SWS (SWS) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 0-19483

SWS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2040825
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1201 Elm Street, Suite 3500, Dallas, Texas	75270
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (214) 859-1800

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

As of May 4, 2007, there were 27,589,746 shares of the registrant’s common stock, $.10 par value, outstanding.

SWS GROUP, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition March 30, 2007(unaudited) and June 30, 2006	1
Consolidated Statements of Income and Comprehensive Income For the three and nine-months ended March 30, 2007 and March 31, 2006(unaudited)	2
Consolidated Statements of Cash Flows For the nine-months ended March 30, 2007 and March 31, 2006(unaudited)	4
Notes to Consolidated Financial Statements(unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3. Defaults Upon Senior Securities	50
Item 4. Submission of Matters to a Vote of Security Holders	50
Item 5. Other Information	50
Item 6. Exhibits	51
SIGNATURES	52
EXHIBIT INDEX	53

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

March 30, 2007 and June 30, 2006

(In thousands, except par values and share amounts)

	March
	(unaudited)			June
Assets
Cash	$	121,583		$	41,674
Assets segregated for regulatory purposes		360,735			345,028
Receivable from brokers, dealers and clearing organizations		2,781,092			2,821,512
Receivable from clients, net of allowances		291,062			373,245
Loans held for sale		123,000			124,874
Loans, net		737,338			642,541
Securities owned, at market value		161,680			159,004
Securities purchased under agreements to resell		43,127			63,636
Goodwill		7,552			7,552
Marketable equity securities available for sale		4,732			3,593
Other assets		82,114			75,192
	$	4,714,015		$	4,657,851
Liabilities and Stockholders’ Equity
Short-term borrowings	$	—		$	30,500
Payable to brokers, dealers and clearing organizations		2,716,880			2,775,564
Payable to clients		615,465			617,697
Deposits		841,984			705,894
Securities sold under agreements to repurchase		10,753			7,719
Securities sold, not yet purchased, at market value		62,457			96,909
Drafts payable		26,433			29,144
Advances from Federal Home Loan Bank		55,513			47,094
Other liabilities		55,098			57,217
		4,384,583			4,367,738
Minority interest in consolidated subsidiaries		911			641
Commitments and contingencies
Stockholders’ equity:
Preferred stock of $1.00 par value. Authorized 100,000 shares; none issued		—			—
Common stock of $.10 par value. Authorized 60,000,000 shares; issued 28,148,976 and outstanding 27,438,613 shares at March 30, 2007; issued 27,424,611 and outstanding 26,591,891 shares at June 30, 2006		2,814			1,828
Additional paid-in capital		274,666			255,331
Retained earnings		55,201			37,968
Accumulated other comprehensive income – unrealized holding gain net of tax of $1,042 at March 30, 2007 and $650 at June 30, 2006		1,987			1,225
Deferred compensation, net		1,674			1,610
Treasury stock (710,363 shares at March 30, 2007 and 832,720 shares at June 30, 2006, at cost)		(7,821	)		(8,490	)
Total stockholders’ equity		328,521			289,472
	$	4,714,015		$	4,657,851

See accompanying Notes to Consolidated Financial Statements.

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SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the three and nine-months ended March 30, 2007 and March 31, 2006

(In thousands, except per share and share amounts)

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	March 30, 2007			March 31, 2006			March 30, 2007			March 31, 2006
Revenues:
Net revenues from clearing operations	$	2,986		$	3,742		$	9,113		$	10,908
Commissions		21,963			19,357			65,262			65,483
Interest		73,376			54,806			218,158			157,766
Investment banking, advisory and administrative fees		7,822			5,773			26,247			21,881
Net gains on principal transactions		2,613			7,803			16,466			16,647
Other		5,729			5,714			20,498			18,285
Total revenue		114,489			97,195			355,744			290,970
Interest expense		50,985			33,935			147,592			98,268
Net revenues		63,504			63,260			208,152			192,702
Non-Interest Expenses:
Commissions and other employee compensation		38,856			34,474			120,537			109,766
Occupancy, equipment and computer service costs		6,268			6,163			17,097			17,730
Communications		2,218			2,273			6,507			6,925
Floor brokerage and clearing organization charges		415			343			2,691			2,436
Advertising and promotional		849			931			1,908			2,257
Other		3,645			6,104			14,112			17,757
Total non-interest expenses		52,251			50,288			162,852			156,871
Income from continuing operations before income tax expense		11,253			12,972			45,300			35,831
Income tax expense		3,663			4,524			14,722			12,632
Income from continuing operations		7,590			8,448			30,578			23,199
Discontinued operations:
Income from discontinued operations		45			20,775			131			22,576
Income tax expense		(14	)		(6,227	)		(41	)		(6,826	)
Minority interest		(4	)		(2,974	)		(13	)		(3,065	)
Income from discontinued operations		27			11,574			77			12,685
Income before cumulative effect of change in accounting principles		7,617			20,022			30,655			35,884
Cumulative effect of a change in accounting principle, net of tax of $40.		—			—			—			75
Net income		7,617			20,022			30,655			35,959
Net income recognized in other comprehensive income		331			678			762			1,138
Comprehensive income	$	7,948		$	20,700		$	31,417		$	37,097

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	For the Three Months Ended				For the Nine Months Ended
	March 30, 2007		March 31, 2006		March 30, 2007		March 31, 2006
Earnings per share—basic
Income from continuing operations	$	0.28	$	0.32	$	1.14	$	0.89
Income from discontinued operations		—		0.44		—		0.49
Cumulative effect of change in accounting principles, net of tax		—		—		—		—
Net income	$	0.28	$	0.76	$	1.14	$	1.38
Weighted average shares outstanding – basic		27,248,436		26,201,053		26,856,992		26,073,195
Earnings per share – diluted
Income from continuing operations	$	0.28	$	0.32	$	1.13	$	0.88
Income from discontinued operations		—		0.44		—		0.48
Cumulative effect of change in accounting principles, net of tax		—		—		—		0.01
Net income	$	0.28	$	0.76	$	1.13	$	1.37
Weighted average shares outstanding – diluted		27,586,700		26,488,406		27,166,758		26,307,160

See accompanying Notes to Consolidated Financial Statements

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SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine-months ended March 30, 2007 and March 31, 2006

(In thousands)

(Unaudited)

	For the Nine Months Ended
	March 30, 2007			March 31, 2006
Cash flows from operating activities:
Net income	$	30,655		$	35,959
Income from discontinued operations		(77	)		(12,685	)
Cumulative effect of a change in accounting principle		—			(75	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,612			4,122
Amortization/accretion of discounts/premiums on loans purchased		(1,073	)		(592	)
Provision for doubtful accounts		1,429			2,530
Deferred income tax benefit		(1,550	)		(539	)
Deferred compensation		230			1,590
Gain on sale of loans		(703	)		(780	)
Loss on sale of fixed assets		48			648
Gain on sale of real estate		(49	)		(65	)
Equity in losses (earnings) of unconsolidated ventures		817			(1,603	)
Dividend received on investment in Federal Home Loan Bank stock		(121	)		(94	)
Windfall tax benefits		(225	)		(30	)
Net change in minority interest in consolidated subsidiaries		255			43
Cash flow from operating activities of discontinued operations		225			(1,294	)
Change in operating assets and liabilities:
(Increase) decrease in assets segregated for regulatory purposes		(15,707	)		2,526
Net change in broker, dealer and clearing organization accounts		(18,264	)		(91	)
Net change in client accounts		79,231			(1,241	)
Net change in loans held for sale		1,874			52,031
Increase in securities owned		(2,676	)		(32,923	)
Decrease (increase) in securities purchased under agreements to resell		20,509			(9,080	)
Increase in other assets		(461	)		(1,979	)
(Decrease) increase in drafts payable		(2,711	)		1,039
(Decrease) increase in securities sold, not yet purchased		(34,452	)		12,487
(Decrease) increase in other liabilities		(1,164	)		5,684
Net cash provided by operating activities		59,652			55,588
Cash flows from investing activities:
Purchase of fixed assets		(4,411	)		(1,891	)
Purchase of real estate		(284	)		(161	)
Proceeds from the sale of fixed assets		5			93
Proceeds from the sale of real estate		1,419			1,507
Loan originations and purchases		(529,544	)		(479,914	)
Loan repayments		434,118			368,047
Cash paid for purchase of correspondent clients of Ameritrade		(2,382	)		—
Cash paid for purchase of O’Connor & Co. Securities, net of cash acquired		—			(86	)
Cash paid on investments		—			(500	)
Cash received on investments		—			1,630
Cash flow from investing activities of discontinued operations		—			104,814
Proceeds from the sale of Federal Home Loan Bank stock		—			3,877
Purchases of Federal Home Loan Bank stock		(7	)		(487	)
Net cash used in investing activities		(101,086	)		(3,071	)
Cash flows from financing activities:
Payments on short-term borrowings		(1,391,270	)		(1,733,100	)
Cash proceeds from short-term borrowings		1,360,770			1,715,800
Increase in deposits		136,090			88,712

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	For the Nine Months Ended
	March 30, 2007			March 31, 2006
Advances from the Federal Home Loan Bank		32,002			3,597,033
Payments on advances from Federal Home Loan Bank		(23,583	)		(3,643,583	)
Payment of cash dividends on common stock – SWS Group		(6,199	)		(5,449	)
Windfall tax benefits		225			30
Cash proceeds on securities sold under agreements to repurchase		3,034			23,267
Net proceeds from exercise of stock options		10,997			3,422
Cash flow from financing activities of discontinued operations		__			(50,878	)
Proceeds related to the Deferred Compensation Plan		239			213
Purchase of treasury stock		(962	)		(477	)
Net cash provided by (used in) financing activities		121,343			(5,010	)
Net increase in cash		79,909			47,507
Cash at beginning of period		41,674			23,045
Cash at end of period	$	121,583		$	70,552
Supplemental schedule of non-cash investing and financing activities:
Granting of Restricted Stock	$	917		$	2,074
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest from continuing operations	$	144,805		$	98,551
Income Taxes	$	15,225		$	6,983

See accompanying Notes to Consolidated Financial Statements.

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SWS Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Three and Nine-Months Ended March 30, 2007 and March 31, 2006

(Unaudited)

GENERAL AND BASIS OF PRESENTATION

The interim consolidated financial statements as of March 30, 2007, and for the three and nine-month periods ended March 30, 2007 and March 31, 2006, are unaudited; however, in the opinion of management, these interim statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes as of and for the year ended June 30, 2006 filed on Form 10-K. Amounts included for June 30, 2006 are derived from the audited consolidated financial statements as filed on Form 10-K. All significant inter-company balances and transactions have been eliminated.

On November 30, 2006, the Company’s Board of Directors declared a 3-for-2 stock split effected in the form of a 50% stock dividend. The additional shares were distributed on January 2, 2007, to shareholders of record on December 15, 2006. The distribution was reflected in the second quarter financial statements. All references in the condensed consolidated financial statements to amounts per share and the number of shares outstanding have been restated to give retroactive effect to the stock split.

The consolidated financial statements include the accounts of SWS Group, Inc. (“SWS Group”) and its consolidated subsidiaries listed below (collectively with SWS Group, “SWS” or the “Company”):

Southwest Securities, Inc.	“Southwest Securities”
SWS Financial Services, Inc.	“SWS Financial”
SWS Capital Corporation	“SWS Capital”
Southwest Investment Advisors, Inc.	“Southwest Advisors”
Southwest Financial Insurance Agency, Inc.
Southwest Insurance Agency, Inc.
Southwest Insurance Agency of Alabama, Inc.	collectively, “SWS Insurance”
SWS Banc Holdings, Inc.	“SWS Banc”
Southwest Securities, FSB*	“Bank”
SWS A, LLC (90%)**	“SWS A”
SWS B, LTD (88.2%)**	“SWS B”
FSB Development, LLC	“FSB Development”

* Effective January 1, 2006, the Bank changed its name from Southwest Securities Bank to Southwest Securities, FSB.

** On March 1, 2006, FSB Financial, LTD sold substantially all of its assets. See discussion in “-Discontinued Operations.” Also, effective March 1, 2006, FSBF, LLC changed its name to SWS A, LLC and FSB Financial, LTD changed its name to SWS B, LTD.

Southwest Securities is a New York Stock Exchange (“NYSE”) member broker/dealer and SWS Financial is a National Association of Securities Dealers (“NASD”) member broker/dealer. Each is registered pursuant to the Securities Exchange Act of 1934 (“Exchange Act”). Southwest Securities and SWS Financial are also registered with the Securities and Exchange Commission (“SEC”) as registered investment advisors under the Investment Advisors Act of 1940.

SWS Capital administered the Local Government Investment Cooperative (“LOGIC”) asset management service for cities, counties, schools and other local governments across Texas through

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September 4, 2005. SWS Capital did not renew its contract as General Manager of LOGIC upon the expiration of the original agreement on September 4, 2005. At March 30, 2007, SWS Capital had no assets under management.

Southwest Advisors is a dormant entity.

SWS Insurance holds insurance agency licenses in 46 states for the purpose of facilitating the sale of insurance and annuities for customers of Southwest Securities and its correspondents. We retain no risk of insurance related to the insurance and annuity products SWS Insurance sells.

The Bank is a federally chartered savings association regulated by the Office of Thrift Supervision. SWS Banc was incorporated as a wholly owned subsidiary of SWS Group and became the sole shareholder of the Bank in 2004. SWS A is a 2% general partner of SWS B.

On March 1, 2006, SWS B (formerly known as FSB Financial, LTD) a purchaser, originator and servicer of non-prime automobile loans, sold substantially all of its assets for $35,870,000 in cash and the retirement of $116,868,000 of related debt. See “-Discontinued Operations.”

FSB Development develops single-family residential lots.

Consolidated Financial Statements. The quarterly consolidated financial statements of SWS for the third fiscal quarter are prepared as of the close of business on the last Friday of March. The Bank’s quarterly financial statements are prepared as of March 31, 2007. Any individually material transactions are reviewed and recorded in the appropriate quarterly period. All significant inter-company balances and transactions have been eliminated.

Discontinued Operations.In March 2006, the Bank sold the assets of its subsidiary, FSB Financial, for $35,870,000 in cash and the retirement of $116,868,000 of related debt. Pursuant to the sale $3,587,000 was placed in escrow until June 30, 2007 to secure the Bank’s indemnifications; until then, the Bank does not have access to the funds. This amount plus interest of $171,000 is presented in Other Assets in the accompanying Consolidated Statements of Financial Condition. A gain of $20,453,000 was recognized on the sale of which $2,965,000 was paid to the minority interest holder.

The results of FSB Financial, summarized below, have been classified as discontinued operations for all periods presented, (in thousands).

	Three Months Ended March 31,				Nine Months Ended March 31,
	2007		2006		2007		2006
Net revenues	$	46	$	25,553	$	133	$	35,312
Net income before taxes		45		20,775		131		22,576
Income tax expense		14		6,227		41		6,826
Minority interest		4		2,974		13		3,065
Income from discontinued operations		27		11,574		77		12,685

Amortization Expense. The Company has recorded a customer relationship intangible which is amortized over a five year period at a rate based on the estimated future economic benefit of the customer relationships. See additional discussion in “-Intangible Assets”

EMPLOYEE BENEFITS

Deferred Compensation Plan. The Company purchases company-owned life insurance as a component of the company’s deferred compensation plan. The policies are valued at the cash surrender values as of the balance sheet date and are included in other assets in the Consolidated Statement of Financial Condition. During the second quarter of fiscal 2007, the Company received proceeds of $2,276,000 from company owned life insurance which were recorded in other revenue in the Consolidated Statements of Income and Comprehensive Income.

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Stock Option Plans. At March 30, 2007, SWS had one active stock option plan, the SWS Group, Inc. 1997 Stock Option Plan (the “1997 Plan”) and one expired plan, the SWS Group, Inc. Stock Option Plan (the “1996 Plan”) under which exerciseable options are still outstanding. All options outstanding under the 1996 Plan, which expired on February 1, 2006, may still be exercised until their contracted expiration date occurs. The 1997 Plan reserves shares of SWS Group’s common stock for eligible employees or potential employees of SWS Group or its subsidiaries. Officers and directors are not eligible to receive options under the 1997 Plan. Options granted under the 1996 and 1997 Plans have a maximum ten-year term, and the vesting period is determined on an individual basis by the Compensation Committee of the Board of Directors. However, options granted to non-employee directors under the 1996 Plan are fully vested six-months after grant and have a five-year term.

SWS accounts for the plans under the recognition and measurement principles of the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.”

The Company has substantially eliminated the use of options as a compensation tool and currently grants restricted stock to reward directors, management and employees. Consequently, no stock options were granted during the nine-months ended March 30, 2007.

Restricted Stock Plan. On November 12, 2003, the stockholders of SWS Group approved the adoption of the SWS Group, Inc. 2003 Restricted Stock Plan (“Restricted Stock Plan”). The Restricted Stock Plan allows for awards of up to 750,000 shares of SWS Group’s common stock to SWS’ directors, officers and employees. No more than 300,000 of the authorized shares may be newly issued shares of common stock. The Restricted Stock Plan terminates on August 21, 2013. The vesting period is determined on an individualized basis by the Compensation Committee of the Board of Directors. In general, restricted stock granted to employees under the Restricted Stock Plan is fully vested after three years, and restricted stock granted to non-employee directors vests on the one year anniversary of the date of grant.

At various times in fiscal 2006, the Board of Directors approved grants to various officers and employees totaling 183,298 shares with a weighted average market value of $12.26 per share. In fiscal 2007, the Board of Directors approved grants to various officers and employees totaling 91,140 shares with a weighted average market value of $16.53 per share. As a result of these grants, SWS recorded deferred compensation in Additional Paid in Capital of approximately $2,074,000 and $1,364,000, respectively. For the three and nine-months ended March 30, 2007, SWS has recognized compensation expense of approximately $335,000 and $1,082,000, respectively. For the three and nine-months ended March 31, 2006, SWS has recognized compensation expense of approximately $332,000 and $763,000, respectively.

At March 30, 2007, the total number of unvested shares outstanding under the Restricted Stock Plan was 237,542 and the total number of securities available for future grants was 393,213.

On June 25, 2005, SWS adopted the provisions of SFAS No. 123R in relation to the Restricted Stock Plan. This adoption resulted in income of $75,000 recorded as a cumulative effect of a change in accounting principle, net of tax. The adoption affected SWS’ accounting for forfeitures and dividends. The adoption required SWS to estimate and record future forfeitures on previously granted restricted stock awards.

CASH

The Company considers cash to include cash on hand and in depository accounts.

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INVESTMENTS

Comprehensive Software Systems, Inc. (“CSS”). In 1993, SWS became a part owner of CSS, a software development company formed to develop a new brokerage front and back office system. By fiscal 2002, SWS held a 25.08% ownership interest in CSS, and implemented the equity method of accounting prescribed by APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

SWS completed its installation of the system in September 2002. In June 2002, SWS determined that the investment in CSS and its related goodwill were fully impaired based on an analysis of the projected cash flow from the investment.

To facilitate the continued enhancement of the CSS system, SWS entered into an agreement in December 2002, amended in June 2003, to loan CSS $3,500,000 under a note bearing interest at 6% per annum. This note was ultimately forgiven in January 2005. In December 2003, SWS agreed to an additional equity investment of $2,900,000, resulting in the purchase of 5.8 million shares of CSS common stock. The purchases were made in equal quarterly installments (two purchases were made in fiscal years 2004 and 2005 totaling approximately $1,443,000 in each fiscal year) and ultimately resulted in increasing SWS’ position in CSS to 30.22%. These investments were made to insure the continued operation of CSS while needed enhancements to the system were built.

SWS did not participate in CSS’ equity offering in January 2005. SWS has developed many of the functions needed to run the CSS system in-house and is no longer dependent on CSS for enhancements. Subsequent to the equity offering in January 2005, SWS owned 13.7% of CSS. SWS has not made any additional investments in CSS since January 2005.

In April 2006, SWS signed an agreement with CSS to pay a $1,700,000 maintenance fee to CSS if a specific member of the consortium of broker/dealers successfully converted to the CSS system by December 31, 2006. CSS made written demand of $1,700,000 under this agreement in January 2007. SWS disputed the payment.

SWS and CSS have reached a tentative agreement on this dispute pursuant to which SWS will enter into a new maintenance contract which will provide for total maintenance payments of $3,000,000 for calendar year 2007 with an additional two years of maintenance at $2,500,000 per year. SWS expects to receive assistance in converting to an updated version of the CSS software and a new broker front end platform in exchange for the increased maintenance payments. The final agreement is dependent on documentation.

SWS’ share of the undistributed losses of CSS for the three and nine-months ended March 30, 2007 were $209,000 and $623,000, respectively. From inception of the investment to date, SWS’ pro-rata percentage of losses of $9,170,000 was greater than the $6,386,000 loaned and invested by $2,784,000. As a result, there is no recorded equity investment from CSS at March 30, 2007.

Summarized financial information of CSS is as follows (in thousands):

	March 31, 2007			June 30, 2006
Total assets	$	4,323		$	4,313
Total liabilities		6,995			5,639
Shareholders’ deficit		(2,672	)		(1,326	)

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	Three Months Ended
	March 31, 2007			March 31, 2006
Total revenues	$	1,012		$	1,174
Net loss		(1,525	)		(1,606	)
	Nine Months Ended
	March 31, 2007			March 31, 2006
Total revenues	$	3,004		$	3,843
Net loss		(4,547	)		(4,694	)

Other Equity Investments. SWS has three other investment vehicles that are accounted for under the equity method. One is a limited partnership venture capital fund to which SWS has committed $5,000,000. As of March 30, 2007, SWS had contributed $4,000,000 of this commitment. During the three and nine-months ended March 30, 2007, SWS recorded losses of $201,000 and $729,000, respectively, related to this investment. In comparison during the three and nine-months ended March 31, 2006, SWS recorded income of $172,000 and $1,710,000, respectively, related to the investment. In December 2005, SWS received a distribution of $1,547,000.

In fiscal 2007, the Bank committed $3,000,000 to a limited partnership equity fund as a cost effective way of meeting its obligations under the Community Reinvestment Act. As of March 31, 2007, the Bank has invested $900,000 of its commitment. During the three and nine-months ended March 31, 2007, the Bank recorded losses of $88,000 related to this investment.

SWS’ remaining equity investment sold its assets to a third party in December 2005, with SWS receiving a distribution of $83,000 for its portion of the sale proceeds. As a result, SWS recorded total losses for the nine-months ended March 31, 2006 of $106,600 on this investment.

Variable Interest Entity. SWS consolidates investments which meet the definition of a “Variable Interest Entity” as defined in Financial Interpretation (“FIN”) No. 46R. In March 2005, FSB Development contributed $475,000 for a limited partnership interest in a land development limited partnership. The Bank has established a $2,400,000 line of credit with this limited partnership. If drawn this line bears a rate of prime plus 1%. At both March 31, 2007 and June 30, 2006, $1,606,000 was outstanding on this line of credit. The line allows the limited partnership to purchase the land to be used in the development and was amended in the March 2006 quarter to be payable on September 10, 2007. This entity is consolidated at the Bank level through FSB Development. As of March 31, 2007 and June 30, 2006, the Bank consolidated $2,405,000 and $2,124,000, respectively, in assets for this investment. For the three and nine-months ended March 31, 2007, the Bank consolidated $37,000 and $112,000 in net losses, respectively, for this investment, which is eliminated in consolidation. For the three and nine-months ended March 31, 2006, the Bank consolidated $29,000 and $86,000 in net losses for this investment, which is eliminated in consolidation.

ASSETS SEGREGATED FOR REGULATORY PURPOSES

At March 30, 2007, SWS had U.S. Treasury securities with a market value of approximately $148,582,000, reverse repurchase agreements of approximately $28,690,000 and related cash and accrued interest of approximately $180,163,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 pursuant to the 1934 Act. These reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately $28,835,000. At March 30, 2007, SWS had $3,300,000 in special reserve bank accounts for the Proprietary Accounts of Introducing Brokers (“PAIB”).

At June 30, 2006, SWS had U.S. Treasury securities with a market value of approximately $137,395,000, reverse repurchase agreements of approximately $25,000,000 and related cash and accrued interest of approximately $182,633,000 segregated in special reserve bank accounts for the

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exclusive benefit of customers under Rule 15c3-3 pursuant to the 1934 Act. These reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately $25,332,000. SWS had no positions in special reserve bank accounts for the PAIB at June 30, 2006.

MARKETABLE EQUITY SECURITIES

SWS owns shares of common stock in U.S. Home Systems, Inc. (“USHS”) and Westwood Holdings Group, Inc., (“Westwood”) that are classified as marketable equity securities available for sale. Consequently, the unrealized holding gains (losses), net of tax, are recorded as a separate component of stockholders’ equity on the consolidated statements of financial condition.

At March 30, 2007 and June 30, 2006, SWS held 357,154 shares of USHS with a cost basis of $1,576,000. The market value of the USHS shares was $4,554,000 at March 30, 2007 and $3,432,000 at June 30, 2006. There were no sales of USHS stock in the three and nine-month periods ended March 30, 2007 and March 31, 2006.

At March 30, 2007 and June 30, 2006, SWS held 7,757 and 8,556 shares of Westwood, respectively, within the deferred compensation plan with a cost basis of $127,000 and $143,000, respectively. The market value of the Westwood shares was $178,000 at March 30, 2007 and $161,000 at June 30, 2006. The reduction in shares results from distributions from the deferred compensation plan.

RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At March 30, 2007 and June 30, 2006, SWS had receivable from and payable to brokers, dealers and clearing organizations related to the following (in thousands):

	March		June
Receivable
Securities failed to deliver	$	50,718	$	33,123
Securities borrowed		2,676,642		2,728,679
Correspondent broker/dealers		16,587		34,601
Clearing organizations		12,104		9,730
Other		25,041		15,379
	$	2,781,092	$	2,821,512
Payable
Securities failed to receive	$	37,601	$	43,723
Securities loaned		2,647,942		2,701,368
Correspondent broker/dealers		18,011		18,464
Other		13,326		12,009
	$	2,716,880	$	2,775,564

SWS participates in the securities borrowing and lending business by borrowing and lending securities other than those of its clients. SWS obtains or releases collateral as prices of the underlying securities fluctuate. At March 30, 2007, SWS had collateral of $2,676,634,000 under securities lending agreements, of which SWS had repledged $2,627,589,000. SWS had collateral of $2,728,266,000 under securities lending agreements, of which SWS had repledged $2,653,504,000 at June 30, 2006.

LOANS HELD FOR SALE

Loans held for sale are carried at the lower of aggregate cost or market value. Loans held for sale consisted of first mortgage loans and home improvement loans which had been purchased or originated but had not yet been sold in the secondary market.

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LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES

Loans receivable at March 31, 2007 and June 30, 2006 are summarized as follows (in thousands):

	March			June
First mortgage loans (principally conventional):
Real estate	$	421,801		$	379,895
Construction		239,623			200,523
		661,424			580,418
Consumer and other loans:
Commercial		72,907			55,634
Other		6,137			6,753
		79,044			62,387
Factored receivables		5,238			8,445
		745,706			651,250
Unearned income		(2,871	)		(3,662	)
Allowance for probable loan losses		(5,497	)		(5,047	)
	$	737,338		$	642,541

Impairment of loans with a recorded investment of approximately $2,693,000 and $682,000 at March 31, 2007 and June 30, 2006, respectively, has been recognized in conformity with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan—an Amendment of SFAS No. 5 and SFAS No. 15,” as amended by SFAS No. 118“Accounting for Creditors for Impairment of a Loan-Income Recognition and Disclosures-an amendment of SFAS No. 114”. No specific allowance for loan losses is recorded if the impaired loans are adequately collateralized. The total allowance for loan losses related to these loans was approximately $104,000 and $38,000 at March 31, 2007 and 2006, respectively. No material amount of interest income on impaired loans was recognized for cash payments received in the third quarter of fiscal 2007 and fiscal 2006.

An analysis of the allowance for probable loan losses for the three and nine-months ended March 31, 2007 and 2006 is as follows (in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Balance at beginning of period	$	5,497		$	7,151		$	5,047		$	7,450
Continuing operations:
Provision for loan losses		(63	)		350			652			1,515
Net recoveries (charge-offs)		63			(105	)		(202	)		(263	)
		—			245			450			1,252
Discontinued operations:
Provision for loan losses		—			2,486			—			5,878
Net charge-offs		—			(1,084	)		—			(5,782	)
Sale of FSB Financial		—			(3,731	)		—			(3,731	)
		—			(2,329	)		—			(3,635	)
Balance at end of period	$	5,497		$	5,067		$	5,497		$	5,067

The reserve to loan ratio as of March 31, 2007 and 2006 was 0.74% and 0.68%, respectively.

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SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

At March 30, 2007 and June 30, 2006, SWS held securities owned and securities sold, not yet purchased as follows (in thousands):

	March		June
Securities owned
Corporate equity securities	$	19,596	$	14,676
Municipal obligations		38,016		30,971
U.S. Government and Government agency obligations		22,686		46,168
Corporate obligations		53,816		54,076
Money Market Funds		18,268		—
Other		9,298		13,113
	$	161,680	$	159,004
Securities sold, not yet purchased
Corporate equity securities	$	3,257	$	1,715
Municipal obligations		—		57
U.S. Government and Government agency obligations		49,548		76,132
Corporate obligations		8,959		18,220
Money Market Funds		—		—
Other		693		785
	$	62,457	$	96,909

During the quarter, certain of the above securities were pledged to secure short-term borrowings and as security deposits at clearing organizations for SWS’ clearing business. Securities pledged as security deposits at clearing organizations were $4,454,000 and $5,044,000 at March 30, 2007 and June 30, 2006, respectively. Additionally, at March 30, 2007 and June 30, 2006, SWS had pledged firm securities valued at $4,991,000 and $2,025,000, respectively, in conjunction with securities lending activities.

Southwest Securities has been a member of the NYSE since 1972 owning one seat carried at a cost of $230,000. Upon the merger of the NYSE and Archipelago Holdings, L.L.C. (“Archipelago”) in March 2006, Southwest Securities surrendered its seat for the right to receive from the new entity, NYSE Euronext, Inc. (“NYSE Euro”), $300,000 in cash and 80,177 restricted shares of NYSE Euro common stock (NYX), par value $0.01 per share.

Prior to the merger, SWS also had an investment of 23,721 shares of Archipelago common stock recorded at its cost of zero. Upon the merger, each outstanding share of Archipelago common stock was converted into one share of NYX stock. At March 30, 2007, the market value of these shares was $2,218,000.

In lieu of a seat, Southwest Securities has secured an annual trading license. This license allows Southwest Securities continued physical and electronic access to the NYSE trading facilities following the close of the merger.

The 80,177 NYX shares received from the merger were restricted shares. These restrictions prohibit any “direct or indirect assignment, sale, exchange, transfer, tender or other disposition of NYX stock.” The restrictions on the shares lapse based on a three year vesting schedule with restrictions lapsing on one-third of the restricted shares annually. There are no restrictions on the 23,721 shares from our investment in Archipelago upon conversion to NYX stock. The restriction on 26,727 shares of stock were lifted as of March 7, 2007.

The remaining 53,450 restricted NYX shares have been discounted at an overall rate of 12.48% of the market price of NYX stock at March 30, 2007. The discount rate was determined based on the length of time of the restrictions, expected rate of return for this type of investment and the relative amount of restricted NYX stock versus fully tradable stock.

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As of March 30, 2007, our total investment, 103,898 of NYX shares, was valued at $8,791,000.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Transactions involving purchases of securities under agreement to resell (“reverse repurchase agreements”) are accounted for as collateralized financings except where SWS does not have an agreement to sell the same or substantially the same securities before maturity at a fixed or determinable price. At March 30, 2007, SWS held reverse repurchase agreements totaling $43,127,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $43,033,000. At June 30, 2006, SWS held reverse repurchase agreements totaling $63,636,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $63,266,000.

GOODWILL

SWS accounts for goodwill under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SWS performed its annual assessment of the fair value of goodwill during fiscal 2006 in June 2006, as required by SFAS No. 142 and based on the results of the valuation, SWS’ goodwill balance was not impaired. There have been no events in the last nine-months that would trigger an interim assessment on the fair value of goodwill.

SWS has two reporting segments with goodwill, clearing and institutional brokerage, both part of Southwest Securities. There were no changes in the carrying value of goodwill during the nine-month period ended March 30, 2007.

INTANGIBLE ASSETS

On March 22, 2006, the Company entered into an agreement with TD Ameritrade Holding Corporation, (“Ameritrade”) to transfer 15 correspondent clients to the Company. This transaction closed in July 2006, with 12 of the 15 correspondents agreeing to transfer to the Company’s clearing platform. The purchase price was based on the estimated value of the transferred correspondents. One half of the purchase price, $2.4 million, was paid upon closing with the remainder to be paid on the one year anniversary of the closing date. Ameritrade will receive 100 percent of the remaining amount if the transferred correspondents meet agreed upon ticket volumes. If these volumes are not met, the second payment will be pro-rated by the ticket volumes incurred compared to the agreed upon ticket volume. The maximum purchase price is approximately $5.8 million. As a result of this transaction, the Company has recorded a customer relationship intangible of $4.8 million, which is the Company’s estimate of the total amount to be paid. The intangible asset is amortized over a five year period at a rate based on the estimated future economic benefit of the customer relationships. SWS has recognized approximately $603,000 of amortization expense for the nine-months ended March 30, 2007. The intangible is included in Other Assets on the Consolidated Statement of Financial Condition.

SHORT-TERM BORROWINGS

Southwest Securities has credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers’ margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. These arrangements can be terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears interest at rates indexed to the federal funds rate. At March 30, 2007, there were no amounts outstanding under these secured arrangements. At June 30, 2006, the amount outstanding under these secured arrangements was $30,500,000, which was collateralized by securities held for firm accounts valued at $68,089,000.

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SWS has unsecured letters of credit, aggregating $2,250,000 at both March 30, 2007 and June 30, 2005, pledged to support its open positions with securities clearing organizations. The unsecured letters of credit bear a 1% commitment fee and are renewable semi-annually.

At both March 30, 2007 and June 30, 2006, SWS had an additional unsecured letter of credit issued for a sub-lease of space previously occupied by Mydiscountbroker.com, Inc., a subsidiary of SWS which was dissolved in July 2004, in the amount of $571,000 and $714,000, respectively. The letter of credit bears a 1% commitment fee and is renewable annually during the term of the sublease.

In addition to the broker loan lines, SWS has a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding on the line and under the unsecured letters of credit at the time of borrowing. At March 30, 2007 and June 30, 2006, the total amount available for borrowings was $17,179,000 and $17,036,000, respectively. There were no amounts outstanding on this line other than $2,821,000 and $2,964,000, under unsecured letters of credit at both March 30, 2007 and June 30, 2006, respectively.

At March 30, 2007 and June 30, 2006, SWS had an irrevocable letter of credit agreement aggregating $48,000,000 and $53,000,000 respectively, pledged to support its open options positions with an options clearing organization. The letter of credit bears interest at the brokers’ call rate, if drawn, and is renewable semi-annually. The letter of credit is fully collateralized by marketable securities held in client and non-client margin accounts with a value of $66,296,000 and $81,303,000 at March 30, 2007 and June 30, 2006, respectively.

In addition to using customer securities to collateralize bank loans, SWS also loans client securities as collateral in conjunction with SWS’ securities lending activities. At March 30, 2007, approximately $374,349,000 of client securities under customer margin loans was available to be pledged, of which SWS has pledged $19,486,000 under securities loan agreements. At June 30, 2006, approximately $479,956,000 of client securities under customer margin loans was available to be pledged, of which SWS had pledged $47,049,000 under securities loan agreements.

DEPOSITS

Deposits at March 31, 2007 and June 30, 2006 are summarized as follows (dollars in thousands):

	March				June
	Amount		Percent		Amount		Percent
Noninterest bearing demand accounts	$	45,498	5.4	%	$	46,942	6.7	%
Interest bearing demand accounts		136,608	16.2			79,198	11.2
Savings accounts		552,563	65.6			468,767	66.4
Limited access money market accounts		28,342	3.4			26,092	3.7
Certificates of deposit, less than $100,000		53,572	6.4			59,304	8.4
Certificates of deposit, $100,000 and greater		25,401	3.0			25,591	3.6
	$	841,984	100.0	%	$	705,894	100.0	%

The weighted average interest rate on deposits was approximately 4.12% at March 31, 2007 and 3.67% at June 30, 2006.

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At March 31, 2007, scheduled maturities of certificates of deposit were as follows (in thousands):

	Fiscal 2007		Fiscal 2008		Fiscal 2009		Fiscal 2010		Thereafter		Total
Certificates of deposit, less than $100,000	$	32,704	$	13,467	$	3,135	$	2,803	$	1,463	$	53,572
Certificates of deposit, $100,000 and greater		13,553		7,013		2,304		2,175		356		25,401
	$	46,257	$	20,480	$	5,439	$	4,978	$	1,819	$	78,973

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at March 30, 2007 and June 30, 2006 were $10,753,000 and $7,719,000, respectively.

ADVANCES FROM THE FEDERAL HOME LOAN BANK (“FHLB”)

At March 31, 2007 and June 30, 2006, advances from the FHLB were due as follows (in thousands):

	March		June
Maturity:
Due within one year	$	544	$	9,753
Due within two years		708		—
Due within five years		14,445		12,544
Due within seven years		2,267		4,421
Due within ten years		6,999		6,657
Due within twenty years		30,550		13,719
	$	55,513	$	47,094

Pursuant to collateral agreements, the advances from the FHLB, with interest rates ranging from 3% to 8%, are collateralized by approximately $274,000,000 of collateral value (as defined) in qualifying loans at March 31, 2007 (calculated at December 31, 2006). At June 30, 2006 (calculated at March 31, 2006), advances with interest rates from 2% to 8% were collateralized by approximately $192,000,000 of collateral value in qualifying loans.

BANK BORROWINGS

In June 2005, the Bank entered into an agreement with an unaffiliated bank for a $20,000,000 unsecured federal funds line of credit. The line bore interest at a rate equal to the federal funds rate plus 0.25%. In the third quarter ended March 31, 2006, the agreement was amended to increase the available credit to $30,000,000. Beginning in the second quarter of fiscal 2007, the interest rate charged on any borrowed funds is at a rate quoted by the unaffiliated bank and accepted by the Bank. The unaffiliated bank is not obligated by this agreement to sell federal funds to the Bank. The agreement is being used by the Bank to support short-term liquidity needs. At March 31, 2007 and June 30, 2006, there were no amounts outstanding on this line of credit.

REGULATORY CAPITAL REQUIREMENTS

Brokerage. The broker/dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule (the “Rule”), which requires the maintenance of minimum net capital. Southwest Securities has elected

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to use the alternative method, permitted by the Rule, which requires that it maintain minimum net capital, as defined in Rule 15c3-1 pursuant to the 1934 Act, equal to the greater of $1,000,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 pursuant to the 1934 Act. At March 30, 2007, Southwest Securities had net capital of $150,511,000, or approximately 35.57% of aggregate debit balances, which was $142,048,000 in excess of its minimum net capital requirement of $8,463,000 at that date. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. At March 30, 2007, Southwest Securities had net capital of $129,354,000 in excess of 5% of aggregate debit items.

SWS Financial follows the basic (aggregate indebtedness) method under Rule 15c3-1, which requires the maintenance of minimum net capital of $250,000. At March 30, 2007, the net capital and excess net capital of SWS Financial were $779,000 and $529,000, respectively.

Banking. The Bank is subject to various regulatory capital requirements administered by federal agencies. Quantitative measures, established by regulation to ensure capital adequacy, require maintaining minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in 12 CFR 565 and 12 CFR 567) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2007 and June 30, 2006, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2007 and June 30, 2006, the Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios.

The Bank’s actual capital amounts and ratios are presented in the following tables (dollars in thousands):

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2007:
Total capital to risk weighted assets	$	87,675	10.4	%	$	67,472	8.0	%	$	84,340	10.0	%
Tier I capital to risk weighted assets		82,178	9.7			33,736	4.0			50,604	6.0
Tier I capital to adjusted total assets		82,178	8.3			39,392	4.0			49,240	5.0
June 30, 2006:
Total capital to risk weighted assets	$	75,574	10.6	%	$	56,831	8.0	%	$	71,039	10.0	%
Tier I capital to risk weighted assets		70,526	9.9			28,416	4.0			42,624	6.0
Tier I capital to adjusted total assets		70,526	8.5			33,114	4.0			41,393	5.0

EARNINGS PER SHARE

A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows for the three and nine-months ended March 30, 2007 and March 31, 2006 (in thousands, except share and per share amounts):

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	Three Months Ended				Nine Months Ended
	March 30, 2007		March 31, 2006		March 30, 2007		March 31, 2006
Income from continuing operations	$	7,590	$	8,448	$	30,578	$	23,199
Income from discontinued operations		27		11,574		77		12,685
Cumulative effect of a change in accounting principles		—		—		—		75
Net income	$	7,617	$	20,022	$	30,655	$	35,959
Weighted average shares outstanding – basic		27,248,436		26,201,053		26,856,992		26,073,195
Effect of dilutive securities:
Assumed exercise of stock options		238,547		211,035		228,323		167,808
Restricted stock		99,717		76,318		81,443		66,157
Weighted average shares outstanding – diluted		27,586,700		26,488,406		27,166,758		26,307,160
Earnings per share – basic
Income from continuing operations	$	0.28	$	0.32	$	1.14	$	0.89
Income from discontinued operations		—		0.44		—		0.49
Cumulative effect of a change in accounting principles		—		—		—		—
Net income	$	0.28	$	0.76	$	1.14	$	1.38
Earnings per share – diluted
Income from continuing operations	$	0.28	$	0.32	$	1.13	$	0.88
Income from discontinued operations		—		0.44		—		0.48
Cumulative effect of a change in accounting principles		—		—		—		0.01
Net income	$	0.28	$	0.76	$	1.13	$	1.37

At March 30, 2007 and March 31, 2006, there were approximately 687,000 and 1.6 million options outstanding under the two stock option plans, respectively. See “-Employee Benefits.” As of March 30, 2007 there were no anti-dilutive options outstanding. As of March 31, 2006, approximately 27,702 outstanding options were anti-dilutive and therefore were not included in the calculation of weighted average shares outstanding-dilutive.

REPURCHASE OF TREASURY STOCK

Periodically, we repurchase our common stock under a plan approved by our Board of Directors. Currently, we have authorization, which will expire in June 30, 2008, to repurchase up to 500,000 shares. No shares were repurchased by SWS under this program for the nine-months ended March 30, 2007. In October 2005, 46,635 shares were repurchased at a cost of $478,000, or $10.24 per share, in accordance with the repurchase plan.

Additionally, the trustee under SWS’ deferred compensation plan periodically purchases stock in the open market in accordance with the terms of the plan. This stock is classified as treasury stock in the consolidated financial statements, but participates in future dividends declared by SWS. The plan purchased 28,773 shares in the three months ended March 30, 2007 at a cost of approximately $730,000 or $25.36 per share. The plan purchased 44,333 shares in the nine months ended March 30, 2007 at a cost of approximately $962,000 or $21.69 per share. 14,345 shares were distributed pursuant to the plan in the nine-month period ended March 30, 2007. The plan did not purchase any shares in the three and nine-month periods ended March 31, 2006. 9,476 and 10,392 shares were sold or distributed pursuant to the plan in the nine-month period ended March 31, 2006.

During the first half of fiscal 2007, one-third of the shares granted under the restricted stock plan on August 18, 2004, August 25, 2005, November 11, 2003 and November 25, 2005 vested. Upon vesting, a portion of the grantees chose to sell a portion of their vested shares to cover the tax liabilities arising from the vesting. As a result, 13,581 shares were repurchased with a market value of approximately $239,000 or $17.60 per share.

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On January 20, 2006, in conjunction with the sale of the Institutional Sales business, the Board of Directors approved the immediate vesting of the 5,840 unvested restricted shares held by the employees affected by the sale. The fair value of the vested shares was $84,000. Upon vesting, a portion of the grantees chose to sell a portion of their vested shares to cover the tax liabilities arising from the vesting. As a result, 1,977 shares were repurchased with a market value of $29,000 or $14.43 per share.

SEGMENT REPORTING

SWS operates the following four business segments:

• Clearing:We provide clearing and execution services (generally on a fully disclosed basis) for general securities broker/dealers, for bank affiliated firms and firms specializing in high volume trading.

• Retail Brokerage:The retail brokerage segment includes retail securities products and services (equities, mutual funds and fixed income products), insurance products and managed accounts and encompasses the activities of our employee registered representatives and our independent contractors who are under contract with SWS Financial.

• Institutional Brokerage:The institutional brokerage segment serves institutional customers in securities lending, investment banking and public finance, fixed income sales and trading, proprietary trading and agency execution services.

• Banking:The Bank offers traditional banking products and services and focuses on several sectors of the residential housing market, including interim construction and short-term funding for mortgage bankers.

Clearing and institutional brokerage services are offered exclusively through Southwest Securities. The Bank and its subsidiaries comprise the bank segment. Retail brokerage services are offered through Southwest Securities (the Private Client Group and the Managed Advisors Accounts department), the insurance subsidiaries and through SWS Financial (which contracts with independent representatives for the administration of their securities business).

Our segments are managed separately based on types of products and services offered and their related client bases. The segments are consistent with how we manage our resources and assess our performance, based primarily on income before income taxes and discontinued operations. Our business segment information is prepared using the following methodologies:

• the financial results for each segment are determined using the same policies as those described in Note 1, “Significant Accounting Policies” contained in our Annual Report on form 10-K for the fiscal year ended June 30, 2006;

• segment financial information includes the allocation of interest based on each segment’s earned interest spreads;

• information system and operation expenses are allocated based on each segment’s usage primarily determined by trading volumes;

• shared securities execution facilities expenses are allocated to the segments based on production levels;

• money market fee revenue is allocated based on each segment’s average balances; and

• clearing charges are allocated based on clearing levels from each segment.

Intersegment balances are eliminated upon consolidation and have been applied to the appropriate segment. Also, SWS reports net interest revenue (expense) by segment as management relies primarily on net interest revenue in assessing a segment’s performance.

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The “other” category includes SWS Group, Corporate Administration, SWS Capital and Capital Markets, which includes the financial results of SWS’ Institutional Sales & Research departments. Certain assets of this business were sold in January 2006 and as a result, the financial results of this department are included in the analysis for three and nine-month periods ending March 31, 2006. SWS Group is a holding company that owns various investments, including USHS and NYX common stock.

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The following tables provide additional information regarding our segmentation for the three and nine-month periods ended March 30, 2007 and March 31, 2006:

UNAUDITED QUARTERLY FINANCIAL INFORMATION

(in thousands)	Clearing			Retail Brokerage		Institutional Brokerage		Banking		Other			Consolidated SWS Group, Inc.
Three months ended March 30, 2007
Operating revenue	$	5,643		$	18,000	$	17,167	$	524	$	(221	)	$	41,113
Net intersegment revenues		(240	)		249		220		1,435		(1,664	)		—
Net interest revenue		3,895			1,800		4,957		11,741		(2	)		22,391
Net revenues		9,538			19,800		22,124		12,265		(223	)		63,504
Operating expenses		4,719			16,792		15,912		6,538		8,290			52,251
Depreciation and amortization		248			149		110		156		532			1,195
Income (loss) from continuing operations before taxes		4,819			3,008		6,212		5,727		(8,513	)		11,253
Income from discontinued operations		—			—		—		27		—			27
Three months ended March 31, 2006
Operating revenue	$	6,029		$	15,896	$	12,502	$	558	$	7,404		$	42,389
Net intersegment revenues		(259	)		268		89		1,124		(1,222	)		—
Net interest revenue		3,260			1,739		4,969		10,381		522			20,871
Net revenues		9,289			17,635		17,471		10,939		7,926			63,260
Operating expenses		5,294			15,257		13,591		6,682		9,464			50,288
Depreciation and amortization		24			125		130		192		854			1,325
Income (loss) from continuing operations before taxes		3,995			2,378		3,880		4,257		(1,538	)		12,972
Income from discontinued operations		—			—		—		11,574		—			11,574
Nine months ended March 30, 2007
Operating revenue	$	16,868		$	51,891	$	61,335	$	1,884	$	5,608		$	137,586
Net intersegment revenues		(677	)		714		762		4,148		(4,947	)		—
Net interest revenue		11,594			5,154		16,795		35,676		1,347			70,566
Net revenues		28,462			57,045		78,130		37,560		6,955			208,152
Operating expenses		14,014			47,480		53,698		18,864		28,796			162,852
Depreciation and amortization		653			416		341		493		1,709			3,612
Income (loss) from continuing operations before taxes		14,448			9,565		24,432		18,696		(21,841	)		45,300
Income from discontinued operations		—			—		—		77		—			77
Assets(*)		480,685			203,847		2,878,488		987,599		25,898			4,576,517
Nine months ended March 31, 2006
Operating revenue	$	17,767		$	47,172	$	52,240	$	1,970	$	14,055		$	133,204
Net intersegment revenues		(751	)		782		398		3,245		(3,674	)		—
Net interest revenue		10,045			4,876		12,152		30,695		1,730			59,498
Net revenues		27,812			52,048		64,392		32,665		15,785			192,702
Operating expenses		15,741			45,352		46,903		18,445		30,430			156,871
Depreciation and amortization		73			449		395		594		2,611			4,122
Income (loss) from continuing operations before taxes		12,071			6,696		17,489		14,220		(14,645	)		35,831
Income from discontinued operations		—			—		—		12,685		—			12,685
Assets(*)		466,908			229,765		2,761,656		823,827		23,303			4,305,459

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^(*) Assets are reconciled to total assets as presented in the March 30, 2007 and March 31, 2006 Consolidated Statement of Financial Condition as follows:

	March 30, 2007			March 31, 2006
Amount as presented above	$	4,576,517		$	4,305,459
Reconciling items:
Unallocated assets:
Cash		23,057			8,278
Receivables from brokers, dealers and clearing organizations		76,135			86,071
Receivable from clients, net of allowances		23,670			33,665
Other assets		15,173			15,534
Unallocated eliminations		(537	)		(439	)
Total Assets	$	4,714,015		$	4,448,568

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COMMITMENTS, CONTINGENCIES and GUARANTEES

Commitments and Contingencies.

Litigation. In the general course of our brokerage business and the business of clearing for other brokerage firms, SWS Group and/or our subsidiaries have been named as defendants in various lawsuits and arbitration proceedings. These claims allege violation of federal and state securities laws. The Bank is also involved in certain claims and legal actions arising in the ordinary course of business. Management believes that resolution of these claims will not result in any material adverse effect on SWS’ consolidated financial position, results of operations or cash flows.

Venture Capital Funds.SWS has committed $5,000,000 to a limited partnership venture capital fund. As of March 30, 2007, SWS had contributed $4,000,000 of its commitment. The Bank has committed $3,000,000 to a limited partnership equity fund. As of March 30, 2007, the Bank has invested $900,000 of its commitment.

Underwriting. As an underwriter of both corporate and municipal securities, SWS faces the risk that securities which it has committed to purchase cannot 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. Total open underwritings at March 30, 2007 were $8,547,000. All open underwritings are generally scheduled to be settled within the next 60 days and are expected to have no material effect on the consolidated financial statements.

Guarantees.The Bank has stand-by letters of credit primarily issued for assigned notes and real estate. The maximum potential amount of future payments the Bank could be required to make under the letters of credit is $1,482,000. The recourse provisions of the letters of credit allow the amount of the letters of credit to become a part of the fully collateralized loans with total repayment. The collateral on these letters of credit consist of assigned notes, real estate, equipment, accounts receivable or furniture and fixtures.

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

SWS is a member of an exchange and multiple clearinghouses. Under the membership agreements, members are generally required to guarantee the performance of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. To mitigate these performance risks, the exchange and clearinghouses often require members to post collateral. SWS’ maximum potential liability under these arrangements cannot be quantified. However, the potential for SWS to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the consolidated financial statements for these arrangements.

ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (“FASB”) has recently issued the following SFAS and FASB interpretations, which are applicable to SWS:

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EITF 06-05,“Accounting for Purchases of Life Insurance—Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin No. 85-4.The EITF provides guidance on the recording of the value of company owned life insurance and appropriate disclosure in the financial statements. The EIFT is effective for fiscal years beginning after December 15, 2006, our fiscal 2008. SWS is assessing the impact of this interpretation on its financial statements and processes.

SFAS No. 159,“The Fair Value Option of Financial Assets and Financial Liabilities.”In February 2007, The FASB issued standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of FASB No. 159 are elective; however, the amendment to FASB No. 115,Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by FASB 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. The standard is effective for fiscal years beginning after November 15, 2007, our fiscal 2009. SWS is assessing the impact of this interpretation on its financial statements and processes.

SFAS No. 157,“Fair Value Measurement.”In September 2006, FASB issued this standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The standard is effective for fiscal years beginning after November 15, 2007, our fiscal 2009. SWS is assessing the impact of this interpretation on its financial statements and processes.

SFAS No. 156,“Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.”In March 2006, FASB issued this standard which amends SFAS 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires an entity to recognize a servicing asset or servicing liability, initially measured at fair value, each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. The Bank, and thus SWS Group, will implement this standard July 1, 2007. The Bank has determined the impact of this SFAS on the financial statements to be immaterial.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109.” In July 2006, the FASB issued this interpretation with respect to all uncertain positions for taxes accounted for under FASB Statement 109,“Accounting for Income Taxes.” The interpretation addresses the recognition, measurement, accrual of interest and penalties, balance sheet classification and disclosure of any uncertain tax positions. This interpretation is effective for SWS beginning in fiscal 2008. SWS is assessing the impact of this interpretation on its financial statements and processes.

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

OVERVIEW

SWS Group, Inc. (“we,” “us,” “SWS” or the “Company”) is engaged in full-service securities brokerage and full-service commercial banking. 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 that may have a substantial impact on our business

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and results of operations. We also face substantial competition in each of our lines of business. See “-Forward-Looking Statements” and “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 13, 2006.

We operate through four segments grouped primarily by products and services: Clearing, Retail Brokerage, Institutional Brokerage and Banking.

Clearing. We provide clearing and execution services (generally on a fully disclosed basis) for general securities broker/dealers, for bank affiliated firms and firms specializing in high volume trading. 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. The retail brokerage segment includes retail securities products and services (equities, mutual funds and fixed income products), insurance products and managed accounts and encompasses the activities of our employee registered representatives and our independent contractors. This segment generates revenue primarily through commissions charged on securities transaction, fees from managed accounts and the sale of insurance products as well as net interest income from retail customer balances.

Institutional. The institutional brokerage segment serves institutional customers in securities lending, investment banking and public finance, fixed income sales and trading, proprietary trading and agency execution services. Revenues in this segment are derived from the net interest spread on stock loan transactions, commission and trading income from fixed income and equity products to institutional customers and investment banking fees from corporate and municipal securities transactions.

Banking. The Bank offers traditional banking products and services and focuses on several sectors of the residential housing market, including interim construction and short-term funding for mortgage bankers. The bank earns substantially all of its income on the spread between the rates charged to customers on loans and the rates paid to depositors.

The “other” category includes SWS Group, Corporate Administration, SWS Capital and Capital Markets, which includes the financial results of SWS’ Institutional Sales & Research departments. Certain assets of this business were sold in January 2006 and as a result, the financial results of this department are included in the analysis for three and nine-month periods ending March 31, 2006. SWS Group is a holding company that owns various investments, including USHS and NYX common stock.

Net interest income from the clearing, retail brokerage and institutional brokerage segments is dependent upon the level of customer and stock loan balances as well as the spread between the rates we earn on those assets compared with the cost of funds. Net interest is the primary source of income from the Bank and represents the amount by which interest and fees generated by earning assets exceed the cost of funds, primarily interest paid to the Bank’s depositors on interest-bearing accounts.

We currently have significant growth agendas in three aspects of our business: we seek to grow our clearing business by expanding our correspondent base, our retail brokerage business by increasing our distribution capabilities and our Bank by adding experienced bankers.

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Business Environment

Financial market conditions improved during fiscal 2007. Short-term interest rates increased 50 basis points since March 2006 but have been unchanged since June 30, 2006. The Federal Reserve Board’s federal funds rate was 5.25% during the third quarter of fiscal 2007 and 4.75% for that same period in fiscal 2006. The Dow Jones Industrial Average increased 10.8% from the end of the fiscal 2006 to the third quarter of fiscal 2007 while the Standard & Poor’s 500 Index and the NASDAQ Composite Index rose 11.9% and 11.5%, respectively, for the same time periods. Average daily volume on the New York Stock Exchange rose 11.2% for fiscal 2007. National rates for a 30 year mortgage decreased 4 basis points from the third quarter of fiscal 2006 to the third quarter of fiscal 2007, from 6.20% to 6.16%.

Our brokerage businesses are positively impacted by active securities markets, positive directional movements in key equity indices, steady interest rates and a normalized yield curve. Our banking business is dependent on relatively low mortgage rates and a healthy North Texas housing market.

Events and Transactions

Several material events and transactions impacted the results of operations in the periods presented. A description of the facts and circumstances surrounding these transactions and the impact on our results are discussed below.

3-for-2 Stock Split.On November 30, 2006, the Company’s Board of Directors declared a 3-for-2 stock split effected in the form of a 50% stock dividend. The additional shares were distributed on January 2, 2007, to shareholders of record on December 15, 2006. All references in the condensed consolidated financial statements to amounts per share and the number of shares outstanding have been restated to give retroactive effect to the stock split.

Payments to the Deferred Compensation Plan.We purchase company-owned life insurance as a component of the company’s deferred compensation plan. The policies are valued at the cash surrender values as of the balance sheet date and are included in other assets in the Consolidated Statement of Financial Condition. During the second quarter of fiscal 2007, we received proceeds of $2,276,000 from company owned life insurance which were recorded in other revenue in the Consolidated Statements of Income and Comprehensive Income.

TD Ameritrade Transaction. On March 22, 2006, the Company entered into an agreement with TD Ameritrade Holding Corporation, (“Ameritrade”) to transfer 15 correspondent clients to the Company. This transaction closed in July 2006, with 12 of the 15 correspondents agreeing to transfer to our clearing platform. As an inducement to transfer, we generally provided substantial clearing fee discounts for a transition period. As a result of this transaction, we have recorded a customer relationship intangible of $4,761,000, which is being amortized over a five year period at a rate based on the future economic benefit of the customer relationships. As a result, we recognized approximately $232,000 and $603,000 of amortization expense for the three and nine-months ended March 30, 2007, respectively. See additional discussion in “-Intangible Assets” in the Notes to the Consolidated Financial Statements contained in this Report.

Discontinued operations/FSB Financial, LTD (“FSB Financial”).In March 2006, the Bank sold the assets of its subsidiary, FSB Financial, for $35,870,000 in cash and the retirement of $116,868,000 of related debt. Pursuant to the sale, 10% of the cash purchase price, or $3,587,000, was placed in escrow until June 30, 2007 to secure the Bank’s indemnifications; until then, the Bank does not have access to these funds. This amount plus interest of $171,000 is presented in Other Assets in the accompanying Consolidated Statement of Financial Condition. The results of FSB Financial are classified as discontinued operations for all periods presented.

NYSE/Archipelago.SWS owned 23,721 shares of Archipelago Holdings, LLC (“Archipelago”) stock prior to the merger of Archipelago and the NYSE in March 2006. Upon the merger, each share of our Archipelago stock was converted into one share of the new entity’s, NYSE Euronext, Inc., common stock (“NYX”). Also, as part of the

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merger, Southwest Securities surrendered its one NYSE seat (carried at a cost of $230,000) in return for $300,000 in cash and 80,177 restricted shares of the new entity. The gain on this transaction was $5,200,000. As of March 7, 2007, one-third of the 80,177 shares, 26,727 shares, are no longer restricted. For the three-months ended March 30, 2007, we recorded a loss of $375,000 on all 103,898 shares we own. For the nine-months ended March 30, 2007, we recorded a gain of $2,747,000 on these shares.

Investment in Comprehensive Software Systems, Inc. (“CSS”).In 1993, SWS became a part owner of CSS, a software development company formed to develop a new brokerage front and back office system. Our ownership in CSS increased to 25.08% in fiscal 2002, and we implemented the equity method of accounting. Subsequent to an equity offering by CSS in January 2005, we owned 13.7% of CSS.

To facilitate the continued enhancement of the CSS system, we invested an aggregate of $6,386,000 is CSS all of which had been written off by March 30, 2007.

Our pro-rata share of CSS’ losses for the three and nine-month periods ended March 30, 2007 were $209,000 and $623,000, respectively. For the three and nine-months periods ended March 31, 2006, our pro-rata share of CSS’ losses was $220,000 and $643,000, respectively. From inception of the investment to date, our pro-rata percentage of losses of $9,170,000 was greater than the $6,386,000 loaned and invested by $2,784,000.

In April 2006, SWS signed an agreement with CSS to pay a $1,700,000 maintenance fee to CSS if a specific member of the consortium of broker/dealers successfully converted to the CSS system by December 31, 2006. CSS made written demand of $1,700,000 under this agreement in January 2007. SWS disputed the payment.

SWS and CSS have reached a tentative agreement of this dispute pursuant to which SWS will enter into a new maintenance contract which calls for total maintenance payments of $3,000,000 for calendar year 2007 with an additional two years of maintenance at $2,500,000 per year. SWS expects to receive assistance in converting to an updated version of the CSS software and a new broker front end platform in exchange for the increased maintenance payments. The final agreement is dependent on documentation. See additional discussion in “-Investment” in the Notes to the Consolidated Financial Statements contained in this Report.

RESULTS OF OPERATIONS

THREE-MONTH ANALYSIS

Consolidated

Net income from continuing operations for the three month period ended March 30, 2007 was $7,590,000, representing a decrease of $858,000 over net income from continuing operations for the comparable three month period ended March 31, 2006. Net income includes income of $11,574,000 from discontinued operations due to the sale of FSB Financial for the three-month period ending March 31, 2006. The three month periods ended March 30, 2007 and March 31, 2006 contained 61 and 62 trading days, respectively.

The following is a summary of increases (decreases) in categories of net revenues and operating expenses for the three month period ended March 30, 2007 compared to the three month period ended March 31, 2006 (dollars in thousands):

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	Three Months Ended
	Amount			%
Net revenues:
Net revenues from clearing operations	$	(756	)	(20	)%
Commissions		2,606		13
Net interest		1,520		7
Investment banking, advisory and administrative fees		2,049		35
Net gains on principal transactions		(5,190	)	(67	)
Other		15		—
		244		—
Operating expenses:
Commissions and other employee compensation	$	4,382		13	%
Occupancy, equipment and computer service costs		105		2
Communications		(55	)	(2	)
Floor brokerage and clearing organization charges		72		21
Advertising and promotional		(82	)	(9	)
Other		(2,459	)	(40	)
		1,963		4
Pretax income	$	(1,719	)	(13	)%

Net revenues increased for the third quarter of fiscal 2007 by $244,000. The largest components of the increase were in commissions, net interest, and investment banking, advisory and administrative fees. The increase in commissions is primarily due to increases in business for both the retail brokerage and the institutional brokerage segments. The increase in net interest revenue is primarily due to an increase at the Bank in average loan balances over the prior fiscal year. The increase in investment banking, advisory and administrative fees are due to an increase in public and corporate finance fees. These increases are offset by a decrease in net gains on principal transactions due to the gain of $5,200,000 realized in the third quarter of fiscal 2006 upon the merger of NYSE and Archipelago into NYX.

Operating expenses increased $1,963,000 for the three-months ended March 30, 2007 as compared to the same period of fiscal 2006. The largest increase was in commissions and other employee compensation, $4,382,000. The increase in commissions and other employee compensation is due primarily to increased business profitability as well as increased costs of employee benefits. This increase was offset by a decrease in other expenses of $2,459,000. The decrease in other is due primarily to a decrease in legal expenses and the Bank’s loan loss provision.

Additionally, occupancy, equipment and computer services expense increased $105,000 over the prior quarter. Our CSS maintenance expenses increased $540,000 over last year and amortization of intangibles was up $232,000. These increases were offset by reduced depreciation and leasehold improvements write-offs of $580,000 and $365,000, respectively. All other expense categories were consistent with last year.

Net Interest Income.The components of interest earnings are as follows for the three month periods ended March 30, 2007 and March 31, 2006 (in thousands):

	Three Months Ended
	March 30, 2007		March 31, 2006
Interest revenue:
Customer margin accounts and assets segregated for regulatory purposes:	$	9,962	$	9,676
Stock borrowed		40,367		27,367
Bank loans		19,453		15,864
Other		3,594		1,899
	$	73,376	$	54,806
Interest expense:
Customer funds on deposit	$	5,871	$	4,934
Stock loaned		35,572		22,145
Bank deposits		8,358		5,353
Federal Home Loan Bank advances		723		553
Other		461		950
		50,985		33,935
Net interest	$	22,391	$	20,871

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For the three months ended March 30, 2007, net interest income generated by our brokerage entities accounted for approximately 16.8% of our net revenues. For the three months ended March 31, 2006, net interest income generated by our brokerage entities accounted for approximately 16.6% of our net revenue. Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):

	Three Months Ended
	March 30, 2007		March 31, 2006
Average interest-earning assets:
Customer margin balances	$	283,000	$	333,000
Assets segregated for regulatory purposes		345,000		346,000
Stock borrowed		2,845,000		2,678,000
Average interest-bearing liabilities:
Customer funds on deposit		521,000		555,000
Stock loaned		2,808,000		2,626,000

Net interest revenue from customer balances decreased $651,000 for the three-months ended March 30, 2007 over the third quarter of fiscal 2006 due to the decrease in the average customer margin balances of 15% for the quarter. The decrease in net interest revenue generated from securities lending activities for the quarter is due to a decrease in the spread by 8 basis points. The type of securities borrowed or loaned and the interest rate environment influence the spread earned in this business. The increase in other interest revenue is due primarily to increased activity in fixed income securities.

Net interest revenue generated by the Bank is reviewed in detail in the segment analysis below.

Segment Information

The following is a summary of increases (decreases) in categories of net revenues and pre-tax income by segment for the three-month period ended March 30, 2007 compared to the three-month period ended March 31, 2006 (dollars in thousands):

	Three Months Ended
	March 30, 2007			March 31, 2006			Increase/ (Decrease)			% Change
Net revenues:
Clearing	$	9,538		$	9,289		$	249		3
Retail brokerage		19,800			17,635			2,165		12
Institutional brokerage		22,124			17,471			4,653		27
Banking		12,265			10,939			1,326		12
Other		(223	)		7,926			(8,149	)	(103	)
Total	$	63,504		$	63,260			244		__
Pre-Tax Income:
Clearing	$	4,819		$	3,995		$	824		21
Retail brokerage		3,008			2,378			630		26
Institutional brokerage		6,212			3,880			2,332		60
Banking		5,727			4,257			1,470		35
Other		(8,513	)		(1,538	)		(6,975	)	454
Total	$	11,253		$	12,972			(1,719	)	(13	)

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Clearing.The clearing segment posted a modest increase in net revenue, up 3% and a 21% increase in pretax income. Tickets processed increased dramatically over the prior year due to increased volume from day trading customers; however, clearing revenue per ticket was down over the prior quarter as these customers are charged substantially lower rates than our general securities clients. Revenue per ticket was $0.77 in the third quarter of fiscal 2007 versus $1.40 per ticket in the third quarter of last year.

	Three Months Ended March 30, 2007	Three Months Ended March 31, 2006
Tickets for high-volume trading firms	3,669,355	2,379,482
Tickets for general securities broker/dealers	216,734	289,173
Total tickets	3,886,089	2,668,655
Correspondents	217	208

Net interest revenue allocated to the clearing segment increased 19% over the same quarter of last year. The increase in net interest revenue accounted for 77% of the total increase in pretax income for this segment. This increase was generated by a growth in the earnings on assets segregated for regulatory purposes, most of which is allocated to the clearing segment. Operating revenues were down in the quarter primarily due to the departure, announced last quarter, of one our general securities customers due to an acquisition. Additionally, the correspondents we acquired from Ameritrade are still receiving reduced rates for clearing.

Operating expenses were down slightly in the quarter primarily due to a rebate received from the Depository Trust and Clearing Corporation Company offset by $231,000 in amortization expenses from the new correspondent acquisition from Ameritrade.

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Retail.Net revenues in the retail segment were up 12% over last year’s third quarter while pretax profits were up 26%. The primary driver of the net revenue increase was increased operating revenue. The table below provides a detail of commission revenue.

	Operating Revenue Three Months Ended				No. of Representatives As of
	March 30, 2007		March 31, 2006		March 30, 2007	March 31, 2006
Private Client Group
Commissions	$	5,980	$	5,583	88	93
Advisory fees		739		610
Insurance products		708		418
Other		161		147
		7,588		6,758
Independent registered representatives (SWSF)
Commissions		6,209		5,619	387	379
Advisory fees		334		284
Insurance products		1,935		1,588
Other		217		289
		8,695		7,780
Other		1,717		1,358
	$	18,000	$	15,896	475	472

While the total number of registered representatives has increased only modestly from March of last year, the productivity of our representatives continues to improve.

Revenues from insurance products also increased 31% over the same quarter last year while fees from managed accounts were up 16%. Assets under management were $ 7.1 billion at March 30, 2007 versus $5.2 billion at March 30, 2006.

Commission expense, the primary component of operating expenses in this segment, increased in line with the revenue increases while cost controls kept fixed expenses down slightly from the previous quarter.

Institutional. Net revenues from the institutional segment increased 27% while pretax income was up 60%. The increased revenues were primarily from commissions on the sale of equity and fixed income products and fees from the municipal investment banking. The following table provides a breakdown of commission revenue in the institutional segment.

	Commission Revenue Three Months Ended				No. of Representatives As of
	March 30, 2007		March 31, 2006		March 30, 2007	March 31, 2006
Fixed income sales and trading	$	4,612	$	4,253	45	36
Portfolio trading		5,057		3,700
Other		4		6
	$	9,673	$	7,959

The municipal finance area participated in 152 transactions during the third quarter of fiscal 2007 versus 130 in the third quarter of fiscal 2006 which led to a 60% increase in public finance advisory fees.

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Net interest allocated to this segment is substantially all from securities lending which is reviewed in detail in the consolidated section, above.

Operating expenses were up 17% driven primarily by increased commissions and incentive compensation due to the improved net revenue.

Banking.The bank’s net revenue increased 12% while its pretax income increased 35% over the same period last year.

Net interest revenue generated by the Bank accounted for approximately 18.5% of consolidated net revenue for the three -month period ended March 31, 2007 and 16.4% for the three -month period ended March 31, 2006, respectively. At the Bank, changes in net interest revenue are generally attributable to the timing of loan payoffs and volume. Changes in net interest revenue are also a result of average balance changes and the overall interest rate environment.

The following table sets forth an analysis of the Bank’s net interest income by each major category of interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2007 and March 31, 2006 (dollars in thousands):

	Three Months Ended
	March 31, 2007						March 31, 2006
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate
Assets:
Interest-earning assets:
Loans:
Real estate – mortgage	$	152,595	$	3,609	9.6	%	$	155,999	$	3,346	8.7	%
Real estate – construction		230,417		5,391	9.5			185,498		4,345	9.5
Commercial		306,287		7,012	9.3			251,756		5,557	9.0
Individual		6,440		125	7.8			8,466		133	6.4
Land		134,471		3,316	10.0			104,177		2,483	9.7
Investments		107,566		1,358	5.1			38,275		423	4.5
		937,776	$	20,811	9.0	%		744,171	$	16,287	8.9	%
Interest-earning assets from discontinued operations								22,747
Noninterest-earning assets:
Cash and due from banks		8,441						11,822
Other assets		22,470						13,911
	$	968,687					$	792,651

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	Three Months Ended
	March 31, 2007						March 31, 2006
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Certificates of deposit	$	79,091		865	4.4	%	$	84,654	$	735	3.5	%
Money market accounts		28,582		234	3.3			27,154		167	2.5
Interest-bearing demand accounts		93,037		1,019	4.4			74,736		534	2.9
Savings accounts		578,322		6,240	4.4			434,708		3,917	3.7
Federal Home Loan Bank advances		55,794		723	5.3			47,969		553	4.7
		834,826		9,081	4.4	%		669,221		5,906	3.6	%
Noninterest-bearing liabilities:
Non interest-bearing demand accounts		44,058						43,175
Other liabilities		7,628						5,527
		886,512						717,923
Stockholders’ equity		82,175						74,728
	$	968,687					$	792,651
Net interest income			$	11,730					$	10,381
Net yield on interest-earning assets					5.1	%					5.7	%

Interest rate trends, changes in the economy and the scheduled maturities and interest rate sensitivity of the loan portfolios and deposits affect the spreads earned by the Bank.

The following table sets forth a summary of the changes in the Bank’s interest earned and interest paid resulting from changes in volume and rate (in thousands):

	Three months ended March 31, 2007 compared to March 31, 2006
	Total Change			Attributed to
				Volume			Rate			Mix
Interest income:
Real estate—mortgage	$	263		$	(73	)	$	343		$	(7	)
Real estate—construction		1,046			1,052			(5	)		(1	)
Commercial		1,455			1,204			207			44
Individual		(8	)		(32	)		31			(7	)
Land		833			722			86			25
Investments		935			767			82			86
	$	4,524		$	3,640		$	744		$	140
Interest expense:
Certificates of deposit	$	130		$	(48	)	$	191		$	(13	)
Money market accounts		67			9			55			3
Interest-bearing demand accounts		485			131			284			70
Savings accounts		2,323			1,294			773			256
Federal Home Loan Bank advances		170			90			69			11
		3,175			1,476			1,372			327
Net interest income	$	1,349		$	2,164		$	(628	)	$	(187	)

The bank’s operating expenses were down slightly at 2%. This decrease is due to reduced loan loss allowance of $712,000 offset by increased compensation expenses. Headcount at the bank was 183 at March 31, 2007 versus 160 at March 31, 2006.

Other.Pretax loss from the other category was $8.5 million in the three months ended March 30, 2007 compared to $1.5 million the same period of last year. The primary driver of the change was the $5.2 million gain recorded on the initial receipt of the NYX shares in March of 2006. Additionally, earnings from our deferred compensation plan investments and our corporate equity investments decreased $588,000 and executive management incentive compensation is up $486,000.

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NINE-MONTH ANALYSIS

Consolidated

Net income from continuing operations for the nine-month period ended March 30, 2007 was $30,578,000, representing an increase of $7,379,000 over net income for the comparable nine-month period ended March 31, 2006. Net income included income of $12,685,000 from discontinued operations due to the sale of FSB Financial for the nine-month period ending March 31, 2006. The nine-month periods ended March 30, 2007 and March 31, 2006 contained 187 and 193 trading days, respectively.

The following is a summary of increases (decreases) in categories of net revenues and operating expenses for the nine-month period ended March 30, 2007 compared to the nine-month period ended March 31, 2006 (dollars in thousands):

	Nine Months Ended
	Amount			%
Net revenues:
Net revenues from clearing operations	$	(1,795	)	(16	)%
Commissions		(221	)	—
Net interest		11,068		19
Investment banking, advisory and administrative fees		4,366		20
Net gains on principal transactions		(181	)	(1	)
Other		2,213		12
		15,450		8
Operating expenses:
Commissions and other employee compensation	$	10,771		10	%
Occupancy, equipment and computer service costs		(633	)	(4	)
Communications		(418	)	(6	)
Floor brokerage and clearing organization charges		255		10
Advertising and promotional		(349	)	(15	)
Other		(3,645	)	(21	)
		5,981		4
Pretax income	$	9,469		26	%

Net revenues increased for the nine-months ended March 30, 2007 by $15,450,000. The largest components of the increase were in net interest revenue, investment banking, advisory and administrative fees and other revenues. The increases in net interest and investment banking, advisory and administrative fees were due to substantially the same reasons as described for the three-month period above. Other revenue increased due to the proceeds received from company owned life insurance policies of $2,276,000 in the second quarter of fiscal 2007, an increase in fees from the sale of insurance products of $2,495,000 offset by a decrease in earnings on equity investments of $2,436, 000. These increases were offset by a decrease in clearing revenue of $1,795,000. The decrease in clearing revenues is due primarily to decreased revenue from general securities correspondents.

Operating expenses increased $5,981,000 for the nine-months ended March 30, 2007 as compared to the same period of fiscal 2006. The largest increase was in commissions and other employee compensation offset by a decrease in other expenses. These items fluctuated for substantially the

- 34 -

same reasons as described for the three-month period namely, increased commissions and other employee compensation of $10,771,000 offset by a decrease in other expenses of $3,645,000, primarily legal expenses. Occupancy, equipment and computer services expense also decreased $633,000 for the nine-month period primarily due to reduced depreciation expenses offset by increased intangible amortization and CSS maintenance charges. Communication expense also decreased during the nine-month period due to reduced quotes fees from the sale of the Institutional Equity business in January of 2006. Lower recruiting costs led to reduced advertising and promotional costs.

Net Interest Income. The components of interest earnings are as follows for nine-month periods ended March 30, 2007 and March 31, 2006 (in thousands):

	Nine Months Ended
	March 30, 2007		March 31, 2006
Interest revenue:
Customer margin accounts and assets segregated for regulatory purposes:	$	31,336	$	28,262
Stock borrowed		117,253		78,924
Bank loans		58,521		46,105
Other		11,048		4,475
	$	218,158	$	157,766
Interest expense:
Customer funds on deposit	$	17,892	$	13,659
Stock loaned		101,398		66,297
Bank deposits		24,272		13,811
Federal Home Loan Bank advances		2,059		2,214
Other		1,971		2,287
		147,592		98,268
Net interest	$	70,566	$	59,498

For the nine-months ended March 30, 2007, net interest income generated by our brokerage entities accounted for approximately 16.8% of our net revenues. For the nine-months ended March 31, 2006, net interest income generated by our brokerage entities accounted for approximately 15.0% of our net revenue. Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):

	Nine Months Ended
	March 30, 2007		March 31, 2006
Average interest-earning assets:
Customer margin balances	$	301,000	$	327,000
Assets segregated for regulatory purposes		353,000		346,000
Stock borrowed		2,958,000		2,580,000
Average interest-bearing liabilities:
Customer funds on deposit		540,000		556,000
Stock loaned		2,908,000		2,511,000

Net interest revenue from customer balances decreased for the nine-months ended March 30, 2007 over the nine-months of fiscal 2006 due to the decrease in average customer margin balances of 8%.

The increase in net interest revenue generated from securities lending activities for the nine-month period is due to an increase in the net interest spread of 10 basis points despite the decrease in average balances of 28%. The type of securities borrowed or loaned and the interest rate environment influence the spread earned in this business. The increase in other interest revenue is due primarily to increased activity in fixed income securities.

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Net interest revenue generated by the Bank is reviewed in detail in the segment analysis below.

Income Tax Expense. For the nine-months ended March 30, 2007, income tax expense (effective rate of 32.5%) differed from the amount that would have otherwise been calculated by applying the federal corporate tax rate (35%) to income from continuing operations before income taxes. The effective rate was lower than the statutory rate because of permanently excluded items, primarily tax exempt interest and proceeds from company owned life insurance policies, offset by state income taxes deductible for federal income tax purposes.

Segment Information

The following is a summary of increases (decreases) in categories of net revenues and pre-tax income by segment for the nine-month period ended March 30, 2007 compared to the nine-month period ended March 31, 2006 (dollars in thousands):

	Nine Months Ended
	March 30, 2007			March 31, 2006			Increase/ (Decrease)			% Change
Net revenues:
Clearing	$	28,462		$	27,812		$	650		2
Retail brokerage		57,045			52,048			4,997		10
Institutional brokerage		78,130			64,392			13,738		21
Banking		37,560			32,665			4,895		15
Other		6,955			15,785			(8,830	)	(56	)
Total	$	208,152		$	192,702			15,450		8
Pre-Tax Income:
Clearing	$	14,448		$	12,071		$	2,377		20
Retail brokerage		9,565			6,696			2,869		43
Institutional brokerage		24,432			17,489			6,943		40
Banking		18,696			14,220			4,476		31
Other		(21,841	)		(14,645	)		(7,196	)	(49	)
Total	$	45,300		$	35,831			9,469		26

Clearing.The clearing segment posted a modest increase in net revenue, up 2% and a 20% increase in pretax income. Tickets processed increased dramatically over the prior year due to increased volume from day trading customers; however, clearing revenue per ticket was down over the prior year as these customers are charged substantially lower rates than our general securities clients. Revenue per ticket was $0.75 for the nine month period of fiscal 2007 versus $1.43 per ticket for the nine month period of fiscal 2006.

- 36 -

	Nine Months Ended March 30, 2007	Nine Months Ended March 31, 2006
Tickets for high-volume trading firms	11,456,086	6,485,818
Tickets for general securities broker/dealers	661,013	1,152,238
Total tickets	12,117,099	7,638,056
Correspondents	217	208

Net interest revenue allocated to the clearing segment increased 15% over the nine months of last year. The increase in net interest revenue accounted for 65% of the total increase in pretax income for this segment. This increase was generated by a growth in the earnings on assets segregated for regulatory purposes, most of which is allocated to the clearing segment. Operating revenues were down in the quarter primarily due to the departure, announced in the second quarter of fiscal 2007, of one of our general securities customers due to an acquisition. Additionally, the correspondents we acquired from Ameritrade are still receiving reduced rates for clearing.

Operating expenses for the nine months ended March 30, 2007 were down when compared to the nine-months ended March 31, 2006 due to a rebate received from the Depository Trust and Clearing Corporation Company and reduced legal fees offset by $603,000 in amortization expenses from the new correspondent acquisition from Ameritrade.

Retail.Net revenues in the retail segment were up 10% over last year’s third quarter while pretax profits were up 43%. All revenue components showed increases in this segment for the nine-month period. The table below provides a detail of operating revenue.

	Operating Revenue Nine Months Ended				No. of Representatives As of
	March 30, 2007		March 31, 2006		March 30, 2007	March 31, 2006
Private Client Group
Commissions	$	17,940	$	17,096	88	93
Advisory fees		2,194		1,669
Insurance products		2,733		903
Other		522		462
		23,389		20,130
Independent registered representatives (SWSF)
Commissions		16,380		16,224	387	379
Advisory fees		1,052		889
Insurance products		5,562		5,084
Other		664		910
		23,658		23,107
Other		4,844		3,935
	$	51,891	$	47,172	475	472

While the total number of registered representatives has increased only modestly from March of last year, the productivity of our representatives continues to improve.

Revenues from insurance products for the nine months ended March 30, 2007 also increased 38% over the nine months ended March 31, 2006 while fees from managed accounts were up 26%.

- 37 -

Commission expense, the primary component of operating expenses in this segment, increased in line with the revenue increases while reduced legal expenses led to an 11% decrease in fixed expenses from the previous year.

Institutional.Net revenues from the institutional segment increased 21% while pretax income was up 40%.

The following table provides a breakdown of commission revenue in the institutional segment.

	Commission Revenue Nine Months Ended				No. of Representatives As of
	March 30, 2007		March 31, 2006		March 30, 2007	March 31, 2006
Fixed income sales & trading	$	15,445	$	15,790	45	36
Portfolio trading		15,186		13,666
Other		10		11
		30,641		29,467

Increased trading revenue as well as fees from municipal transactions led to the increased revenue as did increased net interest income. The municipal finance group participated in 451 transactions during the first nine-months of fiscal 2007 versus 430 in the fiscal 2006 period.

Net interest allocated to this segment is substantially all from securities lending which is reviewed in detail in the consolidated section, above.

Operating expenses were up 14% driven primarily by increased commissions and incentive compensation of $4,388 due to the improved net revenue. Other expenses increased $2,919 primarily due to an increase in clearing costs related to the additional volume in the portfolio trading area.

Banking.The bank’s net revenue increased 15% while its pretax income increased 31% over the same period last year.

Net interest revenue generated by the Bank accounted for approximately 17.1% of consolidated net revenue for the nine-month period ended March 31, 2007 and 15.9% for the nine-month period ended March 31, 2006, respectively. As noted above, changes in net interest revenue are generally attributable to the timing of loan payoffs and volume. Changes in net interest revenue are also a result of average balance changes and the overall interest rate environment.

The following table sets forth an analysis of the Bank’s net interest income by each major category of interest-earning assets and interest-bearing liabilities for the nine month periods ended March 31, 2007 and March 31, 2006 (dollars in thousands):

- 38 -

	Nine Months Ended
	March 31, 2007						March 31, 2006
	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate
Assets:
Interest-earning assets:
Loans:
Real estate – mortgage	$	156,803	$	11,099	9.4	%	$	188,253	$	11,810	8.4	%
Real estate – construction		220,738		15,896	9.6			167,113		11,566	9.2
Commercial		296,506		21,288	9.6			243,177		15,833	8.7
Individual		6,764		397	7.8			9,657		429	5.9
Land		131,933		9,841	9.9			93,577		6,467	9.2
Investments		91,089		3,475	5.1			19,451		615	4.2
		903,833	$	61,996	9.1	%		721,228	$	46,720	8.6	%
Interest-earning assets from discontinued operations								26,961
Noninterest-earning assets:
Cash and due from banks		10,117						10,188
Other assets		22,943						23,313
	$	936,735					$	781,690
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Certificates of deposit	$	81,533		2,574	4.2	%	$	100,734	$	2,533	3.4	%
Money market accounts		28,569		712	3.3			23,373		430	2.5
Interest-bearing demand accounts		75,350		1,998	3.5			64,882		1,245	2.6
Savings accounts		562,839		18,988	4.5			403,388		9,603	3.2
Federal Home Loan Bank advances		55,150		2,059	5.0			70,609		2,214	4.2
		803,441		26,331	4.4	%		662,986		16,025	3.2	%
Noninterest-bearing liabilities:
Non interest-bearing demand accounts		48,424						39,984
Other liabilities		7,270						6,956
		859,135						709,926
Stockholders’ equity		77,600						71,764
	$	936,735					$	781,690
Net interest income				35,665					$	30,695
Net yield on interest-earning assets					5.3	%					5.7	%

Interest rate trends, changes in the economy and the scheduled maturities and interest rate sensitivity of the loan portfolios and deposits affect the spreads earned by the Bank.

	Nine months ended March 31, 2007 compared to March 31, 2006
	Total Change			Attributed to
				Volume			Rate		Mix
Interest income:
Real estate—mortgage	$	(711	)	$	(1,973	)	$	1,515	$	(253	)
Real estate—construction		4,330			3,712			468		150
Commercial		5,455			3,472			1,626		357
Individual		(32	)		(129	)		138		(41	)
Land		3,374			2,651			513		210
Investments		2,860			2,289			153		418
	$	15,276		$	10,022		$	4,413	$	841

- 39 -

	Nine months ended March 31, 2007 compared to March 31, 2006
	Total Change			Attributed to
				Volume			Rate			Mix
Interest expense:
Certificates of deposit	$	41		$	(483	)	$	647		$	(123	)
Money market accounts		282			96			152			34
Interest-bearing demand accounts		753			200			476			77
Savings accounts		9,385			3,796			4,006			1,583
Federal Home Loan Bank advances		(155	)		(387	)		559			(327	)
		10,306			3,222			5,840			1,244
Net interest income	$	4,970		$	6,800		$	(1,427	)	$	(403	)

The bank’s operating expenses were up slightly at 2%. This increase is due to an increase in compensation expense due to primarily to increased headcount at the bank offset by a reduction in the loan loss allowance of $876,000

Other. Pretax loss from the other category was $21.8 million in the first nine months of 2007 versus $14.6 million in the first nine months of fiscal 2006. The variance is due primarily to the gain on the NYX stock recorded in March of 2006, reduced earnings from our corporate equity investments and increased executive management incentive compensation.

FINANCIAL CONDITION

Loans and Allowance for Probable Loan Losses. The Bank grants loans to customers primarily within North Texas. The Bank also purchases loans, in the ordinary course of business, which have been originated in various other areas of the United States. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the general economic conditions of the North Texas area. Substantially all of the Bank’s loans are collateralized with real estate.

The allowance for probable loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

Loans receivable at March 31, 2007 and June 30, 2006 are summarized as follows (in thousands):

	March 31, 2007		June 30, 2006
Real estate – mortgage	$	175,661	$	177,587
Real estate – construction		299,202		250,664
Commercial		251,194		210,641
Individuals		4,359		4,553
Land		129,922		123,970
	$	860,338	$	767,415

- 40 -

The following table shows the expected life of real estate – construction and commercial loans at March 31, 2007, and segregates those loans with fixed interest rates from those with floating or adjustable rates (in thousands):

	1 year or less		1-5 years		Over 5 years		Total
Real estate – construction	$	257,072	$	14,835	$	27,295	$	299,202
Commercial		60,036		101,469		89,689		251,194
Total	$	317,108	$	116,304	$	116,984	$	550,396
Amount of loans based upon:
Floating or adjustable interest rates	$	307,544	$	80,244	$	81,729	$	469,517
Fixed interest rates		9,564		36,060		35,255		80,879
Total	$	317,108	$	116,304	$	116,984	$	550,396

Loans are classified as non-performing when they are 90 days or more past due as to principal or interest or when reasonable doubt exists as to timely collectibility. The Bank uses a standardized review process to determine which loans should be placed on non-accrual status. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income. Interest income on non-accrual loans is credited to income on a cash basis.

Non-performing assets as of March 31, 2007 and June 30, 2006 are as follows (dollars in thousands):

	March 31, 2007			June 30, 2006
Loans accounted for on a non-accrual basis	$	9,318		$	4,115
Non-performing loans as a percentage of total gross loans		1.0	%		0.6	%
Loans past due 90 days or more, not included above	$	211		$	334
Troubled debt restructurings	$	2,452		$	1,785

An analysis of the allowance for probable loan losses for the three and nine-month periods ended March 31, 2007 and March 31, 2006 is as follows (dollars in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Balance at beginning of period	$	5,497		$	7,151		$	5,047		$	7,450
Continuing operations:
Charge-offs:
Charge-offs – commercial, financial and agricultural		—			(34	)		(110	)		(147	)
Charge-offs – real estate-mortgage		—			(37	)		(224	)		(139	)
Charge-offs – real estate-construction		—			(45	)		—			(45	)
Charge-offs – Installment loans to individuals		(22	)		(3	)		(31	)		(3	)
		(22	)		(119	)		(365	)		(334	)

- 41 -

	Three Months Ended March 31,						Nine Months Ended March 31,
	2007			2006			2007			2006
Recoveries:
Recoveries – construction		4			13			16			70
Recoveries – mortgage		—			1			2			1
Recoveries – commercial, financial and agricultural		81			—			145			—
		85			14			163			71
Net recoveries (charge-offs)		63			(105	)		(202	)		(263	)
Additions charged to operations		(63	)		350			652			1,515
		—			245			450			1,252
Discontinued operations:
Provision for loan losses		—			2,486			—			5,878
Loans charged to allowance, net		—			(1,084	)		—			(5,782	)
Sale of FSB Financial		—			(3,731	)		—			(3,731	)
		—			(2,329	)		—			(3,635	)
Balance at end of period	$	5,497		$	5,067		$	5,497		$	5,067
Ratio of net recoveries (charge-offs) during the period to average loans outstanding during the period		0.01	%		(0.01	%)		(0.02	%)		(0.02	%)

The allowance for probable loan losses is applicable to the following types of loans as of March 31, 2007 and June 30, 2006 (dollars in thousands):

	March 31, 2007				June 30, 2006
	Amount		Percent of loans to total loans		Amount		Percent of loans to total loans
Commercial	$	2,591	29.3	%	$	1,954	27.5	%
Real estate – construction		960	34.7			1,178	32.6
Real estate – mortgage & land		1,939	35.5			1,914	39.3
Individuals		7	0.5			1	0.6
	$	5,497	100.0	%	$	5,047	100.0	%

Deposits.Average deposits and the average interest rate paid on the deposits for the three and nine-month periods ended March 31, 2007 and March 31, 2006 can be found in the discussion of the Banking Group’s net interest income under the caption “-Results of Operations- Segment-Banking.”

Certificates of deposit of $100,000 or greater were $25,401,000 and $25,591,000 at March 31, 2007 and June 30, 2006, respectively. The Bank funds its loans through short-term borrowings at the Federal Home Loan Bank (“FHLB”), internally generated deposits, brokered certificates of deposit and funds on deposit in an FDIC insured interest bearing checking account from Southwest Securities’ brokerage customers. The Bank has approximately $676 million in funds on deposit from customers of Southwest Securities. This funding source has reduced the Bank’s reliance on short-term borrowings from the FHLB and brokered certificates of deposit.

Advances from Federal Home Loan Bank.The Bank has historically financed its short-term borrowing needs through advances from the FHLB. The Bank currently uses the FHLB advances to fund fixed rate loans. Short-term borrowing needs are covered by deposits. This table represents advances from the FHLB which were due within one year (generally two to seven days) during the three and nine-month periods ended March 31, 2007 and March 31, 2006 (dollars in thousands):

	Three Months Ended March 31,								Nine Months Ended March 31,
	2007				2006				2007				2006
	Amount		Interest Rate		Amount		Interest Rate		Amount		Interest Rate		Amount		Interest Rate
At end of period	$	544	3.3	%	$	9,916	3.0	%	$	544	3.3	%	$	9,916	3.0	%
Average during period		2,511	3.2	%		9,970	3.6	%		8,367	3.1	%		34,587	3.8	%
Maximum balance during period		6,076	—			37,284	—			18,127	—			77,442	—

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LIQUIDITY AND CAPITAL RESOURCES

While we manage our operation and measure our results through four segments, liquidity and capital resources are considered along more institutional lines due, in part, to the separate capital requirements imposed on our brokerage and banking businesses. Consequently, we will discuss these issues on that basis.

Brokerage

A substantial portion of our assets are highly liquid in nature and consist mainly of cash or assets readily convertible into cash. Our equity capital, short-term bank borrowings, interest bearing and non-interest bearing client credit balances, correspondent deposits and other payables finance these assets. We maintain an allowance for doubtful accounts which represents amounts, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and correspondents. The highly liquid nature of our assets provides us with flexibility in financing and managing our anticipated operating needs.

Short-Term Borrowings.We have credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers’ margin accounts. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed to the federal funds rate and are collateralized by securities of Southwest Securities and its clients. At March 30, 2007, there were no amounts outstanding under these secured arrangements.

We have unsecured letters of credit, aggregating $2,250,000 at March 30, 2007, pledged to support our open positions with securities clearing organizations. The unsecured letters of credit bear a 1% commitment fee and are renewable semi-annually.

At March 30, 2007, we had an additional unsecured letter of credit issued for a sub-lease of space previously occupied by Mydiscountbroker.com, Inc., a subsidiary of SWS dissolved in July 2004, in the amount of $571,000. This letter of credit bears a 1% commitment fee and is renewable annually.

In addition to the broker loan lines, SWS has a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding under the unsecured letters of credit at the time of borrowing. There were no amounts outstanding on this line other than the $2,821,000 under unsecured letters of credit at March 30, 2007. At March 30, 2007, the total amount available for borrowings was $17,179,000.

We have an irrevocable letter of credit agreement aggregating $48,000,000 at March 30, 2007 pledged to support our open options positions with an options clearing organization. The letter of credit bears interest at the brokers’ call rate, if drawn, and is renewable semi-annually. This letter of credit is fully collateralized by marketable securities held in client and non-client margin accounts with a value of $66,296,000 at March 30, 2007.

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In the opinion of management, these credit arrangements are adequate to meet our operating capital needs of the Brokerage segments for the foreseeable future.

Off-Balance Sheet Arrangements.Off-balance sheet arrangements, as defined by the SEC, include certain contractual arrangements pursuant to which a company has a binding obligation not reflected on the balance sheet. Included are contingent obligations, certain guaranteed contracts, retained or contingent interest in assets transferred to an unconsolidated entity, certain derivative investments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. We generally do not enter into off-balance sheet arrangements, as defined, other than those described in the Contractual Obligations and Contingent Payments section of our annual report on Form 10-K for the fiscal year ended June 30, 2006. In addition, our broker/dealer subsidiaries enter into transactions in the normal course of business that expose us to off-balance sheet risk. See Note 25 of the Notes to Consolidated Financial Statements contained in our annual report on Form 10-K for the fiscal year ended June 30, 2006.

Net Capital Requirements.Our broker/dealer subsidiaries are subject to the requirements of the SEC relating to liquidity, capital standards and the use of client funds and securities. The amount of broker/dealer subsidiaries’ net assets that may be distributed is subject to restrictions under applicable net capital rules. Historically, we have operated in excess of the minimum net capital requirements. See “-Net Capital Requirements” in the Notes to the Consolidated Financial Statements contained in this Report.

Banking

Liquidity is monitored daily to ensure the Bank’s ability to support asset growth, meet deposit withdrawals, maintain reserve requirements and otherwise sustain operations. The Bank’s liquidity is maintained in the form of readily marketable loans, balances with the FHLB and other un-affiliated banks and vault cash. In addition, the Bank has borrowing capacity with the FHLB and a $30,000,000 federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Current net available borrowing capacity at FHLB is $219,000,000. Management believes that the Bank’s present position is adequate to meet its current and future liquidity needs.

The Bank’s asset and liability management policy is intended to manage interest rate risk. The Bank accomplishes this through management of the repricing of its interest-earning assets and its interest-bearing liabilities. Overall interest rate risk is monitored through reports showing both sensitivity ratios, a simulation model and existing “gap” data. See the Bank’s gap analysis in “Risk Management-Market Risk-Interest Rate Risk/Banking.” At March 31, 2007, $676,000,000 of the Bank’s deposits was from broker customers of Southwest Securities. Events in the securities markets could impact the amount of these funds available to the Bank.

The Bank is subject to capital standards imposed by regulatory bodies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Bank has historically met all the capital adequacy requirements to which it is subject.

Borrowings. In June 2005, the Bank entered into an agreement with an unaffiliated bank for the availability of a $20,000,000 unsecured federal funds line of credit. In the third quarter of fiscal 2006, the agreement was amended to increase the available credit to $30,000,000. The unaffiliated bank is not obligated by this agreement to sell federal funds to the Bank. Interest is charged on any borrowed funds at a rate quoted by the unaffiliated bank and accepted by the Bank. The line is used by the Bank to support short-term liquidity needs. At March 31, 2007, there were no amounts outstanding on this line of credit.

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Cash Flow

Net cash provided by operating activities was $59,652,000 and $55,588,000 for the nine-months ended March 30, 2007 and March 31, 2006, respectively. The primary reasons for the increase in cash provided by operating activities from fiscal 2006 to fiscal 2007 were:

• an decrease of $21,000,000 in investments held in reverse repurchase agreements ; and

• reduced cash flow from client accounts;

offset by:

• increased investment in assets segregated for regulatory purposes;

• a decrease of $34,400,000 in securities sold, not yet purchased versus a $12,500,000 increase last year; and

• an increase in securities lending and other broker/dealer balances of $18,000,000 versus a decrease of $91,000 last year.

Net cash used in investing activities for the nine-month periods ended March 30, 2007 and March 31, 2006 was $101,100,000 and $3,071,000, respectively. The primary reason for the increase in cash used for investing activities was our purchase of correspondent clients of Ameritrade and the elimination of cash provided by our discontinued operations.

Net cash flows provided by financing activities totaled $121,343,000 for the nine-month period ended March 30, 2007 compared to net cash flow used in financing activities of $5,010,000 for the nine-month period ended March 31, 2006. The primary reasons for the increase in cash proceeds is from increases in deposits at the Bank, increased net advances from the FHLB and an increase in proceeds from the options exercised by our employees.

We expect that cash flows provided by operating activities as well as short-term borrowings will be the primary source of working capital for fiscal 2007.

Treasury Stock

Periodically, we repurchase our common stock under a plan approved by our Board of Directors. Currently, we have authorization, which will expire in June 30, 2008, to repurchase up to 500,000 shares.

Additionally, the trustee under our deferred compensation plan periodically purchases stock in the open market in accordance with the terms of the plan. This stock is classified as treasury stock in our consolidated financial statements, but participates in future dividends declared by us. The plan purchased 44,333 shares in the nine-month period ended March 30, 2007 at a cost of approximately $962,000 or $21.69 per share. 14,345 shares were distributed pursuant to the plan in the nine-month period ended March 30, 2007.

As restricted stock grants vest, some of the grantees choose to sell a portion of their vested shares to cover the tax liabilities arising from such vesting. As a result, in the nine-month period ended March 30, 2007, 13,581 shares were repurchased by the Company at an average price of $17.60 per share to cover tax liabilities.

RISK MANAGEMENT

We manage risk exposure by involving various levels of management in establishing, maintaining and regularly monitoring maximum positions by industry and issuer in both trading and inventory accounts. Current and proposed underwriting, banking and other commitments are subject to due diligence reviews by senior management, as well as professionals in the appropriate business and support units involved. The Bank seeks to reduce the risk of significant adverse effects of market rate fluctuations by minimizing the difference between rate-sensitive assets and liabilities, referred to as “gap”, by maintaining an interest rate sensitivity position within a particular timeframe. Credit risk related to various financing activities is reduced by the industry practice of obtaining and

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maintaining collateral. We monitor our exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. We have established various risk management committees that are responsible for reviewing and managing risk related to interest rates, trading positions, margin and other credit risk and risks from capital market transactions.

Credit Risk

Brokerage. Credit risk arises from the potential nonperformance by counterparties, customers or debt security issuers. We are exposed to credit risk as a trading counterparty and as a stock loan counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing organizations. Credit exposure is also associated with customer margin accounts, which are monitored daily. We monitor exposure to individual securities and perform sensitivity analysis on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

Banking. Credit risk is the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms and is inherent in all types of lending provided. The Bank has developed and implemented extensive policies and procedures to provide a robust process for proactively managing credit risk. These policies and procedures include underwriting guidelines, credit and collateral tracking and detailed loan approval procedures which include officer and director loan committees. The Bank also maintains a detailed loan review process to monitor the quality of the loan portfolio. The Bank grants loans to customers primarily within the Dallas / Fort Worth metropolitan area. The Bank also purchases loans which have been originated in other areas of the United States. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the general economic conditions of the North Texas area. Our policies and procedures to manage credit risk are designed to be responsive to changes in these economic conditions.

Operational Risk

Operational risk refers generally to risk of loss resulting from our operations, including but not limited to improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, inadequacies or breaches in our control processes. We operate in diverse markets and are reliant on the ability of our employees and systems to process large numbers of transactions. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures designed to identify and manage operational risk at appropriate levels. We also use periodic self-assessments and internal audit examinations to review the effectiveness of our controls and procedures in mitigating our operational risk.

Legal Risk

Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct business. We have established procedures based on legal and regulatory requirements that are designed to reasonably ensure compliance with all applicable statutory and regulatory requirements. We also have established procedures that are designed to ensure that executive management’s policies relating to conduct, ethics and business practices are followed. In connection with our business, we have various procedures addressing significant issues such as regulatory capital requirements, sales and trading practices, new products, use and safekeeping of customer funds and securities, granting credit, collection activities, money laundering, privacy and record keeping.

Market Risk

Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, equity prices, investor expectations and changes in credit ratings of the issuer. Our exposure to market risk is directly related to our role as a financial intermediary in customer-related transactions and to our proprietary trading activities.

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Interest Rate Risk/Brokerage. Interest rate risk is a consequence of maintaining inventory positions and trading in interest-rate-sensitive financial instruments. Our fixed income activities also expose us to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer’s credit rating or credit perception could affect the value of financial instruments.

Banking. Our primary emphasis in interest rate risk management for the Bank is the matching of assets and liabilities of similar cash flow and re-pricing time frames. This matching of assets and liabilities reduces exposure to rate movements and aids in stabilizing positive interest spreads. We strive to structure our balance sheet as a natural hedge by matching floating rate assets with variable short term funding and by matching fixed rate liabilities with similar longer term fixed rate assets. The Bank has established limits for acceptable interest rate risk and acceptable portfolio value risk. To verify that the Bank is within the limits established for interest margin, the Bank prepares an analysis of net interest margin based on various shifts in interest rates. To verify that the Bank is within the limits established for net portfolio value, the Bank analyzes data prepared by the Office of Thrift and Supervision (“OTS”) for interest rate sensitivity of the Bank’s net portfolio. These analyses are conducted on a monthly basis for the Bank’s Board of Directors.

The following table illustrates the estimated change in net interest margin based on shifts in interest rates of positive 300 basis points and negative 200 basis points:

Hypothetical Change in Interest Rates	Projected Change in Net Interest Margin
+300	4.86	%
+200	3.23	%
+100	1.60	%
0	0	%
-100	-1.59	%
-200	-3.17	%

The following GAP Analysis table indicates the Bank’s interest rate sensitivity position at March 31, 2007 (in thousands):

	Repricing Opportunities
	0-6 months		7-12 months		1-3 years		3+ years
Interest Earning Assets:
Loans	$	744,392	$	42,842	$	45,228	$	33,373
Securities and FHLB Stock		3,252		—		—		268
Interest Bearing Deposits		81,891		—		—		—
Total Interest Earning Assets		829,535		42,842		45,228		33,641
Interest Bearing Liabilities:
Transaction Accounts and Savings		717,513		—		—		—
Certificates of Deposit		33,642		24,481		14,215		6,635
Borrowings		—		544		2,237		52,732
Total Interest Bearing Liabilities		751,155		25,025		16,452		59,367
GAP	$	78,380	$	17,817	$	28,776	$	(25,726	)
Cumulative GAP	$	78,380	$	96,197	$	124,973	$	99,247

Equity Price Risk. We are exposed to equity price risk as a result of making markets and taking proprietary positions in equity securities. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a basket of stocks or a stock index.

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The following table categorizes securities owned, net of securities sold, not yet purchased, which are in our securities owned and securities sold, not yet purchased, portfolios and marketable equity securities in our available-for-sale portfolio, which are subject to interest rate and equity price risk (dollars in thousands):

	Years to Maturity
	1 or less		1 to 5			5 to 10			Over 10			Total
Trading securities, at fair value
Municipal obligations	$	—	$	8,609		$	11,754		$	17,653		$	38,016
U.S. Government and Government agency obligations		5,747		(16,677	)		(7,595	)		(8,337	)		(26,862	)
Corporate obligations		2,865		4,922			(1,026	)		38,096			44,857
Total debt securities		8,612		(3,146	)		3,133			47,412			56,011
Corporate equity		—		—			—			16,339			16,339
Other		26,873		—			—			—			26,873
	$	35,485	$	(3,146	)	$	3,133		$	63,751		$	99,223

	Years to Maturity
	1 or less			1 to 5			5 to 10			Over 10			Total
Weighted average yield
Municipal obligations		—	%		3.7	%		3.8	%		4.4	%		4.0	%
U.S. Government and Government agency obligations		4.7	%		4.1	%		2.4	%		3.7	%		4.0	%
Corporate obligations		5.4	%		4.9	%		5.6	%		6.1	%		5.7	%
Available-for-sale securities, at fair Value
Marketable equity securities	$	—		$	—		$	—		$	4,732		$	4,732

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies and methodology used in establishing estimates (primarily related to loan loss reserves and other contingency estimates) have not changed materially since June 30, 2006. See our Annual Report on Form 10-K for the fiscal year then ended.

FORWARD-LOOKING STATEMENTS

From time to time, we make statements (including some contained in this Report) that predict or forecast future events, depend on future events for their accuracy, or otherwise contain “forward-looking information.” These statements may relate to anticipated changes in revenues or earnings per share, anticipated changes in our businesses or in anticipated expense levels, or in expectations regarding financial market conditions.

Actual results may differ materially as a result of various factors, some of which are outside of our control. There factors include:

• the interest rate environment;

• the volume of trading in securities;

• the volatility and general level of securities prices and interest rates;

• the level of customer margin loan activity and the size of customer account balances;

• the demand for housing in the North Texas area and the national market;

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• the credit-worthiness of our correspondents, counterparties in securities lending transactions and of our banking and margin customers;

• the demand for investment banking services;

• general economic conditions and investor sentiment and confidence;

• competitive conditions in each of our business segments;

• changes in accounting, tax and regulatory compliance requirements; and

• the ability to attract and retain key personnel.

Our future operating results also depend on our operating expenses, which are subject to fluctuation due to:

• variations in the level of compensation expense incurred as a result of changes in the number of total employees, competitive factors, or other market variables;

• variations in expenses and capital costs, including depreciation, amortization and other non-cash charges incurred to maintain our infrastructure; and

• unanticipated costs which may be incurred from time to time in connection with litigation or other contingencies.

Additionally, factors which may cause actual results to differ materially from our forward-looking statements include those factors discussed in this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Overview,” “-Risk Management” and “-Critical Accounting Policies and Estimates” and those discussed in “Risk Factors” in our Annual Report on Form 10-K filed with the SEC and our other reports filed with and available from the SEC. All forward-looking statements we make speak only as of the date on which they are made, and we undertake no obligation to update them to reflect events or circumstances occurring after the date on which they were made or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is incorporated in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “-Risk Management.”

Item 4. Controls and Procedures

The management of SWS, including the principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) pursuant to the Securities Exchange Act of 1934) as of March 30, 2007. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of March 30, 2007, such disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in the reports SWS submits, files, furnishes or otherwise provides to the SEC is made known to them by others on a timely basis and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) pursuant to the Securities Exchange Act of 1934) during the nine-month period ended March 30, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the general course of our brokerage business and the business of clearing for other brokerage firms, we have been named as defendants in various pending lawsuits and arbitration proceedings. These claims allege violation of federal and state securities laws. The Bank is also involved in certain claims and legal actions arising in the ordinary course of business. We believe that resolution of these claims will not result in any material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

Item 1A. Risk Factors

None.

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

The following table provides information about purchases by SWS during the quarter ended March 30, 2007 of equity securities that are registered by SWS pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet be Purchased Under the Plans(1)
12/30/06 to 1/26/07	—	$	—	—	468,910
1/27/07 to 2/23/07	—		—	—	500,000
2/24/07 to 3/30/07	—		—	—	500,000
	—	$	—	—

⁽¹⁾ There are 468,910 shares available for purchase under a stock repurchase program approved by our Board of Directors pursuant to which SWS has authorization, which expired on December 31, 2006, to repurchase a total of 500,000 shares. In November 2006, the Board of Directors approved a stock repurchase program effective January 1, 2007 and expires June 30, 2008. The program allows for the purchase of up to 500,000 shares of our common stock.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

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Item 6. Exhibits

The exhibits required to be furnished pursuant to Item 6 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

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

	SWS Group, Inc.
	(Registrant)
May 9, 2007	/S/ Donald W. Hultgren
Date	(Signature)
	Donald W. Hultgren
	Chief Executive Officer and Duly Authorized Officer
	(Principal Executive Officer)
May 9, 2007	/S/ Kenneth R. Hanks
Date	(Signature)
	Kenneth R. Hanks
	Treasurer and Chief Financial Officer
	(Principal Financial Officer)
May 9, 2007	/S/ Stacy Hodges
Date	(Signature)
	Stacy Hodges
	Executive Vice President
	(Principal Accounting Officer)

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SWS GROUP, INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit Number	��	Description
3.1		Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K filed September 8, 2004
3.2		Restated By-laws of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed November 12, 2004
31.1*		Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Chief Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

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