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Article by DailyStocks_admin    (12-07-11 12:08 AM)

Description

SWS Group Inc. 10% Owner Holdings Inc. Hilltop bought 146300 shares on 11-22-2011 at $ 5.47

BUSINESS OVERVIEW

We are a diversified financial services holding company focused on delivering a broad range of investment banking, commercial banking and related financial services to individual, corporate and institutional investors, broker/dealers, governmental entities and financial intermediaries. We are the largest full-service brokerage firm headquartered in the Southwestern United States (based on the number of financial advisors).

For purposes of this report, references to “we,” “us,” “our,” “SWS” and the “company” mean SWS Group, Inc. collectively with all of our subsidiaries, and references to “SWS Group” mean solely SWS Group, Inc. as a single entity.

SWS Group is a Delaware corporation and was incorporated in 1972, and its common stock is listed on the New York Stock Exchange (“NYSE”). Our principal executive offices are located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. Our telephone number is (214) 859-1800 and our website is www.swsgroupinc.com. We do not intend for information contained on our website to be part of this Form 10-K. We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room.

The SEC also maintains an Internet site that contains annual, quarterly and current reports, proxy and information statements and other information that we (together with other issuers) file electronically. The SEC’s Internet site is www.sec.gov. We make available free of charge on or through our website our annual, quarterly and current reports and amendments to those reports as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Additionally, we will provide electronic or paper copies of our filings free of charge upon request.

Our principal brokerage subsidiary, Southwest Securities, Inc. (“Southwest Securities”), is a registered broker/dealer and a member of the NYSE. It is also a member of the Financial Industry Regulatory Authority (“FINRA”), Securities Investor Protection Corporation (“SIPC”), and other regulatory and trade organizations.

Southwest Securities provides integrated trade execution, clearing and client account processing to over 160 financial service organizations, which includes correspondent broker/dealers and registered investment advisors in 30 states and Canada. Southwest Securities serves individual investors through its private client group offices in Texas, California, Nevada and Oklahoma and institutional investors nationwide. Southwest Securities also extends margin credit and lends securities and manages and participates in underwriting equity and fixed income securities. For the fiscal year ended June 24, 2011, revenues from Southwest Securities accounted for approximately 72% of our consolidated revenues.

We currently operate SWS Financial Services, Inc. (“SWS Financial”), a broker/dealer subsidiary that is also registered with FINRA. SWS Financial contracts with approximately 300 individual registered representatives (who are FINRA licensed salespersons) for the administration of their securities business. While these registered representatives must conduct all of their securities business through SWS Financial, they may conduct insurance, real estate brokerage or other business for others or for their own accounts. The registered representatives are responsible for all of their direct expenses and are paid higher commission rates than Southwest Securities’ registered representatives to compensate them for their added expenses. SWS Financial is a correspondent of Southwest Securities.

SWS Group purchased M.L. Stern & Co., LLC, a registered broker/dealer, and its wholly-owned subsidiary, Tower Asset Management, LLC, after the close of business on March 31, 2008. Substantially all of the operations of the broker/dealer were transferred to Southwest Securities in December 2008 and are operating as separate offices of Southwest Securities’ private client group. M.L. Stern & Co., LLC was dissolved effective May 26, 2011. Tower Asset Management, LLC ceased business operations on June 30, 2009 and was dissolved effective June 30, 2010.

We offer full-service, traditional and Internet banking through Southwest Securities, FSB (the “Bank”). The Bank is a federally chartered savings bank organized and existing under the laws of the United States. The Bank conducts business from its main operating facilities and headquarters in Dallas, Texas and 15 banking center locations in Texas and New Mexico. In 2003, SWS Banc Holdings, Inc. (“SWS Banc”) was incorporated as a wholly-owned subsidiary of SWS Group in the state of Delaware and became the sole stockholder of the Bank in 2004.

The annual consolidated financial statements of SWS are prepared as of the close of business on the last Friday in June. The Bank’s annual financial statements are prepared as of June 30th.

PRODUCTS AND SERVICES

In fiscal 2011, we operated through four business segments grouped primarily by products, services and customer base: clearing, retail, institutional and banking. The segments are managed separately based on the types of products and services offered and their related client bases and are consistent with how we manage our resources and assess our performance. For more information about each of these business segments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below. See also Note 26 in the Notes to the Consolidated Financial Statements for the fiscal years ended June 24, 2011, June 25, 2010 and June 26, 2009 included under Item 8. “Financial Statements and Supplementary Data” for information regarding the revenues, income (loss) and total assets of each of our business segments.

Clearing. We provide clearing and execution services for other broker/dealers (predominantly on a fully disclosed basis). Our clientele includes general securities broker/dealers and firms specializing in high volume trading.

In a fully disclosed clearing transaction, the identity of the correspondent’s client is known to us and we physically maintain the client’s account and perform a variety of services as agent for the correspondent. Correspondent firms are charged fees based on their use of services according to a contractual schedule.

Our services are tailored to meet the specific needs of our clients. We currently support a wide range of clients, including discount and full-service brokerage firms, direct access firms, registered investment advisors and institutional firms. High-volume trading firms trade actively on a proprietary basis or provide services to those customers who trade actively on a daily basis. As of June 24, 2011, Southwest Securities provided clearing services for three high-volume trading firms. The nature of services provided to the customers of high-volume trading firms and the internal costs necessary to support them are substantially lower than the standard correspondent costs and services. Accordingly, fees for services to these correspondents, on a per trade basis, are discounted substantially from the fees normally charged to other customers.

In addition to clearing trades, we tailor our services to meet the specific business needs of our clearing clients and offer such products and services as recordkeeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of securities.

The terms of our agreements with our correspondents define the allocation of financial, operational and regulatory responsibility arising from the clearing relationship. To the extent that the correspondent has available resources, we are protected against claims by customers of the correspondent arising from actions by the correspondent; however, if the correspondent is unable to meet its obligations, dissatisfied customers may attempt to recover from us.

Retail. The Retail segment includes the sale of retail securities, insurance products and managed accounts.

Retail Securities . We act as securities broker for retail investors in the purchase and sale of securities, options, commodities and futures contracts that are traded on various exchanges or in the over-the-counter market through our employee registered representatives or our independent contractor arrangements. As a securities broker, we extend margin credit on a secured basis to our retail customers in order to facilitate securities transactions. Through our insurance subsidiaries, we hold insurance licenses in 44 states in order to facilitate the sale of insurance and annuity products by our financial advisors to retail clients. In most cases, we charge commissions to our clients in accordance with our established commission schedule. In certain instances, discounts varying from the schedule are given, generally based upon the client’s level of business, the trade size and other relevant factors. Some of our registered representatives also maintain licenses to sell certain insurance products. Southwest Securities is registered with the Commodity Futures Trading Commission (“CFTC”) as a non-guaranteed introducing broker and is a member of the National Futures Association (“NFA”). Southwest Securities is a fully disclosed client of two of the largest futures commodity merchants in the United States.

Our financial advisors work with their individual clients to create investment portfolios based on the client’s specific financial goals and tolerance for risk. We provide access to fee-based platforms and a wide array of products and services including access to investment management programs that can be tailored to the individual client relationship to enhance the financial advisor’s business and benefit his or her clients.

At June 24, 2011, Southwest Securities employed 166 registered representatives in 20 retail brokerage offices (two located in Houston and one located in each of Austin, Dallas, Georgetown, Longview, Lufkin, Plano, San Antonio and Southlake, Texas; a strategic asset group located at the company’s headquarters in Dallas, Texas; one located in each of Oklahoma City and Norman, Oklahoma; one located in each of Beverly Hills, Monterey, Rancho Bernardo, Sacramento, San Diego and San Francisco, California and one located in Las Vegas, Nevada). In addition, at June 24, 2011, SWS Financial had contracts with 297 independent retail representatives for the administration of their securities business.

Insurance. Southwest Financial Insurance Agency, Inc. and Southwest Insurance Agency, Inc., together with its subsidiary, Southwest Insurance Agency of Alabama, Inc., (collectively, “SWS Insurance”) hold insurance agency licenses in 44 states for the purpose of facilitating the sale of insurance and annuity products for our registered representatives to their retail customers. We retain no underwriting risk related to the insurance and annuity products that SWS Insurance sells.

Managed Accounts. Through the Managed Advisors and Accounts department of Southwest Securities, we provide advisors with a wide array of products and services to enhance and grow their advisory business referred to as the “Partner” program. The Partner program can be tailored to the individual client relationship and provides the flexibility that we believe is key to an advisor’s success. Other products available include “Premier Advisors,” which gives an investor access to approximately 300 of the world’s leading institutional money managers at competitive rates; and “Advantage,” which offers an advisory service designed to assist investors with identifying a strategic asset allocation strategy using mutual funds and exchange traded funds (“ETF”) and developing a plan to work toward their long-term financial goals. The “Global Tactical Allocation” (“GTA”) is a strategy that uses ETFs and mutual funds to develop a tactical strategy. This strategy actively adjusts a portfolio’s allocation mix based on a view of the markets over the next 12 months by over/underweighting underlying asset classes to determine the appropriate asset allocation mix in consideration of current market conditions. The Russell Strategies program uses only mutual funds from Russell Investments. The models and the funds that are used within each model are provided by Russell Investments and provide investors with well balanced and diversified portfolios.

Margin Lending . We extend credit on a secured basis directly to our customers, the customers of correspondent firms and the correspondent firms themselves in order to facilitate securities transactions. This credit, which earns interest income, is known as “margin lending” and is conducted primarily in our clearing and retail segments. We extend margin credit to correspondent firms only to the extent that such firms pledge their own (“proprietary”) assets as collateral. Our correspondents indemnify us against margin losses on their customers’ accounts. Since we must rely on the guarantees and general creditworthiness of the correspondents, we may be exposed to significant risk of loss if correspondents are unable to meet their financial commitments should there be a substantial adverse change in the value of margined securities.

In customer margin transactions, the client borrows money from us to purchase securities or for other purposes. The loan is collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed to finance margin transactions at a floating rate. The rate charged is dependent on the average net debit balance in the client’s accounts, the activity level in the accounts and the applicable cost of funds. The amount of the loan is subject to the margin regulations (“Regulation T”) of the Board of Governors of the Federal Reserve System, FINRA margin requirements, and our internal policies. In most transactions, Regulation T limits the amount loaned to a customer for the purchase of securities to 50% of the purchase price. Furthermore, in the event of a decline in the value of the collateral, FINRA requirements regulate the percentage of client cash or securities that must be on deposit as collateral for the loans.

In permitting clients to purchase on margin, we are subject to the risk of a market decline, which could reduce the value of our collateral below the client’s indebtedness. Agreements with margin account clients permit us to liquidate clients’ securities with or without prior notice in the event of an insufficient amount of margin collateral. Despite those agreements, we may be unable to liquidate clients’ securities for various reasons including, but not limited to, a thin trading market, an excessive concentration or the issuance of a trading halt.

The primary source of funds to finance clients’ margin account balances is credit balances in clients’ accounts. We generally pay interest to clients on these credit balances at a rate determined periodically. SEC regulations restrict the use of clients’ funds to the financing of clients’ activities including margin account balances. Excess customer credit balances, as defined by SEC regulations, are invested in short-term securities segregated for the exclusive benefit of customers as required by SEC regulations. We generate net interest income when there is a positive interest rate spread between the rate earned from margin lending and segregated short-term investments and the rate paid on customer credit balances.

Institutional. The Institutional segment is comprised of businesses serving institutional customers in the areas of securities borrowing and lending, public finance, municipal sales and underwriting, investment banking, fixed income sales and trading and equity sales.

Securities Lending Activities. Our securities lending business includes borrowing and lending securities for other broker/dealers, lending institutions and our own clearing and retail operations. These activities involve borrowing securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required settlement date and lending securities to other broker/dealers for similar purposes.

When borrowing securities, we are required to deposit cash or other collateral or to post a letter of credit with the lender, and we generally receive a rebate (based on the amount of cash deposited) or a fee calculated to yield a negotiated rate of return. When lending securities, we receive cash or similar collateral and generally pay interest (based on the amount of cash deposited) to the other party to the transaction. Generally, we earn net interest income based on the spread between the interest rate on cash or similar collateral we deposit and the interest rate paid on cash or similar collateral we receive.

Securities borrowing and lending transactions are executed pursuant to written agreements with counterparties that generally require securities borrowed and loaned to be marked-to-market on a daily basis, excess collateral to be refunded, and deficit collateral to be furnished. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. We are a principal in these securities borrowing and lending transactions and are liable for losses in the event of a failure of any other party to honor its contractual obligation. Our management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The securities lending business is conducted primarily from Southwest Securities’ New Jersey office using a highly specialized sales force.

Investment Banking and Public Finance. Our investment banking and public finance businesses earn investment banking revenues by assisting corporate and public entity clients in meeting their financial needs and advising the most advantageous means of raising capital. Our public finance and municipal sales and underwriting professionals assist public bodies in originating, syndicating and distributing securities for municipalities and political subdivisions. Our corporate finance professionals arrange and evaluate mergers and acquisitions, offer private placements of securities with institutional and individual investors, assist clients with raising capital, and provide other consulting and advisory services.

Our syndicate department coordinates the distribution of managed and co-managed corporate equity underwritings, accepts invitations to participate in competitive or negotiated underwritings managed by other investment banking firms and allocates and merchandises our selling allotments to our branch office system to institutional clients and to other broker/dealers.

Southwest Securities maintains a corporate finance branch office in Dallas, Texas and public finance branch offices in Austin, Dallas, Longview, Allen and San Antonio, Texas; Irvine and Cardiff, California; Hillsdale, New York; Albuquerque, New Mexico; Charlotte, North Carolina; and Monroe, Louisiana.

Participation in corporate and municipal underwritings can expose us to material risk due to the possibility that securities we have committed to purchase may not be sold at the initial offering price. Federal and state securities laws and regulations also affect the activities of underwriters and impose substantial potential liabilities for violations in connection with sales of securities by underwriters to the public.

Fixed Income Sales and Trading and Equity Trading. Our fixed income sales and trading group specializes in trading and underwriting U.S. government and agency bonds, corporate bonds, municipal bonds, mortgage-backed, asset-backed and commercial mortgage-backed securities and structured products. The clients of our fixed income group include corporations, insurance companies, banks, mutual funds, money managers and other institutions. Southwest Securities has fixed income offices in Dallas, Texas; Chicago, Illinois; Ft. Lauderdale and North Palm Beach, Florida; Encino, Irvine and San Francisco, California; Canton and Westport, Connecticut; Evergreen, Colorado; Bloomfield, New Jersey; Memphis, Tennessee and New York, New York.

Our equity trading department focuses on providing best execution for equity and option orders for clients and executes institutional portfolio trades.

Banking. We offer traditional banking products and services through 13 full-service banking centers located in Arlington, Austin, Benbrook, Dallas, El Paso, Garland, Granbury, Houston, Southlake and Waxahachie, Texas as well as two full-service banking centers located in Albuquerque and Ruidoso, New Mexico. We specialize in two primary areas: business banking and mortgage purchase. Our focus in business banking includes small business (“SBA”) lending. We originate the majority of our loans internally, and we believe this business model helps us develop more valuable relationships with our customers. Our banking operations are currently restricted by, and subject to, the Order with the OTS and the OCC. See also Note 27 in the Notes to the Consolidated Financial Statements for the fiscal years ended June 24, 2011, June 25, 2010 and June 26, 2009 included under Item 8. “Financial Statements and Supplementary Data” for additional information on the Order.

The Bank offers a full array of deposit products, including checking, savings, money market and certificates of deposit. As a full-service lender, the Bank offers competitive rates and terms on business loans, as well as a full line of consumer loans. Customers have access to comprehensive Internet banking services and online bill payment. The Bank offers commercial and commercial real estate loans as well as residential mortgages through conventional and government loans, primarily in Texas and New Mexico. In prior years, the Bank also provided interim construction lending to builders throughout the North Texas market.

Our mortgage purchase division purchases participations in newly originated residential loans (1-4 families), from various mortgage bankers nationwide. The loans are pre-committed for sale to the secondary market and remain on the Bank’s books for an average of 9-15 days. Approximately 98% of the loans conform to the standards of Fannie Mae, Freddie Mac or Ginnie Mae, and the rest are “A” credit jumbo loans. As of the date of this report, the Bank had approximately 60 customer/originators across the nation. Although the Bank is exposed to credit risk before the loans are sold, there is no recourse to the Bank once the sale has closed.

CEO BACKGROUND

James H. Ross (age 61)

Mr. Ross was named President, Chief Executive Officer and a member of the Board of Directors of SWS Group on October 28, 2010. Mr. Ross had served as interim CEO and member of the Board since August 18, 2010. He previously served as Executive Vice President since November 2004 and, in September 2007, was elected President and Chief Executive Officer of Southwest Securities. Mr. Ross served as the Director of the Private Client Group at Southwest Securities from March 2004 to March 2008. He has served as Chief Executive Officer of SWS Financial since March 2004. Mr. Ross came to Southwest Securities in 2004 to head the Private Client Group’s brokerage office in Dallas, Texas. Prior to coming to Southwest Securities, Mr. Ross was with UBS Paine Webber, where, from April 1991 to December 2003, Mr. Ross held various positions from financial advisor to branch manager. He began his securities industry career in 1975. The Board concluded that Mr. Ross should serve as a director of the company for the following reasons: (i) he has broad and extensive experience in the securities industry and its regulatory environment; (ii) he has successfully managed our principal broker/dealer subsidiary including the management of senior level staff and profit centers and (iii) he also has significant experience with sales and marketing, strategic planning and mergers and acquisitions.

Robert A. Buchholz (age 51)

Mr. Buchholz has served as a director since May 2008. Mr. Buchholz is Chairman of the Board and founder of Town Center Holdings, Inc. in Coppell, Texas. Town Center Holdings, Inc. is the former parent company of Town Center Bank. Town Center Bank merged with Independent Bank of McKinney, Texas on July 30, 2010. Before organizing Town Center Bank in 2003, Mr. Buchholz was a practicing attorney in North Carolina. Prior to entering the legal field, Mr. Buchholz served as an officer of Southwest Securities Group, Inc. (now SWS Group, Inc.) in Dallas from 1985 to 1995, advancing to President and serving as a member of the Board of Directors. He is also a former certified public accountant. Mr. Buchholz is a director of Blue Sky Technologies, Inc. and the Episcopal School of Dallas. He is a member of the Business Honors Program Advisory Council of the University of Texas at Austin. Mr. Buchholz is the son of Mr. Don A. Buchholz, our current Chairman of the Board who is not seeking reelection. The Board concluded that Mr. Buchholz should serve as a director of the company for the following reasons: (i) his role as the Chairman and founder of Town Center Bank allows him to assist the Board with the oversight of our bank and its interaction with various regulators; (ii) as a former director and executive officer of the company, he is well versed in the business of our broker/dealer and its oversight by multiple regulators; (iii) he brings both legal and accounting expertise to the Board from his prior roles as an attorney and a certified public accountant and (iv) as a past executive of the company and a recent executive of Town Center Bank, he is capable of assisting the Board with oversight of senior level management, as well as oversight of the company’s business policies.

Brodie L. Cobb (age 50) ( 2 )

Mr. Cobb has served as a director since 1999. He is the founder and Managing Director of San Francisco-based The Presidio Group, a specialty advisory firm focusing on mergers and acquisitions, private financings and wealth management, where he has served from 1997 to the present. Mr. Cobb’s previous experience includes serving as a Vice President at Montgomery Securities from 1995 to 1997 and as an Associate at Credit Suisse First Boston LLC from 1992 to 1995. The Board concluded that Mr. Cobb should serve as a director of the company for the following reasons: (i) as a founder and managing director of The Presidio Group, he provides expertise in overseeing senior management and (ii) he is frequently called upon to share his expertise with the full Board on strategic planning.

J. Taylor Crandall (age 57) ( 3 )

Mr. Crandall is a founding Managing Partner of Oak Hill Capital Partners III, L.P and has been part of the firm since 1986. He has senior responsibility for originating, structuring and managing investments for the firm’s Media and Telecom and Technology industry groups. Mr. Crandall has also served as Chief Operating Officer of Keystone, Inc., the primary investment vehicle for Robert M. Bass. Prior to joining Oak Hill Capital, Mr. Crandall was a Vice President with the First National Bank of Boston. Mr. Crandall serves on the Board of Directors of RSC Holdings, Inc., Local TV LLC, SVTC Technologies, Security Networks, LLC and ViaWest, Inc. Mr. Crandall is the secretary-treasurer of the Anne T. and Robert M. Bass Foundation, the trustee of the Lucile Packard Foundation for Children’s Health and currently serves on the boards of trustees of the Cystic Fibrosis Foundation, The Park City Foundation and the U.S. Ski and Snowboard Team Foundation. Mr. Crandall earned a B.A. degree, magna cum laude, from Bowdoin College, where he has served on the Board of Overseers. Mr. Crandall also received an honorary doctorate in humane letters from Bowdoin College in 2010. The Board concluded that Mr. Crandall should serve as a director of the company for the following reasons: (i) his experience in finance and accounting controls; (ii) his experience in management and board governance, including his experience originating, structuring, managing and overseeing investments as Managing Partner of Oak Hill; (iii) his experience as Chief Operating Officer of Keystone, Inc. and Vice President of First National Bank of Boston, as well as his experience serving on the Board of Directors of several public and private companies.

Gerald J. Ford (age 67) ( 3 )

Mr. Ford has served as Chairman of the Board of Hilltop since August 2007 and has served as a director of Hilltop since June 2005. He served as interim Chief Executive Officer of Hilltop from January 1, 2010 until March 11, 2010. Mr. Ford is a banking and financial institutions entrepreneur who has been involved in numerous mergers and acquisitions of private and public sector financial institutions, primarily in the southwestern United States, over the past 35 years. In that capacity, he acquired and consolidated 30 commercial banks from 1975 to 1993, forming First United Bank Group, Inc., a multi-bank holding company for which he functioned as Chairman of the Board and Chief Executive Officer until its sale in 1994. During this period, he also led investment consortiums that acquired numerous financial institutions, forming in succession, First Gibraltar Bank, FSB, First Madison Bank, FSB and First Nationwide Bank. Mr. Ford also served as Chairman of the Board of Directors and Chief Executive Officer of Golden State Bancorp Inc. and its subsidiary, California Federal Bank, FSB, from 1998 to 2002. Mr. Ford also serves as Chairman of the Board of Pacific Capital Bancorp, Chairman of the Board of First Acceptance Corporation and as a board member for McMoRan Exploration Co., Freeport McMoRan Copper and Gold Inc., and Scientific Games Corporation. Mr. Ford also currently serves on the Board of Trustees of Southern Methodist University and is the Managing Partner of Ford Financial Fund, L.P., a private equity fund. Mr. Ford previously served as a director of Triad Financial Corporation. The Board concluded that Mr. Ford should serve as a director of the company for the following reasons: (i) his extensive banking industry experience and educational background, which provide him with significant knowledge in dealing with financial, accounting and regulatory matters; (ii) his experience as a financial institutions entrepreneur and private investor involved in numerous mergers and acquisitions of private and public sector financial institutions over the past 35 years; and (iii) his service on the board of directors and audit and corporate governance committees of a variety of public companies, which gives him a deep understanding of the role of the board of directors.

Larry A. Jobe (age 71) ( 1 ) , ( 2 )

Mr. Jobe has served as a director since July 2005. Mr. Jobe, a certified public accountant, is founder and Chairman of the Board of Legal Network, Ltd. and founder and President of P 1 Resources, L.L.C., both Dallas, Texas based companies. Mr. Jobe founded Legal Network, Ltd., a company that provides litigation support, temporary support staff and contract attorneys to law firms and corporate legal departments, in 1993. In 1994, he founded P 1 Resources, L.L.C., which provides engineering and light industrial staffing services to the construction industry. Mr. Jobe was affiliated with Grant Thornton LLP from 1961 to 1969 and from 1973 to 1991, serving as Managing Partner of the Dallas office from 1973 to 1986 and as Regional Managing Partner of the Southwest Region from 1983 to 1991. From 1969 to 1972, Mr. Jobe served as the United States Assistant Secretary of Commerce for Administration. Mr. Jobe currently serves as Chairman of the Board of Directors of Independent Bank of Texas and as a member of the Board of Directors and Audit Committee chairman of U.S. Home Systems, Inc., a home remodeling and specialty home improvement company, and Mannatech Incorporated, a global wellness solutions company. The Board concluded that Mr. Jobe should serve as a director of the company for the following reasons: (i) Mr. Jobe, the chairman of our Audit Committee, brings extensive accounting and audit skills to the Board from his 26 years of experience at Grant Thornton, LLP; (ii) as a founder and head of Legal Network, Ltd. and P 1 Resources, L.L.C., he has gained extensive experience in managing senior executives and overall profitability and (iii) his experience on other public and non-public boards brings important executive management experience to the Board.

Frederick R. Meyer (age 83) (1),(2),(3)

Mr. Meyer has served as a director since 1991 and as lead director of executive sessions of our non-management directors since 2006. Mr. Meyer was Chairman of the Board of Directors of Aladdin Industries LLC, a diversified company from 1985 to 2004. He also formerly held the position of President and Chief Executive Officer of Aladdin Industries LLC from 1987 to 1994 and again from 1995 to 2004. Mr. Meyer was also President and Chief Operating Officer of Tyler Corporation, a diversified manufacturing corporation, from 1983 to 1986. From 2001 to 2010, he served on the Board of Directors and as chairman of the Compensation Committee of Westwood Holdings Group, Inc., an asset management company. The Board concluded that Mr. Meyer should serve as a director of the company for the following reasons: (i) he gained finance, business policy making and senior level management skills during his executive and board roles at Aladdin Industries LLC and (ii) his public company board experience in corporate governance and compensation also makes him a good choice for the chairman of our Nominating/Corporate Governance and Compensation Committees.

Dr. Mike Moses (age 59)

Dr. Moses has served as a director since March 2006. Dr. Moses serves as Senior Education Advisor for Raise Your Hand Texas, a non-profit educational advocacy organization. From November 2001 to July 2006, he served as Vice Chairman of the Board of Directors for Higher Ed Holdings, LLC, which develops education programs for teachers and administrators and is focused on improving teacher training and redesigning high schools throughout the nation. Prior to joining Higher Ed Holdings, LLC, Dr. Moses was affiliated with the Dallas Independent School District, serving as its General Superintendent from January 2001 to August 2004. From 1995 to 1999, Dr. Moses served as Texas Commissioner of Education, appointed twice by then Texas Governor George W. Bush. In 1999, he joined the Texas Tech University System as Deputy Chancellor where he served until December 2000. Dr. Moses serves on the board of Scientific Learning Corporation, a producer of reading and language intervention programs for Pre-K through 12 th grade schools. Dr. Moses served on the Board of Directors and as a member of the Audit Committee of Trammell Crow Company, a real estate property management company until its sale in 2007 to CB Richard Ellis. The Board concluded that Dr. Moses should serve as a director of the company because his positions as General Superintendent of Dallas Independent School District and Texas Commissioner of Education bring strong administrative, finance and executive management oversight expertise to the Board.

Joel T. Williams III (age 63) (1),(3)

Mr. Williams has served as a director since November 2009. Mr. Williams, an attorney, has been the President of Bristol Investment Company, Inc., a private investment firm, since 1985. He formerly served as President and CEO of Texas Federal Financial Corporation, a savings and loan holding company, prior to its sale in 1984. A long time advocate and volunteer for Children’s Medical Center, Mr. Williams served as its Chairman from 1993 to 2000, and Chairman of its holding company, Children’s Health Services of Texas, from 2000 to 2003. He currently serves as Chairman Emeritus of Children’s Health Services of Texas and on the Executive Committee of Children’s Medical Center Foundation. He is the founder and has been the President of Passion for Children’s Inc., a not-for-profit corporation that raises money exclusively for Children’s Medical Center. The Board concluded that Mr. Williams should serve as a director of the company for the following reasons: (i) his experience as President and CEO of Bristol Investment Company and formerly with Texas Federal Financial Corporation, assists the Board with the oversight of senior level management and management of our business lines and (ii) he also brings legal knowledge and perspectives to the Board as an attorney.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

We are engaged in full-service securities brokerage and full-service commercial banking. During the twelve-months ended June 24, 2011, 82% of our total revenues were generated by our full-service brokerage business and 18% of our revenues were generated by our commercial banking business. While brokerage and banking revenues are dependent upon trading volumes and interest rates, which may fluctuate significantly, a large portion of our expenses remain fixed. Consequently, net operating results can vary significantly from period to period.

Our business is also subject to substantial governmental regulation and changes in legal, regulatory, accounting, tax and compliance requirements, which may have a substantial impact on our business and results of operations. We also face substantial competition in each of our lines of business. See “Forward-Looking Statements,” Item 1. “Business-Competition,” “-Regulation” and Item 1A. “Risk Factors.”

We operate through four segments grouped primarily by products, services and customer base: clearing, retail, institutional and banking.

Clearing. We provide clearing and execution services for other broker/dealers (predominantly on a fully disclosed basis). Our clientele includes general securities broker/dealers and firms specializing in high volume trading. We currently support a wide range of clearing clients, including discount and full-service brokerage firms, direct access firms, registered investment advisors and institutional firms. In addition to clearing trades, we tailor our services to meet the specific needs of our clearing clients (“correspondents”) and offer such products and services as recordkeeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of securities.

Revenues in this segment are generated primarily through transaction charges to our correspondent firms for clearing their trades. Revenue is also earned from various fees and other processing charges as well as through net interest earnings on correspondent customer balances.

Retail. We offer retail securities products and services (equities, mutual funds and fixed income products), insurance products and managed accounts through the activities of our employee registered representatives and our independent contractors. As a securities broker, we extend margin credit on a secured basis to our retail customers in order to facilitate securities transactions. This segment generates revenue primarily through commissions charged on securities transactions, fees from managed accounts and the sale of insurance products as well as net interest income from retail customer balances.

Institutional. We serve institutional customers in the areas of securities borrowing and lending, public finance, municipal sales and underwriting, investment banking, fixed income sales and equity trading. Our securities lending business includes borrowing and lending securities for other broker/dealers, lending institutions, and our own clearing and retail operations. Our public finance and municipal sales and underwriting professionals assist public bodies in originating, syndicating and distributing securities of municipalities and political subdivisions. Our corporate finance professionals arrange and evaluate mergers and acquisitions, conduct private placements and participate in public offerings of securities with institutional and individual investors, assist clients with raising capital, and provide other consulting and advisory services.

Our fixed income sales and trading group specializes in trading and underwriting U.S. government and agency bonds, corporate bonds, mortgage-backed, asset-backed and commercial mortgage-backed securities and structured products. The clients of our fixed income group include corporations, insurance companies, banks, mutual funds, money managers and other institutions. Our equity trading department focuses on providing the best execution for equity and option orders for clients. We also execute institutional portfolio trades and are a market maker in a limited number of listed securities.

Revenues in the institutional segment are derived from the net interest spread on stock loan transactions, commission and trading income from fixed income and equity products and investment banking fees from corporate and municipal securities transactions.

Banking. We offer traditional banking products and services. We specialize in two primary areas, business banking and mortgage purchase. Our focus in business banking includes small business lending. We originate the majority of our loans internally and we believe this business model helps us build more valuable relationships with our customers. Our mortgage purchase division purchases participations in newly originated residential loans from various mortgage bankers nationwide. Southwest Securities, FSB (the “Bank”) earns substantially all of its revenues on the spread between the rates charged to customers on loans and the rates paid to depositors. Our banking operations are currently restricted by and subject to the Order with the OCC.

The “other” category includes SWS Group, corporate administration and SWS Capital Corporation. SWS Capital Corporation is a dormant entity. SWS Group is a holding company that owns various investments, including common stock of U.S. Home Systems, Inc. (“USHS”). At June 26, 2009, SWS Group also owned NYSE Euronext, Inc. (“NYX”) common stock, which was sold in the first quarter of fiscal 2010.

Business Environment

Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services, as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers’ assets under management.

As of June 24, 2011, equity market indices reflected an average increase from a year ago with the Dow Jones Industrial Average (the “DJIA”) up 18%, the Standard & Poor’s 500 Index (“S&P 500”) up 18% and the NASDAQ Composite Index (“NASDAQ”) up 19%. The DJIA closed at 11,934.58 on June 24, 2011 up from 10,143.81 and 8,438.39 on June 25, 2010 and June 26, 2009, respectively. On the other hand, the average daily volume on the NYSE declined during our fiscal 2011, decreasing 39% over the same period last fiscal year. With the Standard and Poor’s downgrade of the United States credit rating on August 5, 2011, equity markets have fallen significantly and risk and volatility have increased.

Despite the positive direction in the equity markets during our fiscal 2011, the volumes in the markets and economic and regulatory uncertainty have created a challenging operating environment for us. The national unemployment rate, which was approximately 9% at the end of June 2011, is down from a high of 10% at the end of December 2009 but remains at historically high levels. The FRB reduced the federal funds target rate to 0 - 0.25% on December 16, 2008 and has not yet begun increasing rates. In August 2011, the FRB announced its intent to keep the federal funds rate at current levels until mid-2013.

The disruptions and developments in the general economy and the credit markets over the past three years have resulted in a range of actions by the U.S. and foreign governments to attempt to bring liquidity and order to the financial markets and to prevent a long recession in the world economy. For more details regarding some of the actions taken by U.S. and foreign governments, see the discussion under Item 1. “Business-Regulation.”

While many economists believe the recession ended in June 2009, unemployment and tight credit markets continue to create a fragile economic environment, and there is no guarantee that conditions will not worsen again. On August 5, 2011, credit rating agency, Standard and Poor’s, downgraded the United States’ credit rating for the first time in the history of the ratings. Further, world markets, especially those focused on the European Union and Japan have been volatile due to debt problems in Europe and the natural disaster in Japan. Texas, which was largely insulated from severe job loss and real estate market deterioration at the start of the recession, has now experienced distress in residential and commercial real estate values as well as elevated unemployment. These factors have had and will continue to have a negative impact on our banking and brokerage operations.

Impact of Economic Environment

Brokerage: On the brokerage side of the business, volatility in the credit and mortgage markets, low interest rates and reduced volume in the stock markets continue to have an adverse impact on several aspects of our business, including depressed net interest margins, reduced liquidity and lower securities valuations.

Net Interest Margins

Historically, the profitability of the brokerage business has been dependent upon net interest income. We earn net interest income on the spread between the rates earned and paid on customer and correspondent balances as well as from our securities lending business. With interest rates at historically low levels, the spread we are able to earn is reduced, primarily from the extremely low yields on our assets segregated for regulatory purposes portfolio. Additionally, the spread in our securities lending business has declined. Lastly, because the yields on money market funds have declined significantly, revenue sharing arrangements with our primary money market fund providers have been substantially reduced. We do not expect any significant changes in these dynamics until short-term interest rates rise.

We have taken actions to mitigate the impact of the margin contraction by renegotiating arrangements with our clearing customers, changing the mix of our assets segregated for regulatory purposes and developing new business in our securities lending portfolio. Despite these actions, profits from net interest remain below historical levels.

We have also implemented a new FDIC sweep product that will eventually allow our brokerage customers to obtain additional FDIC insurance coverage for pending investment funds in their accounts. This product is expected to contribute to increased revenue sharing when interest rates increase.

Liquidity

Dislocation in the credit markets has led to increased liquidity risk. All but $45.0 million of our borrowing arrangements are uncommitted lines of credit and, as such, can be reduced or eliminated at any time by the banks extending the credit. While we have not experienced any reductions in our uncommitted borrowing capacity, our lenders have taken actions that indicate their concerns regarding liquidity in the marketplace. These actions have included reduced advance rates for certain security types, more stringent requirements for collateral eligibility and higher interest rates. All of these actions have had a negative impact on our liquidity. Should our lenders take additional similar actions, the cost of conducting our business will increase and our volume of business could be limited.

The volatility in the U.S. stock markets also impacts our liquidity through increased margin requirements at our clearing houses. These margin requirements are determined through a combination of risk factors including volume of business and volatility in the U.S. stock markets. To the extent we are required to post cash or other collateral to meet these requirements, we will have less borrowing capacity to finance our other businesses.

Valuation of Securities

We trade mortgage, asset-backed and other types of fixed income securities on a regular basis. We monitor our trading limits daily to ensure that these securities are maintained at levels we consider prudent given current market conditions. These securities are priced using a third-party pricing service and we review the price monthly to ensure reasonable valuation. At June 24, 2011, we held mortgage and asset-backed securities of approximately $42.5 million included in securities owned, at fair value on the consolidated statements of financial condition.

Investment in Auction Rate Securities

At June 24, 2011, we held $21.7 million of auction rate municipal bonds which represented one security and 22% of our municipal portfolio. This security is an investment grade credit, was valued at 95.7% of par as of June 24, 2011 and was yielding less than 1% per year for the period. While management does not expect any reduction in the cash flow from this bond, the disruption in the credit markets has led to auction failures.

We currently have the ability to hold this investment until maturity. While we expect the issuer of this bond to refinance its debt when LIBOR interest rates rise, there can be no certainty that this refinancing will occur. We believe valuation of this bond at 95.7% of par at June 24, 2011 reflects an appropriate discount for the current lack of liquidity in this investment.

Our customers also own $1.2 million in auction rate bonds as well as approximately $1.3 million in auction rate preferred securities. We did not actively market these securities to our customers or classify them as cash equivalents on our statements to our customers. We do not underwrite auction rate securities or serve as the remarketing agent for any of these securities.

Bank: The banking environment remains challenging and continues to have a negative impact on the Bank’s earnings. While the migration of loans to classified status has slowed in the last half of fiscal 2011, classified assets remain historically high and at unacceptable levels. The downgrade of the U.S. debt, volatility in the financial markets and the economic indicators subsequent to June 30, 2011 have generally pointed to a negative outlook for the economy. Should this environment persist or worsen, we could experience additional migration of loans to a classified status.

Primarily due to the high level of classified assets, the Bank entered into the Order on February 4, 2011. The Order formalized many of the items included in the Memorandum of Understanding that the Bank received from the OTS on July 2, 2010. The Bank is currently in compliance with the Order.

Prior to and subsequent to the issuance of the Memorandum of Understanding, Bank management implemented several strategies to improve the performance of the Bank. Specifically, (i) management implemented balance sheet reduction strategies by aggressively selling classified assets and reducing the size of the mortgage purchase loan portfolio, and the liquidity provided by these actions has been carefully managed to allow reduction in the total balance sheet size while maintaining significant levels of balance sheet liquidity; (ii) the Bank increased its staffing in its special assets department with qualified professionals to aggressively address the reduction of classified assets; (iii) the Bank worked to reduce its exposure in commercial real estate, residential construction and land development loans by establishing concentration guidelines during fiscal 2011; (iv) the Bank made major changes in credit administration including centralization of loan documentation and loan funding which provided a more efficient and effective control environment; (v) the Bank strengthened credit administration staffing including hiring a senior vice president of credit administration as well as a senior vice president of commercial collateral management; and (vi) the Bank established an internal loan review department in the third quarter of fiscal 2011, which works with external loan reviews to assist management in the early identification of potential problem loans.

Classified assets, though still at an unacceptable level, have decreased from a high at December 31, 2010 of $273.4 million to $228.5 million at June 30, 2011. Classified assets were $191.8 million at June 30, 2010. Classified assets as a percentage of total capital plus the allowance for loan losses was 120.5% at June 30, 2011, 140.0% at December 31, 2010 and 100.9% at June 30, 2010. Management’s goal is to reduce the level of classified assets to total capital plus the allowance for loan losses to an acceptable regulatory level. The Bank expects this will take several quarters to achieve. Non-performing assets (a subset of classified assets) have also decreased from a high of $127.1 million, or 7.3% of the Bank’s assets, at September 30, 2010 to $89.5 million, or 6.6% of the Bank’s assets, at June 30, 2011. Non-performing assets were $93.7 million, or 5.3% of the Bank’s assets, at June 30, 2010. The Bank’s Texas Ratio, defined as non-performing assets divided by the sum of capital plus the allowance for loan losses, has also shown improvement, down from a high of 58.5% at September 30, 2010 to 46.9% at June 30, 2011. The Bank’s Texas Ratio was 44.1% at June 30, 2010.

The loan loss allowance at June 30, 2011 was $44.4 million, or 4.48% of loans held for investment, up from $35.1 million, or 2.96% of loans held for investment at June 30, 2010. The increase in the allowance as a percentage of loans is due to the high level of classified assets. The allowance is expected to remain elevated until the level of classified assets substantially declines. Charge-offs for fiscal 2011 were $42.3 million versus $26.3 million in fiscal 2010 and could remain elevated in fiscal 2012 as management disposes of the classified assets.

With the completion of the $100 million capital raise initiative on July 29, 2011, the Bank expects to have access to additional capital to provide added flexibility to dispose of classified assets as well as substantial support for future earnings opportunities.

Recent Events

On March 20, 2011, we entered into a Funding Agreement with Hilltop and Oak Hill. On July 29, 2011, after receipt of shareholder and regulatory approval, the Company completed the transactions contemplated by the Funding Agreement. This transaction provides for:


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a $100.0 million, five year, unsecured loan with an 8% interest rate from Hilltop and Oak Hill under the terms of a credit agreement;
•

issuance of warrants to each investor allowing such investor to purchase up to 8,695,652 shares of our common stock at an exercise price of $5.75 per share (subject to anti-dilution adjustments), representing approximately 17% of the common stock of our company per warrant (assuming each investor exercises its warrant); and
•

granting the investors certain rights, including certain registration rights, preemptive rights, and the right for each investor to appoint one person to our Board of Directors so long as such investor owns 9.9% or more of all of the outstanding shares of our common stock or securities convertible into at least 9.9% of our outstanding common stock. Mr. Gerald J. Ford and Mr. J. Taylor Crandall were elected as directors of SWS Group by our Board of Directors on July 29, 2011.

We entered into this transaction to ensure that the Bank would maintain adequate capital ratios under the Order and could continue to reduce classified assets in a strategic and efficient manner, as well as to ensure that the broker/dealer business lines would operate without disruption.

Events and Transactions

Several material events and transactions impacted our results of operations in the periods presented. A description of these transactions and the impact on our results of operations is presented below:

Increase in provision for loan losses. The provision for loan loss increased $5.8 million during fiscal 2011 and $31.8 million during fiscal 2010, resulting in an allowance for loan loss of $44.4 million at June 30, 2011 and $35.1 million at June 30, 2010. See discussion in “Overview—Business Environment—Impact of Economic Environment—Bank.”

Sale of 5,000,001 shares of our common stock. On October 16, 2009, we filed a shelf registration statement with the SEC providing for the sale of up to $150.0 million of securities. On December 9, 2009, we closed a public offering of 4,347,827 shares of our common stock at a price of $11.50 per share. On December 16, 2009, the underwriters for the public offering exercised their option to purchase 652,174 additional shares of our common stock to cover over-allotments. We generated net proceeds, after deducting underwriting discounts and commissions, from the offerings of approximately $54.4 million. We invested $47.5 million of the net proceeds as a $20.0 million capital contribution to the Bank and a $27.5 million capital contribution to Southwest Securities. The remaining funds were used for general corporate purposes.

Write-off of $6.3 million for clearing. In the first quarter of fiscal 2010, we recorded a pre-tax loss of $6.3 million as a result of a clearing correspondent’s unauthorized short sale of more than 2 million shares of a stock. The short sale and the subsequent trades to cover the short position resulted in a $6.3 million receivable from the correspondent. We determined that collection of this receivable was doubtful and established an allowance for this receivable. The loss was recorded in other expenses on the consolidated statements of income (loss) and comprehensive income (loss).

NYSE/Archipelago. We owned 23,721 shares of Archipelago Holdings, LLC (“Archipelago”) common stock prior to the merger of Archipelago and the NYSE in March 2006, for which we received 23,721 unrestricted shares of the new entity NYX. As part of the merger, we also surrendered our NYSE seat (carried at a cost of $230,000) in return for $300,000 in cash and 80,177 restricted shares of NYX common stock. In fiscal 2009, we determined that the decline in value of these shares was other than temporary and recorded a $4.3 million realized loss on this investment.

In the first quarter of fiscal 2010, we sold the 103,898 shares of NYX common stock for $2.9 million. SWS recognized a gain of $16,000 on the sale.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

SWS Group, Inc. (together with its subsidiaries, “we,” “us,” “SWS” or the “company”) is engaged in full-service securities brokerage and full-service commercial banking. During the three-months ended September 30, 2011, 84% of our total revenues were generated by our full-service brokerage business and 16% of our revenues were generated by our commercial banking business. While brokerage and banking revenues are dependent upon trading volumes and interest rates, which may fluctuate significantly, a large portion of our expenses remain fixed. Consequently, net operating results can vary significantly from period to period.

Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax and compliance requirements may have a substantial impact on our business and results of operations. We also face substantial competition in each of our lines of business. See Forward-Looking Statements and Risk Factors in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 2, 2011 (the “Fiscal 2011 Form 10-K”).

We operate through four segments grouped primarily by products, services and customer base: clearing, retail, institutional and banking.

Clearing . We provide clearing and execution services for other broker/dealers (predominantly on a fully disclosed basis). Our clientele includes general securities broker/dealers and firms specializing in high volume trading. We currently support a wide range of clearing clients, including discount and full-service brokerage firms, direct access firms, registered investment advisors and institutional firms. In addition to clearing trades, we tailor our services to meet the specific business needs of our clearing clients (“correspondents”) and offer such products and services as recordkeeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of securities.

Revenues in this segment are generated primarily through transaction charges to our correspondent firms for clearing their trades. Revenue is also earned from various fees and other processing charges as well as through net interest earnings on correspondent customer balances.

Retail. We offer retail securities products and services (equities, mutual funds and fixed income products), insurance products and managed accounts through the activities of our employee registered representatives and our independent contractors. As a securities broker, we extend margin credit on a secured basis to our retail customers in order to facilitate securities transactions. This segment generates revenue primarily through commissions charged on securities transactions, fees from managed accounts and the sale of insurance products as well as net interest income from retail customer balances.

Institutional. We serve institutional customers in the areas of securities borrowing and lending, public finance, municipal sales and underwriting, investment banking, fixed income sales and equity trading. Our securities lending business includes borrowing and lending securities for other broker/dealers, lending institutions, and our own clearing and retail operations. Our municipal finance operations assist public bodies in originating, syndicating and distributing securities of municipalities and political subdivisions. Our corporate finance professionals arrange and evaluate mergers and acquisitions, conduct private placements and participate in public offerings of securities with institutional and individual investors, assist clients with raising capital, and provide other consulting and advisory services.

Our fixed income sales and trading group specializes in trading and underwriting U.S. government and government agency bonds, corporate bonds, mortgage-backed, asset-backed and commercial mortgage-backed securities and structured products. The clients of our fixed income group include corporations, insurance companies, banks, mutual funds, money managers and other institutions. Our equity trading department focuses on providing best execution for equity and option orders for clients. We also execute institutional portfolio trades and are a market maker in a limited number of listed securities.

Revenues in the institutional segment are derived from the net interest spread on stock loan transactions, commission and trading income from fixed income and equity products and investment banking fees from corporate and municipal securities transactions.

Banking. We offer traditional banking products and services. We specialize in two primary areas, business banking and mortgage purchase. Our focus in business banking includes small business lending. We originate the majority of our loans internally, and we believe this business model helps us build more valuable relationships with our customers. Our mortgage purchase division purchases participations in newly originated residential loans from various mortgage bankers nationwide. Southwest Securities, FSB (the “Bank”) earns substantially all of its revenues on the spread between the rates charged to customers on loans and the rates paid to depositors. Our banking operations are currently restricted by and subject to the Order to Cease and Desist, Order No. WN-11-003, effective on February 4, 2011 (the “Order”) with the Office of the Comptroller of the Currency (“OCC”).

The “other” category includes SWS Group, Inc. (“SWS Group”), corporate administration and SWS Capital Corporation. SWS Capital Corporation is a dormant entity. SWS Group is a holding company that owns various investments, including common stock of U.S. Home Systems, Inc. (“USHS”).

Loan from Hilltop and Oak Hill

In March 2011, we entered into a Funding Agreement with Hilltop Holdings, Inc. (“Hilltop”) and Oak Hill Capital Partners III, L.P. (“OHCP”) and Oak Hill Capital Management Partners III, L.P. (collectively with OHCP, “Oak Hill”). On July 29, 2011, after receipt of stockholder and regulatory approval, the Company completed the following transactions contemplated by the Funding Agreement:


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a $100.0 million, five year, unsecured loan with an 8% interest rate from Hilltop and Oak Hill under the terms of a credit agreement;


•

issuance of warrants to Hilltop and Oak Hill allowing each to purchase up to 8,695,652 shares of our common stock at an exercise price of $5.75 per share (subject to anti-dilution adjustments), representing approximately 17% of the common stock of our company per warrant (assuming each exercises its warrant in full); and


•

granting Hilltop and Oak Hill certain rights, including certain registration rights, preemptive rights, and the right for each to appoint one person to our Board of Directors so long as each owns 9.9% or more of all of the outstanding shares of our common stock or securities convertible into at least 9.9% of our outstanding common stock. Mr. Gerald J. Ford and Mr. J. Taylor Crandall were elected as directors of SWS Group by our Board of Directors on July 29, 2011.

We entered into this transaction to ensure that the Bank would maintain adequate capital ratios under the Order and could continue to reduce classified assets in a strategic and efficient manner, as well as to ensure that the broker/dealer business lines would operate without disruption. See “ Debt Issued with Stock Purchase Warrants ” in the Notes to the Consolidated Financial Statements contained in this report.

Business Environment

Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services, as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, the value of our customers’ assets under management, the demand for loans and the value of real-estate in our markets.

As of September 30, 2011, equity market indices were flat from a year ago with the Dow Jones Industrial Average (the “DJIA”) up 0.5%, the NASDAQ Composite Index (“NASDAQ”) up 1.4% and the Standards & Poor’s 500 Index (“S&P 500”) down 1.5 %. The DJIA closed at 10,913.38 on September 30, 2011 up from 10,860.26 at September 24, 2010 and down from 11,934.58 at June 24, 2011. The average daily volume on the NYSE increased 3% during the three-months ended September 30, 2011 compared to the same period of our last fiscal year. The Standard and Poor’s downgrade of the United States credit rating on August 5, 2011 and the continuing uncertainty of the economic environment in Europe increased risk and volatility during the three-months ended September 30, 2011.

Economic and regulatory uncertainty created a challenging operating environment for us in the three-months ended September 30, 2011. The national unemployment rate, which was approximately 9% at the end of June 2011, was down from a high of 10% at the end of December 2009, but remains at historically high levels. The FRB reduced the federal funds target rate to 0 - 0.25% in December 2008 and announced in August 2011 that rates were unlikely to increase before mid-2013.

The disruptions and developments in the general economy and the credit markets over the past three years have resulted in a range of actions by U.S. and foreign governments to attempt to bring liquidity and order to the financial markets and to prevent a long recession in the world economy. For more details regarding some of the actions taken by U.S. and foreign governments, see the discussion under the caption Item 1. Business-Regulation contained in the Fiscal 2011 Form 10-K.

While economists believe the recession ended in June 2009, unemployment and tight credit markets continue to create a fragile economic environment, and there is no guarantee that conditions will not worsen again. In addition to the downgrade of the United States’ credit rating for the first time in the history of the ratings, world markets, especially those focused on the European Union and Japan, have been volatile due to debt problems in Europe and the natural disaster in Japan. Texas, which was largely insulated from severe job loss and real estate market deterioration at the start of the recession, has experienced distress in residential and commercial real estate values as well as elevated unemployment since the last quarter of calendar 2010. These factors have had, and will continue to have, a negative impact on our banking and brokerage operations.

Impact of Economic Environment

Brokerage. On the brokerage side of the business, volatility in the credit and mortgage markets, low interest rates and reduced volume in the stock markets continue to have an adverse impact on several aspects of our business, including depressed net interest margins, reduced liquidity and lower securities valuations.

Net Interest Margins

Historically, the profitability of the brokerage business has been dependent upon net interest income. We earn net interest income on the spread between the rates earned and paid on customer and correspondent balances as well as from our securities lending business. With interest rates at historically low levels, the spread we are able to earn is reduced, primarily from the extremely low yields on our assets segregated for regulatory purposes portfolio. Additionally, the spread in our securities lending business has declined. Lastly, because the yields on money market funds have declined significantly, revenue sharing arrangements with our primary money market fund providers have been substantially reduced. We do not expect any significant changes in these dynamics until short-term interest rates rise.

We have taken actions to mitigate the impact of the margin contraction by renegotiating arrangements with our clearing customers, changing the mix of our assets segregated for regulatory purposes and developing new business in our securities lending portfolio. Despite these actions, profits from net interest remain below historical levels.

Liquidity

Dislocation in the credit markets has led to increased liquidity risk. All but $45.0 million of our borrowing arrangements are uncommitted lines of credit and, as such, can be reduced or eliminated at any time by the banks extending the credit. While we have not experienced any reductions in our uncommitted borrowing capacity, in the past, our lenders have taken actions that indicate their concerns regarding liquidity in the marketplace. These actions included reduced advance rates for certain security types, more stringent requirements for collateral eligibility and higher interest rates. Should our lenders or investors take any actions that could negatively impact the terms of our lending arrangements, the cost of conducting our business will increase and our volume of business would be limited.

The volatility in the U.S. stock markets is also impacting our liquidity through increased margin requirements at our clearing houses. These margin requirements are determined through a combination of risk factors including volume of business and volatility in the U.S. stock markets. To the extent we are required to post cash or other collateral to meet these requirements, we will have less borrowing capacity to finance our other businesses.

In July 2011, we borrowed $100.0 million from Hilltop and Oak Hill to provide additional liquidity for the broker/dealer business lines and the Bank, which reduced our liquidity risk.

Valuation of Securities

We trade mortgage, asset-backed securities and other types of fixed income securities on a regular basis. We monitor our trading limits daily to ensure that these securities are maintained at levels we consider to be prudent given current market conditions. We price these securities using a third-party pricing service, and we review the price monthly to ensure reasonable valuation. At September 30, 2011, we held mortgage and asset-backed securities of approximately $47.4 million included in securities owned, at fair value on the Consolidated Statements of Financial Condition.

Investment in Auction Rate Securities

At September 30, 2011, we held $21.7 million of auction rate municipal bonds which represented one security and 17.1% of our municipal portfolio. This security is an investment grade credit, was valued at 95.7% of par as of September 30, 2011 and was yielding less than 1% per year for the period. We currently have the ability to hold this investment until maturity. While we expect the issuer of this bond to refinance its debt when LIBOR interest rates rise, there can be no certainty that this refinancing will occur. We believe valuation of this bond at 95.7% of par at September 30, 2011 reflects an appropriate discount for the current lack of liquidity in this investment.

Our customers also own $575,000 in auction rate bonds as well as approximately $1.1 million in auction rate preferred securities. We did not actively market these securities to our customers or classify them as cash equivalents on our statements to our customers. We do not underwrite auction rate securities or serve as the remarketing agent for any of these securities.

Bank. Management has implemented strategies to address asset quality and the requirements of the Order. Specifically, management has implemented balance sheet reduction strategies by aggressively selling classified assets. The liquidity provided by these actions has been carefully managed to allow reduction in the total balance sheet size while maintaining significant levels of balance sheet liquidity.

The Bank is also diligently working to reduce its exposure in commercial real estate, residential construction and land development loans. As a result of establishing concentration guidelines in fiscal 2011, the Bank has been able to reduce its concentration levels.

While the economic environment remains challenging, the Bank continued to reduce classified assets in the September 2011 quarter. Classified assets were $206.7 million at September 30, 2011, down $21.8 million from $228.5 million at June 30, 2011. Classified assets, as a percentage of total capital plus the allowance for loan losses, was 111.03% at September 30, 2011, 120.5% at June 30, 2011 and 127.1% at September 30, 2010. Non-performing assets (a subset of classified assets) decreased to $78.3 million at September 30, 2011 down from $89.5 million at June 30, 2011. Though we are working diligently to reduce classified assets and improve performance, the volatility of the economic environment remains a significant risk to this progress. Should the economic environment worsen, improvement in classified asset reduction could slow and additional migration of loans to problem status could increase.

The loan loss allowance at September 30, 2011 was $39.7 million, or 4.90% of loans held for investment, excluding purchased mortgage loans held for investment, as compared to $45.4 million, or 4.12% of loans held for investment, at September 30, 2010 and $44.4 million, or 4.99% of loans held for investment, excluding purchased mortgage loans held for investment, at June 30, 2011.

After obtaining the $100.0 million loan from Hilltop and Oak Hill, the Bank now has access to a significant amount of additional capital and is preparing a revised capital plan. We believe that access to this additional capital will provide substantial support for future earnings opportunities as well as provide added flexibility in resolving negatively classified assets. See “ Cease and Desist Order with the Office of the Comptroller of the Currency ” in the Notes to the Consolidated Financial Statements contained in this report.

RESULTS OF OPERATIONS

Consolidated

Net income for the three-months ended September 30, 2011 was $1.7 million as compared to a net loss of $20.7 million for the three-months ended September 24, 2010. The three-month periods ended September 30, 2011 and September 24, 2010 contained 68 and 63 trading days, respectively.

Southwest Securities was custodian for $26.8 billion and $27.8 billion in total customer assets at September 30, 2011 and September 24, 2010, respectively.

CONF CALL

Kathy Kennedy

Good morning, everyone and welcome to the SWS Group quarterly conference call and webcast. This is Kathy Kennedy of the SWS Corporate Staff. We are pleased you could join us today. The quarterly earnings press release can be found on our website at SWST.com or on the Yahoo! Finance website under SWS News. Market professionals on our distribution list should have also received the slides for today's call via email. If you would like to be added to our email list to receive press releases or to be notified of future quarterly calls, please contact us at 214-859-6351.

This conference call is being webcast live on the Internet along with the accompanying slides at SWST.com where it will be archived for the next 30 days. During the question and answer session, the call participants can access the queue to ask questions by pressing *1 on their telephone. Those participating via the internet can ask questions from the link provided on the webcast page or by emailing them to questions@swst.com.

This presentation contains forward-looking statements. Readers are cautioned that any forward-looking statements, including those predicting or forecasting future events or results, which depend on future events for their accuracy and body projections or assumptions or express the intent, belief or current expectations of the Company or management, are not guarantees of future performance and involve risk and uncertainties.

Actual results may differ materially as a result of various factors, some of which are out of our control, including, but not limited to, volume of trading in securities, volatility of security prices and interest rates, liquidity in capital and credit markets, availability of lines of credit, customer margin loan activity, credit worthiness of our correspondents and customers, the ability of the bank's borrowers to meet their contractual obligations, the value of the collateral securing the bank loans, demand for housing, general economic conditions, especially in Texas and New Mexico, changes in the commercial lending and regulatory environment, the ability to meet regulatory capital requirements and other factors discussed in our annual reports on Form 10-K and in our other reports filed with and available from the Securities and Exchange Commission.

This conference also contains references to non-GAAP financial information, which is being presented to provide additional information regarding the Company's operations and should not be used in place of GAAP measures. The Company's press release and today's slides include a reconciliation of these non-GAAP measures with the Company's GAAP results.

At this point, it is a pleasure to introduce Mr. Jim Ross, Chief Executive Officer of SWS. Jim?

Jim Ross

Thank you, Kathy. Good morning, everyone. Let me take this opportunity to introduce our other participants. We have with us this morning Ms. Stacy Hodges, CFO of SWS Group and Mr. John Holt, CEO of Southwest Securities FSB, our bank.

Our agenda for this morning, first, I will touch on some important topics for SWS Group since our last earnings call. John Holt will provide an update on activities at the bank. Stacy Hodges will follow up and provide a detailed review of the numbers for the quarter and I will finish with a discussion of our strategic direction. After that, we will open it up for questions. As Kathy said earlier, star one for those of you on the phone, that is questions@swst.com for people participating on the internet.

This morning, I am going to give you an update on SWS Group. SWS Group is a diverse group of businesses composed of a great brokerage operation, a bank, one that is working to become stronger and more diversified and a holding company with no debt and access to capital markets. This call will focus on what is going well at SWS Group, as well as what is more challenging.

To start, what is going well is the brokerage side of the business. We believe we have a significant opportunity in this business and we are well-positioned in our marketplace. With the challenges experienced by the national firms in the current economic cycle, regional firms have benefited from a good recruiting environment and a chance to enter new business lines. All of our brokerage operations, but particularly the retail and institutional segments, are taking advantage of this opportunity.

The combined scope of our brokerage operations is approximately 78% of first-quarter net revenues. We are pleased to report that each of these segments was profitable in the September quarter. These business lines are operating very well despite the interest rate environment and sluggish economic growth.

Southwest Securities, our primary brokerage subsidiary, ended the quarter with a strong net capital position, over $105 million. It is our plan to operate Southwest Securities at a minimum of $100 million net capital level. The bank, at 22% of net revenue, is facing some challenges on both the regulatory and economic front. Bank management is focused on reducing classified assets, repositioning the balance sheet while maintaining excess capital liquidity.

The Retail segment had a nice quarter, especially considering the summer months are generally a slower time in this segment. The key to growth in this business is the recruiting of representatives that will be a good fit for Southwest Securities. Sometimes our recruiting opportunities lead us to evaluate and then move into new office locations. The December quarter is always a difficult one for recruiting as we look forward, but we are looking forward to starting off a strong new calendar year.

On the Institutional side of the business, we are seeing growth opportunities across those business lines. We are seeing opportunities in this segment as the national firms shed businesses that no longer fit their business model, but are a good fit for regional players. We also have opportunities in this segment to increase the size and depth of our client relationships.

Clearing has been a great business for the firm. It is one that absorbs a lot of fixed costs, contributes to our ability to be competitive in the retail marketplace. We are focused on building scale in this business. We are also analyzing this segment to make sure we have defined the potential clearing markets appropriately.

We own a bank in Texas. It should come as no surprise that financial results from this operation were challenging in the quarter. As Texas was late to the party, the real estate market here is now very challenging and we are playing catch-up in a negative way, but with the markets on the coasts. Because our bank is thrift, we were naturally concentrated in the real estate market and bank management is positively focused on dealing with the results of that concentration today.

First and foremost, we are currently in compliance with the terms of the MOU, memo of understanding, we discussed last quarter. Our capital ratios are above the required minimums and we are making some progress on repositioning the balance sheet.

Our focus in the next few quarters will be dealing with the classified assets in an aggressive manner. John will speak more about our specific strategies later, but it is clearly our biggest challenge over the near term. While the long-term focus on growth at the bank has not changed, the product mix at the bank is likely to be more diversified once we are ready to grow the bank again. This diversity will help us weather uncertain economic times with much less volatility in our earnings.

Net revenues continue to be strong in the first quarter of fiscal 2011 and are in line with last year. Looking at our income numbers eliminating the effect of the loan loss provision produces income numbers also in line with last year. Obviously, we cannot ignore the provision, but the pretax, pre-prevision income of $9.2 million gives some indication of how our businesses are performing outside of the current business issues.

While John will discuss the provision in more detail later in the call, some of the actions we are taking to deal with our classified assets have contributed to the size of the provision in the first quarter. We ended the quarter at a net loss of $0.64 per share and a book value of $11.14 per share.

All of our brokerage segments were profitable for the quarter and generally showed progress from the year-ago quarter. The Retail business was profitable for the second consecutive quarter with net revenues up 12%. Successful recruiting in the independent channel contributed to commission growth in this segment. Our rebranding and reorganization of the West Coast is proceeding as planned. As a final piece to consolidating these operations, we implemented a new compensation plan for our private client group representatives in the quarter. This will streamline operations in the business and simplify recruiting going forward.

While down from last year's first quarter, the Institutional business is still performing very well with a 32% increase in pretax over the June quarter. Taxable fixed income continues to find opportunities to augment their products and produce good results. The municipal business new issue volume was good in the quarter and this unit beat results from both comparable periods. We were pleased to see stock loan spreads improve from the June quarter as this was the first increase in spreads in over a year.

The Clearing segment posted improved results over last year with revenue up 4%. Last year included the $6.3 million correspondent trading loss. The bank results are all the result of credit quality deterioration. We reduced the size of the bank's loan book by $220 million to focus on credit. In addition to the large provision, we recorded about $10 million in expenses associated with REO write-downs, provisions and operating expenses.

That brings us to John Holt who will provide some additional detail regarding the bank's operations. John?

John Holt

Thanks Jim. I would like to provide additional insight into the actions the bank is taking to continue its focus on actively reducing its level of classified assets while repositioning the balance sheet and maintaining excess levels of capital and liquidity.

The bank's primary focus on reducing classified assets includes multiple strategies, which are evaluated on an ongoing basis and include bulk asset dispositions, traditional foreclosure and REO dispositions, short sales, along with other strategic alternatives, such as the transfer of classified assets to a subsidiary of the holding company.

In response to the additional migration and elevated levels of nonperforming and performing classified assets to over $250 million, the bank engaged a consultant to assist with a marketing campaign to auction a pool of classified assets comprised of REO, performing and nonperforming loans. The loans included in the marketing campaign were classified as held-for-sale on the balance sheet, which resulted in an additional charge to reflect the estimated net realizable value for an immediate sale.

Early indications have been favorable as indicative bids are consistent with our targeted prices and we expect closings to occur primarily during the second quarter. Additionally, the bank sold $10.4 million of REO during the quarter with approximately 50% of the sold assets representing single-family homes as the residential REO have been marketable with less holding time relative to the larger balanced commercial real estate and land assets, which require a thorough workout and marketing campaigns. In addition, the bank evaluates on an individual asset-by-asset basis the opportunity for short sales when the sponsors have the financial capability to move a classified asset out of the bank within an appropriate time period.

Although this is not a primary strategy for the disposition of classified assets, the bank will continue to negotiate with qualified sponsors with identified capacity to execute a short sale transaction. Further, the bank is evaluating other strategic alternatives for the disposition of classified assets, which might include the formation of a subsidiary at the holding company level to transfer a pool of classified assets, which primarily have successful characteristics of full repayment, albeit over a longer collection period. The unique structure and capitalization of the firm offers the flexibility to evaluate various strategic alternatives to reducing classified assets at the bank.

The other strategic priority at the bank is focused on repositioning the balance sheet by reducing exposure to certain product types while increasing liquidity and maintaining excess capital. In the slides to come, you will see the bank's progress in reducing its exposure to commercial real estate, land and residential construction during the quarter.

Additionally, the bank has targeted a range of outstanding loan balances for its mortgage purchase department, which is consistent with the balances at quarter-end. By reducing exposure to certain loan types, as well as targeting a lower level of outstanding loan balances and mortgage purchase, the bank has increased its liquidity and risk-based capital levels.

Also, the unique funding model between the brokerage and the bank allows for a fluid sweep of deposits. The bank is evaluating the benefits of implementing a deposit reduction strategy to sweep out excess liquidity, which will further increase the core capital ratio.

We are focused on navigating through the difficulties with our asset quality and are implementing strategies consistent with the goals of reducing classified assets while repositioning the balance sheet and maintaining excess capital and liquidity.

The allowance build of approximately $10.2 million was attributable to the continued migration and growth of classified assets, along with the application of a distressed historical loss factor applied to allowance methodology, which increased the allowance to over 4% of loans held for investment.

The bank's net interest margin at 4.65% remained very strong despite the increased liquidity, which is held in low yielding, short-term securities and exhibits the core earnings power of the strategic relationship between the brokerage and the bank. This slide shows the major balance sheet relationships and highlights the strategic advantage in relationship the bank has with the broker-dealer as approximately 87% of the bank's deposits are provided by the brokerage clients through the bank insured deposit product.

SWS contributed $23 million of capital to the bank during the quarter, which helped facilitate the held-for-sale assets. Our core deposit position remains strong and provides an efficient funding source for the bank and a competitive FDIC-insured cash product for our brokerage clients.

The growth in nonperforming assets for the quarter of $33 million was primarily attributable to legacy assets, which were concentrated in a large condo project located in the North Texas area, along with continued deterioration in real estate land and commercial real estate. The increased staffing and allocated resources to the special assets department is working diligently to resolve, on an asset-by-asset basis, these loans and assets. The larger balance commercial real estate and particularly the land and residential lots have experienced longer marketing periods as the real estate market remains a challenging environment.

We have also begun providing an overview of the performing classified loans, which, although performing, have defined weaknesses, which impact the potential performance of the loan. Classified loans require more stringent monitoring and portfolio management requirements, which include the involvement of the special assets department, as well as other lending personnel across the bank.

Going to bank loans by type, we changed this slide this quarter to show the change in ending balances instead of average balances to reflect the bank's focus on repositioning the balance sheet. During the quarter, the bank was able to decrease loans by $220 million, primarily through reductions in mortgage purchase, commercial real estate in both residential construction and land. Also, our origination focus has been on small and middle market businesses and can be seen in both the quarter and annualized growth in this book and speaks for the lending focus going forward.

This slide deals with MOU with the OTS. The bank entered into an informal memorandum of understanding with the OTS in July of 2010. The primary items include maintaining a minimum core capital ratio of 8% and a minimum risk-based capital ratio of 12%, the preparation of a classified asset reduction plan and a loan review from a third-party consulting firm.

In addition, there were certain lending restrictions in the area of commercial real estate, construction and land, which the bank had already curtailed before the agreement. The bank has been operating with an 8% core capital and 12% risk-based capital position for several quarters and as of the September quarter, the bank was in compliance with all capital requirements, as well as other requirements or provisions in the agreement. While you cannot predict with certainty the continued asset quality deterioration and negative earnings could result in a formal enforcement action by the OTS. Overall, the bank's management staff is focused on the reduction in classified assets and returning the bank to profitability.

At this point, I will turn it over to Stacy Hodges, SWS Group Chief Financial Officer.

Stacy Hodges

Thanks John. Good morning everyone. This morning, I will provide some additional detail on the consolidated revenues and expenses of the firm, as well as a review of a few operating metrics. Looking first at revenues, overall, our operating revenues in the quarter were up 12% from the sequential quarter and were down 6.5% from last year. Comparisons to last year are difficult as the September and December quarters of fiscal 2010 were record quarters for the taxable fixed-income unit. The September quarter for fixed income was a good one, just not a record one.

Clearing revenue in the quarter was down from both comparable periods as ticket volumes were off from both June and last year. In the quarter, we processed 567,000 trades, down from 599,000 in the same quarter a year ago. Revenue per ticket was $429 in the first quarter compared to $439 in the first quarter of last year.

Commission revenue was up 3% from the June quarter on higher taxable and municipal commissions. When compared to last year, commissions were down 9%. The decline in taxable fixed income commissions was partially offset by an increase in commissions in our independent contractor business.

Investment banking fees were up compared to both June and September from increased UIT underwriting and from fees from corporate finance transactions. Net gains on principal transactions increased 34% from June due to substantially improved results in the municipal trading area. The 18% decline from last September was driven by taxable fixed income.

Other revenue was impacted by a $1 million gain on the redemption of some municipal securities at the bank, along with a $1.1 million increase in the value of investments in our deferred compensation plan when compared to the June quarter. Increased fees from the sale of insurance products in the Retail segment caused the variance from September of last year. We were pleased to see some recovery in the net interest income in the brokerage business. Stock loan spreads improved over the June quarter by 17 basis points, but were down versus September of last year by 10 basis points.

Looking at our operating expenses, all of the expense categories are in line with or down from the comparable periods except for compensation and other expenses. The change in compensation is related to variable comp and is driven by changes in the related revenue line. The increases in the other category relate to elevated expenses at the bank. We recorded $9.6 million in expenses for REO write-downs, REO maintenance and consulting fees in the quarter. In June, these expenses totaled $3.1 million and in September of last year, they were only $2.2 million.

As we are able to reduce the classified assets on the bank's books, we should be able to realize significant reductions in these related expenses. Other expenses in September of last year also included a $6.3 million clearing loss.

This last slide provides some key metrics for the brokerage business. Client assets are growing with Retail assets at $13.3 billion as of the end of September. Our independent advisor count is up to 313, while productivity is improving in all of retail.

Margin balances are up a modest 2% from June, but are up 31% versus September of last year. Stock loan balances are improving, up 17% from June and 9.2% from September of last year.

I will now turn it back to Jim.

Jim Ross

In closing, as I mentioned at the first of the call, we have a diverse business model that includes a strong broker-dealer with profitable business units run by an experienced management team. The net capital at Southwest Securities remains strong, over $100 million. The level we view as a non-negotiable component of our business model. We have plans in place to continue to grow this profitable business as opportunities arise. Our bank is working hard every day to reduce classified assets, reposition its balance sheet and to maintain excess capital and liquidity for future operations.

These two business units together provide opportunities that are beneficial to both businesses and make us a stronger whole. As I take a look at the map of our current locations, what I hope you see, as we see, is opportunity. The management team, the Board, and personally, I want to tell you there is nowhere I would rather be than Southwest Securities, SWS Group looking at that map.

With that, I want to take the time to thank our shareholders, to thank our employees and to thank the management team. I know that we have challenges ahead of us, but we cannot lose focus on the opportunities. Let us open it up.

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