    9.96

Tier 1 capital (to risk-weighted assets)

     146,909    4     458,945    12.50

Total capital (to risk-weighted assets)

     293,819    8     504,908    13.75

PlainsCapital Corporation:

          

Tier 1 capital (to average assets)

   $ 185,231    4   $ 437,230    9.44

Tier 1 capital (to risk-weighted assets)

     147,532    4     437,230    11.85

Total capital (to risk-weighted assets)

     295,065    8     503,390    13.65
     At December 31, 2009  
     Required     Actual  
     Amount    Ratio     Amount    Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 184,958    4   $ 461,109    9.97

Tier 1 capital (to risk-weighted assets)

     144,012    4     461,109    12.81

Total capital (to risk-weighted assets)

     288,024    8     506,148    14.06

PlainsCapital Corporation:

          

Tier 1 capital (to average assets)

   $ 185,146    4   $ 437,393    9.45

Tier 1 capital (to risk-weighted assets)

     144,589    4     437,393    12.10

Total capital (to risk-weighted assets)

     289,179    8     502,617    13.90

 

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11. Regulatory Matters (continued)

To be considered adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 capital to total average assets and Tier 1 capital to risk-weighted assets ratios of 4%, and a total capital to risk-weighted assets ratio of 8%. Based on the actual capital amounts and ratios shown in the previous table, the Bank’s ratios place it in the well capitalized (as defined) capital category under the regulatory framework for prompt corrective action. The minimum required capital amounts and ratios for the well capitalized category are summarized as follows (dollar amounts in thousands):

 

     At March 31, 2010  
     Required     Actual  
     Amount    Ratio     Amount    Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 230,436    5   $ 458,945    9.96

Tier 1 capital (to risk-weighted assets)

     220,364    6     458,945    12.50

Total capital (to risk-weighted assets)

     367,273    10     504,908    13.75
     At December 31, 2009  
     Required     Actual  
     Amount    Ratio     Amount    Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 231,197    5   $ 461,109    9.97

Tier 1 capital (to risk-weighted assets)

     216,018    6     461,109    12.81

Total capital (to risk-weighted assets)

     360,030    10     506,148    14.06

Pursuant to the net capital requirements of Rule 15c3-1 of the Exchange Act, FSC has elected to determine its net capital requirements using the alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3. At March 31, 2010, FSC had net capital of $44.8 million; the minimum net capital requirement was $2.9 million; net capital maintained by FSC at March 31, 2010 was 31% of aggregate debits; and net capital in excess of the minimum requirement at March 31, 2010 was $41.9 million.

As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the United States Department of Housing and Urban Development (“HUD”). PrimeLending determines its compliance with the minimum net worth requirements on an annual basis. As of December 31, 2009, PrimeLending was required to have net worth of $1.0 million. PrimeLending’s adjusted net worth as defined by the Consolidated Audit Guide for Audits of HUD Programs was $35.3 million as of December 31, 2009, resulting in adjusted net worth above the required amount of $34.3 million.

12. Shareholders’ Equity

The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At March 31, 2010, approximately $31.1 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve.

PlainsCapital must receive the consent of the U.S. Treasury Department to increase the per share amount of dividends paid on our common stock until December 19, 2011, unless we redeem the preferred stock issued pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program.

 

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13. Broker-Dealer and Clearing Organization Receivables and Payables

Broker/dealer and clearing organization receivables and payables at March 31, 2010 and December 31, 2009 consisted of the following (in thousands):

 

     March 31,
2010
   December 31,
2009

Receivables

     

Securities borrowed

   $ 117,317    $ 73,139

Securities failed to deliver

     10,415      6,110

Clearing organizations

     1,983      3,275

Due from dealers

     175      190
             
   $ 129,890    $ 82,714
             

Payables

     

Securities loaned

   $ 121,787    $ 86,207

Correspondents

     50,738      17,370

Securities failed to receive

     8,916      4,433

Clearing organizations

     27,687      262
             
   $ 209,128    $ 108,272
             

14. Fair Value Measurements

Fair Value Measurements and Disclosures

PlainsCapital determines fair values in compliance with the Fair Value Measurements and Disclosures Topic of the ASC (“Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

The Fair Value Topic creates a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.

 

   

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that PlainsCapital can access at the measurement date.

 

   

Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates and credit risks), and inputs that are derived from or corroborated by market data, among others.

 

   

Level 3 Inputs: Unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques, among others.

 

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14. Fair Value Measurements (continued)

Fair Value Option

PlainsCapital has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and certain time deposits at fair value under the provisions of the Fair Value Option Subsections of the ASC (“Fair Value Option”). PlainsCapital elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. PlainsCapital determines the fair value of the financial instruments accounted for under the provisions of the Fair Value Option in compliance with the provisions of the Fair Value Topic discussed above.

At March 31, 2010, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $486.8 million, while the unpaid principal balance of those loans was $474.7 million. At December 31, 2009, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $430.8 million, while the unpaid principal balance of those loans was $419.5 million. The fair value excludes interest, which is reported as interest income on loans in the income statement.

PlainsCapital holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs. Those inputs include quotes from mortgage loan investors and derivatives dealers, data from an independent pricing service and rates paid in the brokered certificate of deposit market.

At March 31, 2010, the Bank held two collateralized mortgage obligations and two bonds issued by political subdivisions of the State of Texas that the Bank was unable to price due to the terms and conditions of the instruments. As a result, the Bank determined that fair value approximated book value using Level 3 inputs. In addition, the Bank holds auction rate bonds purchased as a result of the First Southwest acquisition. The estimated fair value of the auction rate bonds was determined by a third-party valuation specialist using Level 3 inputs, primarily due to the lack of observable market data. Inputs for the valuation were developed using terms of the auction rate bonds, market interest rates, asset appropriate credit transition matrices and recovery rates and assumptions regarding the term to maturity of the auction rate bonds. The following table reconciles the beginning and ending balances of assets measured at fair value using Level 3 inputs (in thousands).

 

     Collateralized
Mortgage
Obligations
   States and
Political
Subdivisions
   Auction
Rate Bonds
    Total  

Balance, January 1, 2010

   $ —      $ 3,839    $ 44,554      $ 48,393   

Unrealized losses in other comprehensive income, net

     —        —        (96     (96

Purchases, issuances and settlements, net

     20,166      —        (21,735     (1,569
                              

Balance, March 31, 2010

   $ 20,166    $ 3,839    $ 22,723      $ 46,728   
                              

In the table above, settlements include premium amortization and discount accretion.

 

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14. Fair Value Measurements (continued)

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis, including changes in fair value for those instruments that are reported at fair value under an election under the Fair Value Option (in thousands).

 

     At March 31, 2010
     Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
   Total Fair
Value

Loans held for sale

   $ —      $ 486,790    $ —      $ 486,790

Securities available for sale

     —        266,823      46,728      313,551

Trading securities

     —        72,944      —        72,944

Derivative assets

     —        4,297      —        4,297

Time deposits

     —        924      —        924

Trading liabilities

     —        1,521      —        1,521

Derivative liabilities

     —        485      —        485

 

     Changes in Fair Value for Assets and Liabilities Reported  at Fair Value under Fair Value Option  
     Three Months Ended March 31, 2010     Three Months Ended March 31, 2009  
     Net Gains from
Sale of Loans
   Other
Noninterest
Income
    Total
Changes in
Fair Value
    Net Gains from
Sale of Loans
   Other
Noninterest
Income
    Total
Changes in
Fair Value
 

Loans held for sale

   $ 829    $ —        $ 829      $ 632    $ —        $ 632   

Time deposits

     —        (1     (1     —        (57     (57

PlainsCapital also determines the fair value of assets and liabilities on a non-recurring basis. For example, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.

Impaired (Non-accrual) Loans – PlainsCapital reports non-accrual loans at fair value through allocations of the allowance for loan losses. PlainsCapital determines fair value using Level 2 inputs consisting of observable loss experience for similar loans. At March 31, 2010, loans with a carrying amount of $71.2 million had been reduced by allocations of the allowance for loan losses of $12.1 million, resulting in a reported fair value of $59.1 million.

Other Real Estate Owned – PlainsCapital reports other real estate owned at fair value through use of valuation allowances that are charged against the allowance for loan losses when property is initially transferred to other real estate. Subsequent to the initial transfer to other real estate, valuation allowances are charged against earnings. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At March 31, 2010, the estimated fair value of other real estate owned was $19.1 million.

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. The methods for determining estimated fair value for financial assets and liabilities is described in detail in Note 22 to the consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 26, 2010.

 

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14. Fair Value Measurements (continued)

The estimated fair values of PlainsCapital’s financial instruments are shown below (in thousands):

 

     At March 31, 2010    At December 31, 2009  
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
    Estimated
Fair Value
 

Financial assets

          

Cash and short-term investments

   $ 220,204    $ 220,204    $ 160,318      $ 160,318   

Loans held for sale

     488,206      488,206      432,202        432,202   

Securities

     663,922      661,308      545,737        546,611   

Loans, net

     2,961,312      2,995,903      3,019,677        3,053,759   

Broker-dealer and clearing organization receivables

     129,890      129,890      82,714        82,714   

Fee award receivable

     20,184      20,184      20,504        20,504   

Cash surrender value of life insurance policies

     21,629      21,629      21,379        21,379   

Interest rate swaps and interest rate lock commitments (“IRLCs”)

     4,297      4,297      1,851        1,851   

Accrued interest receivable

     15,032      15,032      15,876        15,876   

Financial liabilities

          

Deposits

     3,334,500      3,341,167      3,278,039        3,285,796   

Broker-dealer and clearing organization payables

     209,128      209,128      108,272        108,272   

Other trading liabilities

     1,521      1,521      3,019        3,019   

Short-term borrowings

     611,011      611,011      488,078        488,078   

Debt

     134,619      134,619      135,562        135,562   

Forward purchase commitments

     485      485      (271     (271

Accrued interest payable

     5,940      5,940      5,661        5,661   

15. Derivative Financial Instruments

The Bank and PrimeLending use various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin. PrimeLending has interest rate risk relative to its inventory of mortgage loans held for sale and IRLCs. PrimeLending is exposed to such rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold.

Cash Flow Hedges

The Bank entered into interest rate swap agreements to manage interest rate risk associated with certain customer contracts. The swaps were originally designated as cash flow hedges. The swaps were highly effective in offsetting future cash flow volatility caused by changes in interest rates. The Bank has recorded the fair value of the swaps in other assets and unrealized gains (losses) associated with the swaps in other comprehensive income.

Non-Hedging Derivative Instruments and the Fair Value Option

As discussed in Note 14, PrimeLending elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides PrimeLending the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions. PrimeLending provides IRLCs to its customers and executes forward purchase commitments to sell mortgage loans. The fair values of both IRLCs and purchase commitments are recorded in other assets or other liabilities, as appropriate. Changes in the fair values of these derivative instruments produced net gains of approximately $1.6 million and $1.0 million for the three months ended March 31, 2010 and 2009, respectively. The net gains were recorded as a component of gain on sale of loans.

 

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15. Derivative Financial Instruments (continued)

Derivative positions at March 31, 2010 and December 31, 2009 are presented in the following table (in thousands):

 

     At March 31, 2010    At December 31, 2009  
     Notional
Amount
   Estimated
Fair  Value
   Notional
Amount
   Estimated
Fair Value
 

Non-hedging derivative instruments

           

IRLCs

   $ 532,975    $ 1,800    $ 256,285    $ (511

Interest rate swaps

     9,469      85      9,469      (1

Forward purchase commitments

     394,145      1,927      200,467      2,634   

The Bank recorded unrealized gains (losses), net of reclassifications adjustments, on the swaps designated as cash flow hedges in other comprehensive income as shown in the following table (in thousands).

 

     Three Months Ended March 31, 2010     Three Months Ended March 31, 2009  
     Before-Tax
Amount
    Tax Benefit
(Expense)
   After-Tax
Amount
    Before-Tax
Amount
    Tax Benefit
(Expense)
   After-Tax
Amount
 

Change in market value

   $ —        $ —      $ —        $ —        $ —      $ —     

Reclassification adjustments

     (5     2      (3     (5     2      (3
                                              

Other comprehensive income (loss)

   $ (5   $ 2    $ (3   $ (5   $ 2    $ (3
                                              

16. Segment and Related Information

PlainsCapital has three reportable segments that are organized primarily by the core products offered to the segments’ respective customers. The banking segment includes the operations of the Bank and PlainsCapital Leasing, LLC. The operations of PrimeLending comprise the mortgage origination segment. The financial advisory segment is composed of Hester Capital and First Southwest.

During the third quarter of 2009, PlainsCapital changed its reporting of segment results. Previously, the operations of PlainsCapital and its remaining subsidiaries not discussed in the previous paragraph, (collectively, the “Holding Company”) were not allocated to the segments. Beginning in the third quarter, we adopted a new procedure for determining segment results. First, we eliminated intercompany transactions from the segments and certain noninterest expenses from the Bank. Second, we allocated the net expenses of the Holding Company among the three reporting segments based upon each segment’s relative net income. Finally, we reallocated the noninterest expenses of the Bank, removed above, among the three segments based upon the annual determination of senior managers regarding the allocation of management time and resources. Senior management believes this procedure assists with the allocation of corporate resources and decisions regarding capital investment.

Balance sheet amounts for the Holding Company are included in “All Other and Eliminations.” We have adjusted segment results for prior periods for comparison purposes to reflect the change described above.

 

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16. Segment and Related Information (continued)

The following tables present information about the revenues, profits and assets of PlainsCapital’s reportable segments (in thousands).

 

     Three Months Ended March 31, 2010
     Banking    Mortgage
Origination
    Financial
Advisory
    PlainsCapital
Consolidated

Interest income

   $ 48,955    $ 2,150      $ 1,203      $ 52,308

Interest expense

     7,103      2,893        (361     9,635
                             

Net interest income (expense)

     41,852      (743     1,564        42,673

Provision for loan losses

     22,955      —          —          22,955

Noninterest income

     9,049      45,564        20,819        75,432

Noninterest expense

     24,057      47,576        21,186        92,819
                             

Net income (loss) before taxes

     3,889      (2,755     1,197        2,331

Income tax provision (benefit)

     968      (686     298        580
                             

Consolidated net income (loss)

     2,921      (2,069     899        1,751

Less: net income attributable to noncontrolling interest

     —        —          65        65
                             

Net income (loss) attributable to PlainsCapital Corporation

   $ 2,921    $ (2,069   $ 834      $ 1,686
                             
     Three Months Ended March 31, 2009
     Banking    Mortgage
Origination
    Financial
Advisory
    PlainsCapital
Consolidated

Interest income

   $ 45,167    $ 733      $ 1,734      $ 47,634

Interest expense

     9,760      805        712        11,277
                             

Net interest income (expense)

     35,407      (72     1,022        36,357

Provision for loan losses

     14,013      —          —          14,013

Noninterest income

     4,054      47,420        19,092        70,566

Noninterest expense

     21,051      36,748        19,465        77,264
                             

Net income before taxes

     4,397      10,600        649        15,646

Income tax provision

     947      4,410        263        5,620
                             

Consolidated net income

     3,450      6,190        386        10,026

Less: net income attributable to noncontrolling interest

     —        —          23        23
                             

Net income attributable to PlainsCapital Corporation

   $ 3,450    $ 6,190      $ 363      $ 10,003
                             

 

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16. Segment and Related Information (continued)

 

     March 31, 2010
     Banking    Mortgage
Origination
   Financial
Advisory
   All Other and
Eliminations
    PlainsCapital
Consolidated

Cash and due from banks

   $ 204,729    $ 30,929    $ 5,254    $ (33,208   $ 207,704

Loans held for sale

     1,416      486,790      —        —          488,206

Securities

     590,978      —        72,944      —          663,922

Loans, net

     2,772,345      —        190,165      (1,198     2,961,312

Broker-dealer and clearing organization receivables

     —        —        129,890      —          129,890

Investment in subsidiaries

     698,504      —        —        (698,504     —  

Goodwill and other intangible assets, net

     7,869      23,706      19,378      —          50,953

Other assets

     203,704      21,134      78,254      29,776        332,868
                                   

Total assets

   $ 4,479,545    $ 562,559    $ 495,885    $ (703,134   $ 4,834,855
                                   

Deposits

   $ 3,298,739    $ —      $ 94,693    $ (58,932   $ 3,334,500

Broker-dealer and clearing organization payables

     —        —        209,128      —          209,128

Short-term borrowings

     562,821      —        48,190      —          611,011

Notes payable

     57,879      459,935      21,444      (471,651     67,607

Junior subordinated debentures

     —        —        —        67,012        67,012

Other liabilities

     43,917      37,736      45,652      (5,666     121,639

PlainsCapital Corporation shareholders’ equity

     516,189      64,888      76,778      (235,494     422,361

Noncontrolling interest

     —        —        —        1,597        1,597
                                   

Total liabilities and shareholders’ equity

   $ 4,479,545    $ 562,559    $ 495,885    $ (703,134   $ 4,834,855
                                   
     December 31, 2009
     Banking    Mortgage
Origination
   Financial
Advisory
   All Other and
Eliminations
    PlainsCapital
Consolidated

Cash and due from banks

   $ 139,579    $ 42,544    $ 11,017    $ (44,866   $ 148,274

Loans held for sale

     1,442      430,760      —        —          432,202

Securities

     521,554      —        24,183      —          545,737

Loans, net

     2,866,803      —        154,123      (1,249     3,019,677

Broker-dealer and clearing organization receivables

     —        —        82,714      —          82,714

Investment in subsidiaries

     655,830      —        —        (655,830     —  

Goodwill and other intangible assets, net

     7,871      23,706      19,919      —          51,496

Other assets

     198,927      14,626      45,254      31,813        290,620
                                   

Total assets

   $ 4,392,006    $ 511,636    $ 337,210    $ (670,132   $ 4,570,720
                                   

Deposits

   $ 3,274,900    $ —      $ 64,911    $ (61,772   $ 3,278,039

Broker-dealer and clearing organization payables

     —        —        108,272      —          108,272

Short-term borrowings

     488,078      —        —        —          488,078

Notes payable

     68,511      407,430      22,329      (429,720     68,550

Junior subordinated debentures

     —        —        —        67,012        67,012

Other liabilities

     42,297      38,529      66,276      (10,443     136,659

PlainsCapital Corporation shareholders’ equity

     518,220      65,677      75,422      (236,819     422,500

Noncontrolling interest

     —        —        —        1,610        1,610
                                   

Total liabilities and shareholders’ equity

   $ 4,392,006    $ 511,636    $ 337,210    $ (670,132   $ 4,570,720
                                   

 

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17. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share for the three months ended March 31, 2010 and 2009 (in thousands, except per share data).

 

     Three Months Ended March 31,
     2010     2009

Income applicable to PlainsCapital Corporation common shareholders

   $ 298      $ 8,444

Less: income (loss) applicable to particpating securities

     (40     402
              

Income applicable to PlainsCapital Corporation common shareholders for basic earnings per common share

   $ 338      $ 8,042
              

Weighted-average shares outstanding

     31,458,109        31,254,576

Less: participating securities included in weighted-average shares outstanding

     2,181,602        1,697,430
              

Weighted-average shares outstanding for basic earnings per common share

     29,276,507        29,557,146
              

Basic earnings per common share

   $ 0.01      $ 0.27
              

Income applicable to PlainsCapital Corporation common shareholders

   $ 298      $ 8,444
              

Weighted-average shares outstanding

     31,458,109        31,254,576

Dilutive effect of contingently issuable shares due to First Southwest acquisition

     1,548,666        1,188,201

Dilutive effect of stock options and non-vested stock awards

     297,136        278,628
              

Weighted-average shares outstanding for diluted earnings per common share

     33,303,911        32,721,405
              

Diluted earnings per common share

   $ 0.01      $ 0.26
              

PlainsCapital uses the two-class method prescribed by the Earnings per Share Topic of the ASC to compute earnings per common share. Participating securities include non-vested restricted stock and shares of PlainsCapital stock held in escrow pending the resolution of contingencies with respect to the First Southwest acquisition.

The weighted-average shares outstanding used to compute diluted earnings per common share do not include outstanding options of 57,000 and 98,663 for the three months ended March 31, 2010 and 2009, respectively. The exercise price of the excluded options exceeded the estimated average market price of PlainsCapital stock in the periods shown. Accordingly, the assumed exercise of the excluded options would have been antidilutive.

 

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18. Recently Issued Accounting Standards

Business Combinations

In December 2007, the FASB issued the Business Combinations Topic of the ASC. The Business Combinations Topic replaces previously issued guidance regarding business combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. Departing from the cost-allocation process of previous guidance, the Business Combinations Topic requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In particular, this provision would prohibit an acquirer of a financial institution from carrying over the acquired entity’s allowance for loan losses. In addition, contingent consideration is recognized and measured at fair value at the acquisition date, and acquisition related costs are expensed as incurred. The Business Combinations Topic also distinguishes between assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date and assets or liabilities arising from all other contingencies, requiring different treatment for each type of contingency. The Business Combinations Topic was effective for PlainsCapital on January 1, 2009. To the extent business combinations occur on or after the effective date, PlainsCapital’s accounting for those transactions will be significantly affected by the provisions of the Business Combinations Topic. The First Southwest acquisition closed prior to the effective date and is being accounted for in accordance with previously issued guidance regarding business combinations.

Fair Value Determination

In April 2009, the FASB issued guidance (“Fair Value Determination Guidance”) in the Fair Value Measurements and Disclosures Topic of the ASC regarding the determination of fair value in instances where market conditions result in either inactive markets for assets and liabilities or disorderly transactions within markets. The Fair Value Determination Guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. The Fair Value Determination Guidance requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence and expands certain disclosure requirements. The Fair Value Determination Guidance became effective for PlainsCapital in the quarter ended June 30, 2009, and its adoption did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows.

Other-Than Temporary Impairments

In April 2009, the FASB issued guidance in the Investments-Debt and Equity Securities Topic of the ASC regarding the recognition and presentation of Other-Than-Temporary Impairments (“OTTI Guidance”). The OTTI Guidance (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under the OTTI Guidance, declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The OTTI Guidance became effective for PlainsCapital in the quarter ended June 30, 2009, and its adoption did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows.

 

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18. Recently Issued Accounting Standards (continued)

Interim Disclosure about Fair Value of Financial Instruments

In April 2009, the FASB amended the Fair Value of Financial Instruments Subsection of the ASC to require an entity to provide disclosures about fair value of financial instruments in interim financial information (“Fair Value Disclosure Amendment”). The Fair Value Disclosure Amendment requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The Fair Value Disclosure Amendment became effective for PlainsCapital in the quarter ended June 30, 2009, and its adoption did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows. PlainsCapital has included the disclosures required by the Fair Value Disclosure Amendment in Note 14.

Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

In December 2009, the FASB amended the Consolidations Topic of the ASC to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated (“Variable Interest Entities Amendment”). The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. Companies are required to disclose the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement, as well as its effect on the entity’s financial statements. The Variable Interest Entities Amendment became effective for PlainsCapital on January 1, 2010, and its adoption did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows.

Improving Disclosures about Fair Value Measurements

In January 2010, the FASB amended the Fair Value Measurements and Disclosures Topic of the ASC to expand required disclosures related to fair value measurements (“Improved Fair Value Disclosure Amendment”). The Improved Fair Value Disclosure Amendment requires disclosures regarding significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for the transfers, reasons for transfers in or out of Level 3 of the fair value hierarchy, as well as separate disclosure of significant transfers, and policies for determining when transfers between levels of the fair value hierarchy are recognized. In addition, the Improved Fair Value Disclosure Amendment requires gross presentation of purchases, sales, issuances and settlements of financial instruments that are measured on a recurring basis using Level 3 inputs.

The Improved Fair Value Disclosure Amendment also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities, rather than major category, and that valuation techniques and inputs used to measure fair value on a recurring or nonrecurring basis should be provided for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The Improved Fair Value Disclosure Amendment became effective for PlainsCapital on January 1, 2010, except for the provisions relating to gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy, which become effective January 1, 2011. The adoption of the Improved Fair Value Disclosure Amendment did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows. PlainsCapital has included the disclosures required by the Improved Fair Value Disclosure Amendment in Note 14.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), unless the context otherwise indicates, the references to “we,” “us,” “our,” “our company” or “PlainsCapital” refer to PlainsCapital Corporation, a Texas corporation, and its consolidated subsidiaries as a whole, references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital Corporation), references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company (a wholly owned subsidiary of First Southwest Holdings, LLC) and references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole. In addition, unless the context otherwise requires, references to “shareholders” are to the holders of our voting securities, which consist of our Common Stock, par value $0.001 per share, and our Original Common Stock, par value $0.001 per share, and references to our “common stock” are to our Common Stock and our Original Common Stock, collectively.

The following discussion and analysis should be read in conjunction with (i) the attached unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2010, and with our consolidated financial statements and notes thereto for the year ended December 31, 2009 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2010 (the “Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

Forward-Looking Statements

Certain statements contained in this Quarterly Report that are not statements of historical fact such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We make forward-looking statements regarding topics including, without limitation, our projected sources of funds, anticipated changes in our revenues or earnings, expectations regarding financial or other market conditions, government regulation applicable to our operations, litigation, the adequacy of our allowance for loan losses and provision for loan losses, and our anticipated amount of future loan charge-offs.

Forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Most of these factors are outside our control and difficult to predict. Factors that may cause such differences include, but are not limited to:

(1) changes in general economic, market and business conditions in areas or markets where we compete;

(2) changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums and capital requirements;

(3) changes in the interest rate environment;

(4) changes in the default rate of our loans and risks associated with concentration in real estate related loans;

(5) changes in the auction rate securities markets, including ongoing liquidity problems related thereto;

(6) cost and availability of capital;

(7) competition for our banking, mortgage origination and financial advisory segments from other banks and financial institutions as well as insurance companies, mortgage originators, investment banking and financial advisory firms, asset-based non-bank lenders and government agencies;

(8) approval of new, or changes in, accounting policies and practices;

(9) our participation in governmental programs implemented under the Emergency Economic Stabilization Act of 2008 (the “EESA”) and the American Recovery and Reinvestment Act, including without limitation the Troubled Asset Relief Program (“TARP”), the Capital Purchase Program, and the Temporary Liquidity Guarantee Program, including the Transaction Account Guarantee Program, and the impact of such programs and related regulations on us and on international, national and local economic and financial markets and conditions; and

 

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(10) future legislative or administrative changes to the TARP Capital Purchase Program enacted under the EESA.

For a more detailed discussion of these and other factors that may affect our business, see the discussion under the caption “Risk Factors” set forth in Item 1A of our Annual Report, the discussion under the caption “Risk Factors” set forth in Item 1A of Part II below and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.

Overview

We are a Texas corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. As of March 31, 2010, on a consolidated basis, we had total assets of approximately $4.8 billion, total deposits of approximately $3.3 billion, total loans, including loans held for sale, of approximately $3.5 billion and shareholders’ equity of approximately $422.4 million. The Bank, one of our wholly owned subsidiaries, provides a broad array of products and services, including commercial banking, personal banking, wealth management and treasury management, from offices located throughout central, north and west Texas. In addition to the Bank, we have various subsidiaries with specialized areas of expertise that also offer an array of financial products and services such as mortgage origination and financial advisory services.

We have experienced significant balance sheet growth since our inception. During the first quarter of 2010, our assets increased by 5.8% driven by growth in cash and our investment portfolio, both of which were funded by increased deposits and short-term borrowings, partially offset by lower loan levels. During the first quarter of 2010, our deposits increased by 1.7%, short-term borrowings increased 25.2% as part of an effort to manage interest rate sensitivity and loans, net of unearned income, decreased by 2.0%.

We generate revenue from net interest income and from noninterest income. Net interest income is the difference between interest income we earn on loans and securities and interest expense we incur on deposits and borrowings. Net interest income is a significant contributor to revenues and net income. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. During the first three months of 2010, we generated $42.7 million in net interest income, a 17.4% increase over the three-month period ending March 31, 2009. The increase in net interest income was primarily due to the growth in the principal amount of securities and loans that we own. Net interest margin is a measure of net interest income as a percentage of average interest-earning assets, which is comprised primarily of loans and securities we own. Our taxable equivalent net interest margin was 4.00% for the three months ended March 31, 2010 versus 4.03% for the three months ended March 31, 2009. The decrease in net interest margin was primarily due to changes in the composition of, and yield on, our earning assets.

The contribution of noninterest income to revenue has increased significantly since we expanded our product and service offerings starting with our 1998 acquisition of a Lubbock-based mortgage company. Our noninterest income is primarily comprised of three components:

 

  (i) Income from mortgage loan origination and net gains from sale of loans. Through our wholly owned subsidiary, PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the first three months of 2010, we generated $47.4 million in income from loan origination and net gains from sale of loans, a 2.1% decrease compared to the three months ended March 31, 2009. This decrease in income was primarily due to a lower level of mortgage refinancings during the first three months of 2010 compared to the corresponding period of 2009. Interest rates have remained relatively stable, but our demand from borrowers seeking to refinance decreased in the first quarter of 2010 compared to the first quarter of 2009.

 

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  (ii) Investment advisory fees and commissions and securities brokerage fees and commissions. Through our wholly owned subsidiary, First Southwest, we provide public finance advisory and various investment banking and brokerage services. We earned $21.2 million and $18.8 million in investment advisory fees and commissions and securities brokerage fees and commissions during the three months ended March 31, 2010 and March 31, 2009, respectively.

 

  (iii) Service charges on depositor accounts. We generate fees associated with offering depository services to our banking customers. We earned $2.1 million and $2.2 million in service charges on depositor accounts during the three months ended March 31, 2010 and March 31, 2009, respectively.

In the aggregate, we generated $75.4 million and $70.6 million in noninterest income during the three months ended March 31, 2010 and 2009, respectively. The increase in noninterest income was primarily due to an increase in fees and commissions earned from investment advisory and securities brokerage activities and an increase in realized gains from the sale of securities. The contribution of noninterest income to net revenues (net interest income plus noninterest income) was approximately 63.87% during the three months ended March 31, 2010 versus 66.00% during the three months ended March 31, 2009.

Offsetting our revenues are noninterest expenses we incur through the operations of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.

Segment and Related Information

We have three reportable segments that are organized primarily by the core products offered to the segments’ respective customers. The banking segment includes the operations of the Bank and PlainsCapital Leasing, LLC. The operations of PrimeLending comprise the mortgage origination segment. The financial advisory segment is comprised of Hester Capital and First Southwest. The principal subsidiaries of First Southwest are First Southwest Company, a broker-dealer registered with the SEC and FINRA, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

Our reportable segments also serve as reporting units for the purpose of testing our goodwill for impairment. None of our reporting units is at risk of failing the Step 1 impairment test prescribed in the Goodwill Subtopic of the FASB Accounting Standards Codification.

During 2009, PlainsCapital changed its reporting of segment results. We describe this change in Note 16 to our consolidated financial statements. Segment net revenue percentages reflect net revenue from external customers.

How We Generate Revenue and Net Income

We are substantially dependent on our banking segment for revenue, which provides primarily business banking and personal banking products and services. Approximately 43.10% and 36.91% of our net revenue was derived from the banking segment for the three months ended March 31, 2010 and 2009, respectively. The banking segment generates revenue from earning assets, and its results of operations are primarily dependent on net interest income. Net interest income represents the difference between the income earned on the banking segment’s assets, including its loans and investment securities, and the banking segment’s cost of funds, including the interest paid by the banking segment on its deposits and borrowings that are used to support the banking segment’s assets. The banking segment also derives revenue from other sources, primarily service charges on customer deposit accounts and trust fees.

Our mortgage origination segment’s operations have historically represented our second largest source of net revenue. The mortgage origination segment generated approximately 37.95% and 44.28% of our net revenue for the three months ended March 31, 2010 and 2009, respectively. The mortgage origination segment offers a variety of loan products from offices in 32 states, and generates revenue primarily from fees charged on the origination of loans and from selling these loans in the secondary market.

We generate the remainder of our net revenue primarily from our financial advisory services. The financial advisory segment generated approximately 18.95% of our total net revenue for the three months ended March 31, 2010 and 18.81% of our total net revenue for the three months ended March 31, 2009. The majority of revenues in the financial advisory segment are generated from fees and commissions earned from investment advisory and securities brokerage services at First Southwest.

 

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The fluctuations in the share of total net revenue provided by our banking and mortgage origination segments for the three months ended March 31, 2010 compared with the three months ended March 31, 2009 generally reflect substantial revenue growth in the banking segment and reduced revenues in the mortgage origination segment. The banking segment experienced revenue growth primarily as a result of increased income from loans, including fees, and the increase in income on the securities portfolio, both of which were attributable to higher yields. Revenues declined in the mortgage origination segment due to lower loan origination volume, although the number of mortgage originations increased in March 2010. We describe the operating results of each of our segments more fully in the sections that follow.

Operating Results

Consolidated net income for the three months ended March 31, 2010 was $1.7 million, or $0.01 per diluted share, compared with $10.0 million, or $0.26 per diluted share, for the three months ended March 31, 2009.

We consider the ratios shown in the table below to be key indicators of our performance.

 

     Three Months Ended
March  31,

2010
    Year Ended
December 31,
2009
 

Return on average shareholders’ equity

   1.61   7.50

Return on average assets

   0.14   0.71

Net interest margin (taxable equivalent)

   4.00   4.00

Leverage ratio

   9.44   9.45

Efficiency ratio

   78.59   77.14

The return on average shareholders’ equity ratio is calculated by dividing net income by average shareholders’ equity for the period. The return on average assets ratio is calculated by dividing net income by average total assets for the period. Net interest margin is calculated by dividing net interest income (taxable equivalent) by average interest-earning assets. The leverage ratio is discussed in the “Liquidity and Capital Resources” section below. The efficiency ratio is calculated by dividing noninterest expenses by the sum of total noninterest income and net interest income for the period. The efficiency ratio is generally considered a measure of how well we utilize our resources and manage our expenses.

The changes in our earnings during the periods described above are primarily attributable to the factors listed below (in thousands).

 

     Earnings Increase (Decrease)  
     Three Months Ended
March 31,

2010 v. 2009
 

Net interest income

   $ 6,316   

Provision for loan loss

     (8,942

Income from loan origination and net gains from sale of loans

     (1,017

Investment advisory and brokerage fees and commissions

     2,443   

Noninterest expense

     (15,555

All other (including tax effects)

     8,438   
        
   $ (8,317
        

 

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Net Interest Income

The following table summarizes the components of net interest income (in thousands):

 

     Three Months Ended March 31,  
               Variance  
     2010    2009    2010 v. 2009  

Interest income

        

Loans, including fees

   $ 44,624    $ 42,336    $ 2,288   

Securities

     6,255      4,121      2,134   

Federal funds sold

     9      7      2   

Interest-bearing deposits with banks

     243      12      231   

Other securities

     1,177      1,158      19   
                      

Total interest income

     52,308      47,634      4,674   

Interest expense

        

Deposits

     7,144      8,784      (1,640

Notes payable and other borrowings

     2,491      2,493      (2
                      

Total interest expense

     9,635      11,277      (1,642
                      

Net interest income

   $ 42,673    $ 36,357    $ 6,316   
                      

Net interest income increased $6.3 million for the first quarter of 2010 compared with the three months ended March 31, 2009. The increase in net interest income was primarily due to fluctuations within the banking segment and is discussed further in the “Lines of Business” section below.

Noninterest Income

Noninterest income was $75.4 million for the first quarter of 2010 compared with $70.6 million for the three months ended March 31, 2009, an increase of $4.8 million. The increase was primarily due to increased income from investment advisory fees and commissions and securities brokerage fees and commissions in the financial advisory segment. Also contributing to the increase in noninterest income during the first quarter of 2010 was an increase in income derived from the banking segment, which was due mostly to the gain on sale of securities.

Noninterest Expense

The following table summarizes noninterest expense for the periods indicated below (in thousands).

 

     Three Months Ended March 31,
               Variance
     2010    2009    2010 v. 2009

Noninterest expense

        

Employees’ compensation and benefits

   $ 56,795    $ 48,508    $ 8,287

Occupancy and equipment, net

     13,837      11,372      2,465

Professional services

     5,791      4,040      1,751

Deposit insurance premium

     1,275      561      714

Repossession and foreclosure

     1,452      1,034      418

Other

     13,669      11,749      1,920
                    

Total noninterest expense

   $ 92,819    $ 77,264    $ 15,555
                    

Noninterest expense increased $15.6 million for the first quarter of 2010 compared with the three months ended March 31, 2009. The largest components of this increase were employees’ compensation and benefits, occupancy and equipment expenses, net of rental income, professional services and other expenses.

 

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Employees’ compensation and benefits increased $8.3 million for the first quarter of 2010 compared to the three months ended 2009. The increase was primarily attributable to increased costs in the mortgage origination segment due to increased staffing levels for the additional mortgage banking offices opened during 2009 and 2010.

Occupancy and equipment expenses, net of rental income, increased $2.5 million for the first quarter of 2010 compared with the three months ended March 31, 2009. The increase was primarily attributable to the mortgage origination segment due to costs incurred on the additional mortgage banking offices added during 2009 and 2010.

Professional services were $5.8 million for the first quarter of 2010, an increase of $1.8 million compared to the three months ended March 31, 2009. Among the factors contributing to the increase in professional services were higher volume-related professional services fees, legal fees and appraisal and inspection fees attributable to the mortgage origination segment and higher legal fees attributable to the banking segment.

Other expenses increased $1.9 million for the first quarter of 2010 compared with the three months ended March 31, 2009. The increase was primarily attributable to the mortgage origination segment due to increases in loan origination-related expenses and to amortization of intangible assets in the financial advisory segment.

Lines of Business

Banking Segment

The following table summarizes the results for the banking segment for the indicated periods (in thousands):

 

     Three Months Ended March 31,  
               Variance  
     2010    2009    2010 v. 2009  

Net interest income

   $ 41,852    $ 35,407    $ 6,445   

Provision for loan losses

     22,955      14,013      8,942   

Noninterest income

     9,049      4,054      4,995   

Noninterest expense

     24,057      21,051      3,006   
                      

Net income before taxes

     3,889      4,397      (508

Income tax provision

     968      947      21   
                      

Net income

   $ 2,921    $ 3,450    $ (529
                      

Net income was $2.9 million for the first quarter of 2010, a decrease of $0.5 million compared to the three months ended March 31, 2009. The decrease was primarily due to increases in the provision for loan losses and noninterest expense, partially offset by an increase in net revenue.

Provision for loan losses increased by $8.9 million for the first quarter of 2010 compared with the three months ended March 31, 2009. The increase in the provision for loan losses was primarily a result of an increase in non-performing loans and loan charge-offs due to challenging economic conditions. Noninterest expense increased by $3.0 million for the first quarter of 2010 compared to the three months ended March 31, 2009. The increases were primarily due to increases in employees’ compensation and benefits, deposit insurance premiums and professional services expenses.

 

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The following table summarizes the changes in the banking segment’s taxable equivalent net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).

 

     Three Months Ended March 31,
2010 v. 2009
 
     Change Due To(1)        
     Volume     Yield/Rate     Change  

Interest income

      

Loans

   $ 40      $ 2,552      $ 2,592   

Investment securities(2)

     1,464        1,042        2,506   

Federal funds sold

     —          2        2   

Interest-bearing deposits in other financial institutions

     138        101        239   

Other securities

     32        73        105   
                        

Total interest income(2)

     1,674        3,770        5,444   

Interest expense

      

Deposits

     1,061        (2,634     (1,573

Notes payable and other borrowings

     659        (678     (19
                        

Total interest expense

     1,720        (3,312     (1,592
                        

Net interest income(2)

   $ (46   $ 7,082      $ 7,036   
                        

 

(1) Changes attributable to both volume and yield/rate are included in yield/rate.
(2) Taxable equivalent.

Taxable equivalent net interest income increased $7.0 million for the first quarter of 2010 compared with the three months ended March 31, 2009. Changes in yields earned and rates paid increased taxable equivalent net interest income by $7.1 million. Yields on the loan portfolio increased due to increased spreads relative to the Wall Street Journal Prime Rate on renewed loans. Yields on the investment securities portfolio increased due to historically higher yields on tax-exempt securities issued by political subdivisions of the State of Texas. The $3.3 million decrease in the rates paid on interest-bearing liabilities was primarily due to the decrease in market interest rates compared with the prevailing market rates in the first quarter of 2009. Increases in the volume of interest-earning assets, primarily in the investment securities portfolio, increased taxable equivalent net interest income by $1.7 million, while increases in the volume of interest-bearing liabilities reduced taxable equivalent net interest income by $1.7 million.

 

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The tables below provide additional details regarding the banking segment’s net interest income (dollar amounts in thousands).

 

     Three Months Ended
March 31,
2010
    Three Months Ended
March 31,
2009
 
     Average
Outstanding
Balance
    Interest
Earned or
Paid
   Annualized
Yield or
Rate
    Average
Outstanding
Balance
    Interest
Earned or
Paid
   Annualized
Yield or
Rate
 

Assets

              

Interest-earning assets

              

Loans, gross(1)

   $ 2,857,073      $ 44,552    6.32   $ 2,854,411      $ 41,960    5.96

Investment securities - taxable

     325,448        3,688    4.53     259,146        3,030    4.68

Investment securities - non-taxable(2)

     217,208        3,332    6.14     148,338        1,484    4.00

Federal funds sold

     12,421        9    0.29     12,801        7    0.22

Interest-bearing deposits in other financial institutions

     253,418        244    0.39     8,960        5    0.23

Other securities

     25,857        164    2.54     16,773        59    1.41
                                  

Interest-earning assets, gross

     3,691,425        51,989    5.71     3,300,429        46,545    5.72

Allowance for loan losses

     (51,781          (29,518     
                          

Interest-earning assets, net

     3,639,644             3,270,911        

Noninterest-earning assets

     836,104             722,930        
                          

Total assets

   $ 4,475,748           $ 3,993,841        
                          

Liabilities and Shareholders’ Equity

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 2,970,211        7,176    0.98   $ 2,652,819        8,749    1.34

Notes payable and other borrowings

     645,372        1,484    0.93     450,587        1,503    1.35
                                  

Total interest-bearing liabilities

     3,615,583        8,660    0.97     3,103,406        10,252    1.34

Noninterest-bearing liabilities

              

Noninterest-bearing deposits

     164,488             195,597        

Other liabilities

     172,254             187,510        
                          

Total liabilities

     3,952,325             3,486,513        

Shareholders’ equity

     523,423             507,328        
                          

Total liabilities and shareholders’ equity

   $ 4,475,748           $ 3,993,841        
                                  

Net interest income(2)

     $ 43,329        $ 36,293   
                      

Net interest spread(2)

        4.74        4.38

Net interest margin(2)

        4.76        4.46

 

(1) Average loans include non-accrual loans.
(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $1.1 million and $0.5 million for the three months ended March 31, 2010 and 2009, respectively.

The banking segment’s net interest margin shown above exceeds our consolidated net interest margin. Our consolidated net interest margin includes the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the financial advisory segment, as well as the borrowing costs of PlainsCapital at the holding company level, both of which reduce our consolidated net interest margin.

 

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Mortgage Origination Segment

The following table summarizes the results for the mortgage origination segment for the indicated periods (in thousands):

 

     Three Months Ended March 31,  
                 Variance  
     2010     2009     2010 v. 2009  

Net interest expense

   $ (743   $ (72   $ (671

Noninterest income

     45,564        47,420        (1,856

Noninterest expense

     47,576        36,748        10,828   
                        

Net income (loss) before taxes

     (2,755     10,600        (13,355

Income tax provision (benefit)

     (686     4,410        (5,096
                        

Net income (loss)

   $ (2,069   $ 6,190      $ (8,259
                        

Net loss was $2.1 million for the first quarter of 2010, a decrease of $8.3 million compared to net income of $6.2 million for the three months ended March 31, 2009. The decrease was due primarily to an increase in noninterest expense and a decrease in noninterest income. Employees’ compensation and benefits and other expenses accounted for the majority of the increase in noninterest expense.

Employees’ compensation and benefits increased $5.2 million for the first quarter of 2010 compared to the three months ended March 31, 2009. The increase was attributable to increased staffing levels to support the additional mortgage banking offices opened during 2009 and 2010. Other expenses increased $5.7 million for the first quarter of 2010 compared to the three months ended March 31, 2009, which was primarily attributable to $4.3 million of intercompany financing costs.

Mortgage loan origination volume was $1.174 billion for the first quarter of 2010 compared to $1.305 billion for the three months ended March 31, 2009, a decrease of 10.04%. During the first quarter of 2010, mortgage loan origination volume decreased primarily due to less mortgage refinancing activity compared to the first quarter of 2009. Interest rates have remained relatively stable, but our demand from borrowers seeking to refinance decreased in the first quarter of 2010 compared to the first quarter of 2009. While origination volume declined in the first quarter of 2010 compared to the corresponding period in 2009, the number of originations increased in March 2010. During the first quarter of 2010, refinancings and home purchases accounted by dollar volume for 34.28% and 65.72%, respectively, of the total mortgage loan origination volume.

 

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Financial Advisory Segment

The following table summarizes the results for the financial advisory segment for the indicated periods (in thousands):

 

     Three Months Ended March 31,
               Variance
     2010    2009    2010 v. 2009

Net interest income

   $ 1,564    $ 1,022    $ 542

Noninterest income

     20,819      19,092      1,727

Noninterest expense

     21,186      19,465      1,721
                    

Net income before taxes

     1,197      649      548

Income tax provision

     298      263      35
                    

Net income

   $ 899    $ 386    $ 513
                    

Net income was $0.9 million for the first quarter of 2010, an increase of $0.5 million compared to the three months ended March 31, 2009. The increase was due primarily to increases in net interest income and noninterest income, partially offset by an increase in noninterest expense.

Net interest income increased $0.5 million for the three months ended March 31, 2010 compared to the corresponding period in 2009. The increase resulted from higher customer margin loan balances and from an increased level of trading securities used to support sales and underwriting activities.

The majority of noninterest income is generated from fees and commissions earned from investment advisory and securities brokerage activities, which increased $2.4 million for the first quarter of 2010 compared to the three months ended March 31, 2009.

Noninterest expense increased $1.7 million for the first quarter of 2010 compared to the three months ended March 31, 2009. Employees’ compensation and benefits and other expenses accounted for the majority of the increase in noninterest expense. Employees’ compensation and benefits increased $1.3 million for the first quarter of 2010 compared to the three months ended March 31, 2009. The increase was attributable to higher commission expenses related to increased commission revenue and a slight increase in staffing levels during the first quarter of 2010 compared to the first quarter of 2009. Other expenses increased $0.7 million for the first quarter of 2010 compared to the three months ended March 31, 2009, which was due primarily to various expenses paid to support two new offices that opened during the first quarter of 2010, as well as amortization of intangible assets that began in the second half of 2009.

 

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Financial Condition

The following discussion contains a more detailed analysis of our financial condition at March 31, 2010 and as compared to December 31, 2009.

Securities Portfolio

The securities portfolio plays a role in the management of interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements and the available for sale portion thereof serves as a source of liquidity. Historically, our policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. In connection with our acquisition of First Southwest, we purchased a portfolio of auction rate bonds for which an active market does not currently exist.

The securities portfolio consists of two major components: securities held to maturity and securities available for sale. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities that may be sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value. The table below summarizes our securities portfolio (in thousands).

 

     March 31,
2010
   December 31,
2009

Securities available for sale, at fair value

     

U. S. Treasury securities

   $ —      $ —  

U. S. government agencies

     

Bonds

     —        —  

Mortgage-backed securities

     14,453      28,014

Collateralized mortgage obligations

     266,226      145,361

States and political subdivisions

     10,149      9,612

Auction rate bonds

     22,723      44,554
             
     313,551      227,541

Securities held to maturity, at amortized cost

     

U. S. government agencies

     

Mortgage-backed securities

     15,202      16,963

Collateralized mortgage obligations

     48,695      50,533

States and political subdivisions

     124,136      120,818

Auction rate bonds

     89,394      105,699
             
     277,427      294,013

Trading securities, at fair value

     72,944      24,183
             

Total securities portfolio

   $ 663,922    $ 545,737
             

We had a net unrealized loss of $0.5 million related to the available for sale investment portfolio at March 31, 2010, compared with a net unrealized loss of $1.1 million at December 31, 2009.

The market value of securities held to maturity at March 31, 2010 was $2.6 million below book value. At December 31, 2009, the market value of held to maturity securities was $0.9 million above book value.

 

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We hold securities issued by Access to Loans for Learning Student Loan Corporation that exceed 10% of our shareholders’ equity. The aggregate book value and aggregate market value of these securities at March 31, 2010, was $112.3 million and $107.8 million, respectively.

Loan Portfolio

Loans held for investment in our banking and financial advisory segments are detailed in the table below (in thousands) and classified by type.

 

     March 31,
2010
    December 31,
2009
 

Commercial and industrial

   $ 1,197,949      $ 1,264,735   

Lease financing

     67,196        78,088   

Construction and land development

     397,602        402,876   

Real estate

     1,114,641        1,125,134   

Securities (including margin loans)

     187,472        152,145   

Consumer

     46,423        48,791   
                

Loans, gross

     3,011,283        3,071,769   

Allowance for loan losses

     (49,971     (52,092
                

Loans, net

   $ 2,961,312      $ 3,019,677   
                

Banking Segment

The banking segment’s loan portfolio constitutes the major earning asset of the banking segment and typically offers the banking segment its best alternative for obtaining the maximum interest spread above the cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. The banking segment’s total loans, net of the allowance for loan losses, were $2.8 billion and $2.9 billion as of March 31, 2010 and December 31, 2009, respectively. The $94.5 million decrease in net loans at March 31, 2010 compared with December 31, 2009, was primarily attributable to declines in commercial and industrial loans and real estate loans that reflect efforts to control the growth of the loan portfolio in response to current economic conditions.

The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. At March 31, 2010, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) which exceeded 10% of total loans in its real estate loan portfolio. The areas of concentration within our real estate portfolio were construction and land development loans and non-construction commercial real estate loans. At March 31, 2010, construction and land development loans were 13% of total loans, while non-construction commercial real estate loans were 27% of total loans. The banking segment’s loan concentrations were within regulatory guidelines as of March 31, 2010.

Mortgage Origination Segment

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale, which does not include pipeline loans, were $486.8 million and $430.8 million as of March 31, 2010 and December 31, 2009, respectively. The $56.0 million increase in net loans at March 31, 2010 compared with December 31, 2009 was primarily attributable to internally generated growth that resulted in the opening of additional offices and market conditions that led to increased home purchases. Most of the growth during the first quarter of 2010 occurred in March 2010. PrimeLending was able to service the increased demand for home purchases due to the availability of warehouse financing through our banking segment.

 

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The components of the mortgage origination segment’s loans held for sale and pipeline loans are shown in the following table (in thousands).

 

     March 31,
2010
   December 31,
2009
 

Loans held for sale

     

Unpaid principal balance

   $ 474,674    $ 419,473   

Fair value adjustment

     12,115      11,287   
               
   $ 486,789    $ 430,760   
               

Pipeline loans

     

Unpaid principal balance

   $ 532,975    $ 256,285   

Fair value adjustment

     1,801      (512
               
   $ 534,776    $ 255,773   
               

Although origination volume declined in the first quarter of 2010 compared to the corresponding period in 2009, the number of originations increased in March 2010, resulting in higher levels of loans held for sale and pipeline loans at March 31, 2010, compared to December 31, 2009.

Financial Advisory Segment

The loan portfolio of the financial advisory segment consists primarily of margin loans to customers and correspondents. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as First Southwest’s internal policies. The financial advisory segment’s total loans, net of the allowance for loan losses, were $190.2 million as of March 31, 2010 and $154.1 million as of December 31, 2009. The $36.1 million increase from December 31, 2009 to March 31, 2010 is primarily attributable to increased borrowings in margin accounts held by First Southwest customers and correspondents in response to improving conditions in securities markets.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. Our management has responsibility for determining the level of the allowance for loan losses, subject to review by our board of directors. Among other factors, management, on a quarterly basis, considers our historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, delinquencies, non-performing credits, including impaired loans and our risk-rating-based loan “watch” list, along with national and local economic conditions.

There are additional risks of loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those factors include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The sum of these elements is our management’s recommended level for the allowance. The unallocated portion of the allowance is based on loss factors that cannot be associated with specific loans or loan categories. These factors include management’s subjective evaluation of such conditions as credit quality trends, collateral values, portfolio concentrations, delinquency levels, specific industry conditions in the regional economy, regulatory examination results, loan review findings and recent loss experiences in particular portfolio segments. The unallocated portion of the allowance for losses reflects management’s attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision necessarily inherent in estimates of credit losses.

 

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We have developed a methodology that seeks to determine an allowance to absorb probable loan losses inherent in the portfolio based on evaluations of the collectability of loans, historical loss experience, peer bank loss experience, delinquency trends, economic conditions, portfolio composition and specific loss estimates for loans considered substandard or doubtful. We design our loan review program to review, on an annual basis, loan relationships that account for approximately 60% of the dollar amount of our loan portfolio, regardless of risk. We review all loan relationships that exhibit probable or observed credit weaknesses, the top 25 loan relationships by dollar amount in each market we serve and additional relationships necessary to achieve our desired coverage ratio. Based on management’s evaluation, estimated loan loss allowances are assigned to the individual loans that present a greater risk of loan loss. If necessary, reserves would be allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability and value of collateral and other sources of cash flow. Any reserves for impaired loans are measured based on the present value of the expected future cash flow discounted at the loan’s effective interest rate or the fair value of the underlying collateral. We evaluate the collectability of both principal and interest when assessing the need for a loss accrual. A composite allowance factor that considers our and other peer bank loss experience ratios, delinquency trends, economic conditions and portfolio composition is applied to the total of commercial and commercial real estate loans not specifically evaluated.

The allowance is subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Homogenous loans, such as consumer installment, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogenous pool of loans based on the expected net charge offs from a current trend in delinquencies, losses or historical experience and general economic conditions. As of March 31, 2010, we had no material delinquencies in these types of loans.

Our regular safety and soundness examination, performed jointly by the Federal Reserve Bank of Dallas and the Texas Department of Banking, is currently underway. A major component of this examination is a detailed review of our loan portfolio.

While we believe we have sufficient allowance for our existing portfolio as of March 31, 2010, additional provisions for losses on existing loans may be necessary in the future. We recorded net charge-offs in the amount of $25.1 million for the first quarter of 2010 compared to $25.6 million for the first quarter of 2009. Our allowance for loan losses totaled $50.0 million at March 31, 2010 and $52.1 million at December 31, 2009. The ratio of the allowance for loan losses to total loans held for investment at March 31, 2010 and December 31, 2009 was 1.66% and 1.70%, respectively.

Provision for Loan Losses

Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio.

The provision for loan losses, primarily in the banking segment, was $23.0 million for the first quarter of 2010, an increase of $8.9 million compared to the three months ended March 31, 2009. The increase was primarily a result of a significant increase in non-performing loans and charge-offs due to the broad downturn in the U.S. economy. These challenging economic conditions have resulted, at times, in sudden deterioration in the creditworthiness of some seasoned borrowers, and we have significantly increased the loan loss provision, as well as the allowance for loan losses, to address these circumstances. Conditions in the first quarter of 2010 were similar to those in 2009, but, over the remainder of 2010, we believe we may experience a declining level of net-charge-offs relative to the prior five quarters. Additional information regarding the allowance for loan losses can be found under the heading “Allowance for Loan Losses” above.

 

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The following table presents the activity in our allowance for loan losses for the dates indicated (dollar amounts in thousands). Substantially all of the activity shown below occurred within the banking segment.

 

     Three Months Ended
March 31,
    Year Ended
December 31,
    Three Months Ended
March 31,
 
     2010     2009     2009  

Balance at beginning of period

   $ 52,092      $ 40,672      $ 40,672   

Provisions charged to operating expenses

     22,955        66,673        14,013   

Recoveries of loans previously charged off

      

Commercial and industrial

     164        901        200   

Real estate

     2        94        —     

Construction and land development

     6        32        —     

Lease financing

     —          10        —     

Consumer

     99        47        11   
                        

Total recoveries

     271        1,084        211   
                        

Loans charged off

      

Commercial and industrial

     17,164        46,822        22,917   

Real estate

     7,698        2,987        828   

Construction and land development

     196        3,586        377   

Lease financing

     127        1,628        547   

Consumer

     162        1,314        1,104   
                        

Total charge-offs

     25,347        56,337        25,773   
                        

Net charge-offs

     (25,076     (55,253     (25,562
                        

Balance at end of period

   $ 49,971      $ 52,092      $ 29,123   
                        

Net charge-offs to average loans outstanding

     3.35     1.82     3.50

The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, are presented in the table below (dollar amounts in thousands). Amounts shown in “Unallocated” include the portion of the allowance that is attributable to factors that cannot be distributed by type. Those factors include credit concentrations, trends in loan growth, and various other market, economic and regulatory considerations.

 

     March 31,
2010
    December 31,
2009
 
          % of          % of  
          Gross          Gross  
     Reserve    Loans     Reserve    Loans  

Commercial and industrial

   $ 21,964    39.78   $ 28,580    41.17

Real estate (including construction and land development)

     16,911    50.22     12,357    49.74

Lease financing

     1,673    2.23     1,114    2.54

Securities (including margin loans)

     1,280    6.23     1,280    4.95

Consumer

     385    1.54     469    1.60

Unallocated

     7,758        8,292   
                  

Total

   $ 49,971    100.00   $ 52,092    100.00
                  

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. As of March 31, 2010, we had 26 credit relationships totaling $54.8 million in loans of this type which are not included in either the non-accrual or 90 days past due loan categories.

 

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Non-Performing Assets

The following table presents our components of non-performing assets at the dates indicated (dollar amounts in thousands).

 

     March 31,     December 31,     March 31,  
     2010     2009     2009  

Loans accounted for on a non-accrual basis

      

Commercial and industrial

   $ 43,561      $ 38,592      $ 21,573   

Lease financing

     5,598        3,835        2,843   

Construction and land development

     17,228        16,317        13,693   

Real estate

     13,692        10,279        11,565   

Consumer

     —          —          —     
                        
   $ 80,079      $ 69,023      $ 49,674   
                        

Non-performing loans as a percentage of total loans

     2.29     1.97     1.53
                        

Other Real Estate Owned

   $ 19,112      $ 17,532      $ 10,817   
                        

Other repossessed assets

   $ 2,773      $ 2,538      $ 1,894   
                        

Non-performing assets

   $ 101,964      $ 89,093      $ 62,385   
                        

Non-performing assets as a percentage of total assets

     2.11     1.95     1.50
                        

Loans past due 90 days or more and still accruing

   $ 122      $ 150      $ 1,184   
                        

At March 31, 2010, total non-performing assets increased $12.9 million to $102.0 million compared to $89.1 million at December 31, 2009. Non-accrual loans increased by $11.1 million to $80.1 million at March 31, 2010 compared to $69.0 million at December 31, 2009. Of these non-accrual loans, $43.6 million were characterized as commercial and industrial loans as of March 31, 2010, an increase of $5.0 million compared to December 31, 2009. The commercial and industrial loans included a $10.8 million business loan secured principally by the guarantor. Approximately $9.7 million in business loans were included in commercial and industrial loans, which are for investment properties arising primarily from a single customer relationship and secured principally by the inventory and property, plant and equipment of a group of related borrowers. Also included in the commercial and industrial loan category were two business loans each from a single customer relationship totaling $4.5 million and $3.4 million and secured by each borrower’s accounts receivable and inventory, a $1.8 million business loan secured by livestock, a $1.4 million business loan secured by accounts receivable and inventory, and a $1.4 million business loan secured by oil and gas properties.

Non-accrual loans at March 31, 2010 also included $17.2 million characterized as construction and land development loans. This included two real estate loans totaling approximately $5.8 million from a single customer relationship and secured by assisted living centers, two residential real estate development loans totaling approximately $4.4 million from a single customer relationship and secured by unimproved land, and a $1.4 million residential real estate loan from a single customer relationship secured by commercial land development. Non-accrual loans also included $13.7 million characterized as real estate loans. This included a $2.0 million commercial real estate loan secured by unoccupied residential property, a $1.2 million commercial real estate loan secured by occupied residential property, two commercial real estate loans from a single customer relationship totaling approximately $1.1 million and secured by unoccupied townhomes, and a $1.0 million commercial real estate loan secured by a retirement center.

Loans in troubled debt restructurings bearing market rates of interest at the time of restructuring and performing in compliance with their modified terms are considered impaired in the calendar year of the restructuring. At March 31, 2010, troubled debt restructurings totaled $15.0 million, of which $0.5 million were included in performing loans and $14.5 million were included in non-accrual loans.

 

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Other Real Estate Owned increased $1.6 million to $19.1 million at March 31, 2010 compared to $17.5 million at December 31, 2009. The increase in Other Real Estate Owned was due primarily to the economic downturn affecting the housing market. At March 31, 2010, Other Real Estate Owned included $18.0 million of commercial real estate property consisting of single family residences under development and $1.1 million of residential lots at various levels of completion.

Additional interest income that would have been recorded if the non-accrual loans had been current during the three months ended March 31, 2010 totaled $1.8 million and $2.8 million during the three months ended March 31, 2009.

Borrowings

Our borrowings as of March 31, 2010 and December 31, 2009 are shown in the table below (in thousands).

 

     March 31,    December 31,    Variance  
     2010    2009    2010 v. 2009  

Short-term borrowings

   $ 611,011    $ 488,078    $ 122,933   

Notes payable

     67,607      68,550      (943

Junior subordinated debentures

     67,012      67,012      —     

Other borrowings

     12,022      12,128      (106
                      
   $ 757,652    $ 635,768    $ 121,884   
                      

Short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase, as well as borrowings at the Federal Home Loan Bank. The $122.9 million increase in short-term borrowings at March 31, 2010 compared with December 31, 2009 was due mostly to increased borrowing of $75.0 million from the Federal Home Loan Bank, which had favorable pricing relative to the brokered deposit market, providing an alternative source of funding for the Bank. Also contributing to the increase in short-term borrowings was the borrowing of approximately $43.4 million in unaffiliated notes payable, which represent overnight borrowing on uncommitted broker lines of credit used to finance marketable securities, customer margin loans and correspondent inventories held at First Southwest. Our brokered deposits were $122.2 million at March 31, 2010, an increase of $15.4 million from December 31, 2009.

We have revolving lines of credit for up to $30.0 million with JP Morgan Chase Bank, N.A. At March 31, 2010, we had $5.2 million of additional borrowing capacity under those revolving lines of credit.

Liquidity and Capital Resources

Liquidity refers to the measure of our ability to meet our customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on our net interest income. We discuss our management of interest rate and other risks in Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” below.

Our asset and liability group is responsible for continuously monitoring our liquidity position to ensure that assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the Federal Home Loan Bank. To supply liquidity over the longer term, we have access to brokered certificates of deposit, term loans at the Federal Home Loan Bank and borrowings under lines of credit with other financial institutions.

 

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On December 19, 2008, we sold approximately $87.6 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series A and Series B Preferred Stock”), the aggregate liquidation preference of which is $92.0 million, to the U.S. Treasury pursuant to the TARP Capital Purchase Program. The shares of Series B Preferred Stock were issued to the U.S. Treasury upon the exercise of a warrant issued in conjunction with the Series A Preferred Stock. The Series A and Series B Preferred Stock are senior to shares of our Original Common Stock with respect to dividends and liquidation preference. Under the terms of the Series A Preferred Stock, we are obligated to pay a 5% per annum cumulative dividend on the stated value of the preferred stock until February 14, 2014 and thereafter at a rate of 9% per annum. As long as shares of the Series A and Series B Preferred Stock remain outstanding, we may not pay dividends to our common shareholders (nor may we repurchase or redeem any shares of our common stock) unless all accrued and unpaid dividends on the preferred stock have been paid in full. Furthermore, prior to December 19, 2011, unless we have redeemed all of the preferred stock, the consent of the U.S. Treasury will be required to, among other things, increase the per share amount of dividends paid on our common stock. After December 19, 2011 and thereafter until December 19, 2018, the consent of the U.S. Treasury (if it still holds our preferred stock) will be required for any increase in the aggregate common stock dividends per share greater than 3% per annum. After December 19, 2018, we will be prohibited from paying dividends on, or repurchasing any common stock until the preferred stock issued to the U.S. Treasury is redeemed in whole or the U.S. Treasury has transferred all of its preferred stock to third parties. If dividends on the preferred stock are not paid in full for six dividend periods, whether or not consecutive, the U.S. Treasury will have the right to elect two directors to our board of directors until all unpaid cumulative dividends are paid in full. The terms of the Series B Preferred Stock are identical to those described above for the Series A Preferred Stock except that (i) the dividend rate is 9% per annum and (ii) the Series B Preferred Stock may not be redeemed unless all of the Series A Preferred Stock is redeemed.

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

At March 31, 2010, we exceeded all regulatory capital requirements and were considered to be “well-capitalized” with a total capital to risk weighted assets ratio of 13.65%, Tier 1 capital to risk weighted assets ratio of 11.85% and a Tier 1 capital to average assets, or leverage, ratio of 9.44%. At March 31, 2010, the Bank was also considered to be “well-capitalized.” We discuss regulatory capital requirements in more detail in Note 11 to our consolidated financial statements.

Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled $220.2 million at March 31, 2010, an increase of $95.1 million, or 76.1%, from $125.1 million at March 31, 2009. This increase was primarily due to an increase in deposits, partially offset by an increase in loans held for investment and purchases of securities.

Deposit flows, calls of investment securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Cash used in operations during the first quarter of 2010 was $89.0 million, an increase in cash used of $30.7 million compared with March 31, 2009. Cash used in operations increased due to increases in trading securities and broker-dealer and clearing receivables which related to higher volumes at First Southwest.

Our primary use of funds is for the origination of loans, primarily commercial and industrial loans and real estate loans. Our loan portfolio at March 31, 2010, excluding loans held for sale and the allowance for loan losses, and net of unearned income, was $3.0 billion, a decrease of $60.5 million compared with $3.1 billion at December 31, 2009. The decrease in net loan originations was concentrated in commercial and industrial loans and reflects efforts to control the growth and risk of the loan portfolio in response to current economic conditions.

 

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Cash used in our investment activities included net purchases of securities for our investment portfolio during the three months ended March 31, 2010, which were $65.8 million compared with net purchases of $51.9 million during the three months ended March 31, 2009. The increase in net purchases of securities during the first quarter of 2010 compared to the first quarter of 2009 resulted from the purchase of both municipal securities and collateralized mortgage obligations to take advantage of attractive yields and provide collateral for pledging and, with respect to collateralized mortgage obligations, repurchase agreements. We sold approximately $54.3 million and $21.3 million of available for sale securities during the first quarter of 2010 and 2009, respectively.

Cash provided by financing activities was $186.9 million for the three months ended March 31, 2010 compared with $171.1 million for the three months ended March 31, 2009. The $15.8 million increase was due mostly to the net increase in deposits and payments on notes payable.

We had deposits of $3.3 billion at March 31, 2010, an increase of $56.5 million, or 1.72%, from the level of deposits at December 31, 2009. Deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. Within the deposit portfolio, brokered deposits, interest-bearing demand deposits and money market deposits increased $15.4 million, $13.9 million and $9.7 million at March 31, 2010 compared to the December 31, 2009 level, respectively.

Our 15 largest depositors, excluding First Southwest, our indirect wholly owned subsidiary, accounted for approximately 25.30% of our total deposits, and our five largest depositors, excluding First Southwest, accounted for approximately 16.60% of our total deposits at March 31, 2010. The loss of one or more of our largest customers, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. We have not experienced any liquidity issues to date with respect to brokered deposits or our other large balance deposits, and we believe alternative sources of funding are available, albeit currently at slightly higher rates, to more than compensate for the loss of one or more of these customers.

PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank.

FSC relies on its equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and operations. FSC has credit arrangements with commercial banks of up to $160.0 million, which are used to finance securities owned, securities held for correspondent accounts and receivables in customer margin accounts. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. At March 31, 2010, First Southwest had borrowed approximately $43.4 million under these credit arrangements.

Off-Balance Sheet Arrangements; Commitments; Guarantees

In the normal course of business, we enter into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

 

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In the normal course of business, FSC executes, settles and finances various securities transactions that may expose FSC to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

Critical Accounting Policies and Estimates

Our accounting policies are integral to understanding the results reported. Our accounting policies are described in detail in Note 1 to our consolidated financial statements for the year ended December 31, 2009, which are included in our Annual Report on Form 10-K filed with the SEC on March 26, 2010. You are encouraged to read in its entirety Note 1 to our consolidated financial statements for the year ended December 31, 2009 for additional insight into management’s approach and methodology in estimating the allowance for loan losses. We believe that of our significant accounting policies, the allowance for loan losses may involve a higher degree of judgment and complexity.

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. Loans are charged to the allowance when the loss is confirmed or when a determination is made that a probable loss has occurred on a specific loan. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Management’s judgment regarding the adequacy of the allowance for loan losses involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and management’s internal review of the loan portfolio. In determining the ability to collect certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control. For a complete discussion of allowance for loan losses and provisions for loan losses, see the section entitled “Allowance for Loan Losses” earlier in this Item 2.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Some of the information below contains forward-looking statements. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

We are engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is interest rate risk volatility. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowing. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The magnitude of the change in earnings and market value of equity resulting from interest rate changes is impacted by the time remaining to maturity on fixed-rate obligations, the contractual ability to adjust rates prior to maturity, competition, the general level of interest rates and customer actions. Our objective is to measure the effect of interest rate changes on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of credit or investment risk. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities. We manage our interest rate sensitivity position consistent with our established asset/liability management policies.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to achieve a proper balance so that incorrect rate forecasts should not have a significant impact on earnings.

Interest rate sensitivity analysis presents the amount of assets and liabilities that are estimated to reprice through specified periods. The interest rate sensitivity analysis in the table below reflects changes in banking segment earnings and costs resulting from changes in assets and liabilities on March 31, 2010 that will either be repriced in accordance with market rates, mature or are estimated to mature early within the periods indicated. This is a one-day position that is continually changing and is not necessarily indicative of our position at any other time.

 

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As illustrated in the table below, the banking segment is asset sensitive overall. Loans which adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year. It also attempts to match longer term assets with certificates of deposit with terms of three to five years.

 

     March 31, 2010
     (Dollar amounts in thousands)
     3 Months or     > 3 Months to     > 1 Year to     > 3 Years to            
     Less     1 Year     3 Years     5 Years     > 5 Years     Total

Interest sensitive assets:

            

Loans

   $ 2,394,709      $ 354,748      $ 320,455      $ 98,121      $ 136,172      $ 3,304,205

Securities

     139,515        101,372        184,346        14,681        151,064        590,978

Federal funds sold

     12,500        —          —          —          —          12,500

Other interest sensitive assets

     139,749        —          —          —          —          139,749
                                              

Total interest sensitive assets

     2,686,473        456,120        504,801        112,802        287,236        4,047,432

Interest sensitive liabilities:

            

Interest bearing checking

   $ 1,436,924      $ —        $ —        $ —        $ —        $ 1,436,924

Savings

     139,775        —          —          —          —          139,775

Time deposits

     712,194        269,058        47,377        3,893        2,712        1,035,234

Notes payable & other borrowings

     463,028        102,225        2,015        1,094        7,986        576,348
                                              

Total interest sensitive liabilities

     2,751,921        371,283        49,392        4,987        10,698        3,188,281
                                              

Interest sensitivity gap

   $ (65,448   $ 84,837      $ 455,409      $ 107,815      $ 276,538      $ 859,151
                                              

Cumulative interest sensitivity gap

   $ (65,448   $ 19,389      $ 474,798      $ 582,613      $ 859,151     
                                          

Percentage of cumulative gap to total interest

            

Sensitive assets

     -1.62     0.48     11.73     14.39     21.23  

The positive GAP in the interest rate sensitivity analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate sensitivity analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 1%, 2% and 3% to determine the effect on net interest income changes for the next 12 months. The banking segment also measures the effects of changes in interest rates on market value of equity by discounting projected cash flows of deposits and loans. Market value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Loan and investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance-sheet derivatives. The projected changes in net interest income at March 31, 2010 were in compliance with established policy guidelines.

 

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The table below shows the estimated impact of increases and decreases in interest rates of 1%, 2% and 3% on net interest income and on market value of portfolio equity for the banking segment as of March 31, 2010 (dollar amounts in thousands).

 

     March 31, 2010  
     Changes In
Net Interest Income
    Changes in Market Value  of
Equity
 
Change in Interest Rates    Amount     Percent     Amount     Percent  

Up 3%

   $ (8,384   -5.14   $ (9,031   -1.60

Up 2%

   $ (10,873   -6.67   $ (9,065   -1.60

Up 1%

   $ (7,886   -4.84   $ (9,164   -1.62

Down 1%

   $ (2,689   -1.65   $ (35,882   -6.34

Down 2%

   $ (6,903   -4.24   $ (78,727   -13.91

Down 3%

   $ (9,147   -5.61   $ (120,730   -21.33

The projected changes in net interest income and market value of equity to changes in interest rates at March 31, 2010 were in compliance with established policy guidelines. These projected changes in net interest income results are based on numerous assumptions of growth and changes in the mix of assets or liabilities.

The historically low level of interest rates, combined with the existence of rate floors that are in effect for a significant portion of the loan portfolio, are projected to cause yields on our earning assets to rise more slowly than increases in market interest rates. As a result, in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is sufficient to allow our loan portfolio to reprice above applicable rate floors.

Due to historically low interest rates, the table above may not predict the full effect of decreasing interest rates upon our net interest income that would occur in a more traditional, higher interest rate environment. This is because short-term interest rates are near zero percent and certain modeling assumptions, such as the restriction that deposit and loan rates cannot fall below zero percent, may distort the model’s results.

 

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Item 4T. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and has concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed to ensure that material information relating to us is made known to the Chief Executive Officer and Chief Financial Officer by others within our Company, and, based on their evaluations, our controls and procedures were effective as of the end of the period covered by this report.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

In November 2006, FSC received subpoenas from the SEC and the DOJ in connection with an investigation of possible antitrust and securities law violations, including bid-rigging, in the procurement of guaranteed investment contracts and other investment products for the reinvestment of bond proceeds by municipalities. The investigation is industry-wide and includes approximately 30 or more firms, including some of the largest U.S. investment firms. To the extent that its participation is requested, FSC will continue to cooperate with these investigations.

As a result of these SEC and DOJ investigations into industry-wide practices, FSC was named as a co-defendant in a series of civil lawsuits filed during 2008 in several different federal courts by various state and local governmental entities suing on behalf of themselves and a purported class of similarly situated governmental entities. A similar set of lawsuits were filed in California state courts by various local governmental entities suing only on behalf of themselves and not on behalf of a putative class. The California state court suits were removed to federal court, and all of the cases have been transferred to federal court in New York. On April 29, 2009, the federal court judge dismissed all claims asserted against FSC and nearly all other defendants from the consolidated putative class action case and granted the lead class plaintiffs until June 18, 2009 to file an amended complaint citing specific instances of alleged anti-competitive behavior by specific individuals at specific defendants.

On June 18, 2009, the lead class plaintiffs filed a second consolidated amended class action complaint. This amended complaint did not name FSC as a defendant and did not make any specific allegations of misconduct against FSC or any of its employees. As a result, FSC is no longer a party to the putative class action case. However, FSC is identified in this consolidated amended class action complaint as an alleged co-conspirator with the named defendants. The remaining defendants filed motions to dismiss the second consolidated amended class action complaint, but on March 25, 2010, the Court denied those motions, thus allowing the consolidated class action to proceed against the remaining defendants.

With respect to putative class actions filed in federal court by California plaintiffs that opted not to join in the consolidated class action case, the federal court judge granted those plaintiffs until September 15, 2009 to file an amended complaint. In their amended complaint, these California putative class plaintiffs also did not name FSC as a defendant and did not make any specific allegations of misconduct against FSC or any of its employees. As a result, FSC is no longer a party to these California putative class actions. However, FSC is identified in this complaint as an alleged co-conspirator with the named defendants. The remaining defendants filed motions to dismiss the amended complaint in the California class action. On April 26, 2010, the Court granted those motions in part and denied them in part, allowing certain claims to proceed against the remaining defendants.

With respect to the removed California suits that do not seek class action status, the federal court judge gave the plaintiffs until September 15, 2009 to file an amended complaint. These California plaintiffs, all of which are represented by the Cotchett, Pitre, and McCarthy law firm, filed amended complaints continuing to identify FSC as a named defendant. The few allegations against FSC are very limited in scope.

 

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On November 12, 2009, Sacramento Municipal Utility District, City of Riverside, The Redevelopment Agency of the City of Riverside, and The Public Financing Authority of the City of Riverside filed new lawsuits on behalf of themselves, but not on behalf of a putative class, in federal court. Additionally, on December 10, 2009, The Redevelopment Agency of the City of Stockton and The Public Financing Authority of the City of Stockton, County of Tulare, Los Angeles World Airports and Sacramento Suburban Water District filed new lawsuits on behalf of themselves, but not on behalf of a putative class, in federal court. Similar to the other five cases previously brought by California public entities that do not seek to certify a class, FSC is named as a defendant, the plaintiffs are represented by the Cotchett, Pitre, and McCarthy law firm, and the few allegations against FSC are very limited in scope. The eleven individual California actions are referred to herein as the “Cotchett Complaints.”

On February 9, 2010, the defendants in the Cotchett Complaints, except Bank of America, The Goldman Sachs Group, Inc., Goldman Sachs Mitsui Marine Derivative Products, L.P. and Goldman Sachs Bank USA, filed a Joint Motion to Dismiss the Cotchett Complaints along with a Memorandum in Support of Defendants’ Joint Motion to Dismiss the Cotchett Complaints. Additionally, FSC filed a Supplemental Memorandum in Support of the Motion to Dismiss the Cotchett Complaints setting forth specific reasons why the Cotchett Complaints should be dismissed as to FSC.

On March 26, 2010, the California plaintiffs filed a response to the motion to dismiss. On April 16, 2010, the moving defendants filed a joint reply in support of the motion to dismiss, and FSC filed a Supplemental Reply Memorandum in Support of its Motion to Dismiss. On April 28, 2010, the court denied the motion to dismiss as to FSC and nearly every other defendant named in the Cotchett Complaints. The Court is expected to hold a case management conference in the near future to discuss scheduling and discovery issues.

Like other financial institutions, we are subject to various federal, state and local laws and regulations relating to environmental matters. Under these laws and regulations, we could be held liable for costs relating to environmental contamination at or from properties that secure our loan portfolio. With respect to our borrower’s properties, the potential liabilities may far exceed the original amount of the loan made by us and secured by the property. Currently, we are not a defendant in any environmental legal proceeding.

 

Item 1A. Risk Factors

The following risk factors constitute material amendments to the risk factors disclosed under Item 1A of our Annual Report. For more information concerning our risk factors, please refer to Item 1A of our Annual Report.

We are subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to generate income.

We are subject to extensive federal and state regulation and supervision, including that of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Texas Department of Banking, the Federal Deposit Insurance Corporation (the “FDIC”), the SEC and the Financial Industry Regulatory Authority (“FINRA”). Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. Likewise, regulations promulgated by FINRA are primarily intended to protect customers of broker-dealer businesses rather than security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

 

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The U.S. Congress and federal regulatory agencies continually review banking and securities laws, regulations and policies for possible changes. It is possible that there will be significant changes to the banking and financial institutions regulatory regimes in the near future in light of the recent performance of, and government intervention in, the financial services sector. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. For instance, on June 17, 2009, President Barack Obama laid out a comprehensive regulatory reform plan aiming to modernize and protect the integrity of the U.S. financial system. In response to the President’s financial regulatory reform plan, the House of Representatives passed the “Wall Street Reform and Consumer Protection Act of 2009” on December 11, 2009. The Senate’s version of the regulatory reform package, entitled the “Restoring American Financial Stability Act,” was released by the Senate Committee on Banking, Housing & Urban Affairs on March 15, 2010, and is currently being debated on the floor of the Senate. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. Such changes could subject our business to additional costs, limit the types of financial services and products we may offer and increase the ability of non-banks to offer competing financial services and products, among other things.

In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Consumers must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. Because the Bank’s customers must provide advance consent to the overdraft service for automated teller machine and one-time debit card transactions, we cannot provide any assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges reported in future periods.

We have been advised by the Federal Reserve that the Bank’s 2008 Community Reinvestment Act (“CRA”) and compliance exams have been completed. Although a final, written report has not been issued concerning the results of such exams, we have been advised by staff at the Federal Reserve Bank of Dallas that, despite satisfactory or better findings in the various components of the CRA rating, the Bank will receive a “Needs to Improve” CRA rating, primarily as a result of alleged fair lending issues associated with PrimeLending in prior years. A CRA rating of less than “satisfactory” could adversely affect the Bank’s ability to establish new branches or acquire other financial institutions and could adversely affect our ability as a financial holding company to commence new activities, or acquire companies engaged in certain activities, otherwise permitted by financial holding companies having a “satisfactory” or better CRA rating. In addition, an adverse finding by the Federal Reserve regarding compliance with consumer protection laws and regulations, including but not limited to, fair lending laws, flood insurance laws or any other matters associated with a compliance exam of the Bank, could result in the imposition of civil money penalties, restitution, punitive damages and/or damage to our reputation.

We are subject to losses due to fraudulent and negligent acts.

Our business is subject to potential losses resulting from fraudulent activities. Our banking segment is subject to the risk that our customers may engage in fraudulent activities, including fraudulent access to legitimate customer accounts or the use of a false identity to open an account, or the use of forged or counterfeit checks for payment. The banking segment is subject to the risk of higher than expected charge offs for loans it holds to maturity on its balance sheet if its borrowers supply fraudulent information. Such types of fraud may be difficult to prevent or detect, and we may not be able to recover the losses caused by such activities. Any such losses could have a material adverse effect on our business, financial condition and operating results.

In our mortgage origination segment, we rely heavily upon information supplied by third parties including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the investment value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, another third party or one of our own employees, we generally bear the risk of loss associated with the misrepresentation. A mortgage loan subject to a material misrepresentation is typically unsaleable to investors in the secondary market. If we have already sold the loan when the material misrepresentation is discovered, then the loan is subject to repurchase, but we will often instead agree to indemnify the purchaser for any losses arising from such loan because in the general course of business we do not seek to hold for investment the mortgage loans we originate. Even though we may have rights against persons and entities who made or knew about the misrepresentation, such persons and entities are often difficult to locate, and it is often difficult to collect any monetary losses that we have suffered from them. We cannot assure you that we have detected, or will detect, all misrepresented information in our loan originations. If we experience a significant number of such fraudulent or negligent acts, our business, financial condition, liquidity and results of operations could be significantly harmed.

 

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On August 14, 2009, one of PrimeLending’s employees was indicted, along with eleven other individuals and three business entities, in Cuyahoga County, Ohio. The indictment alleged that PrimeLending’s employee was part of a loan application fraud scheme, and specifically identified loans on three properties in the aggregate amount of approximately $3.3 million that we originated and sold to investors. Trial was held on April 26, 2010, and the case was dismissed without prejudice. Pursuant to the terms of the loan purchase agreement with one of its investors, PrimeLending has agreed to indemnify the investor with respect to losses it suffered on one of the subject properties. Another investor holding loans with respect to the other two subject properties may also seek indemnification from PrimeLending for losses that it suffers with respect to such properties. We cannot assure you that we have detected or will detect all misrepresented information in our loan originations, including with respect to such employee.

First Southwest engages in the underwriting of municipal and other tax-exempt and taxable debt securities. As an underwriter, First Southwest may be liable jointly and severally under federal, state and foreign securities laws for false and misleading statements concerning the securities, or the issuer of the securities, that it underwrites. We are sometimes brought into lawsuits based on actions of our correspondents. In addition, First Southwest may act as a fiduciary in other capacities. Liability under such laws or under common law fiduciary principles could have a material adverse effect on our business, financial condition, liquidity and results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the first quarter of 2010, we issued 87,606 shares of Original Common Stock to employees upon the exercise of outstanding stock options at an average exercise price of $3.06 per share. These options were awarded pursuant to the exemption from compliance with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Rule 701 promulgated thereunder. The issuance of shares of our Original Common Stock pursuant to the exercise of such options was therefore also exempt from registration under the Securities Act pursuant to Rule 701.

In addition, during the first quarter of 2010, we issued 8,281 restricted shares of Original Common Stock to non-employee directors. We awarded these restricted shares to such non-employee directors as consideration, in addition to their director fees, for their service as directors of PlainsCapital Corporation for the 2010 fiscal year. In issuing these shares, we relied upon an exemption from compliance with the registration requirements of the Securities Act provided by Section 4(2) thereunder for transactions by an issuer not involving a public offering. Accordingly, we required each non-employee director to execute an award agreement containing investment representations and limitations on transfer before issuing the restricted shares to such director.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

During the first quarter of 2010, the Bank notified the Federal Reserve Bank of Dallas, the Texas Department of Banking and affected customers of the Bank’s intent to close its full service branch on Hulen Street in Fort Worth, Texas. The accounts of affected customers will be transferred to a nearby branch location of the Bank. We currently anticipate that this branch will be closed on or about June 30, 2010.

 

Item 6. Exhibits

A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein.

 

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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

 

  PLAINSCAPITAL CORPORATION
Date: May 5, 2010   By:  

/s/ ALLEN CUSTARD

  Name:   Allen Custard
  Title:   Executive Vice President and Chief Financial Officer
    (Duly authorized officer and principal financial officer)
Date: May 5, 2010   By:  

/s/ JEFF ISOM

  Name:   Jeff Isom
  Title:   Executive Vice President of Finance and Accounting
    (Principal accounting officer)

 

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Exhibit Index

 

                   Incorporated by Reference

Exhibit No.

      

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    3.1

     Third Amended and Restated Certificate of Formation of PlainsCapital Corporation.       10-Q    000-53629    3.1    10/21/09

    3.2

     Amended and Restated Bylaws of PlainsCapital Corporation.       8-K    000-53629    3.1    08/31/09

    4.1

     Letter Agreement and Securities Purchase Agreement—Standard Terms incorporated therein, dated as of December 19, 2008, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and the United States Department of the Treasury.       10    000-53629    4.1    04/17/09

    4.2

     Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among State Street Bank and Trust Company of Connecticut, National Association, PlainsCapital Corporation (f/k/a Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators.       10    000-53629    4.2    04/17/09

    4.3

     First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association.       10    000-53629    4.3    04/17/09

    4.4

     Indenture, dated as of July 31, 2001, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and State Street Bank and Trust Company of Connecticut, National Association.       10    000-53629    4.4    04/17/09

    4.5

     First Supplemental Indenture, dated as of August 7, 2006, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association.       10    000-53629    4.5    04/17/09

    4.6

     Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of PlainsCapital Corporation (f/k/a Plains Capital Corporation), dated as of August 7, 2006, by PlainsCapital Corporation in favor of U.S. Bank National Association.       10    000-53629    4.6    04/17/09

    4.7

     Guarantee Agreement, dated as of July 31, 2001, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and State Street Bank and Trust Company of Connecticut, National Association, as trustee.       10    000-53629    4.7    04/17/09

    4.8

     First Amendment to Guarantee Agreement, dated as of August 7, 2006, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association.       10    000-53629    4.8    04/17/09

    4.9

     Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National Association, PlainsCapital Corporation (f/k/a Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators.       10    000-53629    4.9    04/17/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    4.10

      Indenture, dated as of March 26, 2003, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association.       10    000-53629    4.10    04/17/09

    4.11

      Floating Rate Junior Subordinated Deferrable Interest Debenture of PlainsCapital Corporation (f/k/a Plains Capital Corporation), dated as of March 26, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association.       10    000-53629    4.11    04/17/09

    4.12

      Guarantee Agreement, dated as of March 26, 2003, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association, as trustee.       10    000-53629    4.12    04/17/09

    4.13

      Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank National Association, PlainsCapital Corporation (f/k/a Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators.       10    000-53629    4.13    04/17/09

    4.14

      Indenture, dated as of September 17, 2003, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association.       10    000-53629    4.14    04/17/09

    4.15

      Floating Rate Junior Subordinated Deferrable Interest Debenture of PlainsCapital Corporation (f/k/a Plains Capital Corporation), dated as of September 17, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association.       10    000-53629    4.15    04/17/09

    4.16

      Guarantee Agreement, dated as of September 17, 2003, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and U.S. Bank National Association, as trustee.       10    000-53629    4.16    04/17/09

    4.17

      Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company, and Alan B. White, DeWayne Pierce, and Jeff Isom, as Administrative Trustees.       10    000-53629    4.17    04/17/09

    4.18

      Junior Subordinated Indenture, dated as of February 22, 2008, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Wells Fargo Bank, N.A.       10    000-53629    4.18    04/17/09

    4.19

      PlainsCapital Corporation (f/k/a Plains Capital Corporation) Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008, by PlainsCapital Corporation in favor of Wells Fargo Bank, N.A., as trustee of the PCC Statutory Trust IV.       10    000-53629    4.19    04/17/09

    4.20

      Guarantee Agreement, dated as of February 22, 2008, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Wells Fargo Bank, N.A.       10    000-53629    4.20    04/17/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    4.21

      Registration Rights Agreement, dated as of December 31, 2008, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Hill A. Feinberg, as Stockholders’ Representative.       10/A    000-53629    4.21    06/26/09

    10.1

      Agreement and Plan of Merger, dated as of November 7, 2008, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), PlainsCapital Bank, First Southwest Holdings, Inc., and Hill A. Feinberg, as Stockholders’ Representative.       10    000-53629    10.1    04/17/09

    10.2

      First Amendment to Agreement and Plan of Merger, dated as of December 8, 2008, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), PlainsCapital Bank, First Southwest Holdings, Inc., and Hill A. Feinberg, as Stockholders’ Representative.       10    000-53629    10.2    04/17/09

    10.3

      Second Amendment to Agreement and Plan of Merger, dated as of December 8, 2008, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), PlainsCapital Bank, FSWH Acquisition LLC, First Southwest Holdings, Inc., and Hill A. Feinberg, as Stockholders’ Representative.       10    000-53629    10.3    04/17/09

    10.4

      Amended and Restated Employment Agreement, dated as of January 1, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Alan White.       10    000-53629    10.4    04/17/09

    10.5

      First Amendment to Amended and Restated Employment Agreement, dated as of March 2, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Alan White.       10    000-53629    10.5    04/17/09

    10.6

      Employment Agreement, effective as of December 31, 2008, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Hill A. Feinberg.       10    000-53629    10.6    04/17/09

    10.7

      First Amendment to Employment Agreement, dated as of March 2, 2009, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Hill A. Feinberg.       10    000-53629    10.7    04/17/09

    10.8

      Employment Agreement, dated as of January 1, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Jerry L. Schaffner.       10    000-53629    10.8    04/17/09

    10.9

      First Amendment to Employment Agreement, dated as of March 2, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Jerry L. Schaffner.       10    000-53629    10.9    04/17/09

    10.10

      Employment Agreement, dated as of January 1, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Jeff Isom.       10    000-53629    10.10    04/17/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    10.11

      First Amendment to Employment Agreement, dated as of March 2, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Jeff Isom.       10    000-53629    10.11    04/17/09

    10.12

      Employment Agreement, dated as of December 18, 2008, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), First Southwest Holdings, LLC and W. Allen Custard III.       8-K    000-53629    10.1    07/08/09

    10.13

      First Amendment to Employment Agreement, dated as of March 2, 2009, by and among PlainsCapital Corporation (f/k/a Plains Capital Corporation), First Southwest Holdings, LLC and W. Allen Custard III.       8-K    000-53629    10.2    07/08/09

    10.14

      Employment Agreement, dated as of March 18, 2010, between PlainsCapital Corporation and Roseanna McGill.       8-K    000-53629    10.1    03/23/10

    10.15

      Plains Capital Corporation Incentive Stock Option Plan, dated October 16, 1996 (the “1996 Incentive Stock Option Plan”).       10    000-53629    10.12    04/17/09

    10.16

      Plains Capital Corporation Incentive Stock Option Plan, dated March 25, 1998 (the “1998 Incentive Stock Option Plan”).       10    000-53629    10.13    04/17/09

    10.17

      Plains Capital Corporation Incentive Stock Option Plan, dated April 18, 2001 (the “2001 Incentive Stock Option Plan”).       10    000-53629    10.14    04/17/09

    10.18

      Plains Capital Corporation Incentive Stock Option Plan, dated March 25, 2003 (the “2003 Incentive Stock Option Plan”).       10    000-53629    10.15    04/17/09

    10.19

      Plains Capital Corporation 2005 Incentive Stock Option Plan, dated April 20, 2005.       10    000-53629    10.16    04/17/09

    10.20

      Amended and Restated Plains Capital Corporation 2007 Nonqualified and Incentive Stock Option Plan, dated December 31, 2008.       10    000-53629    10.17    04/17/09

    10.21

      PlainsCapital Corporation 2009 Long-Term Incentive Plan.       8-K    000-53629    10.1    08/31/09

    10.22

      PlainsCapital Corporation 2010 Long-Term Incentive Plan.       8-K    000-53629    10.2    03/23/10

    10.23

      PNB Financial Bank Supplemental Executive Pension Plan, effective as of January 1, 2008.       10    000-53629    10.18    04/17/09

    10.24

      First Amendment to PlainsCapital Bank Supplemental Executive Pension Plan, effective as of March 19, 2009.       10    000-53629    10.19    04/17/09

    10.25

      Plains Capital Corporation Employee Stock Ownership Plan, effective January 1, 2004 and as amended and restated as of January 1, 2006.       10    000-53629    10.20    04/17/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    10.26

      First Amendment to Plains Capital Corporation Employees’ Stock Ownership Plan, effective as of January 1, 2007.       10    000-53629    10.21    04/17/09

    10.27

      Second Amendment to Plains Capital Corporation Employees’ Stock Ownership Plan, dated as of December 1, 2008.       10    000-53629    10.22    04/17/09

    10.28

      Form of Restricted Stock Award Agreement for restricted stock awards issued to Messrs. Isom, Schaffner and White on December 17, 2008.       10    000-53629    10.23    04/17/09

    10.29

      Form of Restricted Stock Award Agreement for restricted stock awards issued to Messrs. Custard and Feinberg, effective as of December 31, 2008.       10    000-53629    10.24    04/17/09

    10.30

      Form of Stock Option Agreement under the 1996 Incentive Stock Option Plan.       10    000-53629    10.25    04/17/09

    10.31

      Form of Stock Option Agreement under the 1998 Incentive Stock Option Plan.       10    000-53629    10.26    04/17/09

    10.32

      Form of Stock Option Agreement under the 2001 Incentive Stock Option Plan.       10    000-53629    10.27    04/17/09

    10.33

      Form of Stock Option Agreement under the 2003 Incentive Stock Option Plan.       10    000-53629    10.28    04/17/09

    10.34

      Form of Stock Option Agreement under the PlainsCapital Corporation 2005 Incentive Stock Option Plan.       10    000-53629    10.29    04/17/09

    10.35

      Form of Stock Option Agreement under the Amended and Restated PlainsCapital Corporation 2007 Nonqualified and Incentive Stock Option Plan.       10    000-53629    10.30    04/17/09

    10.36

      Form of Restricted Stock Award Agreement under the PlainsCapital Corporation 2010 Long-Term Incentive Plan.       8-K    000-53629    10.3    03/23/10

    10.37

      Form of Restricted Stock Unit Award Agreement under the PlainsCapital Corporation 2010 Long-Term Incentive Plan.       8-K    000-53629    10.4    03/23/10

    10.38

      Amended and Restated Subordinate Credit Agreement, dated as of December 19, 2007, between JP Morgan Chase Bank, N.A. and PlainsCapital Corporation (f/k/a Plains Capital Corporation).       10    000-53629    10.31    04/17/09

    10.39

      Renewal, Extension and Modification Agreement, dated as of June 19, 2009, between JPMorgan Chase Bank, NA and PlainsCapital Corporation (f/k/a Plains Capital Corporation).       10-Q    000-53629    10.32    10/21/09

    10.40

      Third Amended and Restated Subordinate Promissory Note, dated as of June 19, 2009, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) in favor of JPMorgan Chase Bank, NA.       10-Q    000-53629    10.33    10/21/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    10.41

      Amended and Restated Loan Agreement, dated as of October 1, 2001, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA (f/k/a Bank One, NA).       10    000-53629    10.33    04/17/09

    10.42

      First Amendment to Amended and Restated Loan Agreement, dated as of August 1, 2002, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA (f/k/a Bank One, NA).       10    000-53629    10.34    04/17/09

    10.43

      Second Amendment to Amended and Restated Loan Agreement, dated as of August 1, 2003, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA (f/k/a Bank One, NA).       10    000-53629    10.35    04/17/09

    10.44

      Third Amendment to Amended and Restated Loan Agreement, dated as of June 1, 2004, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA (f/k/a Bank One, NA).       10    000-53629    10.36    04/17/09

    10.45

      Fourth Amendment to Amended and Restated Loan Agreement, dated as of November 21, 2005, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10    000-53629    10.37    04/17/09

    10.46

      Fifth Amendment to Amended and Restated Loan Agreement, dated as of October 16, 2006, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10    000-53629    10.38    04/17/09

    10.47

      Sixth Amendment to Amended and Restated Loan Agreement, dated as of December 19, 2007, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10    000-53629    10.39    04/17/09

    10.48

      Seventh Amendment to Amended and Restated Loan Agreement, dated as of June 19, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10-Q    000-53629    10.41    10/21/09

    10.49

      Eighth Amendment to Amended and Restated Loan Agreement, dated as of April 23, 2010, between JPMorgan Chase Bank, NA and PlainsCapital Corporation.       8-K    000-53629    10.1    04/29/10

    10.50

      Commercial Pledge and Security Agreement, dated as of November 1, 2000, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) for the benefit of JPMorgan Chase Bank, NA (f/k/a Bank One, Texas N.A.).       10    000-53629    10.40    04/17/09

    10.51

      Fourth Amended and Restated Promissory Note, dated as of June 19, 2009, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) in favor of JPMorgan Chase Bank, NA.       10-Q    000-53629    10.43    10/21/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    10.52

      Loan Agreement, dated as of September 22, 2004, between JPMorgan Chase Bank, NA (f/k/a Bank One, NA) and PlainsCapital Corporation (f/k/a Plains Capital Corporation).       10    000-53629    10.42    04/17/09

    10.53

      Renewal, Extension and Modification Agreement, dated as of June 19, 2009, between JPMorgan Chase Bank, NA and PlainsCapital Corporation (f/k/a Plains Capital Corporation).       10-Q    000-53629    10.45    10/21/09

    10.54

      Amended and Restated Promissory Note, dated as of June 19, 2009, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) in favor of JPMorgan Chase Bank, NA.       10-Q    000-53629    10.46    10/21/09

    10.55

      Loan Agreement, dated as of October 27, 2004, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA (f/k/a Bank One, NA).       10    000-53629    10.44    04/17/09

    10.56

      Renewal, Extension and Modification Agreement, dated as of June 19, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10-Q    000-53629    10.48    10/21/09

    10.57

      Third Amended and Restated Promissory Note, dated as of June 19, 2009, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) in favor of JPMorgan Chase Bank, NA.       10-Q    000-53629    10.49    10/21/09

    10.58

      Credit Agreement, dated as of October 13, 2006, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, N.A.       10    000-53629    10.47    04/17/09

    10.59

      Renewal, Extension and Modification Agreement, dated as of June 19, 2009, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and JPMorgan Chase Bank, NA.       10-Q    000-53629    10.51    10/21/09

    10.60

      Modification Agreement, dated as of April 23, 2010, between JPMorgan Chase Bank, NA and PlainsCapital Corporation.       8-K    000-53629    10.2    04/29/10

    10.61

      Second Amended and Restated Promissory Note, dated as of June 19, 2009, by PlainsCapital Corporation (f/k/a Plains Capital Corporation) in favor of JPMorgan Chase Bank, NA.       10-Q    000-53629    10.52    10/21/09

    10.62

      Office Lease, dated as of February 7, 2007, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Block L Land, L.P.       10    000-53629    10.49    04/17/09

    10.63

      First Amendment to Office Lease, dated as of April 3, 2007, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Block L Land, L.P.       10    000-53629    10.50    04/17/09


Table of Contents
                    Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
   Form    File No.    Exhibit    Filing
Date

    10.64

      Second Amendment to Office Lease, dated as of November 14, 2008, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and H/H Victory Holdings, L.P.       10    000-53629    10.51    04/17/09

    10.65

      Waiver Letter, dated as of October 16, 2009, from JP Morgan Chase Bank, NA to PlainsCapital Corporation.       10-Q    000-53629    10.59    10/21/09

    31.1

      Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    X            

    31.2

      Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    X            

    32.1

      Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    X            

.