PLAINSCAPITAL CORP - FORM 10-Q

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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER SECTION 302 - PLAINSCAPITAL CORP	dex312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER SECTION 302 - PLAINSCAPITAL CORP	dex311.htm
EX-10.71 - WAIVER LETTER - PLAINSCAPITAL CORP	dex1071.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER SECTION 906 - PLAINSCAPITAL CORP	dex321.htm

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 September 30, 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.

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 October 29, 2010, there were 33,991,465 shares of the registrant’s Original 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, and no shares of the registrant’s Common Stock, $0.001 par value, outstanding.

PlainsCapital Corporation

Quarterly Report on Form 10-Q for the period ended September 30, 2010

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

Unaudited Consolidated Interim Financial Statements

Consolidated Balance Sheets, September 30, 2010 and December 31, 2009		3
Consolidated Statements of Income, Three and Nine Months Ended September 30, 2010 and 2009		4
Consolidated Statements of Shareholders’ Equity, Nine Months Ended September 30, 2010 and 2009		5
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 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	53

Item 4T.	Controls and Procedures	56

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	(Removed and Reserved)	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

Signatures		59

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets


	September 30, 2010 (Unaudited)			December 31, 2009
	*(in thousands)*
Assets
Cash and due from banks	$	94,257		$	148,323
Federal funds sold		24,666			12,044
Loans held for sale		644,389			432,202
Securities
Held to maturity, fair market value $246,672 and $294,887, respectively		239,704			294,013
Available for sale, amortized cost $502,496 and $228,651, respectively		506,884			227,541
Trading, at fair market value		119,282			24,183

		865,870			545,737

Loans, net of unearned income		2,992,359			3,071,769
Allowance for loan losses		(58,605	)		(52,092	)

Loans, net		2,933,754			3,019,677

Broker-dealer and clearing organization receivables		155,577			82,714
Fee award receivable		19,539			20,504
Investment in unconsolidated subsidiaries		2,012			2,012
Premises and equipment, net		78,477			75,602
Accrued interest receivable		15,437			15,876
Other real estate owned		16,184			17,531
Goodwill, net		35,880			35,880
Other intangible assets, net		13,985			15,616
Other assets		192,217			147,051

Total assets	$	5,092,244		$	4,570,769


Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	210,959		$	223,551
Interest-bearing		3,542,157			3,054,488

Total deposits		3,753,116			3,278,039

Broker-dealer and clearing organization payables		197,400			108,272
Short-term borrowings		383,618			488,078
Capital lease obligation		11,804			12,128
Notes payable		62,421			68,550
Junior subordinated debentures		67,012			67,012
Other liabilities		170,638			124,531

Total liabilities		4,646,009			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		84,254			83,595
Series B, 4,382 shares issued		4,736			4,805
Original Common Stock, $0.001 par value per share, authorized 50,000,000 shares; 31,759,863 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		152,621			150,626
Retained earnings		203,931			186,743
Accumulated other comprehensive income (loss)		3,033			(300	)

		448,607			425,501
Unearned ESOP shares (275,867 shares)		(3,001	)		(3,001	)

Total PlainsCapital Corporation shareholders’ equity		445,606			422,500
Noncontrolling interest		629			1,659

Total shareholders’ equity		446,235			424,159

Total liabilities and shareholders’ equity	$	5,092,244		$	4,570,769

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income - Unaudited

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest income:
Loans, including fees	$	47,147	$	46,157	$	138,941	$	133,698
Securities
Taxable		5,239		2,109		13,826		6,800
Tax-exempt		2,040		1,648		7,153		5,081
Federal funds sold		19		42		39		75
Interest-bearing deposits with banks		204		40		587		65
Other		1,468		1,444		3,931		4,227

Total interest income		56,117		51,440		164,477		149,946

Interest expense
Deposits		7,794		8,218		22,262		24,221
Short-term borrowings		315		725		1,755		2,021
Capital lease obligation		139		108		420		326
Notes payable		873		929		2,632		2,549
Junior subordinated debentures		670		685		1,911		2,325
Other		123		165		319		550

Total interest expense		9,914		10,830		29,299		31,992


Net interest income		46,203		40,610		135,178		117,954
Provision for loan losses		20,449		14,310		53,649		39,073

Net interest income after provision for loan losses		25,754		26,300		81,529		78,881

Noninterest income
Service charges on depositor accounts		2,084		2,312		6,497		6,732
Net realized gains on sale of securities		335		—		2,045		301
Net gains from sale of loans		70,443		30,668		155,236		97,473
Mortgage loan origination fees		20,812		21,747		56,442		66,670
Trust fees		1,048		1,040		3,269		2,812
Investment advisory fees and commissions		17,410		19,520		51,455		52,385
Securities brokerage fees and commissions		6,537		6,331		18,005		16,125
Other		2,729		4,771		6,077		5,922

Total noninterest income		121,398		86,389		299,026		248,420

Noninterest expense
Employees’ compensation and benefits		80,116		61,379		210,456		171,658
Occupancy and equipment, net		14,771		12,923		42,957		36,166
Professional services		7,343		4,209		20,391		13,128
Deposit insurance premium		1,364		1,120		4,114		5,168
Repossession and foreclosure, net of recoveries		3,453		1,871		7,507		3,984
Other		21,926		15,837		52,648		41,438

Total noninterest expense		128,973		97,339		338,073		271,542


Income before income taxes		18,179		15,350		42,482		55,759
Income tax provision		7,900		5,598		15,496		19,884


Net income		10,279		9,752		26,986		35,875
Less: Net income attributable to noncontrolling interest		202		70		572		126


Net income attributable to PlainsCapital Corporation		10,077		9,682		26,414		35,749
Dividends on preferred stock and other		1,394		1,381		4,172		4,319

Income applicable to PlainsCapital Corporation common shareholders	$	8,683	$	8,301	$	22,242	$	31,430


Earnings per common share
Basic	$	0.27	$	0.26	$	0.68	$	0.97

Diluted	$	0.26	$	0.25	$	0.66	$	0.95

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity - Unaudited


				PlainsCapital Corporation Shareholders
	Comprehensive			Preferred Stock				Common Stock								Retained			Accumulated Other Comprehensive			Unearned 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					—		—		14,928			—		2,127			—			—			—			—			2,127
Adjustment to stock issued in business combination					—		—		(63	)		—		(1	)		—			—			—			—			(1	)
Stock-based compensation expense					—		—		—			—		642			—			—			—			—			642
ESOP activity					—		—		—			—		—			32			—			—			—			32
Dividends on common stock ($0.15 per share)					—		—		—			—		—			(5,072	)		—			—			—			(5,072	)
Dividends on preferred stock					—		—		—			—		—			(3,741	)		—			—			—			(3,741	)
Preferred stock amortization and accretion					—		578		—			—		—			(578	)		—			—			—			—
Cash distributions to noncontrolling interest					—		—		—			—		—			—			—			—			(319	)		(319	)
Comprehensive income:
Net income	$	35,875			—		—		—			—		—			35,749			—			—			126			35,875
Other comprehensive income (loss):
Unrealized gains on securities available for sale, net of tax of $440.8		856
Unrealized gains on securities held in trust for the Supplemental Executive
Retirement Plan, net of tax of $345.3		670
Unrealized losses on customer-related cash flow hedges, net of tax of $5.0		(9	)

Other comprehensive income		1,517			—		—		—			—		—			—			1,517			—			—			1,517

Total comprehensive income	$	37,392

Balance, September 30, 2009					92,013	$	88,209		31,588,383		$	32	$	150,213		$	194,255		$	1,848		$	(3,489	)	$	1,516		$	432,584


Balance, January 1, 2010					92,013	$	88,400		31,613,010		$	32	$	150,626		$	186,743		$	(300	)	$	(3,001	)	$	1,659		$	424,159
Stock option plans’ activity, including compensation expense					—		—		71,434			—		416			—			—			—			—			416
Vesting of stock-based compensation					—		—		75,419			—		—			—			—			—			—			—
Stock-based compensation expense					—		—		—			—		1,114			—			—			—			—			1,114
ESOP activity					—		—		—			—		—			42			—			—			—			42
Dividends on common stock ($0.15 per share)					—		—		—			—		—			(5,096	)		—			—			—			(5,096	)
Dividends on preferred stock					—		—		—			—		—			(3,582	)		—			—			—			(3,582	)
Preferred stock amortization and accretion					—		590		—			—		—			(590	)		—			—			—			—
Cash received from noncontrolling interest					—		—		—			—		—			—			—			—			74			74
Cash distributions to noncontrolling interest					—		—		—			—		—			—			—			—			(298	)		(298	)
Redemption of noncontrolling interest					—		—		—			—		465			—			—			—			(1,378	)		(913	)
Comprehensive income:
Net income	$	26,986			—		—		—			—		—			26,414			—			—			572			26,986
Other comprehensive income (loss):
Unrealized gains on securities available for sale, net of tax of $1,923.9		3,574
Unrealized losses on securities held in trust for the Supplemental Executive Retirement Plan, net of tax of $98.0		(192	)

Unrealized losses on customer-related cash flow hedges, net of tax of $26.2		(49	)

Other comprehensive income		3,333			—		—		—			—		—			—			3,333			—			—			3,333

Total comprehensive income	$	30,319

Balance, September 30, 2010					92,013	$	88,990		31,759,863		$	32	$	152,621		$	203,931		$	3,033		$	(3,001	)	$	629		$	446,235

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In thousands)


	Nine Months Ended September 30,
	2010			2009
Operating Activities
Net income	$	26,986		$	35,875
Adjustments to reconcile net income to net cash used in operating activities
Provision for loan losses		53,649			39,073
Net losses on other real estate owned		5,397			2,903
Depreciation and amortization		11,181			7,287
Stock-based compensation expense		1,221			812
Net realized gains on sale of securities		(2,045	)		(301	)
Loss on sale of premises and equipment		278			1
Stock dividends received on securities		(48	)		(40	)
Deferred income taxes		(3,971	)		4,956
Changes in prepaid FDIC assessments		3,544			—
Changes in assets segregated for regulatory purposes		—			(5,500	)
Changes in trading securities		(95,099	)		(34,837	)
Changes in broker-dealer and clearing organization receivables		(72,863	)		(176,210	)
Changes in fee award receivable		965			858
Changes in broker-dealer and clearing organization payables		89,128			202,288
Changes in other assets		(25,733	)		4,724
Changes in other liabilities		14,201			35,767
Net gains from sale of loans		(155,236	)		(97,473	)
Loans originated for sale		(5,209,037	)		(4,313,972	)
Proceeds from loans sold		5,118,975			4,156,465

Net cash used in operating activities		(238,507	)		(137,324	)


Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		66,442			25,967
Proceeds from sales, maturities and principal reductions of securities available for sale		259,767			122,139
Purchases of securities held to maturity		(8,720	)		(94,123	)
Purchases of securities available for sale		(533,320	)		(110,322	)
Net (increase) decrease in loans		18,046			(141,785	)
Purchases of premises and equipment and other assets		(10,536	)		(14,996	)
Proceeds from sales of premises and equipment and other real estate owned		11,629			9,345
Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock		6,988			(3,706	)

Net cash used in investing activities		(189,704	)		(207,481	)


Financing Activities
Net increase in deposits		506,273			341,242
Net increase (decrease) in short-term borrowings		(104,460	)		192,519
Proceeds from notes payable		1,700			2,900
Payments on notes payable		(7,829	)		(83,223	)
Proceeds from issuance of common stock		309			72
Dividends paid		(8,678	)		(8,203	)
Cash received from noncontrolling interest		74			—
Cash distributions to noncontrolling interest		(298	)		(319	)
Other, net		(324	)		(210	)

Net cash provided by financing activities		386,767			444,778


Net increase (decrease) in cash and cash equivalents		(41,444	)		99,973
Cash and cash equivalents at beginning of period		160,367			114,571

Cash and cash equivalents at end of period	$	118,923		$	214,544

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	28,295		$	32,456

Income taxes	$	15,189		$	10,680


Supplemental Schedule of Noncash Activities
Conversion of loans to other real estate owned	$	14,879		$	18,612

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements – Unaudited

September 30, 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 and nine month periods ended September 30, 2010 and 2009 have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

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. PlainsCapital has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

PlainsCapital is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-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 69.75% membership 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 Plains Financial Corporation (“PFC”). The Bank has a 100% membership 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.

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

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”).

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 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 materially from those estimates. The allowance for loan losses is particularly subject to change.

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 September 30, 2010 and December 31, 2009 are shown in the following table (in thousands):


	September 30, 2010		December 31, 2009
Unrealized gain (loss) on securities available for sale	$	2,853	$	(721	)
Unrealized gain on securities held in trust for the Supplemental Executive Retirement Plan		102		294
Unrealized gain on customer-related cash flow hedges		78		127

	$	3,033	$	(300	)

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 September 30, 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 September 30, 2010
U. S. government agencies
Mortgage-backed securities	$	11,850	$	686	$	(9	)	$	12,527
Collateralized mortgage obligations		32,914		984		—			33,898
States and political subdivisions		120,979		6,298		(147	)		127,130
Auction rate bonds		73,961		1,431		(2,275	)		73,117

Totals	$	239,704	$	9,399	$	(2,431	)	$	246,672


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 September 30, 2010
U. S. government agencies
Bonds	$	50,000	$	45	$	(1	)	$	50,044
Mortgage-backed securities		21,257		1,559		—			22,816
Collateralized mortgage obligations		386,570		3,025		(383	)		389,212
States and political subdivisions		21,750		462		(95	)		22,117
Auction rate bonds		22,919		—		(224	)		22,695

Totals	$	502,496	$	5,091	$	(703	)	$	506,884


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

2. Securities (continued)

Information regarding securities that were in an unrealized loss position as of September 30, 2010 and December 31, 2009, is shown in the following tables (dollars in thousands):


	As of September 30, 2010						As of December 31, 2009
	Number of Securities		Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses
Held to maturity
U. S. government agencies
Mortgage-backed securities
Unrealized loss for less than twelve months		1	$	2,340	$	2		1	$	495	$	8
Unrealized loss for more than twelve months		1		495		7		—		—		—

		2		2,835		9		1		495		8
Collateralized mortgage obligations
Unrealized loss for less than twelve months		—		—		—		5		26,453		1,042
Unrealized loss for more than twelve months		—		—		—		—		—		—

		—		—		—		5		26,453		1,042
States and political subdivisions
Unrealized loss for less than twelve months		14		5,505		44		39		20,085		304
Unrealized loss for more than twelve months		13		5,176		103		26		11,755		644

		27		10,681		147		65		31,840		948
Auction rate bonds
Unrealized loss for less than twelve months		1		5,842		23		—		—		—
Unrealized loss for more than twelve months		3		30,813		2,252		3		60,257		3,084

		4		36,655		2,275		3		60,257		3,084
Total held to maturity
Unrealized loss for less than twelve months		16		13,687		69		45		47,033		1,354
Unrealized loss for more than twelve months		17		36,484		2,362		29		72,012		3,728

		33	$	50,171	$	2,431		74	$	119,045	$	5,082

Available for sale
U. S. government agencies
Bonds
Unrealized loss for less than twelve months		1	$	19,999	$	1		—	$	—	$	—
Unrealized loss for more than twelve months		—		—		—		—		—		—

		1		19,999		1		—		—		—
Mortgage-backed securities
Unrealized loss for less than twelve months		—		—		—		1		1,443		22
Unrealized loss for more than twelve months		—		—		—		1		4,955		247

		—		—		—		2		6,398		269
Collateralized mortgage obligations
Unrealized loss for less than twelve months		6		84,997		383		6		71,875		3,083
Unrealized loss for more than twelve months		—		—		—		—		—		—

		6		84,997		383		6		71,875		3,083
States and political subdivisions
Unrealized loss for less than twelve months		3		2,740		95		—		—		—
Unrealized loss for more than twelve months		—		—		—		—		—		—

		3		2,740		95		—		—		—
Auction rate bonds
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		1		22,695		224		1		22,848		134

		1		22,695		224		1		22,848		134
Total available for sale
Unrealized loss for less than twelve months		10		107,736		479		7		73,318		3,105
Unrealized loss for more than twelve months		1		22,695		224		2		27,803		381

		11	$	130,431	$	703		9	$	101,121	$	3,486

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 September 30, 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 the Bank will not have to sell any such securities before a recovery of cost. As of September 30, 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.

2. Securities (continued)

The amortized cost and fair value of securities, excluding trading securities, as of September 30, 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	$	2,335	$	2,393	$	—	$	—
Due after one year through five years		1,934		1,979		50,000		50,044
Due after five years through ten years		14,654		15,430		—		—
Due after ten years		176,017		180,445		44,669		44,812

		194,940		200,247		94,669		94,856

Mortgage-backed securities		11,850		12,527		21,257		22,816
Collateralized mortgage obligations		32,914		33,898		386,570		389,212

	$	239,704	$	246,672	$	502,496	$	506,884

For the three and nine months ended September 30, 2010, the Bank received proceeds from the sale of available for sale securities of $99.5 million and $191.8 million, respectively, and realized gross gains of $0.3 million and $2.0 million, respectively. The Bank determines the cost of securities sold by specific identification. The Bank did not sell securities in the three months ended September 30, 2009. For the nine months ended September 30, 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 securities portfolio of $1.0 million and $2.5 million for the three and nine months ended September 30, 2010, respectively, and $0.5 million and $1.0 million for the three and nine months ended September 30, 2009, respectively. The net gains were recorded as a component of other noninterest income.

The Bank tendered $24.0 million par value of available for sale auction rate bonds during the first quarter of 2010, receiving $21.6 million of gross proceeds. No gain or loss resulted from the transaction. In addition, held to maturity 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. Because First Southwest provided related financing to the issuer, the Bank began accreting the discount over the expected term of financing in the first quarter of 2010. At the end of the second quarter, this First Southwest financing expired. Accordingly, the Bank recognized the remaining $0.2 million of unaccreted discount related to call transactions associated with the First Southwest financing.

During the first six months of 2010, held to maturity auction rate bonds with a par value of $30.4 million and an unaccreted discount of approximately $2.6 million were called at par by the issuer in two steps. 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 $2.8 million for costs the issuer incurred related to the calls. As a result of the accelerated discount accretion and the reimbursement to the issuer, the Bank incurred a loss on the call transactions of approximately $0.2 million.

In the aggregate, the par value of the Bank’s holdings of auction rate bonds decreased by $58.9 million from December 31, 2009 to September 30, 2010.

Securities with a carrying amount of approximately $378.3 million and $365.2 million (fair value of approximately $388.4 million and $366.5 million) at September 30, 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 $70.0 million and $149.0 million at September 30, 2010 and December 31, 2009, in lieu of pledging securities to secure certain public deposits.

3. Loans and Allowance for Loan Losses

Loans summarized by category as of September 30, 2010 and December 31, 2009, are as follows (in thousands):


	September 30, 2010			December 31, 2009
Commercial and industrial	$	1,218,185		$	1,264,735
Lease financing		56,805			78,088
Construction and land development		351,726			402,876
Real estate		1,097,597			1,125,134
Securities (primarily margin loans)		227,067			152,145
Consumer		40,979			48,791

		2,992,359			3,071,769
Allowance for loan losses		(58,605	)		(52,092	)

	$	2,933,754		$	3,019,677

Impaired loans totaled approximately $133.2 million and $69.0 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, an allowance for loan loss of approximately $11.6 million was associated with $52.2 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 September 30, 2010 and 2009 was approximately $92.6 million and $58.0 million, respectively. For the nine months ended September 30, 2010 and 2009, the average aggregate balance of impaired loans was approximately $98.4 million and $54.9 million, respectively. Interest income recorded on impaired loans for the three and nine months ended September 30, 2010 was $0.3 million and $1.0 million, respectively, and a nominal amount for each of the three and nine months ended September 30, 2009.

Non-accrual loans are a significant component of total impaired loans. Non-accrual loans were approximately $106.1 million and $69.0 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, an allowance for loan loss of approximately $5.7 million was associated with $25.0 million of non-accrual loans. At December 31, 2009, an allowance for loan loss of approximately $9.2 million was associated with $63.7 million of non-accrual loans. The average aggregate balance of non-accrual loans for the three months ended September 30, 2010 and 2009 was approximately $69.0 million and $58.0 million, respectively. For the nine months ended September 30, 2010 and 2009, the average aggregate balance of non-accrual loans was approximately $74.8 million and $54.9 million, respectively. Interest income recorded on non-accrual loans for the three and nine months ended September 30, 2010 and 2009 was nominal.

At September 30, 2010 and December 31, 2009, the Bank and PlainsCapital Leasing, LLC had loans of approximately $11.4 million and $0.2 million, respectively, that were more than 90 days past due, but upon which interest continued to accrue. Accrued interest receivable on these loans was $0.5 million at September 30, 2010 and a nominal amount at December 31, 2009.

3. Loans and Allowance for Loan Losses (continued)

Net investment in lease financing at September 30, 2010 and December 31, 2009 is shown in the following table (in thousands):


	September 30, 2010			December 31, 2009
Future minimum lease payments	$	60,411		$	83,390
Unguaranteed residual value		139			580
Guaranteed residual value		2,174			2,310
Initial direct costs, net of amortization		205			348
Unearned income		(6,124	)		(8,540	)

	$	56,805		$	78,088

Changes in the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	56,375		$	31,778		$	52,092		$	40,672
Provision charged to operations		20,449			14,310			53,649			39,073
Net charge-offs
Loans charged-off		(18,487	)		(6,580	)		(47,889	)		(40,776	)
Recoveries on previously charged-off loans		268			291			753			830

Net charge-offs		(18,219	)		(6,289	)		(47,136	)		(39,946	)

Balance at end of period	$	58,605		$	39,799		$	58,605		$	39,799

4. Deposits

Deposits at September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):


	September 30, 2010		December 31, 2009
Noninterest-bearing demand	$	210,959	$	223,551
Interest-bearing:
NOW accounts		60,337		56,697
Money market		1,732,604		1,638,763
Demand		53,070		46,156
Savings		212,129		135,962
In foreign branches		105,821		166,746
Time - $100,000 and over		714,698		684,939
Time - brokered		443,144		106,790
Time - other		220,354		218,435

	$	3,753,116	$	3,278,039

5. Short-Term Borrowings

Short-term borrowings at September 30, 2010 and December 31, 2009 were as follows (in thousands):


	September 30, 2010		December 31, 2009
Federal funds purchased	$	72,250	$	150,075
Securities sold under agreements to repurchase		182,317		59,927
Federal Home Loan Bank notes		100,000		275,000
Treasury tax and loan note option account		3,051		3,076
Short-term bank loans		26,000		—

	$	383,618	$	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 tables (dollars in thousands):


	Nine Months Ended September 30,
	2010			2009
Average balance during the period	$	223,420		$	216,138
Average interest rate during the period		0.24	%		0.37	%

	September 30, 2010			December 31, 2009
Average interest rate at end of period		0.27	%		0.21	%
Securities underlying the agreements at end of period
Carrying value	$	141,838		$	65,838
Estimated fair value	$	192,359		$	67,075

The estimated fair value of securities underlying repurchase agreements above includes $49.6 million of securities owned by FSC customers and pledged to FSC as collateral for margin loans as of September 30, 2010. FSC is permitted to sell or re-pledge customer securities held as collateral for margin loans under the terms of the margin loan agreements between FSC and its customers.

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 (dollars in thousands):


	Nine Months Ended September 30,
	2010			2009
Average balance during the period	$	236,172		$	199,267
Average interest rate during the period		0.64	%		0.57	%

	September 30, 2010			December 31, 2009
Average interest rate at end of period		0.43	%		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 September 30, 2010 was 1.36%. No short-term bank loans were outstanding at December 31, 2009.

6. Notes Payable

Notes payable at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
Federal Home Loan Bank Dallas advances	$	—	$	1,534
Revolving credit line with JPMorgan Chase not to exceed $17.7 million. Facility matures July 31, 2011, with interest payable quarterly.		16,700		17,000
Revolving credit line with JPMorgan Chase not to exceed $5.0 million. Facility matures July 31, 2011 with interest payable quarterly.		—		7,650
Term note with JPMorgan Chase, due July 31, 2011. Principal payments of $1.9 million and interest are payable quarterly.		5,738		—
Term note with JPMorgan Chase, due July 31, 2011. Principal payments of $0.5 million and interest are payable semi-annually.		3,000		3,500
Term note with JPMorgan Chase, due October 27, 2015. Principal payments of $25,000 and interest are 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.		16,483		18,366

	$	62,421	$	68,550

The table above reflects July 2010 amendments (“July 2010 Amendments”) to loan agreements between PlainsCapital and JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) governing PlainsCapital’s revolving credit facilities and term notes. The July 2010 Amendments extended the maturity of PlainsCapital’s existing lines of credit and term notes expiring July 31, 2010 to July 31, 2011, converted certain borrowings under PlainsCapital’s existing lines of credit to term borrowings and reduced the aggregate borrowing capacity under PlainsCapital’s existing lines of credit from $30.0 million to $22.7 million without materially altering PlainsCapital’s available borrowing capacity. At September 30, 2010, PlainsCapital had $6.0 million of available borrowing capacity under its existing lines of credit.

In April 2010, PlainsCapital secured an amendment of the covenant in the JPMorgan Chase revolving credit line agreements regarding the Bank’s non-performing asset ratio. The amendment increased the permissible “non-performing asset ratio,” as defined in the JPMorgan Chase revolving credit line agreements, for the Bank to 3.50% from 2.50%, effective for compliance as of March 31, 2010. The July 2010 Amendments specify that the Bank must maintain a non-performing asset ratio of less than or equal to 3.50% on September 30 and December 31, 2010, 3.25% on March 31, 2011 and 3.00% on the last day of each fiscal quarter thereafter.

The Bank’s non-performing asset ratio at September 30, 2010, calculated in accordance with the JPMorgan Chase revolving credit line agreements, was 3.84%, which was greater than the permissible non-performing asset ratio of 3.50% at September 30, 2010. JPMorgan Chase has waived compliance with the non-performing asset ratio covenant at September 30, 2010.

7. Income Taxes

PlainsCapital’s effective tax rate was 43.5% and 36.5% for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, PlainsCapital’s effective tax rate was 36.5% and 35.7%, respectively. The increase in the effective tax rate for the three months ended September 30, 2010, compared to the corresponding period in 2009, is primarily attributable to higher pre-tax income and higher levels of nondeductible expenses.

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.

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 $3.5 million and $8.5 million at September 30, 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.

As a result of these SEC and DOJ investigations into industry-wide practices, FSC was initially named as a co-defendant in cases filed 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 and a similar set of lawsuits filed by various California local governmental entities suing on behalf of themselves and a purported class of similarly situated governmental entities. All claims asserted against FSC in these purported class actions were subsequently dismissed. The plaintiffs in these purported class actions have filed amended complaints in the United States District Court, Southern District of New York against other entities, and FSC is identified in these complaints not as a defendant, but as an alleged co-conspirator with the named defendants. The relief sought is unspecified monetary damages.

FSC is a defendant in seventeen lawsuits that were filed between July 2008 and September 2010 by several California public entities and one New York non-profit corporation that do not seek to certify a class. The Judicial Panel on Multidistrict Litigation has transferred or is in the process of transferring these cases to the United States District Court, Southern District of New York. The California plaintiffs allege violations of Section 1 of the Sherman Antitrust Act and the California Cartwright Act. The New York plaintiff alleges violations of Section 1 of the Sherman Antitrust Act and the New York Donnelly Act. The few allegations against FSC are very limited in scope and do not relate to transactions involving any of these plaintiffs. FSC filed an answer to the first sixteen lawsuits, will soon answer the latest lawsuit, and intends to defend itself vigorously in all of these individual actions. The relief sought is unspecified monetary damages.

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.

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 $5.3 million and $4.9 million for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, rental expense was approximately $15.7 million and $13.3 million, respectively.

9. Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk that are used in the normal course of business to meet the financing needs of its 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 has 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 had in the aggregate outstanding unused commitments to extend credit of $838.1 million at September 30, 2010. The Bank had outstanding standby letters of credit of $53.0 million at September 30, 2010.

The Bank uses the same credit policies in making commitments and standby letters of credit as it does 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.

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 issued 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.

Effective April 1, 2010, certain PrimeLending employees were granted 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.

Effective July 1, 2010, a PrimeLending employee was granted 2,000 restricted stock units under the 2010 Plan. The restricted stock units vest in five years.

Effective September 30, 2010, an employee of the Bank was granted 2,000 restricted stock units under the 2010 Plan. The restricted stock units vest in five years.

10. Stock-Based Compensation (continued)

Compensation cost related to the Stock Option Plans and the 2010 Plan was approximately $0.5 million and $0.3 million for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, compensation cost was approximately $1.2 million and $0.8 million, respectively.

At September 30, 2010, unrecognized cost related to the Stock Option Plans was not significant. At September 30, 2010, PlainsCapital had 510,862 shares of unvested restricted stock. Unrecognized cost related to the restricted stock was $5.1 million at September 30, 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 remaining unrecognized cost related to the restricted stock would be recognized in noninterest expense immediately.

At September 30, 2010, a total of 166,881 shares were available for grant under the Stock Option Plans and 659,662 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 nine months ended September 30, 2010 is as follows:


	2010
	Shares			Weighted Average Exercise Price
Outstanding, January 1		943,515		$	8.50
Exercised		(93,334	)		3.32
Cancellations and expirations		(90,453	)		4.56

Outstanding, September 30		759,728			9.60

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 (dollars in thousands):


	At September 30, 2010
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	198,464		4	%	$	479,964		9.67	%
Tier 1 capital (to risk-weighted assets)		153,640		4	%		479,964		12.50	%
Total capital (to risk-weighted assets)		307,281		8	%		528,118		13.75	%

PlainsCapital Corporation:
Tier 1 capital (to average assets)	$	198,809		4	%	$	457,861		9.21	%
Tier 1 capital (to risk-weighted assets)		154,135		4	%		457,861		11.88	%
Total capital (to risk-weighted assets)		308,270		8	%		526,167		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	%	$	437,442		9.45	%
Tier 1 capital (to risk-weighted assets)		144,589		4	%		437,442		12.10	%
Total capital (to risk-weighted assets)		289,179		8	%		502,666		13.91	%

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 (dollars in thousands):


	At September 30, 2010
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	248,080		5	%	$	479,964		9.67	%
Tier 1 capital (to risk-weighted assets)		230,461		6	%		479,964		12.50	%
Total capital (to risk-weighted assets)		384,101		10	%		528,118		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 September 30, 2010, FSC had net capital of $50.7 million; the minimum net capital requirement was $3.7 million; net capital maintained by FSC at September 30, 2010 was 27% of aggregate debits; and net capital in excess of the minimum requirement at September 30, 2010 was $47.0 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 September 30, 2010, approximately $50.7 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve and the Texas Department of Banking.

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.

13. Broker-Dealer and Clearing Organization Receivables and Payables

Broker/dealer and clearing organization receivables and payables at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
Receivables
Securities borrowed	$	139,633	$	73,139
Securities failed to deliver		6,064		6,110
Clearing organizations		9,819		3,275
Due from dealers		61		190

	$	155,577	$	82,714

Payables
Securities loaned	$	163,583	$	86,207
Correspondents		22,665		17,370
Securities failed to receive		7,785		4,433
Clearing organizations		3,367		262

	$	197,400	$	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.

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 September 30, 2010, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $643.0 million, while the unpaid principal balance of those loans was $625.0 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 September 30, 2010, 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		—			—			(157	)		(157	)
Transfers to Level 2		(35,280	)		(3,839	)		—			(39,119	)
Purchases, issuances and settlements, net		35,280			—			(21,702	)		13,578

Balance, September 30, 2010	$	—		$	—		$	22,695		$	22,695

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

In the normal course of business, the Bank commits to purchase securities prior to their issuance. Because such “when-issued” securities are purchased prior to their actual issuance, the Bank will not, on occasion, receive pricing data on these securities from its independent pricing service. In those instances, the Bank will classify fair value measurements regarding those securities as Level 3. The Bank will transfer the fair value measurements out of Level 3 at the end of the month in which it begins to receive pricing data from the independent pricing service.

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 September 30, 2010
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Loans held for sale	$	—	$	643,048	$	—	$	643,048
Securities available for sale		—		484,189		22,695		506,884
Trading securities		—		119,282		—		119,282
Derivative assets		—		5,890		—		5,890
Time deposits		—		1,107		—		1,107
Trading liabilities		—		4,118		—		4,118
Derivative liabilities		—		80		—		80


	Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option
	Three Months Ended September 30, 2010									Three Months Ended September 30, 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	$	(1,502	)	$	—		$	(1,502	)	$	2,184	$	—		$	2,184
Time deposits		—			(25	)		(25	)		—		(25	)		(25	)

	Nine Months Ended September 30, 2010									Nine Months Ended September 30, 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	$	6,737		$	—		$	6,737		$	5,159	$	—		$	5,159
Time deposits					(29	)		(29	)		—		(88	)		(88	)

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 Loans – PlainsCapital reports certain impaired 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 September 30, 2010, loans with a carrying amount of $52.2 million had been reduced by allocations of the allowance for loan losses of $11.6 million, resulting in a reported fair value of $40.6 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 September 30, 2010, the estimated fair value of other real estate owned was $16.2 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.

14. Fair Value Measurements (continued)

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


	At September 30, 2010				At December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount			Estimated Fair Value
Financial assets
Cash and short-term investments	$	118,923	$	118,923	$	160,367		$	160,367
Loans held for sale		644,389		644,389		432,202			432,202
Securities		865,870		872,838		545,737			546,611
Loans, net		2,933,754		2,970,111		3,019,677			3,053,759
Broker-dealer and clearing organization receivables		155,577		155,577		82,714			82,714

Fee award receivable		19,539		19,539		20,504			20,504
Cash surrender value of life insurance policies		22,148		22,148		21,379			21,379
Interest rate swaps and interest rate lock commitments (“IRLCs”)		5,890		5,890		1,851			1,851
Accrued interest receivable		15,437		15,437		15,876			15,876

Financial liabilities
Deposits		3,753,116		3,762,708		3,278,039			3,285,796
Broker-dealer and clearing organization payables		197,400		197,400		108,272			108,272
Other trading liabilities		4,118		4,118		3,019			3,019
Short-term borrowings		383,618		383,618		488,078			488,078
Debt		129,433		129,433		135,562			135,562

Forward purchase commitments		80		80		(271	)		(271	)
Accrued interest payable		6,665		6,665		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 $2.4 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, changes in the fair value of these instruments produced net gains of approximately $3.5 million and $1.4 million, respectively. The net gains or losses were recorded as a component of gain on sale of loans.

15. Derivative Financial Instruments (continued)

Derivative positions at September 30, 2010 and December 31, 2009 are presented in the following table (in thousands):


	At September 30, 2010				At December 31, 2009
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Non-hedging derivative instruments
IRLCs	$	769,059	$	5,652	$	256,285	$	(511	)
Interest rate swaps		1,969		153		9,469		(1	)
Forward purchase commitments		619,665		5		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 September 30, 2010								Three Months Ended September 30, 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		(52	)		18		(34	)		(5	)		2		(3	)

Other comprehensive income (loss)	$	(52	)	$	18	$	(34	)	$	(5	)	$	2	$	(3	)


	Nine Months Ended September 30, 2010								Nine Months Ended September 30, 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		(75	)		26		(49	)		(14	)		5		(9	)

Other comprehensive income (loss)	$	(75	)	$	26	$	(49	)	$	(14	)	$	5	$	(9	)

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 of 2009, 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 those noninterest expenses removed from the Bank 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.

16. Segment and Related Information (continued)

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

Income Statement Data


	Three Months Ended September 30, 2010
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	54,360	$	7,366		$	3,373	$	(8,982	)	$	56,117
Interest expense		9,204		13,092			881		(13,263	)		9,914


Net interest income (expense)		45,156		(5,726	)		2,492		4,281			46,203
Provision for loan losses		20,550		(101	)		—		—			20,449
Noninterest income		9,463		91,313			25,036		(4,414	)		121,398
Noninterest expense		30,967		72,201			25,954		(149	)		128,973


Net income before taxes		3,102		13,487			1,574		16			18,179
Income tax provision		1,349		5,866			685		—			7,900


Consolidated net income		1,753		7,621			889		16			10,279
Less: net income attributable to noncontrolling interest		—		130			72		—			202


Net income attributable to PlainsCapital Corporation	$	1,753	$	7,491		$	817	$	16		$	10,077


	Nine Months Ended September 30, 2010
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	159,511	$	18,646		$	8,588	$	(22,268	)	$	164,477
Interest expense		27,577		34,284			2,545		(35,107	)		29,299


Net interest income (expense)		131,934		(15,638	)		6,043		12,839			135,178
Provision for loan losses		53,015		634			—		—			53,649
Noninterest income		28,900		211,473			71,910		(13,257	)		299,026
Noninterest expense		88,163		177,758			72,620		(468	)		338,073


Net income before taxes		19,656		17,443			5,333		50			42,482
Income tax provision		7,178		6,370			1,948		—			15,496


Consolidated net income		12,478		11,073			3,385		50			26,986
Less: net income attributable to noncontrolling interest		—		350			222		—			572


Net income attributable to PlainsCapital Corporation	$	12,478	$	10,723		$	3,163	$	50		$	26,414

16. Segment and Related Information (continued)

Income Statement Data


	Three Months Ended September 30, 2009
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	50,030	$	5,066		$	2,243	$	(5,899	)	$	51,440
Interest expense		10,301		7,383			827		(7,681	)		10,830


Net interest income (expense)		39,729		(2,317	)		1,416		1,782			40,610
Provision for loan losses		14,310		—			—		—			14,310
Noninterest income		6,414		52,484			29,425		(1,934	)		86,389
Noninterest expense		23,776		46,689			27,045		(171	)		97,339


Net income before taxes		8,057		3,478			3,796		19			15,350
Income tax provision		2,942		1,270			1,386		—			5,598


Consolidated net income		5,115		2,208			2,410		19			9,752
Less: net income attributable to noncontrolling interest		—		—			70		—			70


Net income attributable to PlainsCapital Corporation	$	5,115	$	2,208		$	2,340	$	19		$	9,682

	Nine Months Ended September 30, 2009
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	145,706	$	11,252		$	6,358	$	(13,370	)	$	149,946
Interest expense		30,514		14,618			2,622		(15,762	)		31,992


Net interest income (expense)		115,192		(3,366	)		3,736		2,392			117,954
Provision for loan losses		39,073		—			—		—			39,073
Noninterest income		15,273		163,609			72,372		(2,834	)		248,420
Noninterest expense		74,597		127,759			69,683		(497	)		271,542


Net income before taxes		16,795		32,484			6,425		55			55,759
Income tax provision		5,995		11,595			2,294		—			19,884


Consolidated net income		10,800		20,889			4,131		55			35,875
Less: net income attributable to noncontrolling interest		—		—			126		—			126

Net income attributable to PlainsCapital Corporation	$	10,800	$	20,889		$	4,005	$	55		$	35,749

16. Segment and Related Information (continued)

Balance Sheet Data


	September 30, 2010
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	90,249	$	54,515	$	5,054	$	(55,561	)	$	94,257
Loans held for sale		1,341		643,048		—		—			644,389
Securities		746,588		—		119,282		—			865,870
Loans, net		3,369,803		2,318		224,578		(662,945	)		2,933,754
Broker-dealer and clearing organization receivables		—		—		155,577		—			155,577
Investment in subsidiaries		223,951		—		—		(223,951	)		—
Goodwill and other intangible assets, net		7,865		23,706		18,294		—			49,865
Other assets		214,415		27,219		60,339		46,559			348,532


Total assets	$	4,654,212	$	750,806	$	583,124	$	(895,898	)	$	5,092,244


Deposits	$	3,793,348	$	—	$	62,230	$	(102,462	)	$	3,753,116
Broker-dealer and clearing organization payables		—		—		197,400		—			197,400
Short-term borrowings		227,033		—		156,585		—			383,618
Notes payable		45,550		607,940		19,407		(610,476	)		62,421
Junior subordinated debentures		—		—		—		67,012			67,012
Other liabilities		48,993		62,827		67,173		3,449			182,442
PlainsCapital Corporation shareholders’ equity		539,288		79,786		80,329		(253,797	)		445,606
Noncontrolling interest		—		253		—		376			629


Total liabilities and shareholders’ equity	$	4,654,212	$	750,806	$	583,124	$	(895,898	)	$	5,092,244


	December 31, 2009
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	139,579	$	42,593	$	11,017	$	(44,866	)	$	148,323
Loans held for sale		1,442		430,760		—		—			432,202
Securities		521,554		—		24,183		—			545,737
Loans, net		3,296,336		—		154,123		(430,782	)		3,019,677
Broker-dealer and clearing organization receivables		—		—		82,714		—			82,714
Investment in subsidiaries		226,297		—		—		(226,297	)		—
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	$	511,685	$	337,210	$	(670,132	)	$	4,570,769


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		—		49		—		1,610			1,659


Total liabilities and shareholders’ equity	$	4,392,006	$	511,685	$	337,210	$	(670,132	)	$	4,570,769

17. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Income applicable to PlainsCapital Corporation common shareholders	$	8,683	$	8,301	$	22,242	$	31,430
Less: income applicable to participating securities		319		309		803		1,168

Income applicable to PlainsCapital Corporation common shareholders for basic earnings per common share	$	8,364	$	7,992	$	21,439	$	30,262


Weighted-average common shares, including participating securities		32,681,560		32,474,643		32,652,395		32,462,334
Less: participating securities included in weighted-average shares		1,199,158		1,206,972		1,179,380		1,206,972

Weighted-average shares outstanding for basic earnings per common share		31,482,402		31,267,671		31,473,015		31,255,362


Basic earnings per common share	$	0.27	$	0.26	$	0.68	$	0.97


Income applicable to PlainsCapital Corporation common shareholders	$	8,683	$	8,301	$	22,242	$	31,430


Weighted-average shares outstanding		31,482,402		31,267,671		31,473,015		31,255,362
Dilutive effect of contingently issuable shares due to First Southwest acquisition		1,720,740		1,527,687		1,720,740		1,527,687
Dilutive effect of stock options and non-vested stock awards		191,223		419,599		265,619		358,775


Weighted-average shares outstanding for diluted earnings per common share		33,394,365		33,214,957		33,459,374		33,141,824


Diluted earnings per common share	$	0.26	$	0.25	$	0.66	$	0.95

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. In the third quarter of 2010, we adjusted the calculation of weighted-average shares outstanding under the two-class method. The adjustments did not have a material impact on reported earnings per share. PlainsCapital has retrospectively adjusted previously reported share and per share amounts to reflect the changes in the calculation of weighted-average shares outstanding for all periods presented.

The weighted-average shares outstanding used to compute diluted earnings per common share do not include outstanding options of 286,659 and 115,650 for the three and nine months ended September 30, 2010, respectively, and 57,000 and 180,489 for the three and nine months ended September 30, 2009. The exercise price of the excluded options exceeded the estimated average market price of PlainsCapital stock in the respective periods. Accordingly, the assumed exercise of the excluded options would have been antidilutive.

18. Recently Issued Accounting Standards

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.

18. Recently Issued Accounting Standards (continued)

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.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB amended the Receivables Topic of the ASC to require entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. These amendments to the Receivables Topic will be effective for PlainsCapital as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will become effective January 1, 2011.

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 Texas banking association (a wholly owned subsidiary of PlainsCapital Corporation), references to “First Southwest” refer to First Southwest Holdings, LLC, a Delaware limited liability company (a wholly owned subsidiary of the Bank), and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, a Delaware corporation, (a wholly owned subsidiary of First Southwest Holdings, LLC) and references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company, a Texas corporation (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 accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 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 (our “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 our projected sources of funds, anticipated changes in our revenues or earnings, expectations regarding financial or other market conditions, the effects of government regulation applicable to our operations, the adequacy of our allowance for loan losses and provision for loan losses, expected levels of loan charge-offs, provision for loan losses and non-accrual loans, the collectibility of margin loans and the outcome of litigation.

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, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

(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

(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 exhaustive, 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 September 30, 2010, on a consolidated basis, we had total assets of approximately $5.1 billion, total deposits of approximately $3.8 billion, total loans, including loans held for sale, of approximately $3.6 billion and shareholders’ equity of approximately $445.6 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 nine-month period ended September 30, 2010, our assets increased by 11.41% driven by growth in loans held for sale and our securities portfolio. The increase in loans held for sale during the first nine months of 2010 was primarily the result of a sharp increase in loan originations from our mortgage origination business. We temporarily hold these mortgage loans for sale on our balance sheet. During the nine-month period ended September 30, 2010, our deposits increased by 14.49%, and our securities portfolio increased by 58.66%.

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 nine months of 2010, we generated $135.2 million in net interest income, a 14.60% increase over the nine-month period ended September 30, 2009. The increase in net interest income was primarily due to the growth in the aggregate principal amount of loans and securities that we own, as well as increased yields on our loan portfolio. 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 4.04% for the nine months ended September 30, 2010 versus 4.02% for the nine months ended September 30, 2009.

The other component of our revenue is noninterest income, which is primarily comprised of the following three components:

(i)

Mortgage loan origination fees 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 nine months of 2010, we generated $211.7 million in mortgage loan origination fees and net gains from sale of loans, a 28.96% increase compared to the nine-month period ended September 30, 2009. This increase in income was primarily due to a higher volume of mortgage originations for home purchases due to increased personnel and market share during the first nine months of 2010, as well as increased mortgage refinancing activity related to a favorable interest rate environment during the nine months ended September 30, 2010 compared to the corresponding period of 2009.

(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 $69.5 million and $68.5 million in investment advisory fees and commissions and securities brokerage fees and commissions during the nine months ended September 30, 2010 and September 30, 2009, respectively.

(iii)

Service charges on depositor accounts. We generate fees associated with offering depository services to our banking customers. We earned $6.5 million and $6.7 million in service charges on depositor accounts during the nine months ended September 30, 2010 and September 30, 2009, respectively.

In the aggregate, we generated $299.0 million and $248.4 million in noninterest income during the nine months ended September 30, 2010 and 2009, respectively. The increase in noninterest income was primarily due to an increase in realized gains on the sale of loans. The contribution of noninterest income to net revenues (net interest income plus noninterest income) was approximately 68.87% during the nine months ended September 30, 2010 versus 67.81% during the nine months ended September 30, 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 First Southwest and Hester Capital. The principal subsidiaries of First Southwest are FSC, 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 are currently 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 unaudited consolidated financial statements. Segment net revenue percentages reflect net revenue from external customers.

How We Generate Revenue and Net Income

We derive our revenue and net income primarily from the banking segment and the mortgage origination segment, while the remainder of our revenue and net income is generated from the financial advisory segment. The banking segment provides primarily business banking and personal banking products and services. Approximately 37.01% and 35.57% of our net revenue, and 46.32% and 30.15% of our net income, were derived from the banking segment for the nine months ended September 30, 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.

The mortgage origination segment generated approximately 45.06% and 43.68% of our net revenue, and 41.11% and 58.32% of our net income, for the nine months ended September 30, 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 17.94% and 20.75% of our net revenue, and 12.57% and 11.53% of our net income, for the nine months ended September 30, 2010 and 2009, respectively. 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.

The fluctuations in the share of total net revenue provided by our banking and mortgage origination segments for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 generally reflect revenue growth in both the banking and mortgage origination segments, although net revenue grew slightly faster in the mortgage origination segment than the banking segment in the first nine months of 2010 compared with the corresponding period in 2009.

The fluctuations in the share of net income provided by our banking and mortgage origination segments for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 are primarily attributable to historically high levels of net income in the mortgage origination segment during 2009. Net income from the mortgage origination segment has moderated during 2010 primarily due to increased intercompany financing costs and, as a result, the relative contribution of the mortgage origination segment to our net income has declined in the first nine months of 2010 compared with the first nine months of 2009.

Operating Results

Consolidated net income for the third quarter of 2010 was $10.1 million, or $0.26 per diluted share, compared with $9.7 million, or $0.25 per diluted share, for the third quarter of 2009. We had net income of $26.4 million, or $0.66 per diluted share, for the nine months ended September 30, 2010, compared with $35.7 million, or $0.95 per diluted share, for the nine months ended September 30, 2009.

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


	Nine Months Ended September 30, 2010			Year Ended December 31, 2009			Nine Months Ended September 30, 2009
Return on average shareholders’ equity		8.22	%		7.50	%		11.56	%

Return on average assets		0.73	%		0.71	%		1.11	%

Net interest margin (taxable equivalent)		4.04	%		4.00	%		4.02	%

Leverage ratio		9.21	%		9.45	%		9.98	%

Efficiency ratio		77.86	%		77.14	%		74.09	%

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)			Earnings Increase (Decrease)
	Three Months Ended September 30, 2010 v. 2009			Nine Months Ended September 30, 2010 v. 2009
Net interest income	$	5,593		$	17,224
Provision for loan loss		(6,139	)		(14,576	)
Mortgage loan origination fees and net gains from sale of loans		38,840			47,535
Investment advisory and brokerage fees and commissions		(1,904	)		950
Noninterest expense		(31,634	)		(66,531	)
All other (including tax effects)		(4,361	)		6,063

	$	395		$	(9,335	)

Net Interest Income

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


	Three Months Ended September 30,							Nine Months Ended September 30,
					Variance							Variance
	2010		2009		2010 v. 2009			2010		2009		2010 v. 2009
Interest income
Loans, including fees	$	47,147	$	46,157	$	990		$	138,941	$	133,698	$	5,243
Securities		5,239		2,109		3,130			13,826		6,800		7,026
Securities - tax exempt		2,040		1,648		392			7,153		5,081		2,072
Federal funds sold		19		42		(23	)		39		75		(36	)
Interest-bearing deposits with banks		204		40		164			587		65		522
Other securities		1,468		1,444		24			3,931		4,227		(296	)

Total interest income		56,117		51,440		4,677			164,477		149,946		14,531

Interest expense
Deposits		7,794		8,218		(424	)		22,262		24,221		(1,959	)
Notes payable and other borrowings		2,120		2,612		(492	)		7,037		7,771		(734	)

Total interest expense		9,914		10,830		(916	)		29,299		31,992		(2,693	)


Net interest income	$	46,203	$	40,610	$	5,593		$	135,178	$	117,954	$	17,224

Net interest income increased $5.6 million for the third quarter of 2010 and $17.2 million for the nine months ended September 30, 2010 compared with the corresponding periods in 2009. The increase in net interest income for both periods was primarily due to growth in the loan and investment securities portfolios and higher yields on the investment securities portfolio in the banking segment compared to the corresponding periods of 2009.

Noninterest Income

Noninterest income was $121.4 million for the third quarter of 2010 compared with $86.4 million in the third quarter of 2009, an increase of $35.0 million. Noninterest income was $299.0 million for the nine months ended September 30, 2010 compared with $248.4 million in the corresponding period in 2009, an increase of $50.6 million. The increase for both periods was primarily due to increased income from loan originations and net gains on the sale of loans in the mortgage origination segment. Higher mortgage loan origination volume resulted from increases in personnel and mortgage banking offices, which led to a greater share of the national market for mortgage originations. Increased income derived from investment advisory fees and commissions and securities brokerage fees and commissions in the financial advisory segment, as well as increases in intercompany financing fees in the banking segment, contributed to the increase in noninterest income for both periods.

Noninterest Expense

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


	Three Months Ended September 30,						Nine Months Ended September 30,
					Variance						Variance
	2010		2009		2010 v. 2009		2010		2009		2010 v. 2009
Noninterest expense
Employees’ compensation and benefits	$	80,116	$	61,379	$	18,737	$	210,456	$	171,658	$	38,798
Occupancy and equipment, net		14,771		12,923		1,848		42,957		36,166		6,791
Professional services		7,343		4,209		3,134		20,391		13,128		7,263
Deposit insurance premium		1,364		1,120		244		4,114		5,168		(1,054	)
Repossession and foreclosure		3,453		1,871		1,582		7,507		3,984		3,523
Other		21,926		15,837		6,089		52,648		41,438		11,210

Total noninterest expense	$	128,973	$	97,339	$	31,634	$	338,073	$	271,542	$	66,531

Noninterest expense increased $31.6 million for the third quarter of 2010 and $66.5 million for the nine months ended September 30, 2010 compared with the corresponding periods in 2009. The largest components of these increases were employees’ compensation and benefits, occupancy and equipment expenses, net of rental income, professional services and other expenses.

Employees’ compensation and benefits increased $18.7 million for the third quarter of 2010 and $38.8 million for the nine months ended September 30, 2010 compared with the corresponding periods in 2009. The increase was primarily attributable to the mortgage origination segment resulting from increased staffing levels for the additional mortgage banking offices opened during 2009 and 2010, as well as higher commission costs due to higher revenues subject to commissions.

Occupancy and equipment expenses, net of rental income, increased $1.8 million for the third quarter of 2010 and $6.8 million for the nine months ended September 30, 2010 compared with the corresponding periods in 2009. The increase was primarily attributable to the mortgage origination segment resulting from costs incurred on the additional mortgage banking offices added during 2009 and 2010.

Professional services increased $3.1 million for the third quarter of 2010 and $7.3 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. Among the factors contributing to the increase in professional services were increased legal fees and appraisal and inspection fees attributable to the mortgage origination segment and higher legal fees attributable to increased collection and foreclosure activity in the banking segment.

Repossession and foreclosure expenses increased $1.6 million for the third quarter of 2010 and $3.5 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. The increase for both periods was due to carrying costs on residential properties totaling $1.0 million. Increased valuation allowances taken against foreclosed real estate also contributed to the increase in repossession and foreclosure expenses.

Other expenses increased $6.1 million for the third quarter of 2010 and $11.2 million for the nine months ended September 30, 2010 compared with the corresponding periods in 2009. The increase was primarily attributable to the mortgage origination segment resulting from increases in loan funding fees and unreimbursed closing costs resulting from increased mortgage loan originations 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 September 30,							Nine Months Ended September 30,
					Variance							Variance
	2010		2009		2010 v. 2009			2010		2009		2010 v. 2009
Net interest income	$	45,156	$	39,729	$	5,427		$	131,934	$	115,192	$	16,742
Provision for loan losses		20,550		14,310		6,240			53,015		39,073		13,942
Noninterest income		9,463		6,414		3,049			28,900		15,273		13,627
Noninterest expense		30,967		23,776		7,191			88,163		74,597		13,566

Net income before taxes		3,102		8,057		(4,955	)		19,656		16,795		2,861
Income tax provision		1,349		2,942		(1,593	)		7,178		5,995		1,183

Net income	$	1,753	$	5,115	$	(3,362	)	$	12,478	$	10,800	$	1,678

Net income was $1.8 million for the third quarter of 2010 and $12.5 million for the nine months ended September 30, 2010, a decrease of $3.3 million compared to the third quarter of 2009, but an increase of $1.7 million compared to the nine months ended September 30, 2009. The decrease for the third quarter of 2010 compared to the corresponding period in 2009 was primarily due to the increase in the provision for loan losses and noninterest expense, partially offset by an increase in net revenue. The increase for the nine months ended September 30, 2010 compared to the corresponding period in 2009 was primarily due to increases in net revenue, offset by increases in the provision for loan losses and noninterest expense.

Net interest income increased $5.4 million for the third quarter of 2010 and $16.7 million for the nine months ended September 30, 2010. The increase for both periods was due primarily to increased interest income on the loan and investment securities portfolios, resulting from higher yields compared to the corresponding periods in 2009. Noninterest income increased $3.0 million for the third quarter of 2010 and $13.6 million for the nine months ended September 30, 2010. The increase for both periods was due primarily to the increase in intercompany financing fees.

Provision for loan losses increased $6.2 million for the third quarter of 2010 and $13.9 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. The increase in the provision for loan losses for both periods was primarily a result of an increase in non-performing loans and net charge-offs due to continued challenging economic conditions.

Noninterest expense increased by $7.2 million for the third quarter of 2010 and $13.6 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. The increases were primarily due to increases in employees’ compensation and benefits, repossession and foreclosure, and professional services expenses.

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 September 30, 2010 v. 2009									Nine Months Ended September 30, 2010 v. 2009
	Change Due To(1)									Change Due To(1)
	Volume			Yield/Rate			Change			Volume			Yield/Rate			Change
Interest income
Loans	$	1,370		$	924		$	2,294		$	5,724		$	2,678		$	8,402
Investment securities(2)		2,226			621			2,847			5,662			2,658			8,320
Federal funds sold		(13	)		(10	)		(23	)		(20	)		(16	)		(36	)
Interest-bearing deposits in other financial institutions		111			54			165			303			228			531
Other securities		(41	)		44			3			(28	)		42			14

Total interest income(2)		3,653			1,633			5,286			11,641			5,590			17,231

Interest expense
Deposits		1,821			(2,219	)		(398	)		5,454			(7,269	)		(1,815	)
Notes payable and other borrowings		(415	)		(101	)		(516	)		(472	)		552			80

Total interest expense		1,406			(2,320	)		(914	)		4,982			(6,717	)		(1,735	)

Net interest income(2)	$	2,247		$	3,953		$	6,200		$	6,659		$	12,307		$	18,966

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

(2)	Taxable equivalent.

Taxable equivalent net interest income increased $6.2 million for the third quarter of 2010 compared with the corresponding period in 2009. Changes in yields earned and rates paid increased taxable equivalent net interest income by $4.0 million. Yields on the loan portfolio increased due to higher rate floors on renewed variable-rate loans. Yields on the investment securities portfolio increased due to the purchase of tax-exempt securities issued by political subdivisions of the State of Texas and collateralized mortgage obligations. The $2.3 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 third quarter of 2009. Increases in the volume of interest-earning assets, primarily in the loan and investment securities portfolios, increased taxable equivalent net interest income by $3.7 million, while increases in the volume of interest-bearing liabilities reduced taxable equivalent net interest income by $1.4 million.

Taxable equivalent net interest income increased $19.0 million for the nine months ended September 30, 2010 compared with the corresponding period in 2009. Changes in yields earned and rates paid increased taxable equivalent net interest income by $12.3 million. Changes in the yields earned, primarily in the loan and investment securities portfolios, increased net interest income by $5.6 million. Yields on the loan portfolio increased due to higher rate floors on renewed variable-rate loans, while the increase in yields on the investment securities portfolio resulted from the purchase of tax-exempt securities issued by political subdivisions of the State of Texas and collateralized mortgage obligations. The $6.7 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 nine months of 2009. Increases in the volume of interest-earning assets, primarily in the loan and investment securities portfolios, increased taxable equivalent net interest income by $11.6 million, while increases in the volume of interest-bearing liabilities reduced taxable equivalent net interest income by $5.0 million.

The tables below provide additional details regarding the banking segment’s net interest income (dollars in thousands):


	Three Months Ended September 30, 2010								Three Months Ended September 30, 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)	$	3,384,934		$	47,645		5.58	%	$	3,284,921		$	45,351		5.48	%
Investment securities - taxable		453,642			4,507		3.97	%		221,173			2,054		3.71	%
Investment securities - non-taxable(2)		203,608			2,725		5.35	%		197,928			2,331		4.71	%
Federal funds sold		23,280			19		0.32	%		34,391			42		0.48	%
Interest-bearing deposits in other financial institutions		248,221			199		0.32	%		57,942			34		0.23	%
Other securities		21,171			149		2.82	%		29,400			146		1.99	%

Interest-earning assets, gross		4,334,856			55,244		5.06	%		3,825,755			49,958		5.18	%
Allowance for loan losses		(52,424	)							(35,764	)

Interest-earning assets, net		4,282,432								3,789,991
Noninterest-earning assets		463,210								500,251

Total assets	$	4,745,642							$	4,290,242


Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,649,926			7,809		0.85	%	$	2,982,771			8,207		1.09	%
Notes payable and other borrowings		320,966			854		1.06	%		462,269			1,370		1.18	%

Total interest-bearing liabilities		3,970,892			8,663		0.87	%		3,445,040			9,577		1.10	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		197,763								162,188
Other liabilities		41,672								155,159

Total liabilities		4,210,327								3,762,387
Shareholders’ equity		535,315								527,855

Total liabilities and shareholders’ equity	$	4,745,642							$	4,290,242


Net interest income(2)				$	46,581							$	40,381


Net interest spread(2)							4.19	%							4.08	%

Net interest margin(2)							4.26	%							4.19	%

(1)	Average loans include non-accrual loans and warehouse lines of credit to subsidiaries.

(2)	Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.9 million and $0.8 million for the third quarter of 2010 and 2009, respectively.


	Nine Months Ended September 30, 2010								Nine Months Ended September 30, 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)	$	3,326,555		$	139,320		5.60	%	$	3,187,559		$	130,918		5.49	%
Investment securities - taxable		398,798			12,558		4.20	%		223,573			6,692		3.99	%
Investment securities - non-taxable(2)		210,984			9,718		6.14	%		199,518			7,264		4.85	%
Federal funds sold		16,139			39		0.32	%		21,987			75		0.46	%
Interest-bearing deposits in other financial institutions		199,075			577		0.39	%		26,295			46		0.23	%
Other securities		24,646			467		2.53	%		26,285			453		2.30	%

Interest-earning assets, gross		4,176,197			162,679		5.21	%		3,685,217			145,448		5.28	%
Allowance for loan losses		(51,763	)							(31,686	)

Interest-earning assets, net		4,124,434								3,653,531
Noninterest-earning assets		461,671								507,603

Total assets	$	4,586,105							$	4,161,134


Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,344,534			22,331		0.89	%	$	2,729,682			24,146		1.18	%
Notes payable and other borrowings		495,038			3,583		0.97	%		571,912			3,503		0.82	%

Total interest-bearing liabilities		3,839,572			25,914		0.90	%		3,301,594			27,649		1.12	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		184,994								185,475
Other liabilities		33,894								157,130

Total liabilities		4,058,460								3,644,199
Shareholders’ equity		527,645								516,935

Total liabilities and shareholders’ equity	$	4,586,105							$	4,161,134


Net interest income(2)				$	136,765							$	117,799


Net interest spread(2)							4.31	%							4.16	%

Net interest margin(2)							4.38	%							4.27	%

(1)	Average loans include non-accrual loans and warehouse lines of credit to subsidiaries.

(2)	Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $3.2 million and $2.4 million for the nine months ended September 30, 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.

Mortgage Origination Segment

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


	Three Months Ended September 30,									Nine Months Ended September 30,
							Variance									Variance
	2010			2009			2010 v. 2009			2010			2009			2010 v. 2009
Net interest expense	$	(5,726	)	$	(2,317	)	$	(3,409	)	$	(15,638	)	$	(3,366	)	$	(12,272	)
Provision for loan losses		(101	)		—			(101	)		634			—			634
Noninterest income		91,313			52,484			38,829			211,473			163,609			47,864
Noninterest expense		72,201			46,689			25,512			177,758			127,759			49,999
Net income before taxes		13,487			3,478			10,009			17,443			32,484			(15,041	)
Income tax provision		5,866			1,270			4,596			6,370			11,595			(5,225)
Net income	$	7,621		$	2,208		$	5,413		$	11,073		$	20,889		$	(9,816	)

Net income was $7.6 million for the third quarter of 2010, an increase of $5.4 million compared to the third quarter of 2009, and $11.1 million for the nine months ended September 30, 2010, a decrease of $9.8 million compared to the nine months ended September 30, 2009. The increase for the third quarter of 2010 compared to the corresponding period in 2009 was primarily due to the increase in net revenue, partially offset by an increase in noninterest expense. The increase in net revenue was primarily due to increased net gains on the sale of loans, partially offset by a decrease in mortgage origination fees. The decrease in net income for the nine months ended September 30, 2010 compared to the corresponding period in 2009 was primarily due to an increase in intercompany financing costs.

Net interest expense increased $3.4 million for the third quarter of 2010 and $12.3 million for the nine months ended September 30, 2010. The increase for both periods was primarily due to increases in other interest expense, which related primarily to increases in intercompany financing costs.

Noninterest income increased $38.8 million for the third quarter of 2010 and $47.9 million for the nine months ended September 30, 2010. Increased income from loan originations and net gains on the sale of loans accounted for substantially all of the change in noninterest income.

Employees’ compensation and benefits increased $16.5 million for the third quarter of 2010 and $32.0 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. The increase was attributable to increased staffing levels to support the additional mortgage banking offices opened during 2009 and 2010, as well as higher commission costs due to higher revenues subject to commissions. Other expenses increased $7.1 million for the third quarter of 2010 compared to the corresponding period in 2009, and increased $11.1 million for the nine months ended September 30, 2010 compared to the corresponding period in 2009. The increase for the nine months ended September 30, 2010 was primarily attributable to increases in legal fees due to regulatory compliance activities and litigation, as well as increased funding fees and unreimbursed closing costs.

Mortgage loan origination volume was $2.233 billion for the third quarter of 2010 compared to $1.339 billion for the third quarter of 2009, an increase of 66.77%. Mortgage loan origination volume was $5.169 billion for the nine months ended September 30, 2010 compared to $4.285 billion for the nine months ended September 30, 2009, an increase of 20.63%. Mortgage loan origination fees decreased $0.9 million for the third quarter of 2010 and $10.2 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. The decrease for both periods was primarily due to lower fees on mortgage refinancing in response to competition and reductions in fees charged on conventional and jumbo loans. For the third quarter of 2010, refinancings and home purchases accounted by dollar volume for 48.8% and 51.2%, respectively, of the total mortgage loan origination volume. For the nine months ended September 30, 2010, refinancings and home purchases accounted by dollar volume for 36.5% and 63.5%, respectively, of total mortgage loan origination volume.

Financial Advisory Segment

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


	Three Months Ended September 30,							Nine Months Ended September 30,
					Variance							Variance
	2010		2009		2010 v. 2009			2010		2009		2010 v. 2009
Net interest income	$	2,492	$	1,416	$	1,076		$	6,043	$	3,736	$	2,307
Noninterest income		25,036		29,425		(4,389	)		71,910		72,372		(462	)
Noninterest expense		25,954		27,045		(1,091	)		72,620		69,683		2,937

Net income before taxes		1,574		3,796		(2,222	)		5,333		6,425		(1,092	)
Income tax provision		685		1,386		(701	)		1,948		2,294		(346	)

Net income	$	889	$	2,410	$	(1,521	)	$	3,385	$	4,131	$	(746	)

Net income was $0.9 million for the third quarter of 2010 and $3.4 million for the nine months ended September 30, 2010, which decreased $1.5 million and $0.7 million, respectively, compared to the corresponding periods in 2009. The decrease for the third quarter of 2010 compared to the corresponding period in 2009 was primarily due to the decrease in noninterest income, partially offset by the decrease in noninterest expense. The decrease for the nine months ended September 30, 2010 compared to the corresponding period in 2009 was primarily due to the increase in noninterest expense, partially offset by the increase in net interest income.

Net interest income increased $1.1 million for the third quarter of 2010 and $2.3 million for the nine months ended September 30, 2010, respectively, compared to the corresponding periods in 2009. The increase resulted from higher customer margin loan balances and from an increased level of securities used to support sales, underwriting, and other customer activities.

The majority of noninterest income is generated from fees and commissions earned from investment advisory and securities brokerage activities, which decreased $4.4 million for the third quarter of 2010 and $0.5 million for the nine months ended September 30, 2010, respectively, compared to the corresponding periods in 2009. In September 2009, First Southwest received $3.1 million from the United States Attorney’s Office. First Southwest had made claims to recover its share of certain funds the U.S. government had recovered from its investigation of a stock fraud from which First Southwest incurred significant losses in 1997. The recovery was included in other noninterest income in the third quarter of 2009. Contingent fees of $0.5 million were paid to attorneys who assisted us with this recovery and were included in professional services expense in 2009.

Noninterest expense decreased $1.1 million for the third quarter of 2010, but increased $2.9 million for the nine months ended September 30, 2010 compared to the corresponding periods in 2009. Employees’ compensation and benefits accounted for the majority of the decrease in noninterest expense for the third quarter of 2010 compared to the corresponding period in 2009, which decreased $1.6 million. The decrease was attributable to a reduction in compensation expense related to noninterest revenue production during the third quarter of 2010. Other expenses accounted for the majority of the increase in noninterest expense for the nine months ended September 30, 2010 compared to the corresponding period in 2009. Other expenses increased $1.7 million for the nine months ended September 30, 2010 compared to the corresponding period in 2009, which was due primarily to the amortization of intangible assets that began in the second half of 2009.

Financial Condition

The following discussion contains a more detailed analysis of our financial condition at September 30, 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 three major components: securities held to maturity, securities available for sale and trading securities. 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. Trading securities are carried at fair market value and are primarily held at First Southwest, which as a broker-dealer is required to carry its securities at fair value. These trading securities are used to support sales, underwriting and other customer activities. The table below summarizes our securities portfolio (in thousands):


	September 30, 2010		December 31, 2009
Securities held to maturity, at amortized cost
U. S. government agencies
Mortgage-backed securities	$	11,850	$	16,963
Collateralized mortgage obligations		32,914		50,533
States and political subdivisions		120,979		120,818
Auction rate bonds		73,961		105,699

		239,704		294,013

Securities available for sale, at fair value
U. S. government agencies
Bonds		50,044		—
Mortgage-backed securities		22,816		28,014
Collateralized mortgage obligations		389,212		145,361
States and political subdivisions		22,117		9,612
Auction rate bonds		22,695		44,554

		506,884		227,541

Trading securities, at fair value		119,282		24,183

Total securities portfolio	$	865,870	$	545,737

We had a net unrealized gain of $4.4 million related to the available for sale investment portfolio at September 30, 2010, compared with a net unrealized loss of $1.1 million at December 31, 2009.

The market value of securities held to maturity at September 30, 2010 was $7.0 million above book value. At December 31, 2009, the market value of held to maturity securities was $0.9 million above book value.

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 September 30, 2010, was $96.9 million and $95.8 million, respectively.

Loan Portfolio

Consolidated loans held for investment are detailed in the table below (in thousands) and classified by type:


	September 30, 2010			December 31, 2009
Commercial and industrial	$	1,218,185		$	1,264,735
Lease financing		56,805			78,088
Construction and land development		351,726			402,876
Real estate		1,097,597			1,125,134
Securities (including margin loans)		227,067			152,145
Consumer		40,979			48,791

Loans, gross		2,992,359			3,071,769
Allowance for loan losses		(58,605	)		(52,092	)

Loans, net	$	2,933,754		$	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 $3.4 billion and $3.3 billion at September 30, 2010 and December 31, 2009, respectively. The banking segment’s loan portfolio includes warehouse lines of credit extended to PrimeLending and First Southwest that are eliminated from net loans on our consolidated balance sheet.

The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. At September 30, 2010, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that 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 September 30, 2010, construction and land development loans were 12% 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 September 30, 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 $643.0 million and $430.8 million as of September 30, 2010 and December 31, 2009, respectively. The $212.3 million increase in net loans at September 30, 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 and refinance originations. PrimeLending was able to service the increased demand for home purchases and refinance loan originations due to the availability of warehouse financing through our banking segment.

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


	September 30, 2010		December 31, 2009
Loans held for sale
Unpaid principal balance	$	625,025	$	419,473
Fair value adjustment		18,023		11,287

	$	643,048	$	430,760

Pipeline loans
Unpaid principal balance	$	769,059	$	256,285
Fair value adjustment		5,652		(512	)

	$	774,711	$	255,773

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 $224.8 million as of September 30, 2010 and $154.1 million as of December 31, 2009. The $70.7 million increase from December 31, 2009 to September 30, 2010 is primarily attributable to increased borrowings in margin accounts held by First Southwest customers and correspondents.

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 the Audit Committee of our board of directors and the Directors’ Loan Review Committee of the Bank’s board of directors.

It is our management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Estimated credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged off against the allowance for loan losses.

We have developed a methodology that seeks to determine an allowance within the scope of Receivables and Contingencies Topics of the ASC. Loans within the scope of the Receivables Topic are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future cash flows discounted on those loans, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. If loans are determined to be impaired, specific reserves would be provided in our estimate of the allowance. Loans within the scope of the Contingencies Topic include all other loans. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segments adjusted for changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers those qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to: changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; changes in the quality of the institution’s loan review system; changes in the value of underlying collateral for collateral-dependent loans; and the existence and effect of any concentrations of credit, and changes in the level of such concentrations.

We design our loan review program to timely identify and monitor problem loans by maintaining a credit grading process, ensuring that timely and appropriate changes are made to the loans with assigned risk grades and coordinating the timely delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impairment when: (i) payments are delayed, typically 90 days or more (unless in the process of collection), (ii) a loan becomes classified, (iii) a loan is being reviewed in the normal course of the loan review scope, or (iv) identified by the servicing officer as a problem. On an annual basis, our loan review department targets 60% coverage 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.

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 September 30, 2010, we had no material delinquencies in these types of loans.

While we believe we have sufficient allowance for our existing portfolio as of September 30, 2010, additional provisions for losses on existing loans may be necessary in the future. We recorded net charge-offs in the amount of $18.2 million for the third quarter of 2010 compared to $6.3 million for the third quarter of 2009. For the nine months ended September 30, 2010 and 2009, net charge-offs were $47.1 million and $39.9 million, respectively. Our allowance for loan losses totaled $58.6 million at September 30, 2010 and $52.1 million at December 31, 2009. The ratio of the allowance for loan losses to total loans held for investment at September 30, 2010 and December 31, 2009 was 1.96% and 1.70%, respectively.

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 $53.6 million for the nine months ended September 30, 2010; an increase of $14.5 million compared to the nine months ended September 30, 2009. The increase was primarily a result of a significant increase in non-performing loans and net charge-offs due to continued weak economic growth in the United States. 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. We expect the levels of non-performing loans, net charge-offs and provisions for loan losses for the fourth quarter of 2010 to be similar to the levels we have experienced in the first three quarters of 2010.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	56,375		$	31,778		$	52,092		$	40,672
Provisions charged to operating expenses		20,449			14,310			53,649			39,073
Recoveries of loans previously charged off
Commercial and industrial		92			190			207			681
Real estate		—			69			2			69
Construction and land development		23			20			38			23
Lease financing		—			—			—			10
Consumer		153			12			506			47

Total recoveries		268			291			753			830

Loans charged off
Commercial and industrial		4,008			4,771			23,879			32,701
Real estate		—			577			7,698			2,623
Construction and land development		13,728			869			14,294			2,798
Lease financing		—			241			452			1,367
Consumer		751			122			1,566			1,287

Total charge-offs		18,487			6,580			47,889			40,776

Net charge-offs		(18,219	)		(6,289	)		(47,136	)		(39,946	)

Balance at end of period	$	58,605		$	39,799		$	58,605		$	39,799

Net charge-offs to average loans outstanding		2.46	%		0.80	%		2.11	%		1.75	%

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 (dollars 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. As shown below, none of the allowance at September 30, 2010 is unallocated, primarily due to our efforts to attribute the various components of the allowance to loan type. We expect that the unallocated portion of the allowance will remain relatively small in future periods as we continue to refine the distribution of the allowance.


	September 30, 2010					December 31, 2009
	Reserve		% of Gross Loans			Reserve		% of Gross Loans
Commercial and industrial	$	32,244		40.71	%	$	28,580		41.17	%
Real estate (including construction and land development)		23,939		48.43	%		12,357		49.74	%
Lease financing		626		1.90	%		1,114		2.54	%
Securities (including margin loans)		1,280		7.59	%		1,280		4.95	%
Consumer		516		1.37	%		469		1.60	%
Unallocated		—					8,292

Total	$	58,605		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 September 30, 2010, we had 23 credit relationships totaling $46.1 million in loans of this type which are not included in either the non-accrual or 90 days past due loan categories.

Non-Performing Assets

The following table presents the components of our non-performing assets at the dates indicated (dollars in thousands):


	September 30, 2010			December 31, 2009			September 30, 2009
Loans accounted for on a non-accrual basis
Commercial and industrial	$	35,009		$	38,592		$	25,695
Lease financing		5,852			3,835			4,337
Construction and land development		55,301			16,317			20,228
Real estate		9,892			10,279			12,290
Consumer		—			—			—

	$	106,054		$	69,023		$	62,550


Non-performing loans as a percentage of total loans		2.92	%		1.97	%		1.80	%


Other Real Estate Owned	$	16,184		$	17,531		$	13,222


Other repossessed assets	$	1,283		$	2,538		$	1,613


Non-performing assets	$	123,521		$	89,092		$	77,385


Non-performing assets as a percentage of total assets		2.43	%		1.95	%		1.65	%


Loans past due 90 days or more and still accruing	$	11,407		$	150		$	150


Troubled debt restructurings included in performing loans	$	6,800		$	664		$	—

At September 30, 2010, total non-performing assets increased $34.4 million to $123.5 million compared to $89.1 million at December 31, 2009, primarily due to an increase in non-accrual construction and land development loans. Non-accrual loans increased by $37.0 million to $106.0 million at September 30, 2010 compared to $69.0 million at December 31, 2009. Of these non-accrual loans, $35.0 million were characterized as commercial and industrial loans as of September 30, 2010, a decrease of $3.6 million compared to December 31, 2009. The commercial and industrial loans included seven loan relationships in a variety of industries with an aggregate balance of approximately $30.4 million. Collateral securing the loans includes accounts receivable, inventory, personal guarantees, and property, plant and equipment,

Non-accrual loans at September 30, 2010 also included $55.3 million characterized as construction and land development loans. Six loan relationships account for approximately $52.4 million of the construction and land development loans. Collateral securing the loans includes commercial land developments, residential land developments and unimproved land.

Non-accrual loans also included $9.9 million characterized as real estate loans, including four commercial real estate loan relationships totaling approximately $3.4 million and secured by unoccupied townhomes, occupied non-residential property and occupied industrial property.

Loans past due 90 days or more and still accruing interest increased $11.2 million to $11.4 million at September 30, 2010 compared to $0.2 million at December 31, 2009. The increase related to two residential construction and land development loans from a single customer relationship secured by unimproved land.

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 September 30, 2010, troubled debt restructurings totaled $38.6 million; of which $6.8 million were included in performing loans and $31.8 million were included in non-accrual loans.

Other Real Estate Owned decreased $1.3 million to $16.2 million at September 30, 2010 compared to $17.5 million at December 31, 2009. At September 30, 2010, Other Real Estate Owned included $13.6 million of commercial real estate property consisting of single family residences under development and $2.6 million of residential lots at various levels of completion.

We would have recorded additional interest income of $3.8 million for each of the nine months ended September 30, 2010 and 2009, if non-accrual loans had been current during the respective periods.

Borrowings

Our borrowings as of September 30, 2010 and December 31, 2009 are shown in the table below (in thousands):


	September 30,		December 31,		Variance
	2010		2009		2010 v. 2009
Short-term borrowings	$	383,618	$	488,078	$	(104,460	)
Notes payable		62,421		68,550		(6,129	)
Junior subordinated debentures		67,012		67,012		—
Other borrowings		11,804		12,128		(324	)

	$	524,855	$	635,768	$	(110,913	)

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 $110.9 million decrease in short-term borrowings at September 30, 2010 compared with December 31, 2009 was due mostly to the purchase of brokered deposits, which had favorable pricing relative to the Federal Home Loan Bank and Federal Reserve. Our brokered deposits were $443.1 million at September 30, 2010, an increase of $336.3 million from December 31, 2009.

Notes payable is comprised of borrowings under term and revolving lines of credit with JPMorgan Chase and nonrecourse notes owed by First Southwest. As of September 30, 2010, our revolving lines of credit with JPMorgan Chase had an outstanding principal balance of $16.7 million and available borrowing capacity of $6.0 million. The loan agreements governing such revolving lines of credit require that the Bank comply with certain covenants, including a financial covenant that the Bank maintain a non-performing asset ratio, as defined in the JPMorgan Chase revolving credit line agreements, of less than or equal to 3.50% on September 30 and December 31, 2010, 3.25% on March 31, 2011, and 3.00% on the last day of each fiscal quarter thereafter. As of September 30, 2010, the Bank’s non-performing asset ratio was 3.84%. On November 8, 2010, we received a waiver from JPMorgan Chase regarding meeting such non-performing asset ratio requirement on the September 30, 2010 measurement date.

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 Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” herein.

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.

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 September 30, 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 11.88% and a Tier 1 capital to average assets, or leverage, ratio of 9.21%. At September 30, 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 $118.9 million at September 30, 2010, a decrease of $41.5 million, or 25.87%, from $160.4 million at December 31, 2009. This decrease was primarily due to the net decrease in short-term borrowings, partially offset by the net increase in deposits and reduced payments on notes payable.

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 nine months of 2010 was $238.5 million, an increase in cash used of $101.2 million compared with the first nine months of 2009. Cash used in operations increased primarily due to an increase in trading securities and a decrease in broker-dealer and clearing payables 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 September 30, 2010, excluding loans held for sale and the allowance for loan losses, and net of unearned income, was $3.0 billion, a decrease of $79.4 million compared with $3.1 billion at December 31, 2009. The decrease in net loans was concentrated in commercial and industrial loans and construction and land development loans and reflects weak loan demand and our efforts to apply more stringent underwriting limits across the loan portfolio in response to current economic conditions.

Cash used in our investment activities, which was $189.7 million and $207.5 million for the nine months ended September 30, 2010 and 2009, respectively, included net purchases of securities for our investment portfolio during the nine months ended September 30, 2010, which were $215.8 million compared with net purchases of $56.3 million during the nine months ended September 30, 2009. The increase in net purchases of securities during the first nine months of 2010 compared to the first nine months in 2009 resulted from the purchase of both municipal securities, mortgage-related securities and other securities to take advantage of attractive yields and provide collateral for pledging. We sold approximately $191.8 million and $21.3 million of available for sale securities during the nine months ended September 30, 2010 and 2009, respectively.

Cash provided by financing activities was $386.8 million for the nine months ended September 30, 2010 compared with $444.8 million for the nine months ended September 30, 2009. The $58.0 million decrease was due mostly to the net decrease in short-term borrowings, partially offset by the net increase in deposits and reduced payments on notes payable.

We had deposits of $3.8 billion at September 30, 2010, an increase of $475.1 million, or 14.49%, 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, money market deposits, savings deposits and time deposits over $100,000 increased $336.3 million, $93.8 million, $76.2 million and $29.8 million, respectively from December 31, 2009 to September 30, 2010.

Our 15 largest depositors, excluding our indirect wholly owned subsidiary, First Southwest, accounted for approximately 20.08% of our total deposits, and our five largest depositors, excluding First Southwest, accounted for approximately 11.63% of our total deposits at September 30, 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 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 of up to $750.0 million maintained with the Bank. At September 30, 2010, PrimeLending had outstanding borrowings of $607.9 million against the warehouse line of credit. 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 September 30, 2010, FSC had borrowed approximately $26.0 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.

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.

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 following table reflects changes in banking segment earnings and costs resulting from changes in assets and liabilities on September 30, 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.

As illustrated in the following table, 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 (dollars in thousands).


	September 30, 2010
	3 Months or Less			> 3 Months to 1 Year			> 1 Year to 3 Years			> 3 Years to 5 Years			> 5 Years			Total
Interest sensitive assets:
Loans	$	2,444,235		$	408,965		$	343,507		$	98,887		$	131,929		$	3,427,523
Securities		143,685			182,158			247,523			21,260			151,962			746,588
Federal funds sold		24,666			—			—			—			—			24,666
Other interest sensitive assets		27,890			—			—			—			—			27,890

Total interest sensitive assets		2,640,476			591,123			591,030			120,147			283,891			4,226,667

Interest sensitive liabilities:
Interest bearing checking	$	1,334,556		$	—		$	—		$	—		$	—		$	1,334,556
Savings		212,128			—			—			—			—			212,128
Time deposits		704,211			346,030			319,567			2,143			5,589			1,377,540
Notes payable & other borrowings		127,265			100,716			2,035			1,091			7,730			238,837

Total interest sensitive liabilities		2,378,160			446,746			321,602			3,234			13,319			3,163,061


Interest sensitivity gap	$	262,316		$	144,377		$	269,428		$	116,913		$	270,572		$	1,063,606


Cumulative interest sensitivity gap	$	262,316		$	406,693		$	676,121		$	793,034		$	1,063,606


Percentage of cumulative gap to total interest
Sensitive assets		6.21	%		9.62	%		16.00	%		18.76	%		25.16	%

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 September 30, 2010 were in compliance with established policy guidelines.

The following table 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 September 30, 2010 (dollars in thousands):


	September 30, 2010
	Changes In Net Interest Income						Changes in Market Value of Equity
Change in Interest Rates	Amount			Percent			Amount			Percent
Up 3%	$	473			0.28	%	$	71,196			13.10	%
Up 2%	$	(3,924	)		-2.29	%	$	58,336			10.73	%
Up 1%	$	(2,665	)		-1.56	%	$	33,992			6.25	%
Down 1%	$	(4,210	)		-2.46	%	$	(56,642	)		-10.42	%
Down 2%	$	(6,814	)		-3.98	%	$	(109,443	)		-20.14	%
Down 3%	$	(7,572	)		-4.42	%	$	(138,579	)		-25.50	%

The projected changes in net interest income and market value of equity to changes in interest rates at September 30, 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.

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

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 restricts our activities and imposes financial requirements and limitations on the conduct of our business and limits our ability to generate income.

We are subject to extensive federal and state regulation and supervision, including that of the Federal Reserve Board, the Texas Department of Banking, the FDIC, the SEC and 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, damages, civil money penalties, restitution 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.

The U.S. Congress and federal regulatory agencies frequently revise banking and securities laws, regulations and policies. On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly alters the regulation of financial institutions and the financial services industry. The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection (the “BCFP”) and requires the BCFP and other federal agencies to implement many provisions of the Dodd-Frank Act.

We expect that several aspects of the Dodd-Frank Act may affect our business, including, without limitation, higher deposit insurance premiums and new examinations, consumer protection rules, and disclosure and reporting requirements. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will affect our business. Compliance with these new laws and regulations likely will result in additional costs, which could be significant and may adversely impact our results of operations, financial condition, and liquidity.

During the second quarter of 2010, the Bank received its 2008 Community Reinvestment Act Performance Evaluation from the Federal Reserve. Despite “high satisfactory” or “outstanding” ratings on the various components of the Community Reinvestment Act (“CRA”) rating, the Federal Reserve lowered the Bank’s overall CRA rating from “satisfactory” to “needs to improve,” as a result of alleged fair lending issues associated with our mortgage origination segment in prior years. Unless and until the Bank’s CRA rating improves, we, as a financial holding company, may not commence new activities that are “financial in nature” or acquire companies engaged in these activities. Our current CRA rating may also adversely affect the Bank’s ability to establish new branches.

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 cannot predict whether or in what form any other proposed regulations or statutes 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.

No market currently exists for our common stock. We cannot assure you that an active trading market will ever develop for our common stock.

There is no established trading market for shares of our common stock. As a qualified plan, our Employee Stock Ownership Plan (the “ESOP”) is therefore required by the Employer Retirement Income Security Act to report account values to ESOP participants on an annual basis based upon an appraised value. As of December 31, 2009, the value of the shares of common stock held in the ESOP was determined to be $11.26 per share in an independent appraisal obtained solely for this purpose. Because there is no established public trading market for shares of our common stock, this value obtained for ESOP purposes may not reflect the actual market value of a share of our common stock, and your ability to transfer your shares of our common stock may be significantly restricted, even if such transfer is exempt from registration under the securities laws. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market might become. We are not at this time seeking listing on any securities exchange. Consequently, you may be unable to liquidate your investment and should be able to bear the economic risk of the investment in our common stock indefinitely.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2010, we issued 5,728 shares of our Original Common Stock upon the exercise of outstanding stock options at prices ranging from $6.69 to $7.58 per share. These options were awarded to employees 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 exempted from registration under the Securities Act pursuant to Rule 701.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

(Removed and Reserved)

Item 5.

Other Information

As previously disclosed, we have two revolving lines of credit with JPMorgan Chase with a near-term maturity of July 31, 2011. Pursuant to such lines of credit, we had an aggregate outstanding principal balance of $16.7 million and an available borrowing capacity of $6.0 million as of November 1, 2010. The loan agreements governing such revolving lines of credit require that the Bank comply with certain covenants, including a financial covenant that the Bank maintain a non-performing asset ratio, as defined in the JPMorgan Chase revolving line of credit agreements, of less than or equal to 3.50% on September 30 and December 31, 2010, 3.25% on March 31, 2011, and 3.00% on the last day of each fiscal quarter thereafter. As of September 30, 2010, the Bank’s non-performing asset ratio was 3.84%, an amount in excess of the ratio permitted under the non-performing asset ratio covenants.

On November 8, 2010, we received a waiver from JPMorgan Chase regarding meeting such non-performing asset ratio requirement on the September 30, 2010 measurement date. Had we not received such waiver, we would have been in default under such revolving lines of credit, and JPMorgan Chase could have elected to accelerate our obligations pursuant to the revolving lines of credit and refused to advance additional funds to us under the revolving lines of credit.

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.

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: November 9, 2010	By:	/s/ ALLEN CUSTARD
	Name:	Allen Custard
	Title:	Executive Vice President and Chief Financial Officer
		(Duly authorized officer and principal financial officer)

Date: November 9, 2010	By:	/s/ JEFF ISOM
	Name:	Jeff Isom
	Title:	Executive Vice President of Finance and Accounting
		(Principal accounting officer)

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


				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


				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


				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 April 1, 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


				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


				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	–	Ninth Amendment to Amended and Restated Loan Agreement, dated as of July 30, 2010, between JPMorgan Chase Bank, NA and PlainsCapital Corporation.		8-K	000-53629	10.1	08/05/10

10.51	–	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


				Incorporated by Reference
Exhibit No.		Exhibit Description	Filed Herewith	Form	File No.	Exhibit	Filing Date
10.52	–	Fifth Amended and Restated Promissory Note, dated as of July 30, 2010, by PlainsCapital Corporation in favor of JPMorgan Chase Bank, NA.		8-K	000-53629	10.2	08/05/10

10.53	–	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

10.54	–	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

10.55	–	Renewal, Extension and Modification Agreement, dated as of July 30, 2010, between JPMorgan Chase Bank, NA and PlainsCapital Corporation.		8-K	000-53629	10.6	08/05/10

10.56	–	Second Amended and Restated Promissory Note, dated as of July 30, 2010, by PlainsCapital Corporation in favor of JPMorgan Chase Bank, NA.		8-K	000-53629	10.7	08/05/10

10.57	–	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

10.58	–	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

10.59	–	Renewal, Extension and Modification Agreement, dated as of July 30, 2010, between PlainsCapital Corporation and JPMorgan Chase Bank, NA.		8-K	000-53629	10.8	08/05/10

10.60	–	Fourth Amended and Restated Promissory Note, dated as of July 30, 2010, by PlainsCapital Corporation in favor of JPMorgan Chase Bank, NA.		8-K	000-53629	10.9	08/05/10

10.61	–	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

10.62	–	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

10.63	–	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

10.64	–	Renewal, Extension and Modification Agreement, dated as of July 30, 2010, between PlainsCapital Corporation and JPMorgan Chase Bank, NA.		8-K	000-53629	10.3	08/05/10

Incorporated by Reference

Exhibit No.

Exhibit Description

Filed
Herewith

Form

File No.

Exhibit

Filing
Date

10.65

–

Third Amended and Restated Promissory Note, dated as of July 30, 2010, by PlainsCapital Corporation in favor of JPMorgan Chase Bank, NA.

8-K

000-53629

10.4

08/05/10

10.66

–

Promissory Note, dated as of July 30, 2010, by PlainsCapital Corporation in favor of JPMorgan Chase Bank, NA.

8-K

000-53629

10.5

08/05/10

10.67

–

Office Lease, dated as of February 7, 2007, between PlainsCapital Corporation (f/k/a Plains Capital Corporation) and Block L Land, L.P.

000-53629

10.49

04/17/09

10.68

–

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.

000-53629

10.50

04/17/09

10.69

–

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.

000-53629

10.51

04/17/09

10.70

–

Waiver Letter, dated as of October 16, 2009, from JPMorgan Chase Bank, NA to PlainsCapital Corporation.

10-Q

000-53629

10.59

10/21/09

10.71

–

Waiver Letter, dated as of November 8, 2010, from JPMorgan Chase Bank, NA to PlainsCapital Corporation.

31.1

–

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

31.2

–

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

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company