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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2011

 

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

For the transition period from              to             

Commission File Number: 000-53629

 

 

PLAINSCAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Texas   75-2182440

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2323 Victory Avenue, Suite 1400, Dallas, Texas 75219

(Address of principal executive offices, including zip code)

(214) 252-4000

(Registrant’s telephone number, including area code)

N/A

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

 

 

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

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

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

 

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

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

As of May 3, 2011, there were 34,108,147 shares of the registrant’s Original Common Stock, $0.001 par value, and no shares of the registrant’s Common Stock, $0.001 par value, outstanding, including 2,473,741 shares that participate in dividends but are not defined as outstanding under generally accepted accounting principles.


Table of Contents

PlainsCapital Corporation

Quarterly Report on Form 10-Q for the period ended March 31, 2011

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   
Item 1.   Financial Statements   

Unaudited Consolidated Interim Financial Statements

  

Consolidated Balance Sheets, March 31, 2011 and December 31, 2010

     3   

Consolidated Statements of Income, Three Months Ended March 31, 2011 and 2010

     4   

Consolidated Statements of Shareholders’ Equity, Three Months Ended March 31, 2011 and 2010

     5   

Consolidated Statements of Cash Flows, Three Months Ended March 31, 2011 and 2010

     6   

Notes to Consolidated Financial Statements

     7   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      55   
Item 4.   Controls and Procedures      58   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      58   
Item 1A.   Risk Factors      59   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      59   
Item 3.   Defaults Upon Senior Securities      59   
Item 4.   (Removed and Reserved)      59   
Item 5.   Other Information      59   
Item 6.   Exhibits      59   
Signatures      60   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets

 

     March 31, 2011
(Unaudited)
    December 31,
2010
 
     (in thousands)  

Assets

    

Cash and due from banks

   $ 451,869      $ 332,208   

Federal funds sold and securities purchased under agreements to resell

     69,561        154,501   

Assets segregated for regulatory purposes

     13,000        —     

Loans held for sale

     482,627        477,711   

Securities

    

Held to maturity, fair market value $200,631 and $228,730, respectively

     196,270        232,913   

Available for sale, amortized cost $806,402 and $614,588, respectively

     798,932        613,236   

Trading, at fair market value

     44,636        18,931   
                
     1,039,838        865,080   

Loans, net of unearned income

     2,985,660        3,138,170   

Allowance for loan losses

     (65,940     (65,169
                

Loans, net

     2,919,720        3,073,001   

Broker-dealer and clearing organization receivables

     78,325        45,768   

Fee award receivable

     18,910        19,222   

Investment in unconsolidated subsidiaries

     2,012        2,012   

Premises and equipment, net

     92,994        80,183   

Accrued interest receivable

     15,159        16,615   

Other real estate owned

     18,847        23,968   

Goodwill, net

     35,880        35,880   

Other intangible assets, net

     12,927        13,441   

Other assets

     152,695        177,064   
                

Total assets

   $ 5,404,364      $ 5,316,654   
                

Liabilities and Shareholders’ Equity

    

Deposits

    

Noninterest-bearing

   $ 282,615      $ 256,372   

Interest-bearing

     3,829,575        3,662,087   
                

Total deposits

     4,112,190        3,918,459   

Broker-dealer and clearing organization payables

     107,987        65,632   

Short-term borrowings

     492,927        582,134   

Capital lease obligation

     11,579        11,693   

Notes payable

     62,195        63,776   

Junior subordinated debentures

     67,012        67,012   

Other liabilities

     101,820        160,672   
                

Total liabilities

     4,955,710        4,869,378   

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

     84,711        84,481   

Series B, 4,382 shares issued

     4,688        4,712   

Original Common Stock, $0.001 par value per share, authorized 50,000,000 shares; 31,866,787 and 31,780,828 shares issued, respectively

     32        32   

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

     —          —     

Surplus

     153,774        153,289   

Retained earnings

     211,278        206,786   

Accumulated other comprehensive loss

     (4,104     (281
                
     450,379        449,019   

Unearned ESOP shares (232,381 shares)

     (2,528     (2,528
                

Total PlainsCapital Corporation shareholders’ equity

     447,851        446,491   

Noncontrolling interest

     803        785   
                

Total shareholders’ equity

     448,654        447,276   
                

Total liabilities and shareholders’ equity

   $ 5,404,364      $ 5,316,654   
                

See accompanying notes.

 

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Table of Contents

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income - Unaudited

(In thousands, except per share amounts)

 

     Three Months Ended March 31,  
     2011      2010  

Interest income:

     

Loans, including fees

   $ 42,204       $ 44,624   

Securities

     

Taxable

     4,606         3,804   

Tax-exempt

     2,387         2,451   

Federal funds sold and securities purchased under agreements to resell

     1,092         9   

Interest-bearing deposits with banks

     314         243   

Other

     1,400         1,177   
                 

Total interest income

     52,003         52,308   

Interest expense

     

Deposits

     7,528         7,144   

Short-term borrowings

     398         778   

Capital lease obligations

     136         141   

Notes payable

     810         881   

Junior subordinated debentures

     621         613   

Other

     85         78   
                 

Total interest expense

     9,578         9,635   
                 

Net interest income

     42,425         42,673   

Provision for loan losses

     6,500         22,955   
                 

Net interest income after provision for loan losses

     35,925         19,718   

Noninterest income

     

Service charges on depositor accounts

     1,842         2,118   

Net realized gains on sale of securities

     —           1,612   

Net gains from sale of loans

     44,334         32,993   

Mortgage loan origination fees

     17,292         14,409   

Trust fees

     1,006         1,073   

Investment advisory fees and commissions

     12,011         15,536   

Securities brokerage fees and commissions

     6,186         5,713   

Other

     2,669         1,978   
                 

Total noninterest income

     85,340         75,432   

Noninterest expense

     

Employees’ compensation and benefits

     66,346         56,795   

Occupancy and equipment, net

     15,398         13,837   

Professional services

     6,046         5,791   

Deposit insurance premiums

     1,856         1,275   

Repossession and foreclosure, net of recoveries

     1,880         1,452   

Other

     17,515         13,610   
                 

Total noninterest expense

     109,041         92,760   
                 

Income before income taxes

     12,224         2,390   

Income tax provision

     4,508         580   
                 

Net income

     7,716         1,810   

Less: Net income attributable to noncontrolling interest

     122         124   
                 

Net income attributable to PlainsCapital Corporation

     7,594         1,686   

Dividends on preferred stock and other

     1,400         1,388   
                 

Income applicable to PlainsCapital Corporation common shareholders

   $ 6,194       $ 298   
                 

Earnings per share

     

Basic

   $ 0.19       $ 0.01   
                 

Diluted

   $ 0.18       $ 0.01   
                 

See accompanying notes.

 

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Table of Contents

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, 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

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

Vesting of stock-based compensation

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

Stock-based compensation expense

      —          —          —          —          217        —          —          —          —          217   

ESOP activity

      —          —          —          —          —          14        —          —          —          14   

Dividends on common stock ($0.05 per share)

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

Dividends on preferred stock

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

Preferred stock discount and accretion

      —          193        —          —          —          (193     —          —          —          —     

Cash distributions to noncontrolling interest

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

Comprehensive income:

                     

Net income

  $ 1,810        —          —          —          —          —          1,686        —          —          124        1,810   

Other comprehensive income (loss):

                     

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

    391                       

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

    144                       

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

    (3                    
                           

Other comprehensive income

    532        —          —          —          —          —          —          532        —          —          532   
                           

Total comprehensive income

  $ 2,342                       
                                                                                       

Balance, March 31, 2010

      92,013      $ 88,593        31,754,135      $ 32      $ 151,146      $ 185,359      $ 232      $ (3,001   $ 1,705      $ 424,066   
                                                                                 

Balance, January 1, 2011

      92,013      $ 89,193        31,780,828      $ 32      $ 153,289      $ 206,786      $ (281   $ (2,528   $ 785      $ 447,276   

Stock option plans’ activity, including compensation expense

      —          —          2,246        —          34        —          —          —          —          34   

Vesting of stock-based compensation

      —          —          83,713        —          —          —          —          —          —          —     

Stock-based compensation expense

      —          —          —          —          451        —          —          —          —          451   

ESOP activity

      —          —          —          —          —          —          —          —          —          —     

Dividends on common stock ($0.05 per share)

      —          —          —          —          —          (1,702     —          —          —          (1,702

Dividends on preferred stock

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

Preferred stock discount and accretion

      —          206        —          —          —          (206     —          —          —          —     

Cash received from noncontrolling interest

      —          —          —          —          —          —          —          —          49        49   

Cash distributions to noncontrolling interest

      —          —          —          —          —          —          —          —          (153     (153

Comprehensive income:

                     

Net income

  $ 7,716        —          —          —          —          —          7,594        —          —          122        7,716   

Other comprehensive income (loss):

                     

Unrealized losses on securities available for sale, net of tax of $2137.6

    (3,982                    

Unrealized gains on securities held in trust for the Supplemental Executive Retirement Plan, net of tax of $103.5

    193                       
                           

Unrealized losses on customer-related cash flow hedges, net of tax of $17.9

    (34                    
                           

Other comprehensive loss

    (3,823     —          —          —          —          —          —          (3,823     —          —          (3,823
                           

Total comprehensive income

  $ 3,893                       
                                                                                       

Balance, March 31, 2011

      92,013      $ 89,399        31,866,787      $ 32      $ 153,774      $ 211,278      $ (4,104   $ (2,528   $ 803      $ 448,654   
                                                                                 

See accompanying notes.

 

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Table of Contents

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In thousands)

 

     Three Months Ended
March 31,
 
     2011     2010  

Operating Activities

    

Net income

   $ 7,716      $ 1,810   

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

    

Provision for loan losses

     6,500        22,955   

Net losses on other real estate owned

     1,460        712   

Depreciation and amortization

     8,584        2,630   

Stock-based compensation expense

     470        253   

Net realized gains on sale of securities

     —          (1,612

Loss on sale of premises and equipment

     5        18   

Stock dividends received on securities

     (7     (16

Deferred income taxes

     5,176        (366

Changes in prepaid FDIC assessments

     1,566        1,116   

Changes in assets segregated for regulatory purposes

     (13,000     —     

Changes in trading securities

     (25,705     (48,761

Changes in broker-dealer and clearing organization receivables

     (32,557     (47,176

Changes in fee award receivable

     312        320   

Changes in broker-dealer and clearing organization payables

     42,355        100,856   

Changes in other assets

     (5,313     (38,941

Changes in other liabilities

     (59,141     (26,385

Net gains from sale of loans

     (44,334     (32,993

Loans originated for sale

     (1,471,560     (1,152,337

Proceeds from loans sold

     1,536,012        1,128,959   
                

Net cash used in operating activities

     (41,461     (88,958
                

Investing Activities

    

Net decrease in securities purchased under resale agreements

     75,402        —     

Proceeds from maturities and principal reductions of securities held to maturity

     9,083        23,187   

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

     98,256        83,689   

Purchases of securities held to maturity

     (1,031     (4,911

Purchases of securities available for sale

     (265,372     (167,760

Net decrease in loans

     144,451        31,271   

Purchases of premises and equipment and other assets

     (17,471     (4,649

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

     6,258        1,542   

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

     2,164        (326
                

Net cash provided by (used in) investing activities

     51,740        (37,957
                

Financing Activities

    

Net increase in deposits

     193,731        67,678   

Net increase (decrease) in short-term borrowings

     (89,207     122,933   

Proceeds from notes payable

     1,500        1,200   

Payments on notes payable

     (3,081     (2,143

Proceeds from issuance of common stock

     15        267   

Dividends paid

     (2,896     (2,891

Net cash distributions to noncontrolling interest

     (104     (78

Other, net

     (114     (106
                

Net cash provided by financing activities

     99,844        186,860   
                

Net increase in cash and cash equivalents

     110,123        59,945   

Cash and cash equivalents at beginning of period

     359,335        160,367   
                

Cash and cash equivalents at end of period

   $ 469,458      $ 220,312   
                

Supplemental Disclosures of Cash Flow Information

    

Cash paid during the period for:

    

Interest

   $ 11,482      $ 9,355   
                

Income taxes

   $ 1,090      $ 802   
                

Supplemental Schedule of Noncash Activities

    

Conversion of loans to other real estate owned

   $ 2,568      $ 4,115   
                

 

See accompanying notes.

    

 

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Table of Contents

PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements – Unaudited

March 31, 2011

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

The unaudited consolidated financial statements of PlainsCapital Corporation, a Texas corporation, and its subsidiaries (“we,” “us,” “our,” “our company,” or “PlainsCapital”) for the three month periods ended March 31, 2011 and 2010 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 22, 2011. 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 Graham-Leach-Bliley Act of 1999, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing, fixed income sales and trading, asset management and correspondent clearing services.

PlainsCapital owns 100% of the outstanding stock of PlainsCapital Bank (the “Bank”) and 100% of the membership interest in PlainsCapital Equity, LLC. PlainsCapital owns a 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% interest in First Southwest Holdings, LLC (“First Southwest”) 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.

 

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Table of Contents

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 pursuant to 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 from those estimates. Estimates regarding the allowance for loan losses are 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 loss, net of taxes, at March 31, 2011 and December 31, 2010 are shown in the following table (in thousands):

 

       March 31,  
2011
    December 31,
2010
 

Unrealized loss on securities available for sale

   $ (4,859   $ (877

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

     744        551   

Unrealized gain on customer-related cash flow hedges

     11        45   
                
   $ (4,104   $ (281
                

Reclassification

Certain items in the 2010 financial statements have been reclassified to conform to the 2011 presentation.

 

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Table of Contents

2. Securities

The amortized cost and fair value of securities, excluding trading securities, as of March 31, 2011, and December 31, 2010 are summarized as follows (in thousands):

 

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

As of March 31, 2011

          

U. S. government agencies

          

Mortgage-backed securities

   $ 8,167       $ 652       $ —        $ 8,819   

Collateralized mortgage obligations

     22,024         433         (256     22,201   

States and political subdivisions

     120,551         3,300         (600     123,251   

Auction rate bonds

     45,528         850         (18     46,360   
                                  

Totals

   $ 196,270       $ 5,235       $ (874   $ 200,631   
                                  

As of December 31, 2010

          

U. S. government agencies

          

Mortgage-backed securities

   $ 10,369       $ 677       $ (8   $ 11,038   

Collateralized mortgage obligations

     28,169         615         (101     28,683   

States and political subdivisions

     120,348         1,758         (2,497     119,609   

Auction rate bonds

     74,027         644         (5,271     69,400   
                                  

Totals

   $ 232,913       $ 3,694       $ (7,877   $ 228,730   
                                     
     Available for Sale  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

As of March 31, 2011

          

U. S. government agencies

          

Bonds

   $ 38,250       $ —         $ (144   $ 38,106   

Mortgage-backed securities

     34,463         426         (560     34,329   

Collateralized mortgage obligations

     620,223         2,747         (6,354     616,616   

States and political subdivisions

     61,952         1,901         (347     63,506   

Auction rate bonds

     51,514         —           (5,139     46,375   
                                     

Totals

   $ 806,402       $ 5,074       $ (12,544   $ 798,932   
                                  

As of December 31, 2010

          

U. S. government agencies

          

Bonds

   $ 30,000       $ 5       $ (46   $ 29,959   

Mortgage-backed securities

     18,907         410         (473     18,844   

Collateralized mortgage obligations

     507,536         2,364         (2,131     507,769   

States and political subdivisions

     35,209         43         (1,042     34,210   

Auction rate bonds

     22,936         —           (482     22,454   
                                     

Totals

   $ 614,588       $ 2,822       $ (4,174   $ 613,236   
                                     

 

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Table of Contents

2. Securities (continued)

 

Information regarding securities that were in an unrealized loss position as of March 31, 2011, is shown in the following tables (dollars in thousands):

 

     As of March 31, 2011  
     Number of
Securities
     Fair Value      Unrealized
Losses
 

Held to maturity

        

U. S. government agencies

        

Collateralized mortgage obligations

        

Unrealized loss for less than twelve months

     2       $ 10,732       $ 256   

Unrealized loss for more than twelve months

     —           —           —     
                          
     2         10,732         256   

States and political subdivisions

        

Unrealized loss for less than twelve months

     49         22,622         429   

Unrealized loss for more than twelve months

     12         4,456         171   
                          
     61         27,078         600   

Auction rate bonds

        

Unrealized loss for less than twelve months

     —           —           —     

Unrealized loss for more than twelve months

     2         10,455         18   
                          
     2         10,455         18   

Total held to maturity

        

Unrealized loss for less than twelve months

     51         33,354         685   

Unrealized loss for more than twelve months

     14         14,911         189   
                          
     65       $ 48,265       $ 874   
                          

Available for sale

        

U. S. government agencies

        

Bonds

        

Unrealized loss for less than twelve months

     4       $ 38,106       $ 144   

Unrealized loss for more than twelve months

     —           —           —     
                          
     4         38,106         144   

Mortgage-backed securities

        

Unrealized loss for less than twelve months

     5         15,035         560   

Unrealized loss for more than twelve months

     —           —           —     
                          
     5         15,035         560   

Collateralized mortgage obligations

        

Unrealized loss for less than twelve months

     25         305,027         6,354   

Unrealized loss for more than twelve months

     —           —           —     
                          
     25         305,027         6,354   

States and political subdivisions

        

Unrealized loss for less than twelve months

     11         13,617         340   

Unrealized loss for more than twelve months

     1         609         7   
                          
     12         14,226         347   

Auction rate bonds

        

Unrealized loss for less than twelve months

     —           —           —     

Unrealized loss for more than twelve months

     3         46,375         5,139   
                          
     3         46,375         5,139   

Total available for sale

        

Unrealized loss for less than twelve months

     45         371,785         7,398   

Unrealized loss for more than twelve months

     4         46,984         5,146   
                          
     49       $ 418,769       $ 12,544   
                          

 

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Table of Contents

2. Securities (continued)

 

Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Bank expects to receive full value for the securities. As of March 31, 2011, management does not intend to sell any of the securities classified as available for sale in the previous table, and management believes that it is more likely than not that PlainsCapital will not have to sell any such securities before a recovery of cost. As of March 31, 2011, management believes the impairments detailed in the table are temporary and relate primarily to changes in interest rates and liquidity. Accordingly, no other-than-temporary impairment loss has been recognized in PlainsCapital’s consolidated statements of income.

The amortized cost and fair value of securities, excluding trading securities, as of March 31, 2011, 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

   $ 3,369       $ 3,412       $ —         $ —     

Due after one year through five years

     2,218         2,254         33,033         32,892   

Due after five years through ten years

     16,479         16,981         670         677   

Due after ten years

     144,013         146,964         118,013         114,418   
                                   
     166,079         169,611         151,716         147,987   

Mortgage-backed securities

     8,167         8,819         34,463         34,329   

Collateralized mortgage obligations

     22,024         22,201         620,223         616,616   
                                   
   $ 196,270       $ 200,631       $ 806,402       $ 798,932   
                                   

The Bank did not sell securities in the three months ended March 31, 2011. For the three months ended March 31, 2010, the Bank received proceeds from the sale of available for sale securities of $54.3 million and recognized gross gains of $1.6 million. The Bank determines the cost of securities sold by specific identification.

FSC realized net gains from its trading operations of $1.0 million and $0.5 million for the three months ended March 31, 2011 and 2010, respectively.

During the first quarter of 2011, auction rate bonds with a net carrying amount of $28.6 million were transferred from held to maturity to available for sale to address a downgrade in credit rating from investment grade to below investment grade. The net carrying amount of the transferred securities included an unrealized loss of $5.1 million that was included in accumulated other comprehensive loss at March 31, 2011, reducing shareholders’ equity. As of March 31, 2011 and December 31, 2010, the unrealized loss on the transferred securities was $5.1 million and $5.0 million, respectively.

Securities with a carrying amount of approximately $585.0 million and $624.4 million (fair value of approximately $585.4 million and $623.6 million) at March 31, 2011 and December 31, 2010, 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 $60.0 million at both March 31, 2011 and December 31, 2010, in lieu of pledging securities to secure certain public deposits.

 

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Table of Contents

3. Loans and Allowance for Loan Losses

Loans summarized by category as of March 31, 2011 and December 31, 2010, are as follows (in thousands):

 

     March 31,
2011
    December 31,
2010
 

Commercial and industrial

    

Commercial

   $ 1,227,439      $ 1,299,654   

Lease financing

     44,606        50,216   

Securities (primarily margin loans)

     232,409        289,351   

Real estate

     1,137,855        1,112,402   

Construction and land development

     302,880        343,920   

Consumer

     40,471        42,627   
                
     2,985,660        3,138,170   

Allowance for loan losses

     (65,940     (65,169
                
   $ 2,919,720      $ 3,073,001   
                

PlainsCapital has lending policies in place with the goal of establishing an asset portfolio that will provide a return on shareholders’ equity in order that we may retain sufficient earnings to maintain capital to assets ratios that meet or exceed established regulatory guidelines. Loans are underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan.

Underwriting procedures address financial components based on the size or complexity of the credit. The financial components include but are not limited to current and projected global cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and income statement ratios. Collateral analysis includes complete description, values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information determined to be relevant to the collateral being pledged. Guarantor analysis includes liquidity and global cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. PlainsCapital’s underwriting standards are governed by adherence to the loan policy. The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided.

PlainsCapital maintains an independent loan review department that reviews credit risk on an ongoing basis. The loan review process reviews the creditworthiness of borrowers and determines compliance with lending policy. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and the Bank’s Board of Directors.

 

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3. Loans and Allowance for Loan Losses (continued)

 

Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments as they become due according to the terms of the loan agreement, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Impaired loans include non-accrual loans, troubled debt restructurings and partially charged-off loans. Impaired loans as of March 31, 2011 and December 31, 2010 are summarized by class in the following table (in thousands):

 

     Unpaid
Contractual
Principal Balance
     Recorded
Investment  with
No Allowance
     Recorded
Investment  with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

As of March 31, 2011

                 

Commercial and industrial

                 

Secured by receivables

   $ 13,780       $ 3,556       $ 4,364       $ 7,920       $ 2,441       $ 11,782   

Secured by equipment

     3,568         1,228         —           1,228         —           1,052   

Unsecured

     7,875         995         2,880         3,875         1,197         1,992   

Lease financing

     5,352         5,352         —           5,352         —           5,690   

All other commercial and industrial

     4,926         254         630         884         256         4,402   

Real estate

                 

Secured by commercial properties

     14,104         14,104         —           14,104         —           15,331   

Secured by residential properties

     9,309         4,261         4,548         8,809         273         9,365   

Construction and land development

                 

Residential construction loans

     196         196         —           196         —           1,014   

Commercial construction loans and land development

     72,136         29,689         28,692         58,381         5,760         57,949   

Consumer

     34         34         —           34         —           35   
                                                     
   $ 131,280       $ 59,669       $ 41,114       $ 100,783       $ 9,927       $ 108,612   
                                                     
     Unpaid
Contractual
Principal Balance
     Recorded
Investment with
No Allowance
     Recorded
Investment with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

As of December 31, 2010

                 

Commercial and industrial

                 

Secured by receivables

   $ 24,036       $ 11,301       $ 4,343       $ 15,644       $ 2,089       $ 29,670   

Secured by equipment

     3,290         638         237         875         57         2,783   

Unsecured

     4,148         109         —           109         —           227   

Lease financing

     6,028         6,028         —           6,028         —           5,607   

All other commercial and industrial

     7,920         4,811         3,109         7,920         2,507         13,989   

Real estate

                 

Secured by commercial properties

     19,039         16,427         130         16,557         1         8,417   

Secured by residential properties

     10,420         6,840         3,080         9,920         417         9,472   

Construction and land development

                 

Residential construction loans

     1,831         1,831         —           1,831         —           1,094   

Commercial construction loans and land development

     70,801         36,430         21,087         57,517         3,724         33,728   

Consumer

     35         35         —           35         —           1   
                                                     
   $ 147,548       $ 84,450       $ 31,986       $ 116,436       $ 8,795       $ 104,988   
                                                     

Interest income recorded on impaired loans that were not in non-accrual status at March 31, 2011, was approximately $0.2 million for the three months ended March 31, 2011. Interest income recorded on non-accrual loans for the three months ended March 31, 2011 and 2010 was nominal. At March 31, 2011, PlainsCapital had unadvanced commitments of approximately $0.8 million to borrowers whose loans had been restructured in troubled debt restructurings.

 

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3. Loans and Allowance for Loan Losses (continued)

 

Non-accrual loans as of March 31, 2011 and December 31, 2010 are summarized by class in the following table (in thousands):

 

       March 31,  
2011
     December 31,
2010
 

Commercial and industrial

     

Secured by receivables

   $ 6,089       $ 7,580   

Secured by equipment

     971         875   

Unsecured

     2,938         64   

Lease financing

     5,352         6,028   

All other commercial and industrial

     630         3,740   

Real estate

     

Secured by commercial properties

     4,156         4,426   

Secured by residential properties

     7,953         3,609   

Construction and land development

     

Residential construction loans

     196         199   

Commercial construction loans and land development

     58,132         57,423   

Consumer

     11         27   
                 
   $ 86,428       $ 83,971   
                 

The average aggregate balance of non-accrual loans for the three months ended March 31, 2010 was approximately $79.4 million.

An analysis of the aging of PlainsCapital’s loan portfolio as of March 31, 2011 and December 31, 2010 is shown in the following table (in thousands):

 

     Loans Past Due
30-89 Days
     Loans Past Due
90  Days or More
     Total
Past Due Loans
     Current
Loans
     Total
Loans
     Accruing Loans
Past Due
90 Days or More
 

As of March 31, 2011

                 

Commercial and industrial

                 

Secured by receivables

   $ 6,225       $ 1,417       $ 7,642       $ 585,197       $ 592,839       $ —     

Secured by equipment

     704         918         1,622         121,291         122,913         —     

Unsecured

     193         5         198         90,532         90,730         —     

Lease financing

     10,025         5,347         15,372         29,234         44,606         —     

All other commercial and industrial

     120         —           120         653,246         653,366         —     

Real estate

                 

Secured by commercial properties

     5,746         2,282         8,028         888,169         896,197         —     

Secured by residential properties

     4,228         1,950         6,178         235,480         241,658         —     

Construction and land development

                 

Residential construction loans

     16         —           16         61,833         61,849         —     

Commercial construction loans and land development

     4,353         4,899         9,252         231,779         241,031         —     

Consumer

     122         20         142         40,329         40,471         9   
                                                     
   $ 31,732       $ 16,838       $ 48,570       $ 2,937,090       $ 2,985,660       $ 9   
                                                     

 

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Table of Contents

3. Loans and Allowance for Loan Losses (continued)

 

     Loans Past Due
30-89 Days
     Loans Past Due
90 Days or More
     Total
Past Due  Loans
     Current
Loans
     Total
Loans
     Accruing Loans
Past Due

90 Days or More
 

As of December 31, 2010

                 

Commercial and industrial

                 

Secured by receivables

   $ 3,630       $ 3,655       $ 7,285       $ 648,856       $ 656,141       $ —     

Secured by equipment

     1,092         287         1,379         121,011         122,390         —     

Unsecured

     15         —           15         92,812         92,827         —     

Lease financing

     2,204         5,343         7,547         42,669         50,216         71   

All other commercial and industrial

     265         2,778         3,043         714,604         717,647         —     

Real estate

                 

Secured by commercial properties

     5,834         1,768         7,602         862,521         870,123         395   

Secured by residential properties

     4,017         1,286         5,303         236,976         242,279         —     

Construction and land development

                 

Residential construction loans

     23         —           23         55,414         55,437         —     

Commercial construction loans and land development

     8,492         21,433         29,925         258,558         288,483         —     

Consumer

     149         —           149         42,478         42,627         —     
                                                     
   $ 25,721       $ 36,550       $ 62,271       $ 3,075,899       $ 3,138,170       $ 466   
                                                     

Management tracks credit quality trends on a monthly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, (iv) net charge-offs and (v) general economic conditions at state and local levels.

PlainsCapital utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an assessment of the borrower’s management, collateral position, financial capacity, and economic factors. The general characteristics of the various risk grades are described below.

Pass – “Pass” loans present a range of acceptable risks to the bank. Loans that would be considered virtually risk-free are rated Pass – low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass – normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass – high risk.

Special Mention – A “Special Mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to require adverse classification.

Substandard – “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.

Doubtful – Loans classified “Doubtful” have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. All doubtful loans are considered impaired.

Loss – Loans classified “Loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value. Rather, it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future.

 

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Table of Contents

3. Loans and Allowance for Loan Losses (continued)

 

The following table presents the internal risk grades of loans, as described above, in the portfolio as of March 31, 2011 and December 31, 2010 by class (in thousands):

 

     Pass      Special Mention      Substandard      Total  

As of March 31, 2011

           

Commercial and industrial

           

Secured by receivables

   $ 554,672       $ 12,454       $ 25,713       $ 592,839   

Secured by equipment

     118,550         18         4,345         122,913   

Unsecured

     87,251         8         3,471         90,730   

Lease financing

     38,264         —           6,342         44,606   

All other commercial and industrial

     631,821         1,286         20,259         653,366   

Real estate

           

Secured by commercial properties

     856,116         11,350         28,731         896,197   

Secured by residential properties

     230,211         —           11,447         241,658   

Construction and land development

           

Residential construction loans

     54,746         6,700         403         61,849   

Commercial construction loans and land development

     174,683         2,607         63,741         241,031   

Consumer

     40,403         —           68         40,471   
                                   
   $ 2,786,717       $ 34,423       $ 164,520       $ 2,985,660   
                                   
     Pass      Special Mention      Substandard      Total  

As of December 31, 2010

           

Commercial and industrial

           

Secured by receivables

   $ 628,464       $ 11,636       $ 16,041       $ 656,141   

Secured by equipment

     119,948         321         2,121         122,390   

Unsecured

     91,654         —           1,173         92,827   

Lease financing

     42,285         —           7,931         50,216   

All other commercial and industrial

     697,938         16,223         3,486         717,647   

Real estate

           

Secured by commercial properties

     834,940         13,078         22,105         870,123   

Secured by residential properties

     229,503         897         11,879         242,279   

Construction and land development

           

Residential construction loans

     55,029         209         199         55,437   

Commercial construction loans and land development

     222,046         1,205         65,232         288,483   

Consumer

     42,536         40         51         42,627   
                                   
   $ 2,964,343       $ 43,609       $ 130,218       $ 3,138,170   
                                   

Net investment in lease financing at March 31, 2011 and December 31, 2010 is shown in the following table (in thousands).

 

       March 31,  
2011
    December 31,
2010
 

Future minimum lease payments

   $ 46,865      $ 53,178   

Unguaranteed residual value

     194        139   

Guaranteed residual value

     2,051        2,096   

Initial direct costs, net of amortization

     160        166   

Unearned income

     (4,664     (5,363
                
   $ 44,606      $ 50,216   
                

 

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3. Loans and Allowance for Loan Losses (continued)

 

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. 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 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 and the Receivables and Contingencies Topics of the ASC. 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. Any subsequent recovery of charged-off loans is added back to the allowance for loan losses.

We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans within the scope of the Receivables Topic has been determined to be impaired and individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. When loans are determined to be impaired, specific reserves are provided in our estimate of the allowance, as appropriate. Loans within the scope of the Contingencies Topic include all non-impaired loans. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segment 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 recent 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 on the loan are delayed, typically by 90 days or more (unless in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. 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 adequate coverage of our various lending markets.

Homogenous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogenous pool of loans based on the expected net charge-offs from a current trend in delinquencies, losses or historical experience and general economic conditions. As of March 31, 2011, we had no material delinquencies in these types of loans.

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.

 

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3. Loans and Allowance for Loan Losses (continued)

 

Changes in the allowance for loan losses, distributed by portfolio segment, for the three months ended March 31, 2011 were as follows (in thousands):

 

     Commercial  and
Industrial
    Real Estate     Construction and
Land  Development
    Consumer     Unallocated      Total  

Three Months Ended March 31, 2011

             

Balance at beginning of period

   $ 41,687      $ 11,732      $ 11,227      $ 523      $ —         $ 65,169   

Provision charged to operations

     3,024        (188     3,575        (35     124         6,500   

Loans charged off

     (4,055     (417     (1,571     (63     —           (6,106

Recoveries on charged off loans

     206        149        5        17        —           377   
                                                 

Balance at end of year

   $ 40,862      $ 11,276      $ 13,236      $ 442      $ 124       $ 65,940   
                                                 

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

 

     Three Months Ended
March  31, 2010
 

Balance at beginning of period

   $ 52,092   

Provision charged to operations

     22,955   

Loans charged off

     (25,347

Recoveries on charged off loans

     271   
        

Balance at end of period

   $ 49,971   
        

As of March 31, 2011 and December 31, 2010, the loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands):

 

     Commercial  and
Industrial
     Real Estate      Construction and
Land  Development
     Consumer      Total  

As of March 31, 2011

              

Loans individually evaluated for impairment

   $ 19,259       $ 22,913       $ 58,577       $ 34       $ 100,783   

Loans collectively evaluated for impairment

     1,485,195         1,114,942         244,303         40,437         2,884,877   
                                            
   $ 1,504,454       $ 1,137,855       $ 302,880       $ 40,471       $ 2,985,660   
                                            
     Commercial and
Industrial
     Real Estate      Construction and
Land Development
     Consumer      Total  

As of December 31, 2010

              

Loans individually evaluated for impairment

   $ 30,576       $ 26,477       $ 59,348       $ 35       $ 116,436   

Loans collectively evaluated for impairment

     1,608,645         1,085,925         284,572         42,592         3,021,734   
                                            
   $ 1,639,221       $ 1,112,402       $ 343,920       $ 42,627       $ 3,138,170   
                                            

As of March 31, 2011 and December 31, 2010, the allowance for loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands):

 

     Commercial  and
Industrial
     Real Estate      Construction and
Land  Development
     Consumer      Unallocated      Total  

As of March 31, 2011

                 

Loans individually evaluated for impairment

   $ 3,894       $ 273       $ 5,760       $ —         $ —         $ 9,927   

Loans collectively evaluated for impairment

     36,968         11,003         7,476         442         124         56,013   
                                                     
   $ 40,862       $ 11,276       $ 13,236       $ 442       $ 124       $ 65,940   
                                                     
     Commercial and
Industrial
     Real Estate      Construction and
Land Development
     Consumer      Unallocated      Total  

As of December 31, 2010

                 

Loans individually evaluated for impairment

   $ 4,654       $ 417       $ 3,724       $ —         $ —         $ 8,795   

Loans collectively evaluated for impairment

     37,033         11,315         7,503         523         —           56,374   
                                                     
   $ 41,687       $ 11,732       $ 11,227       $ 523       $ —         $ 65,169   
                                                     

 

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3. Loans and Allowance for Loan Losses (continued)

 

Net (charge-offs)/recoveries by class for the three months ended March 31, 2011 and 2010 are shown in the following table (in thousands):

 

     Three Months Ended
March 31,
 
           2011                 2010        

Commercial and industrial

    

Secured by receivables

   $ (866   $ (9,394

Secured by equipment

     (267     (1,977

Unsecured

     (14     (562

Lease financing

     (270     (127

All other commercial and industrial

     (2,432     (5,067

Real estate

    

Secured by commercial properties

     39        (7,392

Secured by residential properties

     (307     (304

Construction and land development

    

Residential construction loans

     (23     (98

Commercial construction loans and land development

     (1,543     (92

Consumer

     (46     (63
                
   $ (5,729   $ (25,076
                

4. Deposits

Deposits at March 31, 2011 and December 31, 2010 are summarized as follows (in thousands):

 

        March 31,   
2011
     December 31,
2010
 

Noninterest-bearing demand

   $ 282,615       $ 256,372   

Interest-bearing:

     

NOW accounts

     61,292         61,800   

Money market

     1,565,604         1,416,816   

Brokered - money market

     363,651         374,972   

Demand

     63,277         71,547   

Savings

     165,664         167,398   

In foreign branches

     174,903         132,131   

Time - $100,000 and over

     821,623         817,956   

Time - other

     237,142         218,163   

Brokered - time

     376,419         401,304   
                 
   $ 4,112,190       $ 3,918,459   
                 

 

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5. Short-Term Borrowings

 

Short-term borrowings at March 31, 2011 and December 31, 2010 were as follows (in thousands):

 

       March 31,  
2011
     December 31,
2010
 

Federal funds purchased

   $ 199,625       $ 134,675   

Securities sold under agreements to repurchase

     209,941         304,207   

Federal Home Loan Bank notes

     25,000         100,000   

Treasury tax and loan note option account

     2,611         3,002   

Short-term bank loans

     55,750         40,250   
                 
   $ 492,927       $ 582,134   
                 

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

 

     Three Months Ended March 31,  
     2011     2010  

Average balance during the period

   $ 480,141      $ 237,276   

Average interest rate during the period

     0.23     0.22
     March 31,
2011
    December 31,
2010
 

Average interest rate at end of period

     0.22     0.23

Securities underlying the agreements at end of period

    

Carrying value

   $ 199,869      $ 276,284   

Estimated fair value

   $ 252,349      $ 336,317   

The estimated fair value of securities underlying repurchase agreements above includes approximately $52.5 million of securities owned by FSC customers and pledged to FSC as collateral for margin loans as of March 31, 2011. 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 (dollar amounts in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Average balance during the period

   $ 43,889      $ 331,111   

Average interest rate during the period

     0.42     0.70
     March 31,
2011
    December 31,
2010
 

Average interest rate at end of period

     0.41     0.43

FSC uses short-term bank loans periodically to finance securities owned, customers’ margin accounts, and other short-term operating activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at March 31, 2011 and December 31, 2010 were 1.38% and 1.50%, respectively.

 

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6. Notes Payable

Notes payable at March 31, 2011 and December 31, 2010 consisted of the following (in thousands):

 

       March 31,  
2011
     December 31,
2010
 

Revolving credit line with JPMorgan Chase not to exceed $17.7 million. Facility matures July 31, 2011, with interest payable quarterly.

   $ 17,700       $ 17,700   

Revolving credit line with JPMorgan Chase not to exceed $5.0 million. Facility matures July 31, 2011 with interest payable quarterly.

     2,500         1,000   

Term note with JPMorgan Chase, due July 31, 2011. Principal payments of $1.9 million and interest are payable quarterly.

     3,825         5,738   

Term note with JPMorgan Chase, due July 31, 2011, Principal payments of $0.5 million and interest are payable semi-annually.

     2,500         3,000   

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.

     15,170         15,838   
                 
   $ 62,195       $ 63,776   
                 

The agreements underlying the JPMorgan Chase debt include certain restrictive covenants, including limitations on the ability to incur additional debt, limitations on the disposition of assets and requirements to maintain various financial ratios, including a non-performing asset ratio, at acceptable levels.

In January 2011, PlainsCapital and JPMorgan Chase amended the revolving credit line agreements to, among other things, increase the acceptable non-performing asset ratio for the Bank such that, beginning December 31, 2010, the Bank’s non-performing asset ratio may not exceed 4.50%. At March 31, 2011, the Bank’s non-performing asset ratio, as defined, was 3.43%, which was in compliance with the non-performing asset ratio covenant.

7. Income Taxes

PlainsCapital’s effective tax rate was 36.9% and 24.3% for the three months ended March 31, 2011 and 2010, respectively. Due to the lower amount of pre-tax income, which is taxed at lower marginal rates, the effective tax rate for the three months ended March 31, 2010 was lower compared to the comparable period in 2011.

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

 

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8. Commitments and Contingencies

The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $7.4 million and $0.5 million at March 31, 2011 and December 31, 2010, respectively.

Legal Matters

In November 2006, FSC received subpoenas from the SEC and the United States 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. However, the plaintiffs in these purported class actions have filed amended complaints against other entities, and FSC is identified in these complaints not as a defendant, but as an alleged co-conspirator with the named defendants.

Additionally, as a result of these SEC and DOJ investigations into industry-wide practices, FSC has been named as a defendant in twenty individual lawsuits (of which three were filed after December 31, 2010). These lawsuits have been brought by several California public entities and two New York non-profit corporations that do not seek to certify a class. The Judicial Panel on Multidistrict Litigation has transferred these cases to the United States District Court, Southern District of New York. The California plaintiffs allege violations of Section 1 of the Sherman Act and the California Cartwright Act. The New York plaintiffs allege violations of Section 1 of the Sherman Act and the New York Donnelly Act. The allegations against FSC are very limited in scope. FSC filed an answer to sixteen lawsuits, will timely answer the four unanswered lawsuits on or before May 31, 2011, and intends to defend itself vigorously in these individual actions. The relief sought is unspecified monetary damages.

On December 8, 2010, PrimeLending entered into a settlement with the DOJ pursuant to a Consent Order with respect to an inquiry by the DOJ into certain lending practices of PrimeLending in prior years. The Consent Order settles a complaint filed by the United States against PrimeLending earlier that day in the United States District Court for the Northern District of Texas, Dallas Division relating to alleged violations by PrimeLending of fair lending laws between 2006 and 2009. In its complaint, the United States sought a finding that PrimeLending violated the Fair Housing Act and the Equal Credit Opportunity Act, to enjoin PrimeLending from discriminating in connection with its mortgage lending business, monetary damages on behalf of alleged victims and a civil penalty. The Consent Order was subsequently approved by the court on January 11, 2011.

PrimeLending denies that it has engaged in any discriminating lending practices and entered into the Consent Order voluntarily to avoid the risks and burdens of litigation. No factual finding or adjudication was made with respect to the United States’ allegations against PrimeLending, and no civil penalty was assessed. Prior to entering into the Consent Order, PrimeLending altered its loan pricing policy to ensure that the price it charges for residential loan products is set in a nondiscriminatory manner consistent with applicable law.

As a part of the Consent Order, PrimeLending agreed to provide a $2.0 million settlement fund, which PrimeLending charged to expense in 2010, for borrowers nationwide who may have suffered as a result of the alleged violations by PrimeLending of fair lending laws. Any moneys not distributed from the settlement fund to individual borrowers will be distributed to qualified organizations to provide credit counseling, financial literacy, and other related educational programs.

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.

 

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8. Commitments and Contingencies (continued)

 

Other Contingencies

PlainsCapital and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under noncancelable operating leases with remaining terms, including renewal options, of 1 to 17 years and under capital leases with remaining terms of 11 to 18 years. Future minimum payments under these leases have not changed significantly from the amounts reported at December 31, 2010 in the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 22, 2011. Rental expense under the operating leases was approximately $5.6 million and $5.2 million for the three months ended March 31, 2011 and 2010, 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 $908.7 million at March 31, 2011. The Bank had outstanding standby letters of credit of $49.0 million at March 31, 2011.

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

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.

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.

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

 

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10. Stock-Based Compensation (continued)

 

Compensation cost related to the plans was approximately $0.5 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively.

At March 31, 2011, unrecognized cost related to unvested restricted stock and restricted stock units was $4.8 million and $3.0 million, respectively. The vesting of the unvested restricted stock and restricted stock units will automatically accelerate in full under certain conditions. Upon a change in control of PlainsCapital, the entire unrecognized cost related to both unvested restricted stock and restricted stock units would be recognized in noninterest expense immediately. On 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”), the entire unrecognized cost related to unvested restricted stock would be recognized in noninterest expense immediately.

At March 31, 2011, a total of 187,281 shares were available for grant under the Stock Option Plans and 624,662 shares were available for grant under the 2010 Plan. PlainsCapital typically issues new shares upon exercise of option grants.

PlainsCapital granted 67,059 shares of unvested restricted stock and 294,092 restricted stock units to certain employees effective April 1, 2011. The estimated grant date fair value of the unvested restricted stock and restricted stock units was $0.8 million and $3.3 million, respectively. The grants vest in 5 years and are subject to the accelerated vesting conditions discussed previously.

Information regarding unvested restricted stock and restricted stock units for the three months ended March 31, 2011 is as follows:

 

     2011      2011  
     Unvested
Restricted
Stock
    Weighted
Average Grant
Date Fair Value
     Restricted
Stock Units
     Weighted
Average Grant
Date Fair Value
 

Outstanding, January 1

     535,862      $ 11.48         290,057       $ 12.58   

Granted

     —          —           2,000         11.26   

Vested

     (83,713     11.47         —           —     

Cancellations and expirations

     —          —           —           —     
                      

Outstanding, March 31

     452,149      $ 11.48         292,057       $ 12.57   
                      

Information regarding the Stock Option Plans for the three months ended March 31, 2011 is as follows:

 

     2011  
     Shares     Weighted
Average
Exercise
Price
 

Outstanding, January 1

     725,651      $ 9.62   

Exercised

     (2,246     6.69   

Cancellations and expirations

     (8,700     12.97   
          

Outstanding, March 31

     714,705        9.59   
          

 

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11. Regulatory Matters

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

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

 

     At March 31, 2011  
     Required     Actual  
     Amount      Ratio     Amount      Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 213,088         4   $ 488,332         9.17

Tier 1 capital (to risk-weighted assets)

     148,276         4     488,332         13.17

Total capital (to risk-weighted assets)

     296,552         8     534,920         14.43

PlainsCapital Corporation:

          

Tier 1 capital (to average assets)

   $ 214,000         4   $ 468,538         8.76

Tier 1 capital (to risk-weighted assets)

     149,007         4     468,538         12.58

Total capital (to risk-weighted assets)

     298,015         8     531,352         14.26
     At December 31, 2010  
     Required     Actual  
     Amount      Ratio     Amount      Ratio  

PlainsCapital Bank:

    

Tier 1 capital (to average assets)

   $ 206,270         4   $ 485,013         9.41

Tier 1 capital (to risk-weighted assets)

     152,091         4     485,013         12.76

Total capital (to risk-weighted assets)

     304,181         8     532,769         14.01

PlainsCapital Corporation:

          

Tier 1 capital (to average assets)

   $ 206,664         4   $ 462,823         8.96

Tier 1 capital (to risk-weighted assets)

     152,946         4     462,823         12.10

Total capital (to risk-weighted assets)

     305,891         8     526,843         13.78

 

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11. Regulatory Matters (continued)

 

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

 

     At March 31, 2011  
     Required     Actual  
     Amount      Ratio     Amount      Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 266,360         5   $ 488,332         9.17

Tier 1 capital (to risk-weighted assets)

     222,414         6     488,332         13.17

Total capital (to risk-weighted assets)

     370,690         10     534,920         14.43
     At December 31, 2010  
     Required     Actual  
     Amount      Ratio     Amount      Ratio  

PlainsCapital Bank:

          

Tier 1 capital (to average assets)

   $ 257,838         5   $ 485,013         9.41

Tier 1 capital (to risk-weighted assets)

     228,136         6     485,013         12.76

Total capital (to risk-weighted assets)

     380,227         10     532,769         14.01

Pursuant to the net capital requirements of the Exchange Act, FSC has elected to determine its net capital requirements using the alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3. At March 31, 2011, FSC had net capital of $52.2 million; the minimum net capital requirement was $3.3 million; net capital maintained by FSC at March 31, 2011 was 32% of aggregate debits; and net capital in excess of the minimum requirement at March 31, 2011 was $48.9 million.

As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the United States Department of Housing and Urban Development (“HUD”). PrimeLending determines its compliance with the minimum net worth requirements on an annual basis. As of December 31, 2010, 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 $54.1 million as of December 31, 2010, resulting in adjusted net worth above the required amount of $53.1 million.

12. Shareholders’ Equity

The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At March 31, 2011, approximately $41.7 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve.

13. Assets Segregated for Regulatory Purposes

At March 31, 2011, FSC had segregated $13.0 million of cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 of the Exchange Act. Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. FSC was not required to segregate cash and securities at December 31, 2010.

FSC was not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of introducing broker-dealers at March 31, 2011 or December 31, 2010.

 

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14. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables at March 31, 2011 and December 31, 2010 consisted of the following (in thousands):

 

       March 31,  
2011
     December 31,
2010
 

Receivables

     

Securities borrowed

   $ 65,265       $ 34,495   

Securities failed to deliver

     4,069         4,287   

Clearing organizations

     8,943         6,926   

Due from dealers

     48         60   
                 
   $ 78,325       $ 45,768   
                 

Payables

     

Securities loaned

   $ 65,576       $ 39,660   

Correspondents

     38,533         24,171   

Securities failed to receive

     3,809         1,140   

Clearing organizations

     69         661   
                 
   $ 107,987       $ 65,632   
                 

15. Fair Value Measurements

Fair Value Measurements and Disclosures

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

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

 

   

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

 

   

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

 

   

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

 

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15. Fair Value Measurements (continued)

 

Fair Value Option

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

At March 31, 2011, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $481.4 million, while the unpaid principal balance of those loans was $469.7 million. At December 31, 2010, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $476.4 million, while the unpaid principal balance of those loans was $465.3 million. The fair value excludes interest, which is reported as interest income on loans in the income statement.

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

At March 31, 2011, the Bank held auction rate bonds purchased as a result of the First Southwest acquisition. The estimated fair value of the auction rate bonds is determined quarterly 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).

 

     Auction
Rate Bonds
    Total  

Balance, January 1, 2011

   $ 22,454      $ 22,454   

Unrealized losses in other comprehensive income, net

     (4,657     (4,657

Transfers from held to maturity

     28,564        28,564   

Premium amortization and discount accretion, net

     14        14   
                

Balance, March 31, 2011

   $ 46,375      $ 46,375   
                

During the first quarter of 2011, auction rate bonds with a net carrying amount of $28.6 million were transferred from held to maturity to available for sale to address a downgrade in credit rating from investment grade to below investment grade. The Bank uses the date of the transfer to determine when the auction rate bonds entered Level 3.

 

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15. Fair Value Measurements (continued)

 

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

 

     At March 31, 2011  
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
     Total Fair
Value
 

Loans held for sale

   $ —         $ 481,380       $ —         $ 481,380   

Securities available for sale

     —           752,557         46,375         798,932   

Trading securities

     —           44,636         —           44,636   

Derivative assets

     —           4,893         —           4,893   

Time deposits

     —           1,106         —           1,106   

Trading liabilities

     —           7,323         —           7,323   

Derivative liabilities

     —           606         —           606   

 

     Changes in Fair Value for Assets and Liabilities  Reported at Fair Value under Fair Value Option  
     Three Months Ended March 31, 2011     Three Months Ended March 31, 2010  
     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

   $ 568       $ —        $ 568      $ 829       $ —        $ 829   

Time deposits

     —           (2     (2     —           (1     (1

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 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 March 31, 2011, loans with a carrying amount of $41.1 million had been reduced by allocations of the allowance for loan losses of $9.9 million, resulting in a reported fair value of $31.2 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 adjustments are charged against earnings. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At March 31, 2011, the estimated fair value of other real estate owned was $18.8 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 21 to the consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 22, 2011.

 

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15. Fair Value Measurements (continued)

 

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

 

     At March 31, 2011      At December 31, 2010  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets

           

Cash and short-term investments

   $ 521,430       $ 521,430       $ 486,709       $ 486,709   

Assets segregated for regulatory purposes

     13,000         13,000         —           —     

Loans held for sale

     482,627         482,627         477,711         477,711   

Securities

     1,039,838         1,044,199         865,080         860,897   

Loans, net

     2,919,720         2,964,446         3,073,001         3,116,532   

Broker-dealer and clearing organization receivables

     78,325         78,325         45,768         45,768   

Fee award receivable

     18,910         18,910         19,222         19,222   

Cash surrender value of life insurance policies

     22,603         22,603         22,410         22,410   

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

     4,893         4,893         4,107         4,107   

Accrued interest receivable

     15,159         15,159         16,615         16,615   

Financial liabilities

           

Deposits

     4,112,190         4,117,814         3,918,459         3,924,188   

Broker-dealer and clearing organization payables

     107,987         107,987         65,632         65,632   

Other trading liabilities

     7,323         7,323         4,944         4,944   

Short-term borrowings

     492,927         492,927         582,134         582,134   

Debt

     129,207         129,207         130,788         130,788   

Forward purchase commitments

     606         606         317         317   

Accrued interest payable

     4,045         4,045         5,949         5,949   

16. 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 15, 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 $0.5 million and $1.6 million for the three months ended March 31, 2011 and 2010, respectively. The net gains were recorded as a component of gain on sale of loans.

 

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16. Derivative Financial Instruments (continued)

 

Derivative positions at March 31, 2011 and December 31, 2010 are presented in the following table (in thousands):

 

     At March 31, 2011      At December 31, 2010  
     Notional
Amount
     Estimated
Fair  Value
     Notional
Amount
     Estimated
Fair Value
 

Non-hedging derivative instruments

           

IRLCs

   $ 613,229       $ 3,219       $ 442,270       $ 274   

Interest rate swaps

     1,969         113         1,969         129   

Forward purchase commitments

     616,644         955         436,241         3,387   

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

 

     Three Months Ended March 31, 2011     Three Months Ended March 31, 2010  
     Before-Tax
Amount
    Tax Benefit
(Expense)
     After-Tax
Amount
    Before-Tax
Amount
    Tax Benefit
(Expense)
     After-Tax
Amount
 

Change in market value

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

Reclassification adjustments

     (51     18         (33     (5     2         (3
                                                  

Other comprehensive income (loss)

   $ (51   $ 18       $ (33   $ (5   $ 2       $ (3
                                                  

17. 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. The operations of PrimeLending comprise the mortgage origination segment. The financial advisory segment is composed of Hester Capital and First Southwest.

Balance sheet amounts for the operations of PlainsCapital and its remaining subsidiaries not discussed in the previous paragraph are included in “All Other and Eliminations.”

 

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17. 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 March 31, 2011  
     Banking      Mortgage
Origination
    Financial
Advisory
    Intercompany
Eliminations
    PlainsCapital
Consolidated
 

Interest income

   $ 48,893       $ 3,867      $ 3,566      $ (4,323   $ 52,003   

Interest expense

     8,418         7,451        784        (7,075     9,578   
                                         

Net interest income (expense)

     40,475         (3,584     2,782        2,752        42,425   

Provision for loan losses

     6,500         —          —          —          6,500   

Noninterest income

     7,329         61,674        19,191        (2,854     85,340   

Noninterest expense

     28,089         58,482        22,716        (246     109,041   
                                         

Income (loss) before taxes

     13,215         (392     (743     144        12,224   

Income tax provision (benefit)

     4,931         (146     (277     —          4,508   
                                         

Consolidated net income (loss)

     8,284         (246     (466     144        7,716   

Less: net income attributable to noncontrolling interest

     —           69        53        —          122   
                                         

Net income (loss) attributable to PlainsCapital Corporation

   $ 8,284       $ (315   $ (519   $ 144      $ 7,594   
                                         
     Three Months Ended March 31, 2010  
     Banking      Mortgage
Origination
    Financial
Advisory
    Intercompany
Eliminations
    PlainsCapital
Consolidated
 

Interest income

   $ 50,900       $ 4,496      $ 2,391      $ (5,479   $ 52,308   

Interest expense

     9,057         9,504        832        (9,758     9,635   
                                         

Net interest income (expense)

     41,843         (5,008     1,559        4,279        42,673   

Provision for loan losses

     22,955         —          —          —          22,955   

Noninterest income

     10,618         47,435        21,779        (4,400     75,432   

Noninterest expense

     24,678         45,943        22,359        (220     92,760   
                                         

Income (loss) before taxes

     4,828         (3,516     979        99        2,390   

Income tax provision (benefit)

     1,222         (890     248        —          580   
                                         

Consolidated net income (loss)

     3,606         (2,626     731        99        1,810   

Less: net income attributable to noncontrolling interest

     —           59        65        —          124   
                                         

Net income (loss) attributable to PlainsCapital Corporation

   $ 3,606       $ (2,685   $ 666      $ 99      $ 1,686   
                                         

 

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17. Segment and Related Information (continued)

Balance Sheet Data

 

     March 31, 2011  
     Banking      Mortgage
Origination
     Financial
Advisory
     All Other and
Eliminations
    PlainsCapital
Consolidated
 

Cash and due from banks

   $ 449,201       $ 73,298       $ 4,667       $ (75,297   $ 451,869   

Loans held for sale

     1,247         481,380         —           —          482,627   

Securities

     995,202         —           44,636         —          1,039,838   

Loans, net

     3,157,861         2,294         230,218         (470,653     2,919,720   

Broker-dealer and clearing organization receivables

     —           —           78,325         —          78,325   

Investment in subsidiaries

     189,483         —           —           (189,483     —     

Goodwill and other intangible assets, net

     7,862         23,706         17,239         —          48,807   

Other assets

     245,034         25,462         103,691         8,991        383,178   
                                           

Total assets

   $ 5,045,890       $ 606,140       $ 478,776       $ (726,442   $ 5,404,364   
                                           

Deposits

   $ 4,124,028       $ —         $ 71,052       $ (82,890   $ 4,112,190   

Broker-dealer and clearing organization payables

     —           —           107,987         —          107,987   

Short-term borrowings

     349,529         —           143,398         —          492,927   

Notes payable

     —           456,574         17,554         (411,933     62,195   

Junior subordinated debentures

     —           —           —           67,012        67,012   

Other liabilities

     43,922         58,121         55,243         (43,887     113,399   

PlainsCapital Corporation shareholders’ equity

     528,411         91,133         83,542         (255,235     447,851   

Noncontrolling interest

     —           312         —           491        803   
                                           

Total liabilities and shareholders’ equity

   $ 5,045,890       $ 606,140       $ 478,776       $ (726,442   $ 5,404,364   
                                           
     December 31, 2010  
     Banking      Mortgage
Origination
     Financial
Advisory
     All Other and
Eliminations
    PlainsCapital
Consolidated
 

Cash and due from banks

   $ 329,300       $ 79,428       $ 4,420       $ (80,940   $ 332,208   

Loans held for sale

     1,269         476,442         —           —          477,711   

Securities

     846,149         —           18,931         —          865,080   

Loans, net

     3,275,433         2,305         286,661         (491,398     3,073,001   

Broker-dealer and clearing organization receivables

     —           —           45,768         —          45,768   

Investment in subsidiaries

     240,664         —           —           (240,664     —     

Goodwill and other intangible assets, net

     7,862         23,706         17,753         —          49,321   

Other assets

     280,277         22,269         129,087         41,932        473,565   
                                           

Total assets

   $ 4,980,954       $ 604,150       $ 502,620       $ (771,070   $ 5,316,654   
                                           

Deposits

   $ 3,954,711       $ —         $ 79,770       $ (116,022   $ 3,918,459   

Broker-dealer and clearing organization payables

     —           —           65,632         —          65,632   

Short-term borrowings

     404,541         —           177,593         —          582,134   

Notes payable

     39,220         453,449         18,492         (447,385     63,776   

Junior subordinated debentures

     —           —           —           67,012        67,012   

Other liabilities

     41,998         61,558         77,916         (9,107     172,365   

PlainsCapital Corporation shareholders’ equity

     540,484         88,796         83,217         (266,006     446,491   

Noncontrolling interest

     —           347         —           438        785   
                                           

Total liabilities and shareholders’ equity

   $ 4,980,954       $ 604,150       $ 502,620       $ (771,070   $ 5,316,654   
                                           

 

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18. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share for the three months ended March 31, 2011 and 2010 (in thousands, except per share data).

 

     Three Months Ended March 31,  
     2011      2010  

Income applicable to PlainsCapital Corporation common shareholders

   $ 6,194       $ 298   

Less: income applicable to participating securities

     217         10   
                 

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

   $ 5,977       $ 288   
                 

Weighted-average shares outstanding

     32,773,614         32,597,272   

Less: participating securities included in weighted-average shares outstanding

     1,148,095         1,139,163   
                 

Weighted-average shares outstanding for basic earnings per common share

     31,625,519         31,458,109   
                 

Basic earnings per common share

   $ 0.19       $ 0.01   
                 

Income applicable to PlainsCapital Corporation common shareholders

   $ 6,194       $ 298   
                 

Weighted-average shares outstanding

     31,625,519         31,458,109   

Dilutive effect of contingently issuable shares due to First Southwest acquisition

     1,722,152         1,548,666   

Dilutive effect of stock options and non-vested stock awards

     151,729         297,136   
                 

Weighted-average shares outstanding for diluted earnings per common share

     33,499,400         33,303,911   
                 

Diluted earnings per common share

   $ 0.18       $ 0.01   
                 

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

The weighted-average shares outstanding used to compute diluted earnings per common share do not include outstanding options of 266,259 and 57,000 for the three months ended March 31, 2011 and 2010, respectively. The exercise price of the excluded options exceeded the estimated average market price of PlainsCapital stock in the periods shown. Accordingly, the assumed exercise of the excluded options would have been antidilutive.

 

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19. Recently Issued Accounting Standards

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 became 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 15.

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 became 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 became effective January 1, 2011. PlainsCapital has included the required disclosures regarding credit quality of financing receivables and the allowance for credit losses in Note 3.

A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring

In April 2011, the FASB amended the Receivables Topic of the ASC to clarify when creditors should classify loan modifications as troubled debt restructurings (“TDR Amendment”). The TDR Amendment requires creditors to separately conclude that a creditor has granted a concession to a debtor and that the debtor is experiencing financial difficulties in order to classify a loan modification as a troubled debt restructuring. The TDR Amendment is effective for the first interim or annual period beginning on or after June 15, 2011, and will be applied retrospectively to the beginning of the annual period of adoption. As a result of applying the TDR amendment, PlainsCapital may identify receivables that are newly considered impaired. For purposes of measuring impairment of receivables so identified, PlainsCapital will apply the TDR amendment prospectively for the first interim or annual period beginning on or after June 15, 2011. PlainsCapital does not expect the adoption of the TDR Amendment to have a significant effect on its financial position, results of operations or cash flows.

 

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

As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), unless the context otherwise indicates, the references to “we,” “us,” “our,” “our company” or “PlainsCapital” refer to PlainsCapital Corporation, a Texas corporation, and its consolidated subsidiaries as a whole, references to the “Bank” refer to PlainsCapital Bank, a 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 months ended March 31, 2011, and with our consolidated financial statements and notes thereto for the year ended December 31, 2010 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2011 (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 “anticipate,” “believes,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predicts,” “project,” “should,” “will” 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, expectations regarding mortgage loan origination volume, 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, and the collectability of margin loans. We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

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

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

(3) changes in the interest rate environment;

(4) cost and availability of capital;

(5) 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”);

(6) changes in the auction rate securities we hold and their markets, including ongoing liquidity problems related thereto and the credit ratings thereof;

(7) our participation in governmental programs implemented under the Emergency Economic Stabilization Act of 2008, as amended (the “EESA”), and the American Recovery and Reinvestment Act of 2009 (the “ARRA”), including, without limitation, the Troubled Asset Relief Program (“TARP”), the Capital Purchase Program and the impact of such programs and related regulations on us and on international, national and local economic and financial markets and conditions;

 

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

(9) 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.

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 March 31, 2011, on a consolidated basis, we had total assets of approximately $5.4 billion, total deposits of approximately $4.1 billion, total loans, including loans held for sale, of approximately $3.5 billion and shareholders’ equity of approximately $447.9 million. The Bank, one of our wholly owned subsidiaries, provides a broad array of financial 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.

During the first quarter of 2011, our deposits increased by 4.94%, which drove growth in our securities portfolio and provided funds that supported growth in loans held for sale, resulting in a 1.65% increase in assets. We purchased municipal securities and mortgage-related securities to take advantage of attractive yields and provide collateral for pledging to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase and other purposes.

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 our operating results. 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 quarter of 2011, we generated $42.4 million in net interest income. Net interest margin is a measure of net interest income as a percentage of average interest-earning assets. Our taxable equivalent net interest margin was 3.46% for the three months ended March 31, 2011 versus 4.00% for the three months ended March 31, 2010.

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

 

  (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 quarter of 2011, we generated $61.6 million in mortgage loan origination fees and net gains from sale of loans, a 30.01% increase over the first quarter of 2010. PrimeLending continued to add staff and open mortgage banking offices in 2010. This led to increased market share that resulted in a higher volume of mortgage originations for home purchases during the first quarter of 2011. Total dollar volume of mortgage loan originations increased 30.17% in the first quarter of 2011 compared to the first quarter of 2010.

 

  (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 generated $18.2 million and $21.2 million in investment advisory fees and commissions and securities brokerage fees and commissions during the three months ended March 31, 2011 and 2010, respectively.

 

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In the aggregate, we generated $85.3 million and $75.4 million in noninterest income during the three months ended March 31, 2011 and 2010, respectively. The increase in noninterest income was primarily due to an increase in realized gains on the sale of mortgage loans. The contribution of noninterest income to net revenues (net interest income plus noninterest income) was 66.79% during the three months ended March 31, 2011 versus 63.87% during the three months ended March 31, 2010.

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. Employees’ compensation and benefits were 60.85% and 61.23% of total noninterest expense for the three months ended March 31, 2011 and 2010, respectively.

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. 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. Segment net revenue percentages reflect net revenue from external customers.

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.

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 relative share of total revenue provided by our banking and mortgage origination segments fluctuates depending on market conditions, and operating results for the mortgage origination segment tend to be more volatile than operating results for the banking segment.

The banking segment provides primarily business banking and personal banking products and services and generated 37.39% and 44.37% of our net revenue for the three months ended March 31, 2011 and 2010, 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 45.43% and 35.89% of our net revenue for the three months ended March 31, 2011 and 2010, respectively. The mortgage origination segment offers a variety of loan products from offices in 34 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 from our financial advisory services. The financial advisory segment generated 17.18% and 19.74% of our net revenue for the three months ended March 31, 2011 and 2010, 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.

Operating Results

Consolidated net income for the three months ended March 31, 2011 was $7.6 million, or $0.18 per diluted share, compared to $1.7 million, or $0.01 per diluted share, for the three months ended March 31, 2010. The improvement in net income is primarily due to a lower amount of provision for loan loss.

 

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

 

     Three Months Ended
March 31,

2011
    Year Ended
December  31,
2010
    Three Months Ended
March  31,
2010
 

Return on average shareholders’ equity

     6.87     7.44     1.61

Return on average assets

     0.57     0.65     0.14

Net interest margin (taxable equivalent)

     3.46     3.95     4.00

Leverage ratio

     8.76     8.96     9.44

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

 

     Earnings Increase (Decrease)  
     Three Months Ended
March 31,
2011 v. 2010
 

Net interest income

   $ (248

Provision for loan loss

     16,455   

Mortgage loan origination fees and net gains from sale of loans

     14,224   

Investment advisory and brokerage fees and commissions

     (3,052

Noninterest expense

     (16,281

All other (including tax effects)

     (5,190
        
   $ 5,908   
        

 

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Net Interest Income

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

 

     Three Months Ended March 31,  
                   Variance  
     2011      2010      2011 v. 2010  

Interest income

        

Loans, including fees

   $ 42,204       $ 44,624       $ (2,420

Securities

     4,606         3,804         802   

Securities - tax exempt

     2,387         2,451         (64

Federal funds sold and securities purchased under agreements to resell

     1,092         9         1,083   

Interest-bearing deposits with banks

     314         243         71   

Other securities

     1,400         1,177         223   
                          

Total interest income

     52,003         52,308         (305

Interest expense

        

Deposits

     7,528         7,144         384   

Notes payable and other borrowings

     2,050         2,491         (441
                          

Total interest expense

     9,578         9,635         (57
                          

Net interest income

   $ 42,425       $ 42,673       $ (248
                          

Net interest income decreased $0.2 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The decrease in net interest income during the first quarter of 2011 was primarily due to the decline in loan volume within the banking segment and is discussed further in the “Lines of Business” section below.

Noninterest Income

Noninterest income was $85.3 million for the first quarter of 2011 compared to $75.4 million for the three months ended March 31, 2010, an increase of $9.9 million. The increase was primarily due to increased mortgage loan origination volume, which increased 30.17% during the first quarter of 2011 compared to the three months ended March 31, 2010. The increased mortgage loan origination volume, which resulted from our continuing efforts to add staff and open mortgage banking offices at PrimeLending during 2010, led to higher net gains on the sale of mortgage loans and higher mortgage loan origination fees compared to the three months ended March 31, 2010.

Noninterest Expense

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

 

     Three Months Ended March 31,  
                   Variance  
   2011      2010      2011 v. 2010  

Noninterest expense

        

Employees’ compensation and benefits

   $ 66,346       $ 56,795       $ 9,551   

Occupancy and equipment, net

     15,398         13,837         1,561   

Professional services

     6,046         5,791         255   

Deposit insurance premium

     1,856         1,275         581   

Repossession and foreclosure

     1,880         1,452         428   

Other

     17,515         13,610         3,905   
                          

Total noninterest expense

   $ 109,041       $ 92,760       $ 16,281   
                          

 

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Noninterest expense increased $16.3 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The largest components of this increase were employees’ compensation and benefits, occupancy and equipment expenses, net of rental income and other expenses.

Employees’ compensation and benefits increased $9.5 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The increase was primarily attributable to increased costs in the mortgage origination segment. PrimeLending continued adding staff in 2010. This increased staffing resulted in increased market share that led to a 30.17% increase in the dollar volume of mortgage loan originations during the first quarter of 2011 compared to the first quarter of 2010. As a result, the mortgage origination segment also incurred higher commission-related costs.

Occupancy and equipment expenses, net of rental income, increased $1.6 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The increase was primarily attributable to the continued opening of additional mortgage banking offices at PrimeLending in 2010.

Other expenses increased $3.9 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The increase was primarily attributable to the mortgage origination segment resulting from increases in loan funding fees and unreimbursed closing costs associated with increased mortgage loan origination volume.

Lines of Business

Banking Segment

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

 

     Three Months Ended March 31,  
                   Variance  
     2011      2010      2011 v. 2010  

Net interest income

   $ 40,475       $ 41,843       $ (1,368

Provision for loan losses

     6,500         22,955         (16,455

Noninterest income

     7,329         10,618         (3,289

Noninterest expense

     28,089         24,678         3,411   
                          

Income before taxes

     13,215         4,828         8,387   

Income tax provision

     4,931         1,222         3,709   
                          

Net income

   $ 8,284       $ 3,606       $ 4,678   
                          

Net income was $8.3 million for the first quarter of 2011, an increase of $4.7 million compared to the three months ended March 31, 2010. The increase was primarily due to the decrease in the provision for loan losses, partially offset by a decrease in net revenue.

Net interest income decreased $1.4 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The decrease was due primarily to decreased interest income on the loan portfolio, resulting from lower volume in the loan portfolio compared to the three months ended March 31, 2010.

Provision for loan losses decreased by $16.5 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The decrease in the provision for loan losses was primarily a result of a decrease in loan charge-offs compared to the first quarter of 2010.

Noninterest income decreased $3.3 million for the first quarter of 2011 compared to the three months ended March 31, 2010. We did not sell securities in the first quarter of 2011, while we booked approximately $1.6 million in gains on sales of securities in the first quarter of 2010.

 

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

 

     Three Months Ended March 31,
2011 v. 2010
 
     Change Due To(1)        
     Volume     Yield/Rate     Change  

Interest income

      

Loans

   $ (2,608   $ (524   $ (3,132

Investment securities(2)

     5,012        (4,403     609   

Federal funds sold and securities purchased under agreements to resell

     30        429        459   

Interest-bearing deposits in other financial institutions

     189        (123     66   

Other securities

     (69     50        (19
                        

Total interest income(2)

     2,554        (4,571     (2,017

Interest expense

      

Deposits

     2,014        (1,618     396   

Notes payable and other borrowings

     (552     (572     (1,124
                        

Total interest expense

     1,462        (2,190     (728
                        

Net interest income(2)

   $ 1,092      $ (2,381   $ (1,289
                        

 

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

Taxable equivalent net interest income decreased $1.3 million for the first quarter of 2011 compared to the three months ended March 31, 2010. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $4.6 million, primarily due to lower yields on the investment securities portfolio. Yields on investment securities were lower due to a number of factors, including reinvestment of proceeds from sales and principal repayments at lower market rates and higher premium amortization on mortgage-backed securities and collateralized mortgage obligations. This was partially offset by a $2.2 million decrease in the changes in rates paid on interest-bearing liabilities, primarily due to a decrease in market interest rates on deposits compared to prevailing market rates during the first quarter of 2010. Increases in the volume of interest-earning assets, primarily investment securities, increased taxable equivalent net interest income by $2.6 million, while increases in the volume of interest-bearing liabilities, primarily deposits, reduced taxable equivalent net interest income by $1.5 million.

 

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

 

     Three Months Ended
March 31,
2011
    Three Months Ended
March 31,
2010
 
     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)

   $ 3,096,778      $ 41,420         5.42   $ 3,286,496      $ 44,552         5.50

Investment securities - taxable

     746,426        4,369         2.34     325,448        3,688         4.53

Investment securities - non-taxable(2)

     232,948        3,260         5.60     217,208        3,332         6.14

Federal funds sold and securities purchased under agreements to resell

     53,646        468         3.54     12,421        9         0.29

Interest-bearing deposits in other financial institutions

     447,402        310         0.28     253,418        244         0.39

Other securities

     14,932        145         3.88     25,857        164         2.54
                                      

Interest-earning assets, gross

     4,592,132        49,972         4.41     4,120,848        51,989         5.12

Allowance for loan losses

     (63,888          (51,781     
                          

Interest-earning assets, net

     4,528,244             4,069,067        

Noninterest-earning assets

     462,541             406,681        
                          

Total assets

   $ 4,990,785           $ 4,475,748        
                          

Liabilities and Shareholders’ Equity

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 3,792,341        7,572         0.81   $ 2,970,211        7,176         0.98

Notes payable and other borrowings

     408,673        360         0.36     645,372        1,484         0.93
                                      

Total interest-bearing liabilities

     4,201,014        7,932         0.77     3,615,583        8,660         0.97

Noninterest-bearing liabilities

              

Noninterest-bearing deposits

     222,363             164,488        

Other liabilities

     34,292             172,254        
                          

Total liabilities

     4,457,669             3,952,325        

Shareholders’ equity

     533,116             523,423        
                          

Total liabilities and shareholders’ equity

   $ 4,990,785           $ 4,475,748        
                                      

Net interest income(2)

     $ 42,040           $ 43,329      
                          

Net interest spread(2)

          3.64          4.15

Net interest margin(2)

          3.71          4.26

 

(1) Average loans include non-accrual loans.
(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $1.1 million each for the three months ended March 31, 2011 and 2010, respectively.

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

 

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Mortgage Origination Segment

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

 

     Three Months Ended March 31,  
                 Variance  
     2011     2010     2011 v. 2010  

Net interest income (loss)

   $ (3,584   $ (5,008   $ 1,424   

Noninterest income

     61,674        47,435        14,239   

Noninterest expense

     58,482        45,943        12,539   
                        

Income (loss) before taxes

     (392     (3,516     3,124   

Income tax provision (benefit)

     (146     (890     744   
                        

Net income (loss)

   $ (246   $ (2,626   $ 2,380   
                        

Net loss was $0.2 million for the first quarter of 2011, a decrease of $2.4 million compared to net loss of $2.6 million for the three months ended March 31, 2010. The decrease was primarily due to increases in net revenue, partially offset by an increase in noninterest expense. Employees’ compensation and benefits and other expenses accounted for the majority of the increase in noninterest expense.

Net interest loss decreased $1.4 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The decrease was primarily due to decreases in intercompany financing costs.

Noninterest income increased $14.2 million for the first quarter of 2011 compared to the three months ended March 31, 2010.

Mortgage loan origination volume was $1.497 billion for the first quarter of 2011 compared to $1.150 billion for the three month ended March 31, 2010, an increase of 30.17%. The increase in loan origination volume resulted in increased gains on the sale of loans. Mortgage loan origination fees increased $2.9 million during the first quarter of 2011 compared to the three months ended March 31, 2010. During the first quarter of 2011, refinancings and home purchases accounted by dollar volume for 32.07% and 67.93%, respectively, of the total mortgage loan origination volume.

Employees’ compensation and benefits increased $7.7 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The increase was attributable to an increase in staffing levels, as well as higher commission costs due to higher loan origination volumes subject to commissions. Other expenses increased $3.0 million for the first quarter of 2011 compared to the three months ended March 31, 2010, which was primarily due to increased funding fees and unreimbursed closing costs.

We expect to see a lower demand for mortgage loan originations during 2011 compared to 2010, but we expect our mortgage loan origination volume in 2011 to be similar to volume in 2010 as a result of our efforts to increase market share by expanding our branch network.

 

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Financial Advisory Segment

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

 

     Three Months Ended March 31,  
                  Variance  
     2011     2010      2011 v. 2010  

Net interest income

   $ 2,782      $ 1,559       $ 1,223   

Noninterest income

     19,191        21,779         (2,588

Noninterest expense

     22,716        22,359         357   
                         

Income (loss) before taxes

     (743     979         (1,722

Income tax provision (benefit)

     (277     248         (525
                         

Net income (loss)

   $ (466   $ 731       $ (1,197
                         

Net loss was $0.5 million for the first quarter of 2011, a decrease of $1.2 million compared to the three months ended March 31, 2010. The decrease was due primarily to decreases in noninterest income, partially offset by an increase in net interest income.

Net interest income increased $1.2 million for the first quarter of 2011 compared to the three months ended March 31, 2010. 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 during the first quarter of 2011.

The majority of noninterest income is generated from fees and commissions earned from investment advisory and securities brokerage activities, which decreased $2.6 million for the first quarter of 2011 compared to the three months ended March 31, 2010. The decrease was attributable to a significant slowing of activity in the public finance market that resulted in lower public finance advisory revenues. This slowing of activity is industry-wide and results from factors such as rising interest rates, reduced property tax bases, budget pressures on certain issuers caused by uncertain economic times and other factors.

Noninterest expense increased $0.4 million for the first quarter of 2011. Occupancy expense accounted for the majority of the increase in noninterest expense. The increase was primarily attributable to a $0.2 million increase in equipment depreciation expense related to software and technology equipment capitalized subsequent to the first quarter of 2010.

 

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Financial Condition

The following discussion contains a more detailed analysis of our financial condition at March 31, 2011 and as compared to December 31, 2010.

Securities Portfolio

The securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, federal funds purchased and securities sold under agreements to repurchase and other purposes. The available for sale securities portfolio 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, with holding gains and losses recorded in accumulated other comprehensive income. Trading securities are carried at fair market value, marked to market through operations and 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):

 

     March 31,
2011
     December 31,
2010
 

Securities held to maturity, at amortized cost

     

U.S. government agencies

     

Mortgage-backed securities

   $ 8,167       $ 10,369   

Collateralized mortgage obligations

     22,024         28,169   

States and political subdivisions

     120,551         120,348   

Auction rate bonds

     45,528         74,027   
                 
     196,270         232,913   

Securities available for sale, at fair value

     

U.S. government agencies

     

Bonds

     38,106         29,959   

Mortgage-backed securities

     34,329         18,844   

Collateralized mortgage obligations

     616,616         507,769   

States and political subdivisions

     63,506         34,210   

Auction rate bonds

     46,375         22,454   
                 
     798,932         613,236   

Trading securities, at fair value

     44,636         18,931   
                 

Total securities portfolio

   $ 1,039,838       $ 865,080   
                 

We had a net unrealized loss of $7.5 million related to the available for sale investment portfolio at March 31, 2011, compared to a net unrealized loss of $1.3 million at December 31, 2010. Net unrealized loss at March 31, 2011, included $5.1 million related to certain auction rate bonds transferred from held to maturity to available for sale during the first quarter of 2011 due to a downgrade in the credit rating of the auction rate bonds from investment grade to below investment grade.

 

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The market value of securities held to maturity at March 31, 2011 was $4.4 million above book value. At December 31, 2010, the market value of held to maturity securities was $4.2 million below book value.

We hold auction rate bonds issued by Access to Loans for Learning Student Loan Corporation that exceed 10% of our shareholders’ equity. The aggregate book value and aggregate estimated market value of these auction rate bonds at March 31, 2011, was $97.0 million and $92.7 million, respectively.

Loan Portfolio

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

 

     March 31,
2011
    December 31,
2010
 

Commercial and industrial

    

Commercial

   $ 1,227,439      $ 1,299,654   

Lease financing

     44,606        50,216   

Securities (primarily margin loans)

     232,409        289,351   

Real estate

     1,137,855        1,112,402   

Construction and land development

     302,880        343,920   

Consumer

     40,471        42,627   
                

Loans, gross

     2,985,660        3,138,170   

Allowance for loan losses

     (65,940     (65,169
                

Loans, net

   $ 2,919,720      $ 3,073,001   
                

Banking Segment

The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s 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 $3.2 billion and $3.3 billion as of March 31, 2011 and December 31, 2010, respectively. The banking segment’s loan portfolio includes warehouse lines of credit extended to PrimeLending and First Southwest that aggregated $0.5 billion each at March 31, 2011 and December 31, 2010, respectively and 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 March 31, 2011, 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 March 31, 2011, construction and land development loans were 10% of total loans, while non-construction commercial real estate loans were 28% of total loans. The banking segment’s loan concentrations were within regulatory guidelines as of March 31, 2011.

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 were $481.4 million and $476.4 million as of March 31, 2011 and December 31, 2010, respectively.

 

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

 

       March 31,  
    2011    
     December 31,
2010
 

Loans held for sale

     

Unpaid principal balance

   $ 469,712       $ 465,342   

Fair value adjustment

     11,668         11,100   
                 
   $ 481,380       $ 476,442   
                 

Pipeline loans

     

Unpaid principal balance

   $ 613,229       $ 442,270   

Fair value adjustment

     3,219         274   
                 
   $ 616,448       $ 442,544   
                 

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 $230.2 million and $286.7 million as of March 31, 2011 and December 31, 2010, respectively. The decrease was primarily attributable to decreased 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 held for investment. 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 and the Receivables and Contingencies Topics of the ASC. 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. Any subsequent recovery of charged-off loans is added back to the allowance for loan losses.

 

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We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans within the scope of the Receivables Topic has been determined to be impaired and individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. When loans are determined to be impaired, specific reserves are provided in our estimate of the allowance, as appropriate. Loans within the scope of the Contingencies Topic include all non-impaired loans. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segment 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 recent 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 collectability 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 on the loan are delayed, typically by 90 days or more (unless in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. 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 adequate coverage of our various lending markets.

Homogenous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogenous pool of loans based on the expected net charge-offs from a current trend in delinquencies, losses or historical experience and general economic conditions. As of March 31, 2011, we had no material delinquencies in these types of loans.

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. While we believe we have sufficient allowance for our existing portfolio as of March 31, 2011, additional provisions for losses on existing loans may be necessary in the future. We recorded net charge-offs in the amount of $5.7 million for the first quarter of 2011 compared to $25.1 million for the first quarter of 2010. Our allowance for loan losses totaled $65.9 million at March 31, 2011 and $65.2 million at December 31, 2010. The ratio of the allowance for loan losses to total loans held for investment at March 31, 2011 and December 31, 2010 was 2.21% and 2.08%, 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 $6.5 million for the first quarter of 2011, a decrease of $16.5 million compared to the three months ended March 31, 2010. The decrease was primarily a result of a decrease in net charge-offs during the first quarter of 2011 compared to the first quarter of 2010.

 

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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
March 31,

2011
    Year Ended
December 31,
2010
    Three Months Ended
March 31,

2010
 

Balance at beginning of period

   $ 65,169      $ 52,092      $ 52,092   

Provisions charged to operating expenses

     6,500        83,226        22,955   

Recoveries of loans previously charged off

      

Commercial and industrial

     201        754        164   

Real estate

     149        2        2   

Construction and land development

     5        917        6   

Lease financing

     5        6        —     

Consumer

     17        121        99   
                        

Total recoveries

     377        1,800        271   
                        

Loans charged off

      

Commercial and industrial

     3,780        42,288        17,164   

Real estate

     417        9,272        7,698   

Construction and land development

     1,571        19,511        196   

Lease financing

     275        586        127   

Consumer

     63        292        162   
                        

Total charge-offs

     6,106        71,949        25,347   
                        

Net charge-offs

     (5,729     (70,149     (25,076
                        

Balance at end of period

   $ 65,940      $ 65,169      $ 49,971   
                        

Net charge-offs to average loans outstanding

     0.77     2.34     3.35

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. We expect that the unallocated portion of the allowance will remain relatively small in future periods as we continue to refine our methodology for the distribution of the allowance.

 

     March 31,
2011
    December 31,
2010
 
     Reserve      % of
Gross
Loans
    Reserve      % of
Gross
Loans
 

Commercial and industrial

   $ 40,862         50.39   $ 41,687         48.66

Real estate (including construction and land development)

     24,512         48.26     22,959         49.74

Consumer

     442         1.36     523         1.60

Unallocated

     124           —        
                      

Total

   $ 65,940         100.00   $ 65,169         100.00
                      

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. As of March 31, 2011, we had 16 credit relationships totaling $34.4 million in loans of this type that are not included in either the non-accrual or 90 days past due non-performing loan categories.

 

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Non-Performing Assets

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

 

     March 31,
2011
    December 31,
2010
    March 31,
2010
 

Loans accounted for on a non-accrual basis

      

Commercial and industrial

   $ 10,628      $ 12,259      $ 43,561   

Lease financing

     5,352        6,027        5,598   

Real estate

     12,109        8,035        17,228   

Construction and land development

     58,328        57,622        13,692   

Consumer

     11        28        —     
                        
   $ 86,428      $ 83,971      $ 80,079   
                        

Non-performing loans as a percentage of total loans

     2.49     2.32     2.29
                        

Other Real Estate Owned

   $ 18,847      $ 23,968      $ 19,112   
                        

Other repossessed assets

   $ 8,737      $ 6,365      $ 2,773   
                        

Non-performing assets

   $ 114,012      $ 114,304      $ 101,964   
                        

Non-performing assets as a percentage of total assets

     2.11     2.15     2.11
                        

Loans past due 90 days or more and still accruing

   $ 9      $ 466      $ 122   
                        

Troubled debt restructurings included in accruing loans

   $ 14,353      $ 28,160      $ 25,083   
                        

At March 31, 2011, total non-performing assets decreased $0.3 million to $114.0 million compared to $114.3 million at December 31, 2010, primarily due to a decrease in Other Real Estate Owned, partially offset by the increase in non-accrual loans. Non-accrual loans increased by $2.4 million to $86.4 million at March 31, 2011 compared to $84.0 million at December 31, 2010. Of these non-accrual loans, $10.6 million were characterized as commercial and industrial loans as of March 31, 2011, a decrease of $1.6 million compared to December 31, 2010. The commercial and industrial loans included four loan relationships in a variety of industries with an aggregate balance of approximately $7.3 million and secured by accounts receivable and inventory.

Non-accrual loans also included $12.1 million characterized as real estate loans at March 31, 2011, including four commercial real estate loan relationships totaling approximately $8.3 million and secured by occupied single family residential property, occupied commercial real estate and occupied industrial property.

Non-accrual loans at March 31, 2011 also included $58.3 million characterized as construction and land development loans. Three loan relationships account for approximately $48.5 million of the non-performing construction and land development loans. Collateral securing the loans includes residential land developments and unimproved land.

At March 31, 2011, loans past due 90 days or more and still accruing interest decreased $0.5 million compared to December 31, 2010.

Loans restructured in troubled debt restructurings bearing market rates of interest at the time of restructuring and performing in compliance with their modified terms are considered impaired in the calendar year of the restructuring. At March 31, 2011, troubled debt restructurings totaled $69.8 million, of which $14.3 million were included in accruing loans and $55.5 million were reported in non-accrual loans.

 

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Other Real Estate Owned decreased $5.2 million to $18.8 million at March 31, 2011 compared to $24.0 million at December 31, 2010. The decrease was primarily due to the lower level of foreclosed properties compared to the three months ended March 31, 2010. At March 31, 2011, Other Real Estate Owned included $15.3 million of commercial real estate property consisting of single family residences under development and $3.5 million of residential lots at various levels of completion.

Additional interest income that would have been recorded if the non-accrual loans had been current during the three months ended March 31, 2011 totaled $1.0 million and $1.8 million during the three months ended March 31, 2010.

Borrowings

Our borrowings as of March 31, 2011 and December 31, 2010 are shown in the table below (in thousands):

 

     March 31,      December 31,      Variance  
     2011      2010      2011 v. 2010  

Short-term borrowings

     492,927       $ 582,134       $ (89,207

Notes payable

     62,195         63,776         (1,581

Junior subordinated debentures

     67,012         67,012         —     

Capital lease obligations

     11,579         11,693         (114
                          
   $ 633,713       $ 724,615       $ (90,902
                          

Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase, borrowings from the FHLB and short-term bank loans. The $89.2 million decrease in short-term borrowings at March 31, 2011 compared to December 31, 2010 was due primarily to decreases in borrowings of $94.3 million under repurchase agreements.

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 March 31, 2011, our revolving lines of credit with JPMorgan Chase had an outstanding principal balance of $20.2 million and available borrowing capacity of $2.5 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 4.50% beginning December 31, 2010. As of March 31, 2011, the Bank’s non-performing asset ratio, as defined, was 3.43%.

Liquidity and Capital Resources

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

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

 

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On December 19, 2008, we sold approximately $87.6 million of Series A and Series B Preferred Stock 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 have paid all required dividends on Series A and Series B Preferred Stock.

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

At March 31, 2011, we exceeded all regulatory capital requirements and were considered to be “well-capitalized” with a total capital to risk weighted assets ratio of 14.26%, Tier 1 capital to risk weighted assets ratio of 12.58% and a Tier 1 capital to average assets, or leverage, ratio of 8.76%. At March 31, 2011, the Bank was also considered to be “well-capitalized.” We discuss regulatory capital requirements in more detail in Note 11 to our unaudited consolidated interim financial statements.

Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled $469.4 million at March 31, 2011, an increase of $249.1 million from $220.3 million at March 31, 2010. Deposit flows, calls of investment securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Cash used in operations during the first quarter of 2011 was $41.5 million, a decrease in cash used of $47.5 million compared to March 31, 2010. Cash used by operations decreased due to a decrease in the net cash used in our mortgage origination segment’s operations.

We use cash primarily to originate loans and purchase securities for our investment portfolio. During the first quarter of 2011, our loan portfolio declined marginally and the amount of cash generated by lending activities increased to $144.4 million compared to $31.3 million for the three months ended March 31, 2010. On the other hand, our investment securities portfolio grew by $174.8 million during the first quarter of 2011. Cash used in our investment activities included net purchases of securities for our investment portfolio during the first quarter of 2011, which were $159.1 million compared to net purchases of $65.8 million during the three months ended March 31, 2010. The increase in net purchases of securities during the first quarter of 2011 resulted from the purchase of both municipal securities and collateralized mortgage obligations to take advantage of attractive yields and provide collateral to pledge as security for public and trust deposits and, with respect to collateralized mortgage obligations, repurchase agreements. We did not sell securities during the first quarter of 2011. We sold approximately $54.3 million of available for sale securities during the first quarter of 2010.

 

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Cash provided by financing activities was $99.8 million for the three months ended March 31, 2011 compared to $186.9 million for the three months ended March 31, 2010. The $87.1 million decrease was due mostly to a net reduction in short-term borrowings, partially offset by an increase in deposit inflows.

We had deposits of $4.1 billion at March 31, 2011, an increase of $193.7 million from $3.9 billion at December 31, 2010. 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 deposits portfolio, money market deposits, foreign deposits and time deposits under $100,000 increased by $148.8 million, $42.8 million and $19.0 million, respectively.

Our 15 largest depositors, excluding our indirect wholly owned subsidiary, First Southwest, accounted for approximately 23.45% of our total deposits, and our five largest depositors, excluding First Southwest, accounted for approximately 15.18% of our total deposits at March 31, 2011. 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 could 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 $600.0 million maintained with the Bank. At March 31, 2011, PrimeLending had outstanding borrowings of $456.6 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 unrelated commercial banks of up to $140.0 million, which are used to finance securities owned, securities held for correspondent accounts and receivables in customer margin accounts. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. At March 31, 2011, FSC had borrowed approximately $55.7 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.

 

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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, 2010, which are included in our Annual Report on Form 10-K filed with the SEC on March 22, 2011. You are encouraged to read in its entirety Note 1 to our consolidated financial statements for the year ended December 31, 2010 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. See the discussion under the caption “Forward-Looking Statements” in Item 2, above.

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.

 

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

Interest rate sensitivity analysis presents the amount of assets and liabilities that are estimated to reprice through specified periods. The interest rate sensitivity analysis in the table below reflects changes in banking segment earnings and costs resulting from changes in assets and liabilities on March 31, 2011 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 table below, the banking segment is asset sensitive overall. Loans that 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):

 

     March 31, 2011  
     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

   $ 2,273,520      $ 357,652      $ 353,022      $ 74,318      $ 161,892      $ 3,220,404   

Securities

     145,327        238,862        297,638        41,249        272,126        995,202   

Federal funds sold and securities purchased under agreements to resell

     17,650        9,091        —          —          —          26,741   

Other interest sensitive assets

     375,036        —          —          —          —          375,036   
                                                

Total interest sensitive assets

     2,811,533        605,605        650,660        115,567        434,018        4,617,383   

Interest sensitive liabilities:

            

Interest bearing checking

   $ 1,561,003      $ —        $ —        $ —        $ —        $ 1,561,003   

Savings

     165,664        —          —          —          —          165,664   

Time deposits

     819,569        383,995        213,014        7,395        11,211        1,435,184   

Notes payable & other borrowings

     324,758        25,702        1,996        1,070        7,582        361,108   
                                                

Total interest sensitive liabilities

     2,870,994        409,697        215,010        8,465        18,793        3,522,959   
                                                

Interest sensitivity gap

   $ (59,461   $ 195,908      $ 435,650      $ 107,102      $ 415,225      $ 1,094,424   
                                                

Cumulative interest sensitivity gap

   $ (59,461   $ 136,447      $ 572,097      $ 679,199      $ 1,094,424     
                                          

Percentage of cumulative gap to total interest

            

Sensitive assets

     -1.29     2.96     12.39     14.71     23.70  

 

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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 table below shows the estimated impact of increases of 1%, 2% and 3% and a decrease of 0.5% in interest rates on net interest income and on market value of portfolio equity for the banking segment as of March 31, 2011 (dollars in thousands):

 

March 31, 2011  
Change  in
Interest Rates
(basis points)
    Changes in
Net Interest Income
    Changes in
Market Value of Equity
 
      Amount             Percent             Amount             Percent      
  +300      $ 3,887        2.30   $ (40,974     -6.13
  +200      $ (2,054     -1.22   $ (37,688     -5.64
  +100      $ (1,680     -1.00   $ (1,128     -0.17
  -50      $ (309     -0.18   $ (25,413     -3.80

The projected changes in net interest income and market value of equity to changes in interest rates at March 31, 2011 were in compliance with established internal policy guidelines. These projected changes 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.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

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. However, the plaintiffs in these purported class actions have filed amended complaints against other entities, and FSC is identified in these complaints not as a defendant, but as an alleged co-conspirator with the named defendants.

Additionally, as a result of these SEC and DOJ investigations into industry-wide practices, FSC has been named as a defendant in twenty individual lawsuits (of which three were filed after December 31, 2010). These lawsuits have been brought by several California public entities and two New York non-profit corporations that do not seek to certify a class. The Judicial Panel on Multidistrict Litigation has transferred these cases to the United States District Court, Southern District of New York. The California plaintiffs allege violations of Section 1 of the Sherman Act and the California Cartwright Act. The New York plaintiffs allege violations of Section 1 of the Sherman Act and the New York Donnelly Act. The allegations against FSC are very limited in scope. FSC filed an answer to sixteen lawsuits, will timely answer the four unanswered lawsuits on or before May 31, 2011, and intends to defend itself vigorously in these individual actions. The relief sought is unspecified monetary damages.

On December 8, 2010, PrimeLending entered into a settlement with the DOJ pursuant to a Consent Order with respect to an inquiry by the DOJ into certain lending practices of PrimeLending in prior years. The Consent Order settles a complaint filed by the United States against PrimeLending earlier that day in the United States District Court for the Northern District of Texas, Dallas Division relating to alleged violations by PrimeLending of fair lending laws between 2006 and 2009. In its complaint, the United States sought a finding that PrimeLending violated the Fair Housing Act and the Equal Credit Opportunity Act, to enjoin PrimeLending from discriminating in connection with its mortgage lending business, monetary damages on behalf of alleged victims and a civil penalty. The Consent Order was subsequently approved by the court on January 11, 2011.

 

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PrimeLending denies that it has engaged in any discriminating lending practices and entered into the Consent Order voluntarily to avoid the risks and burdens of litigation. No factual finding or adjudication was made with respect to the United States’ allegations against PrimeLending, and no civil penalty was assessed. Prior to entering into the Consent Order, PrimeLending altered its loan pricing policy to ensure that the price it charges for residential loan products is set in a nondiscriminatory manner consistent with applicable law.

As a part of the Consent Order, PrimeLending agreed to provide a $2.0 million settlement fund, which PrimeLending charged to expense in 2010, for borrowers nationwide who may have suffered as a result of the alleged violations by PrimeLending of fair lending laws. Any moneys not distributed from the settlement fund to individual borrowers will be distributed to qualified organizations to provide credit counseling, financial literacy, and other related educational programs.

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 borrowers’ 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

There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our Annual Report. For more information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our Annual Report.

 

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

During the first quarter of 2011, we issued 2,246 shares of Original Common Stock to employees upon the exercise of outstanding stock options at an average exercise price of $6.69 per share. These options were awarded pursuant to the exemption from compliance with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Rule 701 promulgated thereunder. The issuance of shares of our Original Common Stock pursuant to the exercise of such options was therefore also exempt from registration under the Securities Act pursuant to Rule 701.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

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

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

 

    PLAINSCAPITAL CORPORATION
Date: May 5, 2011   By:  

/S/ JOHN A. MARTIN

  Name:   John A. Martin
  Title:   Executive Vice President and Chief Financial Officer
    (Duly authorized officer and principal financial officer)
Date: May 5, 2011   By:  

/S/ JEFF ISOM

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

 

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Exhibit Index

 

                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    3.1

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

    3.2

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

    4.1

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

    4.2

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

    4.3

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

    4.4

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

    4.5

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

    4.6

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

    4.7

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

    4.8

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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    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

    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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    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

    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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    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

    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*

      Second Amendment to Employment Agreement, dated as of November 15, 2010, between W. Allen Custard III and PlainsCapital Corporation.       8-K    000-53629    10.5    11/16/10

    10.15*

      Employment Agreement, dated as of April 1, 2010, between PlainsCapital Corporation and Roseanna McGill.       8-K    000-53629    10.1    03/23/10

    10.16*

      First Amendment to Employment Agreement, dated as of November 15, 2010, between Roseanna McGill and PlainsCapital Corporation.       8-K    000-53629    10.6    11/16/10

    10.17*

      Employment Agreement, dated as of January 1, 2009, between James R. Huffines and PlainsCapital Corporation.       8-K    000-53629    10.1    11/16/10

    10.18*

      First Amendment to Employment Agreement, dated as of March 2, 2009, between James R. Huffines and PlainsCapital Corporation.       8-K    000-53629    10.2    11/16/10

    10.19*

      Second Amendment to Employment Agreement, dated as of November 15, 2010, between James R. Huffines and PlainsCapital Corporation.       8-K    000-53629    10.3    11/16/10

    10.20*

      Employment Agreement, dated as of November 15, 2010, between John A. Martin and PlainsCapital Corporation.       8-K    000-53629    10.4    11/16/10

    10.21*

      Employment Agreement, dated as of April 1, 2010, between Todd Salmans and PlainsCapital Corporation.       10-K    000-53629    10.21    03/22/11

    10.22*

      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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    10.23*

      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

    10.24*

      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

    10.25*

      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

    10.26*

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

    10.27*

      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

    10.28*

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

    10.29*

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

    10.30*

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

    10.31*

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

    10.32*

      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

    10.33*

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

    10.34*

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

    10.35*

      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

    10.36*

      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

    10.37*

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

    10.38*

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

    10.39*

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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    10.40*

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

    10.41*

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

    10.42*

      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

    10.43*

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

    10.44*

      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

    10.45

      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

    10.46

      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

    10.47

      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

    10.48

      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

    10.49

      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

    10.50

      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

    10.51

      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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    10.52

      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

    10.53

      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

    10.54

      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

    10.55

      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

    10.56

      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

    10.57

      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

    10.58

      Tenth Amendment to Amended and Restated Loan Agreement, dated as of January 10, 2011, between PlainsCapital Corporation and JPMorgan Chase Bank, NA.       8-K    000-53629    10.1    01/25/11

    10.59

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

    10.60

      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

    10.61

      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

    10.62

      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

    10.63

      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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    10.64

      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

    10.65

      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

    10.66

      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

    10.67

      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

    10.68

      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

    10.69

      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

    10.70

      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

    10.71

      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

    10.72

      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

    10.73

      Modification Agreement, dated as of January 10, 2011, between PlainsCapital Corporation and JPMorgan Chase Bank, NA.       8-K    000-53629    10.2    01/25/11

    10.74

      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

    10.75

      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

    10.76

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

    10.77

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


Table of Contents
                      Incorporated by Reference

Exhibit No.

       

Exhibit Description

   Filed
Herewith
     Form    File No.    Exhibit    Filing
Date

    10.78

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

    10.79

      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

    10.80

      Waiver Letter, dated as of November 8, 2010, from JPMorgan Chase Bank, NA to PlainsCapital Corporation.       10-Q    000-53629    10.71    11/09/10

    31.1

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

    31.2

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

    32.1

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

 

* Management contract or compensatory plan or arrangement.