Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2012

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

For the transition period from to

Commission File Number: 000-53629

PLAINSCAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

Texas

75-2182440

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

2323 Victory Avenue, Suite 1400, Dallas, Texas 75219

(Address of principal executive offices, including zip code)

(214) 252-4000

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

As of ~~August~~October 130, 2012, there were 34,~~462~~557,~~390~~535 shares of the registrant’s Original Common Stock, $0.001 par value, and no shares of the registrant’s Common Stock, $0.001 par value, outstanding, including 2,~~377~~390,~~809~~160 shares of Original Common Stock that participate in dividends but are not defined as outstanding under generally accepted accounting principles.

PlainsCapital Corporation

Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2012

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 1. Financial Statements
Unaudited Consolidated Interim Financial Statements
Consolidated Balance Sheets, June 30, 2012 and December 31, 2011			3
Consolidated Balance Sheets, September 30, 2012 and December 31, 2011		3
Consolidated Statements of Income, Three and Six Months Ended June 30, 2012 and 2011			4
Consolidated Statements of Income, Three and Nine Months Ended September 30, 2012 and 2011		4
Consolidated Statements of Comprehensive Income, Three and Six Months Ended June 30, 2012 and 2011			5
Consolidated Statements of Comprehensive Income, Three and Nine Months Ended September 30, 2012 and 2011		5
Consolidated Statements of Shareholders’ Equity, Six Months Ended June 30, 2012 and 2011			6
Consolidated Statements of Shareholders’ Equity, Nine Months Ended September 30, 2011 and 2012		6
Consolidated Statements of Cash Flows, Six Months Ended June 30, 2012 and 2011			7
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2012 and 2011		7
Notes to Consolidated Financial Statements		8	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		43
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		62
Item 3. Quantitative and Qualitative Disclosures about Market Risk		64
Item 4.	Controls and Procedures		65
Item 4. Controls and Procedures		67
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		65
Item 1. Legal Proceedings		67
Item 1A.	Risk Factors		66
Item 1A. Risk Factors		68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		70
Item 3.	Defaults Upon Senior Securities		68
Item 3. Defaults Upon Senior Securities		70
Item 4.	Mine Safety Disclosures		68
Item 4. Mine Safety Disclosures		70
Item 5.	Other Information		68
Item 5. Other Information		70
Item 6.	Exhibits		68
Item 6. Exhibits		70
Signatures		71	69

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets

	June 30. 2012(Unaudited)			December 31,2011
	September 30, 2012			December 31,
	(In thousands)
	(Unaudited)			2011
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	~~231~~355,~~646~~302		$	344,647
Federal funds sold and securities purchased under agreements to resell		5355,~~085~~441			3,347
Loans held for sale		970,632			776,372
Assets segregated for regulatory purposes		2,800			—
Loans held for sale		1,335,687			776,372
Securities
Trading, at fair market value		4945,~~277~~156			58,957
Available for sale, amortized cost $615,107 and $594,287, respectively		620,711			601,086
Available for sale, amortized cost $627,919 and $594,287, respectively		639,838			601,086
Held to maturity, fair market value $133,227 and $188,736, respectively		125,164			179,710
Held to maturity, fair market value $127,017 and $188,736, respectively		117,471			179,710
		795,152			839,753
		802,465			839,753
Loans, net of unearned income		3,~~301~~259,~~445~~745			3,351,167
Allowance for loan losses		(6059,~~010~~453	)		(67,495	)
Loans, net		3,~~241~~200,~~435~~292			3,283,672
Broker-dealer and clearing organization receivables		~~122~~174,~~740~~595			111,690
Fee award receivable		17,~~408~~107			18,002
Investment in unconsolidated subsidiaries		2,012			2,012
Premises and equipment, net		9396,~~693~~941			92,906
Accrued interest receivable		15,~~318~~557			16,175
Other real estate owned		26,~~229~~314			30,254
Goodwill, net		3531,~~880~~568			35,880
Other intangible assets, net		10,~~610~~222			11,385
Other assets		~~229~~223,~~853~~712			133,925
Total assets	$	56,~~845~~350,~~693~~015		$	5,700,020
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	~~237~~240,~~413~~240		$	328,858
Interest-bearing		34,~~715~~085,~~265~~847			3,917,348
Total deposits		34,~~952~~326,~~678~~087			4,246,206
Broker-dealer and clearing organization payables		~~254~~219,~~448~~450			186,483
Short-term borrowings		~~819~~898,~~181~~344			476,439
Capital lease obligations		11,~~893~~775			12,121
Notes payable		4945,~~174~~620			54,966
Junior subordinated debentures		67,012			67,012
Other liabilities		~~126~~178,~~979~~003			137,509
Total liabilities		5,~~281~~746,~~365~~291			5,180,736
Commitments and contingencies
Shareholders’ equity
PlainsCapital Corporation shareholders’ equity
Preferred stock, $1.00 par value per share, authorized 50,000,000 shares; Series C, 114,068 shares issued		114,068			114,068
Original Common Stock, $0.001 par value per share, authorized 100,000,000 shares; 32,274,835 and 31,920,732 shares issued, respectively		32			32
Original Common Stock, $0.001 par value per share, authorized 100,000,000 shares; 32,357,629 and 31,920,732 shares issued, respectively		32			32
Common Stock, $0.001 par value per share, authorized 150,000,000 shares; 0 shares issued		—			—
Surplus		~~161~~162,~~011~~697			156,123
Retained earnings		~~284~~318,~~740~~200			244,291
Accumulated other comprehensive income		48,~~056~~300			4,587
		563,907			519,101
		603,297			519,101
Unearned ESOP shares (190,254 shares)		(2,070	)		(2,070	)
Total PlainsCapital Corporation shareholders’ equity		~~561~~601,~~837~~227			517,031
Noncontrolling interest		2,~~491~~497			2,253
Total shareholders’ equity		~~564~~603,~~328~~724			519,284
Total liabilities and shareholders’ equity	$	56,~~845~~350,~~693~~015		$	5,700,020

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income - —Unaudited

(In thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Interest income:

Loans, including fees

4851,~~245~~281

4446,~~636~~051

96148,~~845~~126

86132,~~840~~891

Securities

Taxable

3,~~332~~216

54,~~093~~904

69,~~744~~960

914,~~699~~603

Tax-exempt

2,~~596~~445

2,~~605~~130

57,~~071~~516

47,~~992~~122

Federal funds sold and securities purchased under agreements to resell

~~146~~501

~~660~~916

~~232~~733

12,~~752~~668

Interest-bearing deposits with banks

~~215~~199

~~193~~243

~~388~~587

~~507~~750

Other

21,~~067~~683

12,~~531~~009

35,~~877~~560

24,~~931~~940

Total interest income

5659,~~601~~325

5456,~~718~~253

~~113~~172,~~157~~482

~~106~~162,~~721~~974

Interest expense

Deposits

43,~~379~~817

7,~~496~~013

913,~~644~~461

1522,~~024~~037

Short-term borrowings

~~565~~549

~~374~~349

~~993~~1,542

~~772~~1,121

Capital lease obligations

141

~~135~~133

~~284~~425

~~271~~404

Notes payable

~~672~~639

~~805~~777

12,~~395~~034

12,~~615~~392

Junior subordinated debentures

~~644~~647

~~627~~622

1,~~292~~939

1,~~248~~870

Other

~~215~~105

96166

~~355~~460

~~181~~347

Total interest expense

65,~~616~~898

9,~~533~~060

1319,~~963~~861

1928,~~111~~171

Net interest income

4953,~~985~~427

4547,~~185~~193

99152,~~194~~621

87134,~~610~~803

Provision for loan losses

32,~~419~~876

74,~~238~~500

58,~~640~~516

1318,~~738~~238

Net interest income after provision for loan losses

4650,~~566~~551

3742,~~947~~693

93144,~~554~~105

73116,~~872~~565

Noninterest income

Service charges on depositor accounts

2,~~067~~018

2,~~025~~207

46,~~163~~181

36,~~867~~074

Net realized gains on sale of securities

—

1,245

—

1,245

Net realized gains (losses) on sale of securities

(2,601

)

288

(2,601

)

1,533

Other-than-temporary impairment

Total other-than-temporary impairment losses on securities

~~(4,876~~—

)

—(6,218

)

(4,876

)

—(6,218

)

Portion of loss recognized in other comprehensive income

~~2,788~~—

—2,318

2,788

—2,318

Net other-than-temporary impairment losses recognized in earnings

~~(2,088~~—

)

—(3,900

)

(2,088

)

—(3,900

)

Net gains from sale of loans

~~118~~157,~~675~~410

6091,~~641~~916

~~218~~375,~~393~~803

~~104~~196,~~975~~891

Mortgage loan origination fees

2023,~~407~~172

1817,~~180~~041

3861,~~732~~904

3552,~~472~~513

Trust fees

1,~~045~~016

1,~~044~~073

23,~~076~~092

23,~~050~~123

Investment advisory fees and commissions

1918,~~680~~686

1618,~~256~~275

3755,~~133~~819

2846,~~267~~542

Securities brokerage fees and commissions

65,~~143~~653

56,~~221~~246

1318,~~285~~938

1117,~~407~~653

Other

2,~~490~~827

2,~~977~~760

69,~~831~~658

58,~~646~~406

Total noninterest income

~~168~~208,~~419~~181

~~107~~135,~~589~~906

~~318~~526,~~525~~706

~~192~~328,~~929~~835

Noninterest expense

Employees’ compensation and benefits

~~112~~134,~~403~~046

7894,~~412~~145

~~218~~352,~~177~~223

~~144~~238,~~758~~903

Occupancy and equipment, net

1718,~~760~~968

15,~~812~~889

3453,~~842~~810

3147,~~210~~099

Professional services

11,~~031~~246

68,~~592~~333

1930,~~206~~452

1220,~~638~~971

Deposit insurance premium

~~907~~835

~~1,234~~837

12,~~903~~738

3,~~090~~927

Repossession and foreclosure, net of recoveries

~~1,682~~670

~~732~~5,829

78,~~600~~270

28,~~612~~441

Other

2936,~~008~~022

1927,~~148~~088

5591,~~165~~187

3663,~~663~~751

Total noninterest expense

~~172~~201,~~791~~787

~~121~~152,~~930~~121

~~336~~538,~~893~~680

~~230~~383,~~971~~092

Income before income taxes

4256,~~194~~945

2326,~~606~~478

75132,~~186~~131

3562,~~830~~308

Income tax provision

1519,~~962~~354

79,~~992~~215

2746,~~216~~570

1221,~~500~~715

Net income

2637,~~232~~591

1517,~~614~~263

4785,~~970~~561

2340,~~330~~593

Less: Net income attributable to noncontrolling interest

1,~~155~~321

~~184~~570

12,~~636~~957

~~306~~876

Net income attributable to PlainsCapital Corporation

2536,~~077~~270

1516,~~430~~693

4682,~~334~~604

2339,~~024~~717

Dividends on preferred stock and other

~~692~~748

13,~~403~~609

12,~~786~~534

26,~~803~~412

Income applicable to PlainsCapital Corporation common shareholders

2435,~~385~~522

1413,~~027~~084

4480,~~548~~070

2033,~~221~~305

Earnings per common share

Basic

01.7307

0.4340

12.3542

01.6202

Diluted

01.7203

0.4239

12.3235

0.6099

Dividends per common share

0.06

0.05

0.1218

0.1015

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income - —Unaudited

(In thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	2637,~~232~~591		$	1517,~~614~~263		$	4785,~~970~~561		$	2340,~~330~~593
Other comprehensive income (loss)
Unrealized gains (losses) on securities available for sale, net of tax ($250), $1,630, ($348) and ($508)		(465	)		3,036			(647	)		(946	)
Unrealized gains on securities available for sale, net of tax of $2,210, $3,508, $1,862 and $3,000		4,104			6,515			3,457			5,569
Unrealized gains (losses) on securities held in trust for the Supplemental Executive Pension Plan, net of tax of ($182), ($25), $62 and $79		(336	)		(45	)		116			148
Unrealized gains (losses) on securities held in trust for the Supplemental Executive Pension Plan, net of tax of $76, ($486), $138 and ($407)		140			(903	)		256			(755	)
Unrealized loss on customer-related cash flow hedges, net of tax of $0, ($6), $0 and ($24)		—			(11	)		—			(45	)
Unrealized loss on customer-related cash flow hedges, net of tax of ($24)		—			—			—			(45	)
Comprehensive income		2541,~~431~~835			1822,~~594~~875			4789,~~439~~274			2245,~~487~~362
Less: comprehensive income attributable to noncontrolling interest		1,~~155~~321			~~184~~570			12,~~636~~957			~~306~~876
Comprehensive income applicable to PlainsCapital Corporation	$	2440,~~276~~514		$	1822,~~410~~305		$	4586,~~803~~317		$	2244,~~181~~486

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity - —Unaudited

	PlainsCapital Corporation Shareholders
																Accumulated Other			Unearned
	Preferred Stock						Common Stock						Retained			AccumulatedOtherComprehensive			UnearnedESOP			Noncontrolling
	Preferred Stock						Common Stock						Retained			Comprehensive			ESOP			Noncontrolling
	Shares			Amount			Shares		Amount		Surplus		Earnings			Income (Loss)			Shares			Interest			Total
	(In thousands, except share and per share amounts)
Balance, January 1, 2011		92,013		$	89,193			31,780,828	$	32	$	153,289	$	206,786		$	(281	)	$	(2,528	)	$	785		$	447,276
Stock option plans’ activity, including compensation expense		—			—			2,246		—		37		—			—			—			—			37
Redemption of Series A and Series B preferred stock		(92,013	)		(92,013	)		—		—		—		—			—			—			—			(92,013	)
Vesting of stock-based compensation		—			—			83,713		—		—		—			—			—			—			—
Sale of Series C preferred stock		114,068			114,068			—		—		—		—			—			—			—			114,068
Stock-based compensation expense		—			—			—		—		1,109		—			—			—			—			1,109
Stock option plans’ activity, including compensation expense		—			—			45,663		—		319		—			—			—			—			319
ESOP activity		—			—			—		—		—		24			—			—			—			24
Vesting of stock-based compensation		—			—			85,213		—		—		—			—			—			—			—
Dividends on common stock ($0.10 per share)		—			—			—		—		—		(3,408	)		—			—			—			(3,408	)
Stock-based compensation expense		—			—			—		—		1,780		—			—			—			—			1,780
Dividends on preferred stock		—			—			—		—		—		(2,388	)		—			—			—			(2,388	)
ESOP activity		—			—			—		—		—		35			—			—			—			35
Preferred stock discount and accretion		—			415			—		—		—		(415	)		—			—			—			—
Dividends on common stock ($0.15 per share)		—			—			—		—		—		(5,117	)		—			—			—			(5,117	)
Cash received from noncontrolling interest		—			—			—		—		—		—			—			—			598			598
Dividends on preferred stock		—			—			—		—		—		(3,592	)		—			—			—			(3,592	)
Cash distributions to noncontrolling interest		—			—			—		—		—		—			—			—			(359	)		(359	)
Preferred stock discount and accretion		—			2,820			—		—		—		(2,820	)		—			—			—			—
Net income		—			—			—		—		—		23,024			—			—			306			23,330
Cash received from noncontrolling interest		—			—			—		—		—		—			—			—			944			944
Other comprehensive loss		—			—			—		—		—		—			(843	)		—			—			(843	)
Cash distributions to noncontrolling interest		—			—			—		—		—		—			—			—			(652	)		(652	)
Balance, June 30, 2011		92,013		$	89,608			31,866,787	$	32	$	154,435	$	223,623		$	(1,124	)	$	(2,528	)	$	1,330		$	465,376
Net income		—			—			—		—		—		39,717			—			—			876			40,593
Other comprehensive income		—			—			—		—		—		—			4,769			—			—			4,769
Balance, September 30, 2011		114,068		$	114,068			31,911,704	$	32	$	155,388	$	235,009		$	4,488		$	(2,528	)	$	1,953		$	508,410
Balance, January 1, 2012		114,068		$	114,068			31,920,732	$	32	$	156,123	$	244,291		$	4,587		$	(2,070	)	$	2,253		$	519,284
Stock option plans’ activity, including compensation expense		—			—			90173,~~779~~573		—		~~656~~1,514		—			—			—			—			~~656~~1,514
Vesting of stock-based compensation		—			—			84,753		—		—		—			—			—			—			—
Stock-based compensation expense		—			—			—		—		12,~~732~~560		—			—			—			—			12,~~732~~560
ESOP activity		—			—			178,571		—		2,500		2334			—			—			—			2,~~523~~534
Dividends on common stock ($0.12 per share)		—			—			—		—		—		(4,122	)		—			—			—			(4,122	)
Dividends on common stock ($0.18 per share)		—			—			—		—		—		(6,195	)		—			—			—			(6,195	)
Dividends on preferred stock		—			—			—		—		—		(12,~~786~~534	)		—			—			—			(12,~~786~~534	)
Cash received from noncontrolling interest		—			—			—		—		—		—			—			—			~~116~~316			~~116~~316
Cash distributions to noncontrolling interest		—			—			—		—		—		—			—			—			(12,~~514~~840	)		(12,~~514~~840	)
Net income		—			—			—		—		—		46,334			—			—			1,636			47,970
Sale of majority-owned subsidiary		—			—			—		—		—		—			—			—			(189	)		(189	)
Other comprehensive loss		—			—			—		—		—		—			(531	)		—			—			(531	)
Net income		—			—			—		—		—		82,604			—			—			2,957			85,561
Balance, June 30, 2012		114,068		$	114,068			32,274,835	$	32	$	161,011	$	284,740		$	4,056		$	(2,070	)	$	2,491		$	564,328
Other comprehensive income		—			—			—		—		—		—			3,713			—			—			3,713
Balance, September 30, 2012		114,068		$	114,068			32,357,629	$	32	$	162,697	$	318,200		$	8,300		$	(2,070	)	$	2,497		$	603,724

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows - —Unaudited

(In thousands)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012			2011
Operating Activities
Net income	$	4785,~~970~~561		$	2340,~~330~~593
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses		58,~~640~~516			1318,~~738~~238
Net losses on other real estate owned		6,~~786~~980			27,~~010~~352
Depreciation and amortization		1217,~~411~~881			1622,~~229~~247
Stock-based compensation expense		12,~~732~~560			1,~~128~~799
Net realized losses (gains) on securities		24,~~088~~689			(12,~~245~~367	)
Loss on sale of premises and equipment		~~156~~975			~~131~~178
Stock dividends received on securities		(9	)		(13	)
Gain on sale of majority-owned subsidiary		(74	)		—
Deferred income taxes		(2,358	)		3,387
Stock dividends received on securities		(23	)		(17	)
Net change in prepaid FDIC assessments		1,740			2,706
Deferred income taxes		(3,645	)		(746	)
Net change in trading securities		9,680			(5,905	)
Net change in prepaid FDIC assessments		2,490			3,446
Net change in broker-dealer and clearing organization receivables		(11,050	)		(24,772	)
Net change in assets segregated for regulatory purposes		(2,800	)		—
Net change in fee award receivable		594			619
Net change in trading securities		13,801			(28,275	)
Net change in broker-dealer and clearing organization payables		67,965			61,776
Net change in broker-dealer and clearing organization receivables		(62,905	)		(80,434	)
Net change in other assets		(10,245	)		(5,815	)
Net change in fee award receivable		895			922
Net change in other liabilities		(9,405	)		(51,489	)
Net change in other assets		(53,244	)		(6,612	)
Net gains from sale of loans		(218,393	)		(104,975	)
Net change in broker-dealer and clearing organization payables		32,967			76,662
Loans originated for sale		(5,829,090	)		(3,407,745	)
Net change in other liabilities		39,905			(19,969	)
Proceeds from loans sold		5,843,584			3,424,069
Net gains from sale of loans		(375,803	)		(196,891	)
Net cash provided by (used in) operating activities		(80,204	)		(52,836	)
Loans originated for sale		(9,706,400	)		(5,870,405	)
Proceeds from loans sold		9,515,877			5,848,913
Net cash provided by (used in) operating activities		(471,797	)		(180,632	)
Investing Activities
Net change in securities purchased under resale agreements		(3734,~~553~~976	)		5482,~~570~~464
Proceeds from maturities and principal reductions of securities held to maturity		916,~~230~~888			1120,~~857~~657
Proceeds from sales, maturities and principal reductions of securities available for sale		~~250~~515,~~489~~601			~~244~~478,~~073~~773
Purchases of securities held to maturity		—			(1,031	)
Purchases of securities available for sale		(~~290~~511,~~678~~761	)		(~~360~~534,~~641~~902	)
Net change in loans		3064,~~058~~556			(424,~~824~~080	)
Purchases of premises and equipment and other assets		(1220,~~848~~245	)		(2124,~~481~~952	)
Proceeds from sales of premises and equipment and other real estate owned		48,~~644~~337			811,~~460~~020
Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock		(11,922	)		34
Net proceeds from sale of majority-owned subsidiary		3,934			—
Net cash provided by (used in) investing activities		(58,580	)		(68,983	)
Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock		(27,292	)		3,341
Net cash provided by (used in) investing activities		15,042			11,290
Financing Activities
Net change in deposits		~~(293~~79,~~528~~881	)		44456,~~213~~001
Net change in short-term borrowings		~~342~~421,~~742~~905			(~~127~~175,~~357~~229	)
Proceeds from notes payable		—			4,000
Payments on notes payable		(59,~~792~~346	)		(510,~~677~~197	)
Proceeds from issuance of common stock		3,156			18
Payments to redeem preferred stock		—			(92,013	)
Dividends paid		(6,984	)		(5,796	)
Proceeds from issuance of preferred stock		—			114,068
Net cash received from (distributed to) noncontrolling interest		(1,398	)		239
Proceeds from issuance of common stock		4,014			300
Other, net		(228	)		(229	)
Dividends paid		(9,056	)		(9,256	)
Net cash provided by (used in) financing activities		37,968			(90,589	)
Net cash received from (distributed to) noncontrolling interest		(2,524	)		292
Net change in cash and cash equivalents		(100,816	)		(212,408	)
Other, net		(346	)		(347	)
Net cash provided by (used in) financing activities		484,528			287,619
Net change in cash and cash equivalents		27,773			118,277
Cash and cash equivalents at beginning of period		347,189			359,335
Cash and cash equivalents at end of period	$	~~246~~374,~~373~~962		$	~~146~~477,~~927~~612
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	1421,~~897~~173		$	2130,~~693~~496
Income taxes	$	3244,~~174~~138		$	2,~~497~~575
Supplemental Schedule of Noncash Activities
Conversion of loans to other real estate owned	$	711,~~097~~029		$	627,~~105~~630
Capital leases	$	—		$	887

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements -– Unaudited

~~June~~September 30, 2012

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

The unaudited consolidated financial statements of PlainsCapital Corporation, a Texas corporation, and its subsidiaries (“we,” “us,” “our,” “our company,” or “PlainsCapital”) for the ~~six~~three and nine month periods ended ~~June~~September 30, 2012 and 2011 have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

The consolidated interim financial statements of PlainsCapital and subsidiaries are unaudited, but in the opinion of management, contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results of the interim periods presented. The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q adopted by the SEC. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 16, 2012. Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period. PlainsCapital has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

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

PlainsCapital owns 100% of the outstanding stock of PlainsCapital Bank (the “Bank”), ~~PCC-CIC, Inc.~~ and 100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”), PNB Aero Services, Inc. and PCB-ARC, Inc. The Bank has a 100% membership interest in First Southwest Holdings, LLC (“First Southwest”) and PlainsCapital Securities, LLC, as well as a 51% voting interest in PlainsCapital Insurance Services, LLC.

~~PrimeLending~~The ~~owns~~principal asubsidiaries ~~100%~~of ~~membership~~First ~~interest~~Southwest inare ~~PrimeLending~~First ~~Ventures~~Southwest ~~Management,~~Company ~~LLC~~(“FSC”), ~~the~~a ~~controlling~~broker-dealer ~~and~~registered ~~sole~~with ~~managing~~the ~~member~~SEC ofand ~~PrimeLending~~the ~~Ventures,~~Financial Industry ~~LLC~~Regulatory Authority (“~~Ventures~~FINRA”)~~. Through a series limited liability company structure~~, ~~Ventures~~and ~~establishes~~First ~~separate~~Southwest ~~operating~~Asset ~~divisions with select business partners~~Management, ~~such as home builders~~Inc., ~~real~~a ~~estate~~registered ~~brokers~~investment ~~and~~advisor ~~financial~~under ~~institutions,~~the toInvestment ~~originate~~Advisors ~~residential~~Act ~~mortgage~~of ~~loans~~1940.

OnPrimeLending ~~May 8,~~owns ~~2012,~~a we100% ~~entered~~membership ~~into~~interest anin ~~Agreement~~PrimeLending ~~and~~Ventures ~~Plan~~Management, ofLLC, ~~Merger~~the ~~with~~controlling ~~Hilltop Holdings Inc. (“Hilltop”)~~ and asole ~~wholly~~managing ~~owned~~member ~~subsidiary~~ of ~~Hilltop,~~ ~~whereby~~PrimeLending ifVentures, ~~the~~LLC ~~merger~~ (~~the~~ “~~Merger~~Ventures”). ~~contemplated~~Through ~~therein were consummated, PlainsCapital would merge into~~ a ~~subsidiary of Hilltop, which subsidiary would survive the transaction, and each share of our common stock would be~~series ~~converted~~limited ~~into~~liability ~~the~~company ~~right to receive 0.776 shares of Hilltop’s common stock and a cash payment of $9.00~~structure, ~~subject~~Ventures toestablishes ~~certain~~separate ~~adjustments.~~operating ~~The~~divisions ~~Merger~~with isselect ~~subject~~business ~~to the approval of the shareholders of PlainsCapital~~partners, ~~the~~primarily ~~approval~~home ~~by shareholders of Hilltop of the issuance of shares in connection with the Merger~~builders, ~~regulatory~~to ~~approval~~originate ~~and~~residential ~~other~~mortgage ~~customary closing conditions~~loans. ~~If completed, the Merger would constitute a change of control.~~

InOn ~~July~~May 8, 2012, ~~PlainsCapital~~we ~~sold,~~entered atinto ~~approximately~~an ~~carrying~~Agreement ~~value,~~and ~~its~~Plan ~~controlling~~of ~~membership~~Merger ~~interest~~with inHilltop ~~Hester~~Holdings ~~Capital~~Inc. ~~Management~~(“Hilltop”) and a wholly owned subsidiary of Hilltop, ~~LLC~~whereby if the merger (the “~~Hester Capital~~Merger”) tocontemplated antherein ~~unrelated~~were ~~third~~consummated, ~~party.~~PlainsCapital ~~The~~would merge into a subsidiary of Hilltop, which subsidiary would survive the transaction, and each share of our common stock would be converted into the right to receive 0.776 ~~operations~~shares of ~~Hester~~Hilltop’s ~~Capital~~common ~~were~~stock ~~not~~and ~~significant~~a cash payment of $9.00, subject to certain adjustments. The shareholders of PlainsCapital orhave approved the Merger, and the shareholders of Hilltop have approved the issuance of shares in connection with the Merger. The Merger is subject to ~~PlainsCapital’s~~receipt ~~financial~~of ~~advisory~~regulatory ~~segment~~approval and satisfaction of other customary closing conditions. If completed, the Merger would constitute a change in control of PlainsCapital.

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

~~After~~In ~~the~~July ~~close~~2012, ofPlainsCapital ~~business on December 31~~sold, ~~2008,~~at ~~First~~approximately ~~Southwest~~carrying ~~Holdings~~value, ~~Inc.,~~its acontrolling ~~diversified, private~~membership ~~investment banking corporation headquartered~~ interest in ~~Dallas,~~Hester ~~Texas~~Capital ~~merged into FSWH Acquisition LLC~~Management, ~~a wholly owned subsidiary of the Bank. Following the merger, FSWH Acquisition~~ LLC ~~changed~~(“Hester ~~its~~Capital”) ~~name~~ to ~~“First~~an ~~Southwest~~unrelated ~~Holdings, LLC~~third party.” The ~~principal~~operations ~~subsidiaries~~ of ~~First~~Hester ~~Southwest~~Capital ~~are~~were ~~First~~not ~~Southwest~~significant ~~Company~~to ~~(“FSC”),~~PlainsCapital aor ~~broker-dealer~~to ~~registered~~PlainsCapital’s ~~with~~financial ~~the~~advisory ~~SEC and the Financial Industry Regulatory Authority (“FINRA”), and First Southwest Asset Management, Inc~~segment., ~~a registered investment advisor under the Investment Advisors Act of 1940.~~

The acquisition cost of First Southwest ~~Holdings,~~ ~~Inc.~~ was approximately $62.2 million. In addition, PlainsCapital placed approximately 1.7 million shares of PlainsCapital common stock, valued at approximately $19.2 million as of December 31, 2008, into escrow. The percentage of shares to be released from escrow and distributed to former First Southwest stockholders will be determined based upon, among other factors, the valuation of certain auction rate bonds held by First Southwest prior to the merger (or repurchased from investors following the closing of the merger) as of the last day of December 2012 or, if applicable, the aggregate sales price of such auction rate bonds prior to such date. Based on sales of auction rate bonds to date and the fair value of bonds held at September 30, 2012, we expect to release between 50% and 80% of the shares held in escrow to former First Southwest stockholders. However, we cannot determine the precise number of shares to be released from escrow upon resolution of the contingency on December 31, 2012. Any shares ~~issued~~released out of the escrow will be accounted for as ~~additional~~ additional acquisition cost.

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

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

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

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

Cash Flow Reporting

For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents are defined as the amount included in the consolidated balance sheets caption “Cash and due from banks” and the portion of the amount in the caption “Federal funds sold and securities purchased under agreements to resell” that represents federal funds sold. Cash equivalents have original maturities of three months or less.

Comprehensive Income

PlainsCapital’s comprehensive income consists of its net income and unrealized holding gains (losses) on its available for sale securities, including securities for which the credit portion of an other-than-temporary impairment (“OTTI”) has been recognized in earnings, and investments held in trust for the Supplemental Executive Pension Plan.

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

The components of accumulated other comprehensive income (“AOCI”) at ~~June~~September 30, 2012 ~~and~~ and December 31, 2011 are shown in the following table (in thousands, net of taxes):

	June 30,			December 31,
	September 30,2012			December 31,2011
	2012			2011
Unrealized gain on securities available for sale	$	7,706		$	5,718
Unrealized gain on securities available for sale	$	6,142		$	5,718
Unrealized gain (loss) on securities for which the credit portion of an OTTI has been recognized in earnings		41			(1,428	)
Unrealized loss on securities for which the credit portion of an OTTI has been recognized in earnings		(2,499	)		(1,428	)
Unrealized gain on securities held in trust for the Supplemental Executive Pension Plan		553			297
Unrealized gain on securities held in trust for the Supplemental Executive Pension Plan		413			297
	$	8,300		$	4,587
	$	4,056		$	4,587

Reclassification

Certain items in the 2011 financial statements have been reclassified to conform to the 2012 presentation.

2. Securities

The amortized cost and fair value of securities, excluding trading securities, as of ~~June~~September 30, 2012, and December 31, 2011 are summarized as follows (in thousands):

	Available for Sale
			Recognized in AOCI
	AmortizedCost		GrossUnrealizedGains		GrossUnrealizedLosses			OTTI			Fair Value
As of June 30, 2012
As of September 30, 2012
U. S. government agencies
Bonds	$	~~266~~390,~~595~~250	$	~~674~~1,082	$	(~~299~~26	)	$	—		$	~~266~~391,~~970~~306
Mortgage-backed securities		33,~~480~~275		3,~~019~~536		—			—			36,~~499~~811
Collateralized mortgage obligations		~~158~~118,~~501~~866		1,~~278~~342		(~~181~~49	)		—			~~159~~120,~~598~~159
States and political subdivisions		6661,~~682~~435		45,~~981~~973		(233	)		—			7167,~~640~~405
Auction rate bonds		8924,~~849~~093		—		—			~~(3,845~~64	)		8624,~~004~~157
Totals	$	~~615~~627,~~107~~919	$	911,~~952~~933	$	(~~503~~78	)	$	~~(3,845~~64	)	$	~~620~~639,~~711~~838
As of December 31, 2011
U. S. government agencies
Bonds	$	183,191	$	659	$	—		$	—		$	183,850
Mortgage-backed securities		33,897		2,456		(83	)		—			36,270
Collateralized mortgage obligations		260,878		2,284		(1,084	)		—			262,078
States and political subdivisions		69,779		4,613		(48	)		—			74,344
Auction rate bonds		46,542		—		—			(1,998	)		44,544
Totals	$	594,287	$	10,012	$	(1,215	)	$	(1,998	)	$	601,086

	Held to Maturity
	AmortizedCost		OTTIUnrealized LossRecognized in AOCI			Carrying Value		GrossUnrealizedGains		GrossUnrealizedLosses			Fair Value
As of June 30, 2012
As of September 30, 2012
U. S. government agencies
Mortgage-backed securities	$	5,~~618~~209	$	—		$	5,~~618~~209	$	~~475~~449	$	(5	)	$	65,~~088~~653
Collateralized mortgage obligations		1310,~~050~~915		—			1310,~~050~~915		~~244~~223		(4520	)		1311,~~249~~118
States and political subdivisions		~~106~~101,~~496~~347		—			~~106~~101,~~496~~347		78,~~399~~901		(52	)		~~113~~110,~~890~~246
Totals	$	125,164	$	—		$	125,164	$	8,118	$	(55	)	$	133,227
Auction rate bonds		—		—			—		—		—			—
Totals	$	117,471	$	—		$	117,471	$	9,573	$	(27	)	$	127,017
As of December 31, 2011
U. S. government agencies
Mortgage-backed securities	$	6,639	$	—		$	6,639	$	547	$	(6	)	$	7,180
Collateralized mortgage obligations		15,974		—			15,974		419		(88	)		16,305
States and political subdivisions		111,924		—			111,924		7,209		(10	)		119,123
Auction rate bonds		45,372		(199	)		45,173		955		—			46,128
Totals	$	179,909	$	(199	)	$	179,710	$	9,130	$	(104	)	$	188,736

2. Securities (continued)

In the second quarter of 2012, the credit ratings of all of the auction rate bonds held by the Bank were downgraded. In response to the deterioration of the creditworthiness of the ~~issuer of the~~ auction rate bonds evidenced by the downgrade, the Bank transferred senior auction rate bonds with a net carrying amount of $41.3 million from held to maturity to available for sale. The net carrying amount of the transferred securities included an unrealized loss of $2.8 million that was included, net of tax, in accumulated other comprehensive income at June 30, 2012, which reduced shareholders’ equity.

In addition, the Bank determined that certain senior auction rate bonds had incurred other-than-temporary impairment. In order to ~~determine~~ determine the amount of the OTTI, the Bank evaluated the historical and projected performance of the underlying student loan collateral, the extent of the government guarantee, expenses associated with the trust that issued the securities, the expected cash flows from the auction rate bonds and other factors. As a result of this evaluation, the Bank determined that it incurred OTTI of $0 and approximately $4.9 million on auction rate bonds for the three and ~~six~~nine months ended ~~June~~September 30, 2012. The credit-related portion of the OTTI, calculated as the difference between the securities’ amortized cost basis and the present value of the securities’ expected future cash flows, was $0 and approximately $2.1 million for the three and ~~six~~ nine months ended ~~June~~September 30, 2012, and was recorded in operating results. The remaining $2.8 million of the OTTI for the nine months ended September 30, 2012 has been recognized in other comprehensive income. The Bank ~~did~~incurred OTTI ~~not~~of ~~incur~~$6.2 ~~OTTI~~million infor ~~either~~the three and nine months ended September 30, 2011. The credit related portion of the OTTI was approximately $3.9 million for the three orand ~~six~~nine months ended ~~June 30~~and was recorded in operating results, while the remaining ~~2011~~OTTI of $2.3 million was recorded in other comprehensive income.

In the third quarter of 2012, the Bank sold all of its senior auction rate bonds, resulting in a remaining balance of $24.2 million of subordinated action rate bonds. The bank received proceeds of $63.2 million and realized gross losses of $2.6 million.

The following table provides details regarding the amounts of credit-related OTTI recognized in earnings (in thousands):


	Nine Months Ended September 30,			Twelve Months Ended December 31,
	2012			2011
Balance at beginning of period	$	5,305		$	—
Additions for credit-related OTTI not previously recognized		1,156			5,305
Additional increases to credit loss on OTTI previously recognized		932			—
Reductions for securities sold during the period (realized)		(2,847	)		—

Balance at end of period	$	4,546		$	5,305

2. Securities (continued)

Information regarding securities, including those for which the credit-related portion of an OTTI has been recorded in earnings, which were in an unrealized loss position as of ~~June~~September 30, 2012 and December 31, 2011, is shown in the following tables (dollars in thousands):

	As of June 30, 2012						As of December 31, 2011
	As of September 30, 2012						As of December 31, 2011
	Number ofSecurities		Fair Value		UnrealizedLosses		Number ofSecurities		Fair Value		UnrealizedLosses
Available for sale
U. S. government agencies
Bonds
Unrealized loss for less than twelve months		91	$	~~123~~24,~~836~~969	$	~~299~~26		—	$	—	$	—
Unrealized loss for more than twelve months		—		—		—		—		—		—
		9		123,836		299		—		—		—
		1		24,969		26		—		—		—
Mortgage-backed securities
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		—		—		—		1		4,404		83
		—		—		—		1		4,404		83
Collateralized mortgage obligations
Unrealized loss for less than twelve months		108		4033,~~177~~666		~~177~~47		15		106,887		1,083
Unrealized loss for more than twelve months		1		96,~~537~~568		42		1		552		1
		11		49,714		181		16		107,439		1,084
		9		40,234		49		16		107,439		1,084
States and political subdivisions
Unrealized loss for less than twelve months		1—		~~127~~—		7—		3		635		13
Unrealized loss for more than twelve months		1		~~1,530~~133		163		4		4,380		35
		2		1,657		23		7		5,015		48
		1		133		3		7		5,015		48
Auction rate bonds
Unrealized loss for less than twelve months		3—		~~57,996~~—		~~3,222~~—		—		—		—
Unrealized loss for more than twelve months		21		2016,~~788~~841		~~746~~155		3		44,544		1,998
		5		78,784		3,968		3		44,544		1,998
		1		16,841		155		3		44,544		1,998
Total available for sale
Unrealized loss for less than twelve months		239		~~222~~58,~~136~~635		~~3,705~~73		18		107,522		1,096
Unrealized loss for more than twelve months		43		3123,~~855~~542		~~766~~160		9		53,880		2,117
		27	$	253,991	$	4,471		27	$	161,402	$	3,213
		12	$	82,177	$	233		27	$	161,402	$	3,213
Held to maturity
U. S. government agencies
Mortgage-backed securities
Unrealized loss for less than twelve months		1	$	491	$	5		1	$	491	$	6
Unrealized loss for more than twelve months		—		—		—		—		—		—
		1		491		5		1		491		6
Collateralized mortgage obligations
Unrealized loss for less than twelve months		1		43,~~540~~316		4520		1		5,337		88
Unrealized loss for more than twelve months		—		—		—		—		—		—
		1		43,~~540~~316		4520		1		5,337		88
States and political subdivisions
Unrealized loss for less than twelve months		13		~~541~~1,875		—		—		—		—
Unrealized loss for more than twelve months		1		~~206~~208		52		6		2,498		10
		2		747		5		6		2,498		10
		4		2,083		2		6		2,498		10
Auction rate bonds
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		—		—		—		2		10,081		199
		—		—		—		2		10,081		199
Total held to maturity
Unrealized loss for less than twelve months		35		5,~~572~~682		5025		2		5,828		94
Unrealized loss for more than twelve months		1		~~206~~208		52		8		12,579		209
		4	$	5,778	$	55		10	$	18,407	$	303
		6	$	5,890	$	27		10	$	18,407	$	303

2. Securities (continued)

As noted above, the Bank has incurred OTTI on securities classified as available for sale. Subject to the discussion of OTTI above, management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Bank expects to receive full value for the securities. As of ~~June~~September 30, 2012, management does not intend to sell any of the securities classified as available for sale in the previous table and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. As of ~~June~~September 30, 2012 and December 31, 2011, the securities included in the previous table represented 3411.4548% and 22.77%, respectively, of the fair value of the Bank’s securities portfolio. At ~~June~~September 30, 2012 and December 31, 2011, total impairment represented 10.7430% and 1.96%, respectively, of the fair value of the underlying securities, and 0.6003% and 0.45%, respectively, of the fair value of the Bank’s securities portfolio. Management believes the other impairments detailed in the table are temporary and relate primarily to changes in interest rates and liquidity as of ~~June~~September 30, 2012.

The ~~following table~~amortized ~~provides~~cost ~~details~~and ~~regarding~~fair ~~the~~value ~~amounts~~of securities, excluding trading securities, as of ~~credit-related~~September 30, ~~OTTI~~2012 ~~recognized~~are inshown ~~earnings~~by contractual maturity below (in thousands):.

	June 30,2012		December 31,2011
	Securities Available forSale				Securities Held toMaturity
Balance at beginning of period	$	5,305	$	—
	AmortizedCost		Fair Value		CarryingValue		Fair Value
Additions for credit-related OTTI not previously recognized		1,156		5,305
Due in one year or less	$	3,095	$	3,195	$	4,766	$	4,833
Additional increases to credit loss on OTTI previously recognized		932		—
Due after one year through five years		12,055		12,277		3,915		4,038
Balance at end of period	$	7,393	$	5,305
Due after five years through ten years		664		689		14,140		14,872
Due after ten years		459,964		466,707		78,526		86,503
		475,778		482,868		101,347		110,246
Mortgage-backed securities		33,275		36,811		5,209		5,653
Collateralized mortgage obligations		118,866		120,159		10,915		11,118
	$	627,919	$	639,838	$	117,471	$	127,017

~~The~~Excluding ~~amortized~~the ~~cost~~auction ~~and~~rate ~~fair~~bonds ~~value~~described ~~of securities~~previously, ~~excluding~~the ~~trading~~Bank did not sell securities, asin either of ~~June~~the three or nine months ended September 30, 2012. ~~are~~For ~~shown~~the bythree ~~contractual~~and nine months ended September 30, 2011, the Bank received proceeds from the sale of available for sale securities of $152.3 million and $228.5 million, respectively, and realized gross gains ~~maturity~~of ~~below~~$0.3 ~~(in~~million ~~thousands)~~and $1.5 million, respectively. The Bank determines the cost of securities sold by specific identification.

	Securities Available for Sale				Securities Held to Maturity
	AmortizedCost		Fair Value		CarryingValue		Fair Value
Due in one year or less	$	5,300	$	5,367	$	6,716	$	6,802
Due after one year through five years		12,064		12,280		4,330		4,476
Due after five years through ten years		665		682		13,608		14,253
Due after ten years		405,097		406,285		81,842		88,359
		423,126		424,614		106,496		113,890
Mortgage-backed securities		33,480		36,499		5,618		6,088
Collateralized mortgage obligations		158,501		159,598		13,050		13,249
	$	615,107	$	620,711	$	125,164	$	133,227

We realized net gains on our trading securities portfolio of $1.3 million and $4.8 million for the three and nine months ended September 30, 2012, respectively, and $1.2 million and $2.9 million for the three and nine months ended September 30, 2011, respectively.

~~The~~Securities ~~Bank~~with ~~did~~a ~~not~~carrying ~~sell~~amount ~~securities~~of inapproximately ~~either~~$472.5 ofmillion ~~the~~and ~~three~~$685.9 ormillion ~~six~~(fair ~~months~~value ~~ended~~of ~~June 30,~~approximately ~~2012~~$493.2 million ~~For~~and ~~both~~$701.8 ~~the~~million) ~~three~~at ~~and~~September 30, ~~six~~2012 ~~months~~and ~~ended June~~December 3031, 2011, ~~the~~respectively, ~~Bank~~were ~~received~~pledged ~~proceeds~~to ~~from~~secure ~~the~~public ~~sale~~and oftrust ~~available~~deposits, ~~for~~federal ~~sale~~funds ~~securities~~purchased ~~of $76.2 million~~ and ~~realized~~securities ~~gross~~sold ~~gains~~under ofagreements ~~$1.2~~to ~~million.~~repurchase, ~~The~~and ~~Bank~~for ~~determines~~other ~~the~~purposes ~~cost~~as required ofor ~~securities~~permitted ~~sold~~ by ~~specific identification~~law.

We realized net gains on our trading securities portfolio of $0.8 million and $3.5 million for the three and six months ended June 30, 2012, respectively, and $0.7 million and $1.7 million for the three and six months ended June 30, 2011, respectively.

Securities with a carrying amount of approximately $621.4 million and $685.9 million (fair value of approximately $638.5 million and $624.4 million) at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

3. Loans and Allowance for Loan Losses

Loans summarized by category as of ~~June~~September 30, 2012 and December 31, 2011, are as follows (in thousands):

	June 30,2012			December 31,2011
	September 30,2012			December 31,2011
Commercial and industrial
Commercial	$	1,~~466~~485,~~219~~353		$	1,473,564
Lease financing		27,~~531~~185			32,604
Securities (primarily margin loans)		~~305~~264,~~808~~050			319,895
Real estate		1,~~221~~183,~~609~~969			1,221,726
Construction and land development		~~252~~271,~~709~~524			273,949
Consumer		27,~~569~~664			29,429
		3,301,445			3,351,167
		3,259,745			3,351,167
Allowance for loan losses		(6059,~~010~~453	)		(67,495	)
	$	3,~~241~~200,~~435~~292		$	3,283,672

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

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

PlainsCapital maintains an independent loan review department that reviews credit risk in response to both external and internal factors that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and the Bank’s Board of Directors.

3. Loans and Allowance for Loan Losses (continued)

Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”) and partially charged-off loans. Impaired loans as of ~~June~~September 30, 2012 and December 31, 2011 are summarized by class in the following tables (in thousands):

UnpaidContractualPrincipal Balance

RecordedInvestment withNo Allowance

RecordedInvestment withAllowance

TotalRecordedInvestment

RelatedAllowance

~~AverageRecordedInvestment~~

As of June 30, 2012

As of September 30, 2012

Commercial and industrial

Secured by receivables

1513,~~345~~062

86,~~460~~065

—6,016

812,~~460~~081

—468

~~10,683~~

Secured by equipment

~~311~~5,939

~~311~~217

—5,722

~~311~~5,939

—643

~~287~~

Unsecured

6,~~541~~559

~~168~~289

1,~~526~~423

1,~~694~~712

~~162~~786

~~2,224~~

Lease financing

~~877~~791

—

~~877~~791

—

~~1,219~~

All other commercial and industrial

24,~~185~~126

1,~~331~~279

~~854~~2,847

24,~~185~~126

—427

~~2,517~~

Real estate

Secured by commercial properties

2018,~~836~~468

106,~~450~~710

89,~~311~~683

1816,~~761~~393

~~1,669~~970

~~23,672~~

Secured by residential properties

119,~~740~~130

97,~~211~~153

—

97,~~211~~153

—

~~9,365~~

Construction and land development

Residential construction loans

~~1,189~~949

—

~~1,189~~949

—

~~1,426~~

Commercial construction loans and land development

26,~~801~~512

1817,~~160~~871

—

1817,~~160~~871

—

~~21,385~~

Consumer

—

85,~~825~~536

5041,~~157~~324

1025,691

6067,~~848~~015

13,~~831~~294

~~72,778~~

	UnpaidContractualPrincipal Balance		RecordedInvestment withNo Allowance		RecordedInvestment withAllowance		TotalRecordedInvestment		RelatedAllowance		~~AverageRecordedInvestment~~
As of December 31, 2011
Commercial and industrial
Secured by receivables	$	13,991	$	11,037	$	1,869	$	12,906	$	392	$	~~14,275~~
Secured by equipment		263		263		—		263		—		~~569~~
Unsecured		6,753		192		2,561		2,753		837		~~1,431~~
Lease financing		1,561		1,561		—		1,561		—		~~3,795~~
All other commercial and industrial		2,848		1,963		885		2,848		—		~~5,384~~
Real estate
Secured by commercial properties		32,888		16,547		12,035		28,582		2,664		~~22,570~~
Secured by residential properties		10,812		9,519		—		9,519		—		~~9,720~~
Construction and land development
Residential construction loans		1,662		1,662		—		1,662		—		~~1,747~~
Commercial construction loans and land development		28,547		6,690		17,920		24,610		4,894		~~41,064~~
Consumer		—		—		—		—		—		18
	$	99,325	$	49,434	$	35,270	$	84,704	$	8,787	$	~~100,573~~

Interest income recorded on accruing impaired loans was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively, and $0.1 million and $0.3 million for the three and six months ended June 30, 2011, respectively. Interest income recorded on non-accrual loans for the three and six months ended June 30, 2012 and 2011 was nominal. At June 30, 2012, PlainsCapital had no unadvanced commitments to borrowers whose loans have been restructured in TDRs.

3. Loans and Allowance for Loan Losses (continued)

~~Non-accrual~~Average investment in impaired loans asfor ofthe ~~June~~three and nine months ended September 30, 2012 and ~~December 31,~~ 2011 are summarized by class in the following table (in thousands):

	June 30,		December 31,
	ThreeMonths EndedSeptember 30, 2012		NineMonths EndedSeptember 30, 2012		ThreeMonths EndedSeptember 30, 2011		NineMonths EndedSeptember 30, 2011
	2012		2011
Commercial and industrial
Commercial and industrial
Secured by receivables	$	10,271	$	12,494	$	6,866	$	10,914
Secured by receivables	$	8,460	$	12,707
Secured by equipment		3,125		3,101		392		575
Secured by equipment		311		263
Unsecured		1,703		2,233		4,899		2,249
Unsecured		1,667		2,720
Lease financing		834		1,176		1,886		3,932
Lease financing		877		1,561
All other commercial and industrial		3,156		3,487		898		4,391
All other commercial and industrial		854		1,000
Real estate
Real estate
Secured by commercial properties		17,577		22,488		18,553		17,439
Secured by commercial properties		15,984		26,611
Secured by residential properties		8,182		8,336		8,515		9,713
Secured by residential properties		8,287		4,612
Construction and land development
Construction and land development
Residential construction loans		1,069		1,306		847		1,354
Residential construction loans		1,189		1,465
Commercial construction loans and land development		18,016		21,241		43,624		44,982
Commercial construction loans and land development		17,936		24,376
Consumer		—		—		116		118
Consumer		—		—
	$	63,933	$	75,862	$	86,596	$	95,667
	$	55,565	$	75,315

~~PlainsCapital~~Interest ~~classifies~~income ~~loan~~recorded ~~modifications~~on asaccruing ~~TDRs~~impaired ~~when~~loans itwas ~~concludes~~approximately ~~both~~$0.1 ~~that~~million ~~it has granted a concession to a debtor~~ and ~~that the debtor is experiencing financial difficulties~~$0.3 ~~Loan~~million ~~modifications are typically structured to create affordable payments~~ for the ~~debtor~~three and nine ~~can~~months beended ~~achieved~~September 30, in2012, arespectively, ~~variety~~and ~~of ways~~$0.3 ~~PlainsCapital~~million ~~modifies loans by reducing interest rates~~ and~~/or lengthening~~ ~~loan amortization schedules~~$0.6 ~~PlainsCapital~~million ~~also~~for ~~reconfigures~~the athree ~~single~~and ~~loan~~nine ~~into~~months ~~two~~ended orSeptember 30, ~~more~~2011, ~~loans (“A/B Note”)~~respectively. ~~The~~Interest ~~typical~~income ~~A/B~~recorded ~~Note~~on ~~restructure~~non-accrual ~~results~~loans infor athe ~~“bad”~~three ~~loan which is charged off~~ and anine ~~“good”~~months ~~loan~~ended orSeptember 30, ~~loans~~2012 ~~the~~and ~~terms~~2011 ofwas ~~which~~nominal. ~~comply~~At ~~with~~September 30, ~~the~~2012, ~~Bank’s~~PlainsCapital ~~customary~~had ~~underwriting~~no ~~policies.~~unadvanced ~~The~~commitments ~~debt~~to ~~charged~~borrowers ~~off~~whose onloans ~~the~~have ~~“bad”~~been ~~loan~~restructured isin ~~not forgiven to the debtor~~TDRs.

3. Loans and Allowance for Loan Losses (continued)

~~For~~Non-accrual ~~the~~loans ~~three~~as ~~and~~of ~~six months ended June~~September 30, 2012, ~~information~~and ~~regarding~~December 31, ~~TDRs~~2011 ~~granted~~are issummarized ~~shown~~by class in the following ~~tables~~table (in thousands):

	Recorded Investment in Loans Modified by
	September 30,2012		December 31,2011
	A/B Note		Interest RateAdjustment		Payment TermExtension		TotalModifications
Commercial and industrial
Three Months Ended June 30, 2012
Secured by receivables	$	12,081	$	12,707
Commercial and industrial
Secured by equipment		5,939		263
Secured by receivables	$	—	$	—	$	606	$	606
Unsecured		1,694		2,720
Secured by equipment		—		—		—		—
Lease financing		791		1,561
Unsecured		—		—		—		—
All other commercial and industrial		2,847		1,000
Lease financing		—		—		—		—
Real estate
All other commercial and industrial		—		—		—		—
Secured by commercial properties		13,708		26,611
Real estate		—		—		—		—
Secured by residential properties		6,231		4,612
Secured by commercial properties		—		—		2,392		2,392
Construction and land development
Secured by residential properties		—		—		2,100		2,100
Residential construction loans		949		1,465
Construction and land development		—		—		—		—
Commercial construction loans and land development		17,651		24,376
Residential construction loans		—		—		951		951
Consumer		—		—
Commercial construction loans and land development		—		—		—		—
	$	61,891	$	75,315
Consumer		—		—		—		—
	$	—	$	—	$	6,049	$	6,049

	Recorded Investment in Loans Modified by
	A/B Note		Interest RateAdjustment		Payment TermExtension		TotalModifications
Six Months Ended June 30, 2012
Commercial and industrial
Secured by receivables	$	—	$	—	$	606	$	606
Secured by equipment		—		—		—		—
Unsecured		—		—		—		—
Lease financing		—		—		—		—
All other commercial and industrial		—		—		—		—
Real estate		—		—		—		—
Secured by commercial properties		—		—		2,392		2,392
Secured by residential properties		—		—		2,100		2,100
Construction and land development		—		—		—		—
Residential construction loans		—		—		951		951
Commercial construction loans and land development		—		—		—		—
Consumer		—		—		—		—
	$	—	$	—	$	6,049	$	6,049

PlainsCapital classifies loan modifications as TDRs when it concludes both that it has granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. PlainsCapital modifies loans by reducing interest rates and/or lengthening loan amortization schedules. PlainsCapital also reconfigures a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

None of the TDRs granted during the twelve months preceding June 30, 2012 had a payment that was at least 30 days past due during the three or six months ended June 30, 2012.

3. Loans and Allowance for Loan Losses (continued)

AnInformation ~~analysis~~regarding ofTDRs ~~the~~granted ~~aging~~for ofthe ~~PlainsCapital’s~~nine ~~loan~~months ~~portfolio~~ended ~~as of June~~September 30, 2012 and ~~December 31,~~ 2011 is shown in the following tables. ~~(in~~There ~~thousands):~~were no TDRs granted for the three months ended September 30, 2012 or 2011.

	Loans Past Due30-89 Days		Loans Past Due90 Days or More		TotalPast Due Loans		CurrentLoans		TotalLoans		Accruing LoansPast Due90 Days or More
	Recorded Investment in Loans Modified by
As of June 30, 2012
	A/B Note		Interest RateAdjustment		Payment TermExtension		TotalModifications
Commercial and industrial
Nine Months Ended September 30, 2012
Secured by receivables	$	5,770	$	4,814	$	10,584	$	689,515	$	700,099	$	—
Commercial and industrial
Secured by equipment		418		273		691		179,769		180,460		—
Secured by receivables	$	—	$	—	$	498	$	498
Unsecured		47		114		161		112,476		112,637		—
Secured by equipment		—		—		—		—
Lease financing		721		888		1,609		25,922		27,531		11
Unsecured		—		—		—		—
All other commercial and industrial		246		889		1,135		777,696		778,831		35
Lease financing		—		—		—		—
Real estate
All other commercial and industrial		—		—		—		—
Secured by commercial properties		1,372		11,992		13,364		934,365		947,729		—
Real estate		—		—		—		—
Secured by residential properties		3,611		3,910		7,521		266,359		273,880		—
Secured by commercial properties		—		—		2,370		2,370
Construction and land development
Secured by residential properties		—		—		1,548		1,548
Residential construction loans		258		238		496		34,003		34,499		—
Construction and land development		—		—		—		—
Commercial construction loans and land development		332		17,301		17,633		200,577		218,210		—
Residential construction loans		—		—		949		949
Consumer		103		2		105		27,464		27,569		2
Commercial construction loans and land development		—		—		—		—
	$	12,878	$	40,421	$	53,299	$	3,248,146	$	3,301,445	$	48
Consumer		—		—		—		—
	$	—	$	—	$	5,365	$	5,365

	Loans Past Due30-89 Days		Loans Past Due90 Days or More		TotalPast Due Loans		CurrentLoans		TotalLoans		Accruing LoansPast Due90 Days or More
	Recorded Investment in Loans Modified by
As of December 31, 2011
	A/B Note		Interest RateAdjustment		Payment TermExtension		TotalModifications
Commercial and industrial
Nine Months Ended September 30, 2011
Secured by receivables	$	2,168	$	7,961	$	10,129	$	685,075	$	695,204	$	—
Commercial and industrial
Secured by equipment		1,151		218		1,369		133,290		134,659		—
Secured by receivables	$	—	$	—	$	—	$	—
Unsecured		34		8		42		113,481		113,523		—
Secured by equipment		—		—		—		—
Lease financing		2,965		1,561		4,526		28,078		32,604		—
Unsecured		—		—		2,666		2,666
All other commercial and industrial		5,119		968		6,087		843,986		850,073		—
Lease financing		—		—		—		—
Real estate
All other commercial and industrial		246		—		1,621		1,867
Secured by commercial properties		531		19,105		19,636		921,613		941,249		—
Real estate		—		—		—		—
Secured by residential properties		3,604		3,924		7,528		272,949		280,477		—
Secured by commercial properties		—		—		—		—
Construction and land development
Secured by residential properties		203		—		—		203
Residential construction loans		1,745		—		1,745		46,810		48,555		—
Construction and land development		—		—		—		—
Commercial construction loans and land development		43		24,164		24,207		201,187		225,394		—
Residential construction loans		—		647		—		647
Consumer		79		—		79		29,350		29,429		—
Commercial construction loans and land development		478		—		—		478
	$	17,439	$	57,909	$	75,348	$	3,275,819	$	3,351,167	$	—
Consumer		—		—		—		—
	$	927	$	647	$	4,287	$	5,861

3. Loans and Allowance for Loan Losses (continued)

The following tables present information regarding the TDRs granted in the twelve months preceding September 30, 2012 and 2011 for which a payment was at least 30 days past due in the three and nine months ended September 30, 2012 and 2011 (dollar amounts in thousands):


	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial and industrial
Secured by receivables		—	$	—		—	$	—
Secured by equipment		—		—		—		—
Unsecured		—		—		—		—
Lease financing		—		—		—		—
All other commercial and industrial		—		—		—		—
Real estate		—		—		—		—
Secured by commercial properties		—		—		6		1,005
Secured by residential properties		—		—		—		—
Construction and land development		—		—		—		—
Residential construction loans		—		—		—		—
Commercial construction loans and land development		—		—		—		—
Consumer		—		—		—		—

		—	$	—		6	$	1,005


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial and industrial
Secured by receivables		—	$	—		—	$	—
Secured by equipment		—		—		1		228
Unsecured		—		—		—		—
Lease financing		—		—		—		—
All other commercial and industrial		—		—		—		—
Real estate		—		—		—		—
Secured by commercial properties		—		—		—		—
Secured by residential properties		—		—		—		—
Construction and land development		—		—		—		—
Residential construction loans		—		—		—		—
Commercial construction loans and land development		3		16,671		4		16,910
Consumer		—		—		—		—

		3	$	16,671		5	$	17,138

3. Loans and Allowance for Loan Losses (continued)

An analysis of the aging of PlainsCapital’s loan portfolio as of September 30, 2012 and December 31, 2011 is shown in the following tables (in thousands):


	Loans Past Due 30-89 Days		Loans Past Due 90 Days or More		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans Past Due 90 Days or More
As of September 30, 2012
Commercial and industrial
Secured by receivables	$	2,986	$	3,241	$	6,227	$	679,690	$	685,917	$	—
Secured by equipment		192		182		374		183,773		184,147		—
Unsecured		150		—		150		120,468		120,618		—
Lease financing		779		791		1,570		25,615		27,185		—
All other commercial and industrial		179		15		194		758,527		758,721		15
Real estate
Secured by commercial properties		1,414		1,177		2,591		910,172		912,763		—
Secured by residential properties		1,874		2,351		4,225		266,981		271,206		—
Construction and land development
Residential construction loans		—		—		—		39,732		39,732		—
Commercial construction loans and land development		589		16,966		17,555		214,237		231,792		—
Consumer		76		—		76		27,588		27,664		—

	$	8,239	$	24,723	$	32,962	$	3,226,783	$	3,259,745	$	15


	Loans Past Due 30-89 Days		Loans Past Due 90 Days or More		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans Past Due 90 Days or More
As of December 31, 2011
Commercial and industrial
Secured by receivables	$	2,168	$	7,961	$	10,129	$	685,075	$	695,204	$	—
Secured by equipment		1,151		218		1,369		133,290		134,659		—
Unsecured		34		8		42		113,481		113,523		—
Lease financing		2,965		1,561		4,526		28,078		32,604		—
All other commercial and industrial		5,119		968		6,087		843,986		850,073		—
Real estate
Secured by commercial properties		531		19,105		19,636		921,613		941,249		—
Secured by residential properties		3,604		3,924		7,528		272,949		280,477		—
Construction and land development
Residential construction loans		1,745		—		1,745		46,810		48,555		—
Commercial construction loans and land development		43		24,164		24,207		201,187		225,394		—
Consumer		79		—		79		29,350		29,429		—

	$	17,439	$	57,909	$	75,348	$	3,275,819	$	3,351,167	$	—

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

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

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

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

1820

3. Loans and Allowance for Loan Losses (continued)

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

The following tables present the internal risk grades of loans, as previously described, in the portfolio as of ~~June~~September 30, 2012 and December 31, 2011 by class (in thousands):

Pass

~~Special Mention~~SpecialMention

Substandard

Total

As of June 30, 2012

As of September 30, 2012

Commercial and industrial

Secured by receivables

~~662~~654,~~809~~174

78,~~638~~320

2923,~~652~~423

~~700~~685,~~099~~917

Secured by equipment

~~171~~174,~~350~~922

1,~~723~~588

7,~~387~~637

~~180~~184,~~460~~147

Unsecured

97105,~~705~~724

~~192~~166

14,~~740~~728

~~112~~120,~~637~~618

Lease financing

26,~~282~~185

—

1,~~249~~000

27,~~531~~185

All other commercial and industrial

~~769~~750,~~564~~296

64324

98,~~203~~101

~~778~~758,~~831~~721

Real estate

Secured by commercial properties

~~921~~890,~~715~~374

~~2,917~~925

2321,~~097~~464

~~947~~912,~~729~~763

Secured by residential properties

262,~~277~~339

—306

118,~~603~~561

~~273~~271,~~880~~206

Construction and land development

Residential construction loans

3338,~~310~~783

—

~~1,189~~949

3439,~~499~~732

Commercial construction loans and land development

~~194~~211,~~008~~720

—

2420,~~202~~072

~~218~~231,~~210~~792

Consumer

27,~~569~~664

—

27,~~569~~664

3,~~166~~142,~~589~~181

1211,~~534~~629

~~122~~105,~~322~~935

3,~~301~~259,~~445~~745

	Pass		~~Special Mention~~SpecialMention		Substandard		Total
As of December 31, 2011
Commercial and industrial
Secured by receivables	$	661,269	$	1,501	$	32,434	$	695,204
Secured by equipment		132,344		—		2,315		134,659
Unsecured		110,287		—		3,236		113,523
Lease financing		28,530		—		4,074		32,604
All other commercial and industrial		826,138		241		23,694		850,073
Real estate
Secured by commercial properties		908,267		272		32,710		941,249
Secured by residential properties		271,533		544		8,400		280,477
Construction and land development
Residential construction loans		47,090		—		1,465		48,555
Commercial construction loans and land development		194,664		2,736		27,994		225,394
Consumer		29,429		—		—		29,429
	$	3,209,551	$	5,294	$	136,322	$	3,351,167

1921

3. Loans and Allowance for Loan Losses (continued)

Net investment in lease financing at ~~June~~September 30, 2012 and December 31, 2011 is shown in the following table (in thousands).

	June 30,			December 31,
	September 30,2012			December 31,2011
	2012			2011
Future minimum lease payments	$	27,791		$	33,565
Future minimum lease payments	$	27,986		$	33,565
Unguaranteed residual value		141			136
Guaranteed residual value		2,~~116~~113			2,333
Initial direct costs, net of amortization		5569			79
Unearned income		(2,~~767~~929	)		(3,509	)
	$	27,~~531~~185		$	32,604

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our Board of Directors and the Directors’ Loan Review Committee of the Bank’s Board of Directors.

It is management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Receivables and Contingencies Topics of the ASC. Estimated credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged off against the allowance for loan losses. Any subsequent recovery of charged-off loans is added back to the allowance for loan losses.

We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic and is individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in our estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segment adjusted for changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and business conditions and developments that affect the ~~collectibility~~collectability of the portfolio; the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations of credit and changes in the level of such concentrations.

We have designed our loan review program to identify and monitor problem loans by maintaining a credit grading process, ensuring that timely and appropriate changes are made to the loans with assigned risk grades and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impairment when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. We review all loan relationships over $0.2 million that exhibit probable or observed credit weaknesses, the top 25 loan relationships by dollar amount in each market we serve and additional relationships necessary to achieve adequate coverage of our various lending markets.

2022

3. Loans and Allowance for Loan Losses (continued)

Homogeneous loans, such as pools of consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each pool of homogeneous loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. As of ~~June~~September 30, 2012, we had no material delinquencies in these types of loans.

The allowance is subject to regulatory examinations and determinations as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance.

Changes in the allowance for loan losses, distributed by portfolio segment, were as follows (in thousands):

Commercial andIndustrial

~~Real Estate~~RealEstate

Construction andLand Development

Consumer

Total

Three Months Ended June 30, 2012

Three Months Ended September 30, 2012

Balance at beginning of period

3536,~~781~~536

14,~~817~~012

109,~~689~~357

~~122~~105

6160,~~409~~010

Provision charged to operations

41,~~100~~920

~~724~~1,151

(~~1,396~~274

)

(979

)

32,~~419~~876

Loans charged off

(32,~~657~~354

)

(1,~~858~~414

)

(7821

)

(148

)

(53,~~607~~797

)

Recoveries on charged off loans

~~312~~328

~~329~~9

~~142~~19

~~789~~364

Balance at end of period

36,~~536~~430

1413,~~012~~758

9,~~357~~081

~~105~~184

6059,~~010~~453

	Commercial andIndustrial			~~Real Estate~~RealEstate			Construction andLand Development			Consumer			Total
Six Months Ended June 30, 2012
Nine Months Ended September 30, 2012
Balance at beginning of period	$	38,196		$	15,703		$	13,268		$	328		$	67,495
Provision charged to operations		57,~~208~~128			~~(16~~1,135	)		~~661~~387			(~~213~~134	)		58,~~640~~516
Loans charged off		(79,~~639~~993	)		(23,~~021~~435	)		(4,~~715~~736	)		(3139	)		(1418,~~406~~203	)
Recoveries on charged off loans		~~771~~1,099			~~346~~355			~~143~~162			2129			1,~~281~~645
Balance at end of period	$	36,~~536~~430		$	1413,~~012~~758		$	9,~~357~~081		$	~~105~~184		$	6059,~~010~~453

	Commercial andIndustrial			Real Estate			Construction andLand Development			Consumer			Unallocated			Total
Three Months Ended June 30, 2011
Three Months Ended September 30, 2011
Balance at beginning of period	$	4042,~~862~~162		$	1110,~~276~~851		$	1314,~~236~~859		$	~~442~~425		$	~~124~~11		$	6568,~~940~~308
Provision charged to operations		4(1,~~780~~093	)		~~(90~~1,016	)		24,~~705~~557			(447	)		~~(113~~27	)		74,~~238~~500
Loans charged off		(31,~~675~~919	)		(~~358~~539	)		(12,~~241~~724	)		(1762	)		—			(5,~~291~~244	)
Recoveries on charged off loans		~~195~~316			2391			~~159~~34			4411			—			~~421~~452
Balance at end of period	$	4239,~~162~~466		$	1011,~~851~~419		$	1416,~~859~~726		$	~~425~~367		$	1138		$	68,~~308~~016

	Commercial andIndustrial			Real Estate			Construction andLand Development			Consumer			Unallocated		Total
Six Months Ended June 30, 2011
Nine Months Ended September 30, 2011
Balance at beginning of period	$	41,687		$	11,732		$	11,227		$	523		$	0—	$	65,169
Provision charged to operations		76,~~804~~711			~~(278~~738	)		610,~~280~~837			(7986	)		1138		1318,~~738~~238
Loans charged off		(79,~~730~~649	)		(~~775~~1,314	)		(25,~~812~~536	)		(80142	)		—		(1116,~~397~~641	)
Recoveries on charged off loans		~~401~~717			~~172~~263			~~164~~198			6172			—		~~798~~1,250
Balance at end of period	$	4239,~~162~~466		$	1011,~~851~~419		$	1416,~~859~~726		$	~~425~~367		$	1138	$	68,~~308~~016

2123

3. Loans and Allowance for Loan Losses (continued)

As of ~~June~~September 30, 2012 and December 31, 2011, the loan portfolio was distributed by ~~portfolio~~ portfolio segment and impairment methodology as shown below (in thousands):

Commercial andIndustrial

~~Real Estate~~RealEstate

Construction andLand Development

Consumer

Total

As of June 30, 2012

As of September 30, 2012

Loans individually evaluated for impairment

1324,~~527~~649

2723,~~972~~546

1918,~~349~~820

—

6067,~~848~~015

Loans collectively evaluated for impairment

1,~~786~~751,~~031~~939

1,~~193~~160,~~637~~423

~~233~~252,~~360~~704

27,~~569~~664

3,~~240~~192,~~597~~730

1,~~799~~776,~~558~~588

1,~~221~~183,~~609~~969

~~252~~271,~~709~~524

27,~~569~~664

3,~~301~~259,~~445~~745

	Commercial andIndustrial		~~Real Estate~~RealEstate		Construction andLand Development		Consumer		Total
As of December 31, 2011
Loans individually evaluated for impairment	$	20,331	$	38,101	$	26,272	$	—	$	84,704
Loans collectively evaluated for impairment		1,805,732		1,183,625		247,677		29,429		3,266,463
	$	1,826,063	$	1,221,726	$	273,949	$	29,429	$	3,351,167

As of ~~June~~ September 30, 2012 and December 31, 2011, the allowance for loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands):

Commercial andIndustrial

~~Real Estate~~RealEstate

Construction andLand Development

Consumer

Total

As of June 30, 2012

As of September 30, 2012

Loans individually evaluated for impairment

~~162~~2,324

~~1,669~~970

—

13,~~831~~294

Loans collectively evaluated for impairment

3634,~~374~~106

12,~~343~~788

9,~~357~~081

~~105~~184

5856,~~179~~159

36,~~536~~430

1413,~~012~~758

9,~~357~~081

~~105~~184

6059,~~010~~453

	Commercial andIndustrial		~~Real Estate~~RealEstate		Construction andLand Development		Consumer		Total
As of December 31, 2011
Loans individually evaluated for impairment	$	1,229	$	2,664	$	4,894	$	—	$	8,787
Loans collectively evaluated for impairment		36,967		13,039		8,374		328		58,708
	$	38,196	$	15,703	$	13,268	$	328	$	67,495

4. Deposits

Deposits at ~~June~~September 30, 2012 and December 31, 2011 are summarized as follows (in thousands):

	June 30,2012		December 31,2011
	September 30,2012		December 31,2011
Noninterest-bearing demand	$	~~237~~240,~~413~~240	$	328,858
Interest-bearing:
NOW accounts		~~109~~117,~~031~~608		117,395
Money market		2,~~071~~100,~~370~~211		2,090,172
Brokered - money market		226,127		224,925
Brokered—money market		265,265		224,925
Demand		4871,~~661~~138		53,650
Savings		~~163~~187,~~805~~313		171,088
Time - $100,000 and over		732,827		840,837
Time—$100,000 and over		714,474		840,837
Time - other		199,762		216,836
Time—other		191,962		216,836
Brokered - time		163,682		202,445
Brokered—time		437,876		202,445
	$	34,~~952~~326,~~678~~087	$	4,246,206

5. Short-Term Borrowings

Short-term borrowings at ~~June~~September 30, 2012 and December 31, 2011 were as follows (in thousands):

	June 30,		December 31,
	September 30,2012		December 31,2011
	2012		2011
Federal funds purchased	$	325,550	$	211,025
Federal funds purchased	$	214,375	$	211,025
Securities sold under agreements to repurchase		113,694		134,114
Securities sold under agreements to repurchase		129,206		134,114
Federal Home Loan Bank (FHLB) notes		350,000		50,000
Federal Home Loan Bank (FHLB) notes		400,000		50,000
Short-term bank loans		109,100		81,300
Short-term bank loans		75,600		81,300
	$	898,344	$	476,439
	$	819,181	$	476,439

22Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand or on some other short-term basis. The Bank and FSC execute transactions to sell securities under agreements to repurchase with both their customers and broker-dealers. Securities involved in these transactions are held by the Bank, FSC or the dealer. Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following table (dollar amounts in thousands):


	Nine Months Ended September 30,
	2012			2011
Average balance during the period	$	325,655		$	408,411
Average interest rate during the period		0.22	%		0.25	%

	September 30, 2012			December 31, 2011
Average interest rate at end of period		0.15	%		0.20	%
Securities underlying the agreements at end of period
Carrying value	$	141,761		$	95,993
Estimated fair value	$	143,159		$	142,866

5. Short-Term Borrowings (continued)

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

	Six Months Ended June 30,
	2012			2011
Average balance during the period	$	368,238		$	435,077
Average interest rate during the period		0.22	%		0.24	%

	June 30,2012			December 31,2011
Average interest rate at end of period		0.19	%		0.20	%
Securities underlying the agreements at end of period
Carrying value	$	157,423		$	95,993
Estimated fair value	$	158,589		$	142,866

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

	Six Months Ended June 30,
	Nine Months EndedSeptember 30,
	2012			2011
Average balance during the period	$	~~134~~252,~~341~~099		$	3428,~~392~~187
Average interest rate during the period		0.1415	%		0.4239	%
	September 30,2012			December 31,2011
Average interest rate at end of period		0.13	%		0.10	%

		June 30,2012				December 31,2011
Average interest rate at end of period			0.14	%			0.10	%

FSC uses short-term bank loans periodically to finance securities owned, customers’ margin accounts, and other short-term operating activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at September 30, 2012 and December 31, 2011 was 1.20% and 1.33%, respectively.

FSC uses short-term bank loans periodically to finance securities owned, customers’ margin accounts, and other short-term operating activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at June 30, 2012 and December 31, 2011 was 1.18% and 1.33%, respectively.

6. Notes Payable

Notes payable at ~~June~~September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

	June 30,2012		December 31,2011
	September 30,2012		December 31,2011
Term note with JPMorgan Chase, due July 31, 2013. Principal payments of $0.9 million and interest are payable quarterly.	$	1412,~~160~~390	$	15,930
Revolving credit line with JPMorgan Chase not to exceed $5.0 million. Facility matures July 31, 2013 with interest payable quarterly.		5,000		5,000
Term note with JPMorgan Chase, due July 31, 2013. Principal payment of $0.5 million is due annually and interest is payable semi-annually.		2,000		2,500
Term note with JPMorgan Chase, due October 27, 2015. Principal payments of $25,000 and interest are payable quarterly.		~~400~~375		450
Subordinated note with JPMorgan Chase, not to exceed $20 million. Facility matures October 27, 2015 with principal payments of $1.0 million and interest payable quarterly.		1615,000		18,000
First Southwest nonrecourse notes, due January 25, 2035 with interest payable quarterly.		1110,~~614~~855		13,086
	$	4945,~~174~~620	$	54,966

The previous table reflects July 2012 amendments to loan agreements between PlainsCapital and JPMorgan Chase Bank, NA (“JPMorgan Chase”) governing PlainsCapital’s existing line of credit and term notes. The amendments extended the maturity of PlainsCapital’s line of credit and term notes expiring July 31, 2012, to July 31, 2013 and, where noted in the previous table, reflected a reduction to the principal balance outstanding. The remaining provisions of the loan agreements were unchanged.

The agreements underlying the JPMorgan Chase debt include certain restrictive covenants, including limitations on the ability to incur additional debt, limitations on the disposition of assets and requirements to maintain various financial ratios, including a non-performing asset ratio, at acceptable levels. At ~~June~~September 30, 2012, the Bank’s non-performing asset ratio was in compliance with the non-performing asset ratio covenant. In addition, certain of the loan agreements provide that a transaction involving a transfer in the ownership of PlainsCapital, such as that contemplated by the Merger, requires the prior written consent of JPMorgan Chase. PlainsCapital requested JPMorgan Chase’s consent and it is currently anticipated that such consent will be timely obtained.

7.26 ~~Income Taxes~~

PlainsCapital’s effective tax rate was 37.83% and 33.86% for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, PlainsCapital’s effective tax rate was 36.20% and 34.89%, respectively. The increase in the effective tax rate was primarily due to certain discrete items regarding non-deductible expenses recorded in the second quarter of 2012 and lower projected tax exempt income in 2012 compared to 2011.

PlainsCapital files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. PlainsCapital is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008. PlainsCapital is currently under examination for the 2009 tax year by the U.S. federal income tax authorities and does not anticipate any material adjustments to result from this examination.

7. Income Taxes

PlainsCapital’s effective tax rate was 33.99% and 34.80% for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, PlainsCapital’s effective tax rate was 35.25% and 34.85%, respectively.

PlainsCapital files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. PlainsCapital is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2009. PlainsCapital is currently under examination for the 2009 tax year by the U.S. federal income tax authorities and does not anticipate any material adjustments to result from this examination.

8. Commitments and Contingencies

The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $61.0 million and $33.0 million at ~~June~~September 30, 2012 and December 31, 2011, respectively.

Legal Matters

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

As a result of these SEC and DOJ investigations into industry-wide practices, FSC was initially named as a co-defendant in cases filed in several different federal courts by various state and local governmental entities suing on behalf of themselves and a purported class of similarly situated governmental entities and a similar set of lawsuits filed by various California local governmental entities suing on behalf of themselves and a purported class of similarly situated governmental entities. All claims asserted against FSC in these purported class actions were subsequently dismissed. However, the plaintiffs in these purported class actions have filed amended complaints against other entities, and FSC is identified in these complaints not as a defendant, but as an alleged co-conspirator with the named defendants.

Additionally, as a result of these SEC and DOJ investigations into industry-wide practices, FSC has been named as a defendant in 20 individual lawsuits. These lawsuits have been brought by several California public entities and two New York non-profit corporations that do not seek to certify a class. The Judicial Panel on Multidistrict Litigation has transferred these cases to the United States District Court, Southern District of New York. The California plaintiffs allege violations of Section 1 of the Sherman Act and the California Cartwright Act. The New York plaintiffs allege violations of Section 1 of the Sherman Act and the New York Donnelly Act. The allegations against FSC are very limited in scope. FSC has filed answers in each of the twenty lawsuits denying the allegations and asserting several affirmative defenses. FSC intends to defend itself vigorously in these individual actions. The relief sought is unspecified monetary damages.

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

Other Contingencies

~~PlainsCapital~~The ~~and~~mortgage ~~its~~origination ~~subsidiaries~~segment ~~lease~~may ~~space,~~be ~~primarily~~responsible for ~~branch~~errors ~~facilities~~or ~~and~~omissions ~~automated~~relating ~~teller~~to ~~machines,~~its ~~under~~representations ~~noncancelable operating~~and ~~leases~~warranties ~~with~~that ~~remaining~~the ~~terms,~~loans ~~including~~sold ~~renewal~~meet ~~options~~certain requirements, ofincluding 1representations as to underwriting 16standards ~~years~~ and ~~under~~the ~~capital~~validity ~~leases~~of ~~with~~certain ~~remaining~~borrower ~~terms~~representations ofin 12connection towith 16the ~~years~~loan. ~~Future~~If ~~minimum~~determined ~~payments~~to ~~under~~be ~~these~~at ~~leases~~fault, ~~have~~the ~~not~~mortgage ~~changed~~origination ~~significantly~~segment ~~from~~either repurchases the ~~amounts~~loans ~~reported at~~from ~~December 31,~~the ~~2011~~investors inor reimburses the ~~audited~~investors’ losses ~~consolidated~~(a ~~financial~~“make-whole” ~~statements~~payment). ~~and~~The ~~notes~~mortgage ~~thereto~~origination ~~included~~segment inhas ~~our~~established ~~Annual~~an ~~Report~~indemnification onliability ~~Form~~for ~~10-K~~such ~~filed~~probable ~~with~~losses ~~the~~based ~~SEC~~upon, onamong ~~March 16~~other things, ~~2012.~~the ~~Rental~~level ~~expense~~of ~~under~~current ~~the~~unresolved ~~operating~~repurchase ~~leases~~requests, ~~was~~the ~~approximately~~volume ~~$6.6~~of ~~million~~estimated ~~and~~probable ~~$5.8~~future ~~million~~repurchase ~~for~~requests, our ability to cure the ~~three~~defects ~~months~~identified ~~ended~~in ~~June 30,~~the ~~2012~~repurchase requests, and ~~2011,~~the ~~respectively.~~severity ~~For~~of the ~~six~~estimated ~~months~~loss ~~ended~~upon ~~June 30,~~repurchase. ~~2012~~The ~~and~~liability ~~2011,~~for ~~rental~~the ~~expense~~indemnification ~~was~~reserve ~~approximately~~totaled $1217.64 million as of September 30, 2012 and $118.41 million as of December 31, ~~respectively~~2011.

PlainsCapital and its subsidiaries lease space, primarily for mortgage banking offices, branch facilities and automated teller machines, under non-cancelable operating leases with remaining terms, including renewal options, of 1 to 16 years and under capital leases with remaining terms of 12 to 16 years. Future minimum payments under these leases have not changed significantly from the amounts reported at December 31, 2011 in the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 16, 2012. Rental expense under the operating leases was approximately $6.6 million and $5.6 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, rental expense was approximately $19.2 and $17.0 million, respectively.

9. Financial Instruments with Off-Balance Sheet Risk

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

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

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

The Bank had in the aggregate outstanding unused commitments to extend credit of $1.0 billion at ~~June~~September 30, 2012. The Bank had outstanding standby letters of credit of $4445.89 million at ~~June~~ September 30, 2012.

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

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

10. Stock-Based Compensation

The PlainsCapital Corporation 2009 Long-Term Incentive Plan (the “2009 LTIP”) allows for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of PlainsCapital, its subsidiaries and outside directors of PlainsCapital. The 2009 LTIP provides flexibility to PlainsCapital’s compensation methods in order to adapt the compensation of key employees and outside directors to a changing business environment. In the aggregate, 4.0 million shares of common stock may be delivered pursuant to awards granted under the 2009 LTIP.

In addition, the PlainsCapital Corporation 2010 Long-Term Incentive Plan (the “2010 Plan”) allowed for the granting of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of PlainsCapital, its subsidiaries and outside directors of PlainsCapital. The 2010 Plan terminated on March 18, 2012 as to all future awards.

At ~~June~~September 30, 2012, a total of 3.6 million shares were available for grant under the 2009 LTIP. PlainsCapital typically issues new shares upon issuance, exercise or vesting of equity-based awards.

Stock-based compensation cost was approximately $1.0.9 million and $0.67 million for the three months ended ~~June~~September 30, 2012 and 2011, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, stock-based compensation cost was $12.76 million and $1.18 million, respectively.

At ~~June~~September 30, 2012, unrecognized cost related to unvested restricted stock and restricted stock units was $43.29 million and $8.94 million, respectively. The vesting of the unvested restricted stock ~~and~~ and restricted stock units will automatically accelerate in full under certain conditions. If and when our common stock is listed and traded on an exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the entire unrecognized cost related to unvested restricted stock would be recognized in noninterest expense immediately. Upon a change in control of PlainsCapital, the entire unrecognized cost related to both unvested restricted stock ~~and~~ and restricted stock units would be recognized in noninterest expense immediately. As discussed in Note 1, the Merger, if completed, would constitute a change in control of PlainsCapital.

2629

~~10.~~Information ~~Stock-Based~~regarding ~~Compensation~~unvested ~~(continued)~~restricted stock and restricted stock units for the nine months ended September 30, 2012 is as follows:

Information regarding unvested restricted stock and restricted stock units for the six months ended June 30, 2012 is as follows:


	2012					2012
	Unvested Restricted Stock			Weighted Average Grant Date Fair Value		Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding, January 1		528,532		$	11.45		590,149		$	11.91
Granted		7,497			15.18		344,811			14.00
Vested		(84,753	)		11.33		—			—
Cancellations and expirations		—			—		(3,500	)		12.07

Outstanding, September 30		451,276		$	11.53		931,460		$	12.68

	UnvestedRestrictedStock			WeightedAverage GrantDate Fair Value		RestrictedStock Units			WeightedAverage GrantDate Fair Value
Outstanding, January 1		528,532		$	11.45		590,149		$	11.91
Granted		7,497			15.18		344,811			14.00
Vested		(84,753	)		11.33		—			0.00
Cancellations and expirations		—			0.00		(3,500	)		12.07
Outstanding, June 30		451,276		$	11.53		931,460		$	12.68

Information regarding stock options for the nine months ended September 30, 2012 is as follows:

Information regarding stock options for the six months ended June 30, 2012 is as follows:


	2012
	Shares			Weighted Average Exercise Price
Outstanding, January 1		647,053		$	10.04
Exercised		(185,924	)		8.15
Cancellations and expirations		(47,913	)		9.89

Outstanding, September 30		413,216		$	10.91

	Shares			WeightedAverageExercisePrice
Outstanding, January 1		647,053		$	10.04
Exercised		(90,779	)		7.23
Cancellations and expirations		(47,913	)		9.89
Outstanding, June 30		508,361		$	10.55

11. Regulatory Matters

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

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

	At June 30, 2012
	At September 30, 2012
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	~~227~~236,~~098~~699		4	%	$	~~570~~592,~~720~~538		10.0501	%
Tier 1 capital (to risk-weighted assets)		~~179~~187,~~296~~742		4	%		~~570~~592,~~720~~538		12.7362	%
Total capital (to risk-weighted assets)		~~358~~375,~~592~~484		8	%		~~626~~651,~~809~~227		13.9887	%
PlainsCapital Corporation:
Tier 1 capital (to average assets)	$	~~227~~237,~~554~~168		4	%	$	~~578~~618,~~380~~121		10.1743	%
Tier 1 capital (to risk-weighted assets)		~~179~~188,~~756~~226		4	%		~~578~~618,~~380~~121		1213.8714	%
Total capital (to risk-weighted assets)		~~359~~376,~~511~~451		8	%		~~644~~685,~~211~~960		14.3458	%


	At December 31, 2011
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	219,660		4	%	$	536,274		9.77	%
Tier 1 capital (to risk-weighted assets)		169,281		4	%		536,274		12.67	%
Total capital (to risk-weighted assets)		338,561		8	%		589,365		13.93	%

PlainsCapital Corporation:
Tier 1 capital (to average assets)	$	220,103		4	%	$	532,025		9.67	%
Tier 1 capital (to risk-weighted assets)		169,740		4	%		532,025		12.54	%
Total capital (to risk-weighted assets)		339,480		8	%		596,057		14.05	%

2830

11. Regulatory Matters (continued)

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

	At June 30, 2012
	At September 30, 2012
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	~~283~~295,~~872~~874		5	%	$	~~570~~592,~~720~~538		10.0501	%
Tier 1 capital (to risk-weighted assets)		~~268~~281,~~944~~613		6	%		~~570~~592,~~720~~538		12.7362	%
Total capital (to risk-weighted assets)		~~448~~469,~~240~~355		10	%		~~626~~651,~~809~~227		13.9887	%
	At December 31, 2011
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	274,575		5	%	$	536,274		9.77	%
Tier 1 capital (to risk-weighted assets)		253,921		6	%		536,274		12.67	%
Total capital (to risk-weighted assets)		423,202		10	%		589,365		13.93	%

Pursuant to the net capital requirements of the Exchange Act, FSC has elected to determine its net capital requirements using the alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3. At June 30, 2012, FSC had net capital of $61.2 million; the minimum net capital requirement was $3.6 million; net capital maintained by FSC was 34% of aggregate debits; and net capital in excess of the minimum requirement was $57.6 million.


	At December 31, 2011
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	274,575		5	%	$	536,274		9.77	%
Tier 1 capital (to risk-weighted assets)		253,921		6	%		536,274		12.67	%
Total capital (to risk-weighted assets)		423,202		10	%		589,365		13.93	%

AsPursuant ato ~~mortgage~~the ~~originator~~net capital requirements of the Exchange Act, ~~PrimeLending~~FSC ishas ~~subject~~elected to ~~minimum~~determine its net ~~worth~~capital requirements using ~~established~~the byalternative ~~both~~method. ~~the~~Accordingly, ~~United~~FSC ~~States~~is ~~Department~~required ofto ~~Housing~~maintain ~~and~~minimum ~~Urban Development~~net ~~(“HUD”)~~capital, ~~and~~as defined in Rule 15c3-1, equal to the ~~Government~~greater ~~National~~of ~~Mortgage~~$250,000 ~~Association~~or ~~(“GNMA”).~~2% Onof anaggregate ~~annual~~debit ~~basis~~balances, ~~PrimeLending~~as ~~submits~~defined ~~audited~~in ~~financial~~Rule ~~statements~~15c3-3. toAt ~~HUD~~September 30, ~~and~~2012, ~~GNMA~~FSC ~~documenting~~had net ~~PrimeLending’s~~capital ~~compliance~~of ~~with~~$62.8 million; the minimum net ~~worth~~ ~~requirements.~~capital Inrequirement ~~addition,~~was ~~PrimeLending~~$3.8 ~~monitors~~million; ~~compliance~~net oncapital anmaintained ~~ongoing~~by ~~basis~~FSC ~~and,~~was as33% of ~~June~~aggregate ~~30,~~debits; ~~2012,~~and ~~PrimeLending’s~~ net ~~worth~~capital ~~exceeded~~in ~~the~~excess ~~amounts~~of ~~required~~the byminimum ~~both~~requirement ~~HUD~~was ~~and~~$59.0 ~~GNMA~~million.

As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by both the United States Department of Housing and Urban Development (“HUD”) and the Government National Mortgage Association (“GNMA”). On an annual basis, PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending’s compliance with the minimum net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of September 30, 2012, PrimeLending’s net worth exceeded the amounts required by both HUD and GNMA.

12. Shareholders’ Equity

The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At ~~June~~September 30, 2012, approximately $82104.81 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve.

At ~~June~~September 30, 2012, $114.1 million of our Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”) was outstanding under the Small Business Lending Fund ~~program~~ program (the “SBLF”). The Series C Preferred Stock has an aggregate liquidation preference of approximately $114.1 million and qualifies as Tier 1 Capital for regulatory purposes.

The terms of the Series C Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis beginning January 1, 2012. The dividend rate, as a percentage of the liquidation amount, fluctuates while the Series C Preferred Stock is outstanding based upon changes in the level of “qualified small business lending” (“QSBL”) by the Bank from its average level of QSBL at each of the four quarter ends leading up to June 30, 2010 (the “Baseline”). Until March 2016, the dividend rate will generally decrease if we increase our level of QSBL from the Baseline and increase if we decrease our level of QSBL from the Baseline, subject to certain limitations described in the Certificate of Designations.

2931

12. Shareholders’ Equity (continued)

The dividend rate on the Series C Preferred Stock was 2.~~427~~626% for the three months ended ~~June~~ September 30, 2012. The dividend rate is 2.~~626~~730% for the period from ~~July~~October 1, 2012 to ~~September~~December 3031, 2012 as a result of a slight decrease in the level of QSBL at ~~March 31~~June 30, 2012, compared to ~~December~~the ~~31, 2011~~Baseline.

The Merger Agreement provides that, upon completion of the Merger, each outstanding share of Series C Preferred Stock will be converted into one share of Hilltop preferred stock having rights, preferences, privileges, voting powers, limitations and restrictions thereof, substantially identical to the Series C Preferred Stock being converted.

13. Assets Segregated for Regulatory Purposes

At September 30, 2012, FSC ~~was~~had ~~not~~segregated ~~required~~$2.8 tomillion ~~segregate~~of cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 of the Exchange Act at ~~June~~September 30, 2012 ~~or December 31, 2011~~. Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. FSC was not required to segregate cash and securities at December 31, 2011.

FSC was not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of introducing broker-dealers at ~~June~~September 30, 2012 or December 31, 2011.

14. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables at ~~June~~September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

	June 30,2012		December 31,2011
	September 30,		December 31,
	2012		2011
Receivables
Securities borrowed	$	~~102~~101,~~222~~147	$	94,044
Securities failed to deliver		1331,~~155~~447		11,476
Clearing organizations		741,~~323~~960		6,141
Due from dealers		4041		29
	$	~~122~~174,~~740~~595	$	111,690
Payables
Securities loaned	$	~~174~~143,~~041~~529	$	120,658
Correspondents		6443,~~974~~905		56,645
Securities failed to receive		1430,~~030~~194		8,114
Clearing organizations		1,~~403~~822		1,066
	$	~~254~~219,~~448~~450	$	186,483

15. Fair Value Measurements

Fair Value Measurements and Disclosures

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

3032

15. Fair Value Measurements (continued)

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

•

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

•

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

•

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

Fair Value Option

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

At ~~June~~September 30, 2012, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $~~969~~1.7335 ~~million~~billion, ~~while~~ while the unpaid principal balance of those loans was $~~942~~1.6292 ~~million~~billion. At December 31, 2011, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $775.3 million, while the unpaid principal ~~balance~~ balance of those loans was $752.8 million. The interest component of fair value is reported as interest income on loans in the income statement.

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

At ~~June~~September 30, 2012, the Bank held certain ~~senior~~subordinated ~~and subordinate~~ auction rate bonds purchased as a result of the First Southwest acquisition. The estimated fair value of the auction rate bonds is determined quarterly with the assistance of a third-party valuation expert using significant unobservable inputs. We project cash flows from the bonds based on assumptions for expected workout period and the contractual rate formula specified in the bond indenture. The workout assumptions capture the expectations for prepayments on the underlying student loan collateral and the likelihood of possible redemptions by the issuer. The cash flows are then discounted to determine fair value. The components of the discounts rates are the risk free rate, a credit spread, and a liquidity spread. The credit spreads are derived from observed market spreads in the student loan ABS market. The liquidity spreads represent the estimated risk premium a willing buyer would demand to compensate for the lack of liquidity in the auction rate market. The fair value calculations are sensitive to the input assumptions. Higher credit spreads, higher liquidity spreads, or longer workout assumptions result in lower fair values. In addition, a credit rating downgrade by a Nationally Recognized Statistical Rating Organization could lead to higher credit spreads and lower fair values.

3133

15. Fair Value Measurements (continued)

Information regarding the significant unobservable inputs used to estimate the fair value of the auction rate bonds at ~~June~~September 30, 2012 is shown in the following table.

	Liquidity Spread (bps)						Credit Spread (bps)						Workout (Yrs)
	Low		High		Weighted Avg		Low		High		Weighted Avg		Low		High		Weighted Avg
Senior Auction Rate Bonds		200		250		225		31		1069		462		3.0		4.0		3.5
Auction Rate Bonds		200		250		225		236		1001		516		4.0		5.0		4.5
Subordinate Auction Rate Bonds		200		250		225		266		1169		564		4.0		5.0		4.5

The following table reconciles the beginning and ending balances of assets measured at fair value using Level 3 inputs (in thousands).

	AuctionRate Bonds
	Auction
	Rate Bonds
Balance, January 1, 2012	$	44,544
Other-than-temporary impairment losses recognized in earnings		(2,088	)
Unrealized losses in other comprehensive income, net		(1,848	)
Realized loss recognized in earnings (Realized loss on sale of securities)		(2,601	)
Unrealized gains in other comprehensive income, net		2,061
Transfers from held to maturity		45,396
Balance, June 30, 2012	$	86,004
Sale of securities		(63,155	)
Balance, September 30, 2012	$	24,157

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

	At June 30, 2012
	At September 30, 2012
	Level 1Inputs		Level 2Inputs		Level 3Inputs		TotalFair Value
	Level 1		Level 2		Level 3		Total
Loans held for sale	$	—	$	969,726	$	—	$	969,726
	Inputs		Inputs		Inputs		Fair Value
Securities available for sale		—		534,707		86,004		620,711
Loans held for sale	$	—	$	1,334,898	$	—	$	1,334,898
Trading securities		—		49,277		—		49,277
Securities available for sale		—		615,681		24,157		639,838
Derivative assets		—		23,961		—		23,961
Trading securities		—		45,156		—		45,156
Time deposits		—		1,086		—		1,086
Derivative assets		—		41,282		—		41,282
Trading liabilities		—		2,444		—		2,444
Mortgage servicing asset		—		—		899		899
Derivative liabilities		—		5,583		—		5,583
Time deposits		—		1,080		—		1,080
Trading liabilities		—		3,474		—		3,474
Derivative liabilities		—		25,656		—		25,656

	Changes in Fair Value for Assets and Liabilities Reported at Fair Valueunder Fair Value Option
	Three Months Ended June 30, 2012						Three Months Ended June 30, 2011
	Net Gains fromSale of Loans		OtherNoninterestIncome		TotalChanges inFair Value		Net Gains fromSale of Loans		OtherNoninterestIncome			TotalChanges inFair Value
Loans held for sale	$	2,933	$	—	$	2,933	$	2,754	$	—		$	2,754
Time deposits		—		9		9		—		(1	)		(1	)
	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Net Gains fromSale of Loans		OtherNoninterestIncome		TotalChanges inFair Value		Net Gains fromSale of Loans		OtherNoninterestIncome			TotalChanges inFair Value
Loans held for sale	$	4,585	$	—	$	4,585	$	3,322	$	—		$	3,322
Time deposits		—		13		13		—		(3	)		(3	)

The mortgage servicing asset was recorded during the three months ended September 30, 2012.

3234

15. Fair Value Measurements (continued)

The following table presents information regarding changes in fair value for those instruments that are reported at fair value under an election under the Fair Value Option (in thousands).


	Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option
	Three Months Ended September 30, 2012						Three Months Ended September 30, 2011
			Other		Total					Other			Total
	Net Gains from		Noninterest		Changes in		Net Gains from			Noninterest			Changes in
	Sale of Loans		Income		Fair Value		Sale of Loans			Income			Fair Value
Loans held for sale	$	16,229	$	—	$	16,229	$	(1,502	)	$	—		$	(1,502	)
Other assets		899		—		899		—			—			—
Time deposits		—		6		6		—			(25	)		(25	)


	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
			Other		Total				Other			Total
	Net Gains from		Noninterest		Changes in		Net Gains from		Noninterest			Changes in
	Sale of Loans		Income		Fair Value		Sale of Loans		Income			Fair Value
Loans held for sale	$	20,814	$	—	$	20,814	$	6,737	$	—		$	6,737
Other assets		899		—		899		—		—			—
Time deposits		—		19		19		—		(29	)		(29	)

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

Impaired Loans – PlainsCapital reports impaired loans at fair value through allocations of the allowance for loan losses. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At ~~June~~September 30, 2012, loans with a carrying amount of $1025.7 million had been reduced by allocations of the allowance for loan losses of $13.83 million, resulting in a reported fair value of $822.9 4 million.

Other Real Estate Owned – PlainsCapital reports other real estate owned at fair value less estimated cost to sell. Any excess of recorded investment over fair value less cost to sell is charged against the allowance for loan losses when property is initially transferred to other real estate. Subsequent to the initial transfer to other real estate, valuation adjustments are charged against earnings. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At ~~June~~September 30, 2012, the estimated fair value of other real estate owned was $26.2 3 million.

3335

15. Fair Value Measurements (continued)

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. The methods for determining estimated fair value for financial assets and liabilities is described in detail in Note 21 to the consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 16, 2012.

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

At June 30, 2012

At September 30, 2012

Estimated Fair Value

CarryingAmount

Level 1Inputs

Level 2Inputs

Level 3Inputs

Total

Financial assets

Cash and short-term investments

~~284~~410,~~731~~743

—

~~284~~410,~~731~~743

Loans held for sale

~~970~~1,~~632~~335,687

—

~~970~~1,~~632~~335,687

—

~~970~~1,~~632~~335,687

Securities

~~795~~802,~~152~~465

—

~~717~~787,~~211~~854

8624,~~004~~157

~~803~~812,~~215~~011

Loans, net

3,~~241~~200,~~435~~292

—

822,~~860~~397

3,~~244~~200,~~531~~312

3,~~253~~222,~~391~~709

Broker-dealer and clearing organization receivables

~~122~~174,~~740~~595

—

~~122~~174,~~740~~595

—

~~122~~174,~~740~~595

Fee award receivable

17,~~408~~107

—

17,~~408~~107

—

17,~~408~~107

Cash surrender value of life insurance policies

23,~~743~~941

—

23,~~743~~941

—

23,~~743~~941

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

2341,~~961~~282

—

2341,~~961~~282

—

2341,~~961~~282

Accrued interest receivable

15,318

—

15,318

—

15,318

Mortgage servicing asset

899

—

899

Accrued interest receivable

15,557

—

15,557

—

15,557

Financial liabilities

Deposits

34,~~952~~326,~~678~~087

—

34,~~958~~352,~~027~~132

—

34,~~958~~352,~~027~~132

Broker-dealer and clearing organization payables

~~254~~219,~~448~~450

—

~~254~~219,~~448~~450

—

~~254~~219,~~448~~450

Other trading liabilities

23,~~444~~474

—

23,~~444~~474

—

23,~~444~~474

Short-term borrowings

~~819~~898,~~181~~344

—

~~819~~898,~~181~~344

—

~~819~~898,~~181~~344

Debt

~~116~~112,~~186~~632

—

~~116~~112,~~186~~632

—

~~116~~112,~~186~~632

Forward purchase commitments

525,~~583~~656

—

525,~~583~~656

—

525,~~583~~656

Accrued interest payable

21,~~019~~641

—

21,~~019~~641

—

21,~~019~~641


	At December 31, 2011
			Estimated Fair Value
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Financial assets
Cash and short-term investments	$	347,994	$	347,994	$	—	$	—	$	347,994
Loans held for sale		776,372		—		776,372		—		776,372
Securities		839,753		—		758,107		90,672		848,779
Loans, net		3,283,672		—		26,483		3,276,102		3,302,585
Broker-dealer and clearing organization receivables		111,690		—		111,690		—		111,690

Fee award receivable		18,002		—		18,002		—		18,002
Cash surrender value of life insurance policies		23,122		—		23,122		—		23,122
Interest rate swaps, interest rate lock commitments (“IRLCs”) and forward purchase commitments		10,481		—		10,481		—		10,481
Accrued interest receivable		16,175		—		16,175		—		16,175

Financial liabilities
Deposits		4,246,206		—		4,255,639		—		4,255,639
Broker-dealer and clearing organization payables		186,483		—		186,483		—		186,483
Other trading liabilities		4,592		—		4,592		—		4,592
Short-term borrowings		476,439		—		476,439		—		476,439
Debt		121,978		—		121,978		—		121,978

Forward purchase commitments		3,642		—		3,642		—		3,642
Accrued interest payable		2,952		—		2,952		—		2,952

3436

16. Derivative Financial Instruments

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

Derivative Instruments and the Fair Value Option

As discussed in Note 15, PrimeLending elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides PrimeLending the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions. PrimeLending ~~provides~~and FSC provide IRLCs to ~~its~~their customers and ~~executes~~execute forward ~~purchase~~ purchase commitments to sell mortgage loans. The fair values of both IRLCs and purchase commitments are recorded in other assets or other liabilities, as appropriate. ~~For~~Changes ~~the three months ended June 30, 2012 and 2011, changes~~ in the fair values of these derivative instruments produced a net ~~gains~~loss of ~~approximately~~ $62.97 million for the three months ended September 30, 2012, and a net gain of $21.32 million for the three months ended September 30, ~~respectively~~2011. For the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, changes in the fair value of these instruments produced net gains of $118.69 million and $24.8 0 million, respectively. The net gains or losses were recorded as a component of gain on sale of loans or in other noninterest income, as appropriate.

Derivative positions at ~~June~~September 30, 2012 and December 31, 2011 are presented in the following table (in thousands):

At June 30, 2012

At December 31, 2011

At September 30, 2012

At December 31, 2011

NotionalAmount

EstimatedFair Value

NotionalAmount

EstimatedFair Value

Notional

Estimated

Notional

Estimated

Amount

Fair Value

Amount

Fair Value

Derivative instruments

IRLCs

1,~~283~~477,~~727~~203

2340,~~651~~119

687,890

10,096

Interest rate swaps

1,969

5642

1,969

Forward purchase commitments

1,~~366~~633,~~267~~171

(524,~~329~~534

)

675,794

(3,339

)

3537

17. Segment and Related Information

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

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

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

Income Statement Data

	Three Months Ended June 30, 2012
	Three Months Ended September 30, 2012
	Banking		MortgageOrigination			FinancialAdvisory			IntercompanyEliminations			PlainsCapitalConsolidated
Interest income	$	5559,~~117~~364	$	610,~~889~~666		$	43,~~459~~785		$	(914,~~864~~490	)	$	5659,~~601~~325
Interest expense		54,~~201~~687		1520,~~015~~997			~~1,110~~890			(1420,~~710~~676	)		65,~~616~~898
Net interest income (expense)		4954,~~916~~677		(810,~~126~~331	)		32,~~349~~895			46,~~846~~186			4953,~~985~~427
Provision for loan losses		3,~~534~~000		—			(~~115~~124	)		—			32,~~419~~876
Noninterest income		8,~~213~~328		~~139~~180,~~121~~625			2625,~~136~~639			(56,~~051~~411	)		~~168~~208,~~419~~181
Noninterest expense		3233,~~454~~091		~~112~~142,~~278~~289			2826,~~264~~632			(~~205~~225	)		~~172~~201,~~791~~787
Income before taxes	$	2226,~~141~~914	$	1828,~~717~~005		$	12,~~336~~026		$	—		$	4256,~~194~~945
Income tax provision		8,317		7,124			521			—			15,962
Consolidated net income		13,824		11,593			815			—			26,232
Less: net income attributable to noncontrolling interest		—		1,129			26			—			1,155
Net income attributable to PlainsCapital Corporation	$	13,824	$	10,464		$	789		$	—		$	25,077

	Six Months Ended June 30, 2012
	Nine Months Ended September 30, 2012
	Banking		MortgageOrigination			FinancialAdvisory			IntercompanyEliminations			PlainsCapitalConsolidated
Interest income	$	~~109~~168,~~563~~929	$	1424,~~146~~811		$	812,~~497~~282		$	(1933,~~049~~540	)	$	~~113~~172,~~157~~482
Interest expense		1115,~~247~~934		2748,~~784~~781			2,~~050~~941			(2747,~~118~~795	)		1319,~~963~~861
Net interest income (expense)		98152,~~316~~995		(1323,~~638~~970	)		69,~~447~~341			814,~~069~~255			99152,~~194~~621
Provision for loan losses		58,617		—			23(101	)		—			58,~~640~~516
Noninterest income		1726,~~804~~129		~~257~~437,~~203~~828			5177,~~994~~635			(814,~~476~~886	)		~~318~~526,~~525~~706
Noninterest expense		67100,~~219~~401		~~214~~356,~~404~~629			5582,~~677~~281			(~~407~~631	)		~~336~~538,~~893~~680
Income before taxes	$	4370,~~284~~106	$	2957,~~161~~229		$	24,~~741~~796		$	—		$	75132,~~186~~131
Income tax provision		14,881		11,332			1,003			—			27,216
Consolidated net income		28,403		17,829			1,738			—			47,970
Less: net income attributable to noncontrolling interest		—		1,575			61			—			1,636
Net income attributable to PlainsCapital Corporation	$	28,403	$	16,254		$	1,677		$	—		$	46,334

3638

17. Segment and Related Information (continued)

Income Statement Data

	Three Months Ended June 30, 2011
	Three Months Ended September 30, 2011
	Banking		MortgageOrigination			FinancialAdvisory		IntercompanyEliminations			PlainsCapitalConsolidated
Interest income	$	5152,~~627~~935	$	5,~~439~~872		$	34,~~760~~245	$	(6,~~108~~799	)	$	5456,~~718~~253
Interest expense		87,~~385~~882		9,~~209~~899			~~795~~829		(89,~~856~~550	)		9,~~533~~060
Net interest income (expense)		4345,~~242~~053		(34,~~770~~027	)		23,~~965~~416		2,~~748~~751			4547,~~185~~193
Provision for loan losses		74,~~250~~500		~~(12~~—	)		—		—			74,~~238~~500
Noninterest income		84,~~985~~699		79108,~~176~~279			2225,~~279~~783		(2,~~851~~855	)		~~107~~135,~~589~~906
Noninterest expense		2533,~~824~~890		7192,~~768~~467			2426,~~491~~092		(~~153~~328	)		~~121~~152,~~930~~121
Income before taxes	$	1911,~~153~~362	$	311,~~650~~785		$	~~753~~3,107	$	50224		$	2326,~~606~~478
Income tax provision		6,499		1,238			255		—			7,992
Consolidated net income		12,654		2,412			498		50			15,614
Less: net income attributable to noncontrolling interest		—		110			74		—			184
Net income attributable to PlainsCapital Corporation	$	12,654	$	2,302		$	424	$	50		$	15,430

	Six Months Ended June 30, 2011
	Nine Months Ended September 30, 2011
	Banking		MortgageOrigination			FinancialAdvisory		IntercompanyEliminations			PlainsCapitalConsolidated
Interest income	$	~~100~~153,~~519~~460	$	915,~~306~~175		$	711,~~327~~569	$	(1017,~~431~~230	)	$	~~106~~162,~~721~~974
Interest expense		1624,~~886~~915		1626,~~611~~372			12,~~545~~365		(1525,~~931~~481	)		1928,~~111~~171
Net interest income (expense)		83128,~~633~~545		(711,~~305~~197	)		59,~~782~~204		58,~~500~~251			87134,~~610~~803
Provision for loan losses		1318,~~750~~250		(12	)		0—		0—			1318,~~738~~238
Noninterest income		1621,~~331~~080		~~140~~249,~~837~~069			4167,~~466~~245		(58,~~705~~559	)		~~192~~328,~~929~~835
Noninterest expense		5489,~~459~~297		~~129~~221,~~929~~506			4673,~~981~~015		(~~398~~726	)		~~230~~383,~~971~~092
Income before taxes	$	3142,~~755~~078	$	316,~~615~~378		$	~~267~~3,434	$	~~193~~418		$	3562,~~830~~308
Income tax provision		11,138		1,268			94		0			12,500
Consolidated net income		20,617		2,347			173		193			23,330
Less: net income attributable to noncontrolling interest		0		178			128		0			306
Net income attributable to PlainsCapital Corporation	$	20,617	$	2,169		$	45	$	193		$	23,024

3739

17. Segment and Related Information (continued)

Balance Sheet Data

June 30, 2012

September 30, 2012

Banking

MortgageOrigination

FinancialAdvisory

All Other andEliminations

PlainsCapitalConsolidated

Cash and due from banks

~~225~~350,~~209~~998

5481,~~767~~632

64,~~330~~195

(5481,~~660~~523

)

~~231~~355,~~646~~302

Loans held for sale

~~906~~789

~~969~~1,~~726~~334,898

—

~~970~~1,~~632~~335,687

Securities

~~748~~757,~~267~~798

—

4644,~~885~~667

—

~~795~~802,~~152~~465

Loans, net

34,~~849~~153,~~411~~706

1,~~838~~607

~~302~~260,~~184~~115

(~~911~~1,~~998~~215,136

)

3,~~241~~200,~~435~~292

Broker-dealer and clearing organization receivables

—

~~122~~174,~~740~~595

—

~~122~~174,~~740~~595

Investment in subsidiaries

~~255~~279,~~831~~122

—

(~~255~~279,~~831~~122

)

—

Goodwill and other intangible assets, net

7,862

23,706

1410,~~922~~222

—

4641,~~490~~790

Other assets

~~287~~242,~~499~~606

4454,~~309~~143

74116,~~346~~606

3126,~~444~~529

~~437~~439,~~598~~884

Total assets

5,~~374~~792,~~985~~881

1,~~094~~495,~~346~~986

~~567~~610,~~407~~400

(1,~~191~~549,~~045~~252

)

56,~~845~~350,~~693~~015

Deposits

34,~~967~~327,~~970~~923

—

6173,~~956~~332

(7775,~~248~~168

)

34,~~952~~326,~~678~~087

Broker-dealer and clearing organization payables

—

~~254~~219,~~448~~450

—

~~254~~219,~~448~~450

Short-term borrowings

~~725~~741,~~907~~062

—

93157,~~274~~282

—

~~819~~898,~~181~~344

Notes payable

—

~~888~~1,~~732~~235,487

1817,~~620~~213

(~~858~~1,~~178~~207,080

)

4945,~~174~~620

Junior subordinated debentures

—

67,012

Other liabilities

6683,~~459~~675

71106,~~310~~795

4653,~~884~~184

(4553,~~781~~876

)

~~138~~189,~~872~~778

PlainsCapital Corporation shareholders’ equity

~~614~~640,~~649~~221

~~132~~151,~~002~~207

9289,~~225~~939

(~~277~~280,~~039~~140

)

~~561~~601,~~837~~227

Noncontrolling interest

—

2,~~302~~497

—

~~189~~—

2,~~491~~497

Total liabilities and shareholders’ equity

5,~~374~~792,~~985~~881

1,~~094~~495,~~346~~986

~~567~~610,~~407~~400

(1,~~191~~549,~~045~~252

)

56,~~845~~350,~~693~~015


	December 31, 2011
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	341,821	$	48,715	$	4,424	$	(50,313	)	$	344,647
Loans held for sale		1,061		775,311		—		—			776,372
Securities		783,586		—		56,167		—			839,753
Loans, net		3,685,013		1,848		316,992		(720,181	)		3,283,672
Broker-dealer and clearing organization receivables		—		—		111,690		—			111,690
Investment in subsidiaries		230,389		—		—		(230,389	)		—
Goodwill and other intangible assets, net		7,862		23,706		15,697		—			47,265
Other assets		186,737		25,850		51,873		32,161			296,621

Total assets	$	5,236,469	$	875,430	$	556,843	$	(968,722	)	$	5,700,020

Deposits	$	4,238,662	$	—	$	68,778	$	(61,234	)	$	4,246,206
Broker-dealer and clearing organization payables		—		—		186,483		—			186,483
Short-term borrowings		347,559		—		128,880		—			476,439
Notes payable		—		705,715		19,432		(670,181	)		54,966
Junior subordinated debentures		—		—		—		67,012			67,012
Other liabilities		68,357		57,481		64,088		(40,296	)		149,630
PlainsCapital Corporation shareholders’ equity		581,891		110,311		89,182		(264,353	)		517,031
Noncontrolling interest		—		1,923		—		330			2,253

Total liabilities and shareholders’ equity	$	5,236,469	$	875,430	$	556,843	$	(968,722	)	$	5,700,020

3840

18. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share for the three and ~~six~~nine months ended ~~June,~~ September 30, 2012 and 2011 (in thousands, except share and per share amounts).

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Income applicable to PlainsCapital Corporation common shareholders

2435,~~385~~522

1413,~~027~~084

4480,~~548~~070

2033,~~221~~305

Less: income applicable to participating securities

~~842~~1,225

~~518~~485

12,~~544~~769

~~727~~1,209

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

2334,~~543~~297

1312,~~509~~599

4377,~~004~~301

1932,~~494~~096

Weighted-average shares outstanding

33,~~217~~248,~~711~~474

32,~~847~~872,~~678~~729

33,~~104~~152,~~555~~878

32,~~810~~831,~~850~~703

Less: participating securities included in weighted-average shares outstanding

1,146,~~858~~897

1,~~213~~219,~~192~~727

1,147,~~237~~122

1,~~180~~193,~~823~~934

Weighted-average shares outstanding for basic earnings per common share

32,~~070~~101,~~853~~577

31,~~634~~653,~~486~~002

3132,~~957~~005,~~318~~756

31,~~630~~637,~~027~~769

Basic earnings per common share

01.7307

0.4340

12.3542

01.6202

Income applicable to PlainsCapital Corporation common shareholders

2435,~~385~~522

1413,~~027~~084

4480,~~548~~070

2033,~~221~~305

Weighted-average shares outstanding

32,~~070~~101,~~853~~577

31,~~634~~653,~~486~~002

3132,~~957~~005,~~318~~756

31,~~630~~637,~~027~~769

Dilutive effect of contingently issuable shares due to First Southwest acquisition

1,~~215~~398,~~395~~904

1,~~722~~562,~~152~~651

1,~~215~~398,~~395~~904

1,~~722~~562,~~152~~651

Dilutive effect of stock options and non-vested stock awards

~~702~~858,~~557~~926

~~219~~314,~~728~~819

~~607~~694,~~796~~441

~~198~~246,~~787~~337

Weighted-average shares outstanding for diluted earnings per common share

3334,~~988~~359,~~805~~407

33,~~576~~530,~~366~~472

3334,~~780~~099,~~509~~101

33,~~550~~446,~~966~~757

Diluted earnings per common share

01.7203

0.4239

12.3235

0.6099

PlainsCapital uses the two-class method prescribed by the Earnings Per Share Topic of the ASC to compute earnings per common share. Participating securities include non-vested restricted stock and shares of PlainsCapital stock held in escrow pending the resolution of contingencies with respect to the First Southwest acquisition. For the purpose of calculating fully diluted earnings per share, PlainsCapital evaluates the effect of the First Southwest acquisition on weighted-average shares outstanding assuming that the contingencies are resolved given the conditions existing at the balance sheet date.

The weighted-average shares outstanding used to compute diluted earnings per common share do not include outstanding options of ~~265~~152,~~179~~679 for the three and ~~six~~nine months ended ~~June~~ September 30, 2011. The exercise price of the excluded options exceeded the estimated average market price of PlainsCapital stock in the periods shown. Accordingly, the assumed exercise of the excluded options would have been antidilutive. No such options were excluded from the calculation of weighted average shares outstanding for the three and ~~six~~nine months ended ~~June~~September 30, 2012.

19. Recently Adopted Accounting Standards

Achieving Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB amended the Fair Value Measurements and Disclosures Topic of the ASC to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendments clarify the application of existing fair value measurement requirements, change certain principles in the Fair Value Measurements and Disclosure Topic and require additional fair value disclosures. The amendments became effective for PlainsCapital on January 1, 2012 and did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows. PlainsCapital has included the additional disclosures required by the amendments in Note 15.

3941

19. Recently Issued Accounting Standards (continued)

Comprehensive Income

In June 2011, the FASB amended the Comprehensive Income Topic of the ASC to revise the manner in which entities present comprehensive income in their financial statements. The amendments became effective for PlainsCapital January 1, 2012. Accordingly, PlainsCapital has presented the components of comprehensive income in a separate statement of comprehensive income immediately following the statement of income, rather than in the statement of shareholders’ equity. The adoption of the amendment did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows.

Testing Goodwill for Impairment

In September 2011, the FASB amended the Intangibles Topic of the ASC to simplify how entities test goodwill for impairment. Entities have the option to qualitatively test whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount in determining whether step one of the annual goodwill impairment test is necessary. PlainsCapital early adopted the amendments in the fourth quarter of 2011 and the adoption of the amendment did not have a significant effect on its financial position, results of operations or cash flows.

4042

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

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

The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and ~~six~~nine months ended ~~June~~September 30, 2012, and with our consolidated financial statements and notes thereto for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2012 (our “Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

Forward-Looking Statements

Certain statements contained in this Quarterly Report that are not statements of historical fact are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “anticipate,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We make forward-looking statements regarding topics including, without limitation, our projected sources of funds, expectations concerning mortgage loan origination volume, the expected dividend rate on our Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), expectations concerning the pending merger (the “Merger”) with a subsidiary of Hilltop Holdings Inc. (“Hilltop”), anticipated changes in our revenues or earnings, expectations regarding financial or other market conditions, the effects of government regulation applicable to our operations, the number of shares to be released from escrow to the former stockholders of First Southwest, the appropriateness of our allowance for loan losses, provision for loan losses and provision for ~~loan~~indemnification losses, and the collectability of margin loans. We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

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

(1) fluctuations in the market price of Hilltop common stock and the related effect on the market value of the merger consideration that common shareholders will receive upon completion of the Merger;

(2) business uncertainties and contractual restrictions while the Merger is pending;

(3) the possibility that the proposed Merger does not close when expected or at all because required regulatory, ~~shareholder or other~~ approvals and other conditions to closing are not received or satisfied on a timely basis or at all and that the terms of the proposed Merger may need to be modified to satisfy such approvals or conditions;

(4) the anticipated benefits from the proposed Merger are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which the companies operate;

(5) the ability to promptly and effectively combine the businesses of PlainsCapital and Hilltop;

(6) reputational risks and the reaction of the companies’ respective customers to the Merger;

4143

(7) diversion of management time on Merger related issues;

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

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

(10) changes in the interest rate environment;

(11) cost and availability of capital;

(12) changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements, and the Dodd-Frank Wall Street Reform and Consumer Protection Act ~~(the “Dodd-Frank Act”)~~;

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

(14) our participation in governmental programs, including the ~~Small Business Lending Fund (“~~SBLF”);

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

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

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

Overview

We are a Texas corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. As of ~~June~~September 30, 2012, on a consolidated basis, we had total assets of approximately $56.84 billion, total deposits of approximately $4.03 billion, total loans, including loans held for sale, of approximately $4.36 billion, and shareholders’ equity of approximately $~~561~~601.82 million. The Bank, one of our wholly owned subsidiaries, provides a broad array of financial products and services, including commercial banking, personal banking, wealth management and treasury management, from offices located throughout central, north and west Texas. In addition to the Bank, we have various subsidiaries with specialized areas of expertise that also offer an array of financial products and services such as mortgage origination and financial advisory services.

On May 8, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hilltop and a wholly owned subsidiary of Hilltop, whereby if the Merger contemplated therein were consummated, PlainsCapital would merge into a subsidiary of Hilltop, which subsidiary would survive the transaction, and each share of our common stock would be converted into the right to receive 0.776 shares of Hilltop’s common stock and a cash payment of $9.00, subject to certain adjustments. The ~~Merger~~shareholders isof ~~subject~~PlainsCapital tohave ~~the~~approved ~~approval of~~ the ~~shareholders~~Merger ofand ~~PlainsCapital,~~ the ~~approval by~~ shareholders of Hilltop ofhave approved the issuance of shares in connection with the Merger,. The Merger is subject to receipt of regulatory approval and satisfaction of other customary closing conditions. If completed, the Merger would constitute a change ofin control of PlainsCapital.

We44 generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. During the first half of 2012, we generated $99.2 million in net interest income, compared with $87.6 million in the first half of 2011. Net interest margin is a measure of net interest income as a percentage of average interest-earning assets. Our taxable equivalent net interest margin was 3.76% for the six months ended June 30, 2012, as compared to 3.60% for the six months ended June 30, 2011.

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

(i) Net gains from sale of loans and mortgage loan origination fees. Through our wholly owned subsidiary, PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the first half of 2012, we generated $257.1 million in combined net gains from sale of loans and mortgage loan origination fees, an 83.08% increase compared to the six-month period ended June 30, 2011. In recent years, PrimeLending has added staff and opened mortgage banking offices on an opportunistic basis. This increase in staff has led to increased market share and a higher volume of mortgage originations during the first half of 2012, compared to the six-month period ended June 30, 2011. In addition, a more favorable interest rate environment contributed to the higher volume of mortgage originations. Total dollar volume of mortgage loan originations increased 67.06% in the first half of 2012 compared to the six-month period ended June 30, 2011. In addition to the increase in volume, an increase in average gain on sale per loan contributed to the increase in combined net gains from sale of loans and mortgage loan origination fees; and

~~(ii)~~We ~~Investment~~generate ~~advisory~~revenue ~~fees~~from net interest income and ~~commissions~~from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, ~~brokerage~~and ~~fees~~our cost of funds, including the interest paid on the deposits and ~~commissions~~borrowings that are used to support our assets. ~~Through~~Net interest income is a significant contributor to our ~~wholly~~operating ~~owned~~results. ~~subsidiary,~~Fluctuations ~~First~~in ~~Southwest~~interest rates, weas ~~provide~~well ~~public~~as ~~finance~~the ~~advisory~~amounts and ~~various~~types ~~investment~~of ~~banking~~interest-earning assets and ~~brokerage~~interest-bearing ~~services~~liabilities we hold, affect net interest income. WeDuring the first nine months of 2012, we generated $50152.46 million ~~and~~in net interest income, compared with $39134.78 million in ~~investment~~the ~~advisory~~nine-month ~~fees~~period ~~and~~ended ~~commissions~~September ~~and~~30, ~~securities~~2011. ~~brokerage~~Net ~~fees~~interest ~~and~~margin ~~commissions~~is ~~during~~a ~~the~~measure ~~six~~of ~~months~~net ~~ended~~interest ~~June~~income ~~30,~~as ~~2012~~a ~~and~~percentage ~~2011,~~of ~~respectively~~average interest-earning assets. ~~Activity~~Our taxable inequivalent ~~the~~net ~~public~~interest ~~finance~~margin ~~market~~was ~~improved~~3.79% ~~during~~for the ~~first~~nine ~~half~~months ofended September 30, 2012, ~~leading~~as compared to an3.64% ~~increase~~for inthe ~~public~~nine ~~finance~~months ~~advisory~~ended ~~revenues~~September 30, 2011.

InThe ~~the~~other ~~aggregate,~~component weof ~~generated~~our ~~$318.5~~revenue ~~million~~is ~~and $192.9 million in~~ noninterest income ~~during the six months ended June 30~~, ~~2012~~which ~~and~~is ~~2011, respectively. The increase in noninterest income was~~ primarily ~~due~~comprised ~~to an increase in net gains on the sale~~ of ~~mortgage loans. Noninterest income represented 76.25% and 68.77% of net revenues (net interest income plus noninterest income) during~~ the ~~six~~following: ~~months ended June 30, 2012 and 2011, respectively.~~

We(i) ~~also~~Net ~~incur~~gains from sale of loans and mortgage loan origination fees. Through our wholly owned subsidiary, PrimeLending, we generate noninterest ~~expenses~~income inby originating and selling mortgage loans. During the ~~operation~~first nine months of ~~our~~2012, ~~businesses.~~we ~~Our~~generated ~~businesses~~$437.7 ~~engage~~million in ~~labor~~combined ~~intensive~~net ~~activities~~gains from sale of loans and mortgage loan origination fees, ~~consequently~~ a 75% increase compared to the nine-month period ended September 30, ~~employees’~~2011. ~~compensation~~During the first nine months of 2011, PrimeLending opened mortgage banking offices and ~~benefits~~added ~~represent~~mortgage bankers on an opportunistic basis. While the ~~majority~~number of mortgage banking offices and mortgage bankers has remained relatively stable since the third quarter of 2011, the increase in the number of mortgage bankers during the first nine months of 2011 coupled with an increase in the productivity of our ~~noninterest~~bankers ~~expenses.~~has ~~Employees’~~increased ~~compensation~~our market share and ~~benefits~~led ~~were~~to 64a higher volume of mortgage originations during the first nine months of 2012, compared to the nine-month period ended September 30, 2011.~~76%~~ ~~and~~The 62mortgage bankers’ productivity was aided by the continued favorable interest rate environment during the first nine months of 2012, which has increased mortgage origination volume in the industry.~~67%~~ Total dollar volume of ~~total~~mortgage ~~noninterest~~loan ~~expense~~originations ~~for~~increased 62% in the ~~six~~first nine months of 2012 compared to the nine-month period ended ~~June~~ September 30, ~~2012 and~~ 2011. In addition to the increase in volume, ~~respectively.~~an increase in average gain on sale per loan contributed to the increase in combined net gains from sale of loans and mortgage loan origination fees; and

(ii)

Investment advisory fees and commissions and securities brokerage fees and commissions. Through our wholly owned subsidiary, First Southwest, we provide public finance advisory and various investment banking and brokerage services. We generated $74.8 million and $64.2 million in investment advisory fees and commissions and securities brokerage fees and commissions during the nine months ended September 30, 2012 and 2011, respectively. Activity in the public finance market improved during the first nine months of 2012, leading to an increase in public finance advisory revenues.

In the aggregate, we generated $526.7 million and $328.8 million in noninterest income during the nine months ended September 30, 2012 and 2011, respectively. The increase in noninterest income was primarily due to an increase in net gains on the sale of mortgage loans. Noninterest income represented 78% and 71% of net revenues (net interest income plus noninterest income) during the nine months ended September 30, 2012 and 2011, respectively.

We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses. Employees’ compensation and benefits were 65% and 62% of total noninterest expense for the nine months ended September 30, 2012 and 2011, respectively.

Segment and Related Information

We have three reportable segments that are organized primarily by the core products offered to the segments’ respective customers. The banking segment includes the operations of the Bank. The operations of PrimeLending comprise the mortgage origination segment. The financial advisory segment is comprised of First Southwest and, until its sale in July 2012, included Hester Capital Management, LLC. The principal subsidiaries of First Southwest are FSC, a broker-dealer registered with the SEC and FINRA, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

The following table presents income before taxes by segment for the indicated periods (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Banking segment

2226,~~141~~914

1911,~~153~~362

4370,~~284~~106

3142,~~755~~078

Mortgage Origination segment

1828,~~717~~005

311,~~650~~785

2957,~~161~~229

316,~~615~~378

Financial Advisory segment

12,~~336~~026

~~753~~3,107

24,~~741~~796

~~267~~3,434

Intercompany eliminations

—

50224

—

~~193~~418

Income before taxes

4256,~~194~~945

2326,~~606~~478

75132,~~186~~131

3562,~~830~~308

Our reportable segments also serve as reporting units for the purpose of testing our goodwill for impairment. We do not believe that our reporting units are currently at risk of failing the Step One impairment test prescribed in the Goodwill Subtopic of the FASB ASC.

How We Generate Revenue

We derive our revenue and net income primarily from the banking segment and the mortgage origination segment, while the remainder is generated from the financial advisory segment. The relative share of total revenue provided by our banking and mortgage origination segments fluctuates depending on market conditions, and operating results for the mortgage origination segment tend to be more volatile than operating results for the banking segment.

The banking segment primarily provides business banking and personal banking products and services and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income. The banking segment also derives revenue from other sources, including service charges on customer deposit accounts and trust fees.

The mortgage origination segment offers a variety of loan products from offices in 39 states and generates revenue predominantly from selling loans in the secondary market and from fees charged on the origination of those loans.

We generate the remainder of our revenue from our financial advisory services. The majority of revenues in the financial advisory segment are generated from fees and commissions earned from investment advisory and securities brokerage services at First Southwest.

Operating Results

Net income for the ~~second~~third quarter of 2012 was $2536.13 million, or $01.7203 per diluted share, compared to $1516.47 million, or $0.4239 per diluted share, for the ~~second~~third quarter of 2011. Net income for the ~~six~~nine months ended ~~June~~September 30, 2012 was $4682.36 million, or $12.32 35 per diluted share, compared to $2339.07 million, or $0.60 99 per diluted share, for the ~~six~~nine months ended ~~June~~September 30, 2011.

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

	Increase (Decrease) in Net Income			Increase (Decrease) in Net Income
	Three Months EndedJune 30,2012 v. 2011			Six Months EndedJune 30,2012 v. 2011
	Three Months Ended			Nine Months Ended
Net interest income	$	4,800		$	11,584
	September 30,			September 30,
Provision for loan losses		3,819			8,098
	2012 v. 2011			2012 v. 2011
Net gains from sale of loans and mortgage loan origination fees	$	6071,~~261~~625		$	~~116~~188,~~678~~303
Investment advisory and brokerage fees and commissions		4,346			10,744
Employees’ compensation and benefits		(39,901	)		(113,320	)
Employees’ compensation and benefits		(33,991	)		(73,419	)
Other noninterest expenses		(9,765	)		(42,268	)
Other noninterest expenses		(16,870	)		(32,503	)
All other (including tax effects)		(2,382	)		10,172
All other (including tax effects)		(12,718	)		(17,872	)
	$	19,577		$	42,887
	$	9,647		$	23,310

We46 ~~consider the ratios shown in the table below to be key indicators of our performance:~~

	Six Months EndedJune 30,2012			Year EndedDecember 31,2011			Six Months EndedJune 30,2011
Return on average shareholders’ equity		17.38	%		11.27	%		10.28	%
Return on average assets		1.63	%		0.98	%		0.87	%
Net interest margin (taxable equivalent)		3.76	%		3.71	%		3.60	%
Leverage ratio		10.17	%		9.67	%		9.21	%

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


	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2012			2011			2011
Return on average shareholders’ equity		20.09	%		11.27	%		11.57	%
Return on average assets		1.90	%		0.98	%		0.99	%
Net interest margin (taxable equivalent)		3.79	%		3.71	%		3.64	%
Leverage ratio		10.43	%		9.67	%		9.68	%

The return on average shareholders’ equity ratio is calculated by dividing annualized net income by average shareholders’ equity for the period. The return on average assets ratio is calculated by dividing annualized net income by average total assets for the period. Net interest margin is calculated by dividing annualized net interest income (taxable equivalent) by average interest-earning assets. Our taxable equivalent net interest margin has increased in the nine months ended September 30, 2012, compared to recent periods primarily due to loans held for sale representing an increasing proportion of earning assets relative to lower-yielding components of earning assets and decreased funding costs resulting from continuing declines in market interest rates. The leverage ratio is discussed in the “Liquidity and Capital Resources” section below.

Net Interest Income

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Variance

2012

2011

2012 v. 2011

2012

2011

2012 v. 2011

Interest income

Loans, including fees

4851,~~245~~281

4446,~~636~~051

35,~~609~~230

96148,~~845~~126

86132,~~840~~891

1015,~~005~~235

Securities

3,~~332~~216

54,~~093~~904

(1,~~761~~688

)

69,~~744~~960

914,~~699~~603

(24,~~955~~643

)

Securities - tax exempt

2,596

2,605

)

5,071

4,992

Securities—tax exempt

2,445

2,130

315

7,516

7,122

394

Federal funds sold and securities purchased under agreements to resell

~~146~~501

~~660~~916

(~~514~~415

)

~~232~~733

12,~~752~~668

(1,~~520~~935

)

Interest-bearing deposits with banks

~~215~~199

~~193~~243

22(44

)

~~388~~587

~~507~~750

(~~119~~163

)

Other securities

21,~~067~~683

12,~~531~~009

~~536~~(326

)

35,~~877~~560

24,~~931~~940

~~946~~620

Total interest income

5659,~~601~~325

5456,~~718~~253

13,~~883~~072

~~113~~172,~~157~~482

~~106~~162,~~721~~974

69,~~436~~508

Interest expense

Deposits

43,~~379~~817

7,~~496~~013

(3,~~117~~196

)

913,~~644~~461

1522,~~024~~037

(58,~~380~~576

)

Notes payable and other borrowings

2,~~237~~081

2,~~037~~047

~~200~~34

46,~~319~~400

46,~~087~~134

~~232~~266

Total interest expense

65,~~616~~898

9,~~533~~060

(23,~~917~~162

)

1319,~~963~~861

1928,~~111~~171

(58,~~148~~310

)

Net interest income

4953,~~985~~427

4547,~~185~~193

46,~~800~~234

99152,~~194~~621

87134,~~610~~803

1117,~~584~~818

Net interest income increased $46.82 million for the ~~second~~third quarter of 2012 and $1117.68 million for the ~~six~~nine months ended ~~June~~September 30, 2012, compared with the corresponding periods in 2011. The increase for both periods was primarily due to increases in loan volumes within the banking segment and decreases in market interest rates paid on deposits, both of which are discussed further in the “Lines of Business – -Banking Segment” section below.

Noninterest Income

Noninterest income was $~~168~~208.42 million for the ~~second~~third quarter of 2012 compared with $~~107~~135.69 million for the ~~second~~third quarter of 2011, an increase of $6072.8 3 million. Noninterest income was $~~318~~526.57 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with $~~192~~328.98 million for the ~~six~~nine months ended ~~June~~September 30, 2011, an increase of $~~125~~197.69 million. The increase for both periods was primarily due to increased mortgage loan origination volume, which increased ~~57.76~~56% during the ~~second~~third quarter of 2012 and ~~67.06~~62% during the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The increased mortgage loan origination volume resulted primarily from increased productivity of PrimeLending’s ~~efforts~~mortgage tobankers, ~~add~~which ~~staff~~was ~~and~~aided ~~open~~by ~~mortgage~~the ~~banking~~continued ~~offices~~favorable ininterest ~~recent~~rate ~~years~~environment, during the nine months ended September 30, 2012 that has increased mortgage origination volume in the industry. In addition, tothe aaverage ~~more~~net ~~favorable~~gain ~~interest~~on ~~rate~~sale ~~environment~~per inloan for the ~~first~~three ~~half~~and ofnine months ended September 30, 2012, increased compared to the ~~same~~corresponding ~~period~~periods in 2011. ~~The~~These factors ~~increased mortgage origination volume~~ led to higher combined net gains on the sale of mortgage loans and mortgage loan origination fees during the first ~~half~~nine months of 2012.

4547

Noninterest Expense

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Variance

2012

2011

2012 v. 2011

2012

2011

2012 v. 2011

Noninterest expense

Employees’ compensation and benefits

~~112~~134,~~403~~046

7894,~~412~~145

3339,~~991~~901

~~218~~352,~~177~~223

~~144~~238,~~758~~903

73113,~~419~~320

Occupancy and equipment, net

1718,~~760~~968

15,~~812~~889

13,~~948~~079

3453,~~842~~810

3147,~~210~~099

36,~~632~~711

Professional services

11,~~031~~246

68,~~592~~333

42,~~439~~913

1930,~~206~~452

1220,~~638~~971

69,~~568~~481

Deposit insurance premium

~~907~~835

~~1,234~~837

(~~327~~2

)

12,~~903~~738

3,~~090~~927

(1,~~187~~189

)

Repossession and foreclosure, net of recoveries

~~1,682~~670

~~732~~5,829

~~950~~(5,159

)

78,~~600~~270

28,~~612~~441

~~4,988~~(171

)

Other

2936,~~008~~022

1927,~~148~~088

98,~~860~~934

5591,~~165~~187

3663,~~663~~751

1827,~~502~~436

Total noninterest expense

~~172~~201,~~791~~787

~~121~~152,~~930~~121

5049,~~861~~666

~~336~~538,~~893~~680

~~230~~383,~~971~~092

~~105~~155,~~922~~588

Noninterest expense increased $5049.97 million for the ~~second~~third quarter of 2012 and $~~105~~155.96 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The largest components of the increase were employees’ compensation and benefits, other expenses, ~~professional services,~~ and ~~repossession~~professional ~~and foreclosure expenses~~services.

Employees’ compensation and benefits increased $3439.09 million for the ~~second~~third quarter of 2012 and $73113.43 million for the ~~six~~nine months ended ~~June~~ September 30, 2012 compared with the corresponding periods in 2011. The increase for both periods was primarily attributable to higher variable commission expense, which resulted from an increase in the volume of mortgage loan originations during the first ~~half~~nine months of 2012 compared with the first ~~half~~nine months of 2011 and, ~~which~~to ~~resulted in~~a ~~the~~lesser ~~mortgage~~extent, ~~origination~~from ~~segment~~an ~~incurring~~increase ~~higher~~in ~~variable~~the ~~costs~~average ~~for~~commission ~~commissions~~rate paid to mortgage bankers. In addition, costs for salaries and employee benefits increased in the mortgage origination segment as a ~~direct~~ result of the hiring of additional staff ~~in recent years~~.

Other expenses increased $98.9 million for the ~~second~~third quarter of 2012 and $1827.54 million for the ~~six~~nine months ended ~~June~~ September 30, 2012 compared with corresponding periods in 2011. The increase for both periods was primarily attributable to a higher number of loans originated in the mortgage origination segment ~~where~~with respect to which the customer chose to accept a higher interest rate on the loan in return for our payment of the customer’s closing costs, which we expensed as unreimbursed closing costs. Our unreimbursed closing costs for the first ~~half~~nine months of 2012 increased both as result of an increase in the volume of mortgage loans originated as well as an increase in the percentage of customers who chose this option, which percentage has increased as interest rates have reached historical lows. In addition, expenses resulting from additions to the mortgage origination segment’s indemnification liability were higher during the first half of 2012, primarily as a result of an increase in investor claims over previous estimates.

Professional services increased $42.49 million for the ~~second~~third quarter of 2012 and $69.65 million for the ~~six~~nine months ended ~~June~~ September 30, 2012 compared with the corresponding periods in 2011. The increase for both periods was primarily attributable to professional fees and appraisal and inspection fees attributable to the mortgage origination segment, as well as $1.5 million of professional fees related to the Merger discussed in Note 1.

4648

Lines of Business

Banking Segment

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Variance

2012

2011

2012 v. 2011

2012

2011

2012 v. 2011

Net interest income

4954,~~916~~677

4345,~~242~~053

69,~~674~~624

98152,~~316~~995

83128,~~633~~545

1424,~~683~~450

Provision for loan losses

3,~~534~~000

74,~~250~~500

(31,~~716~~500

)

58,617

1318,~~750~~250

(89,~~133~~633

)

Noninterest income

8,~~213~~328

84,~~985~~699

~~(772~~3,629

)

1726,~~804~~129

1621,~~331~~080

15,~~473~~049

Noninterest expense

3233,~~454~~091

2533,~~824~~890

~~6,630~~(799

)

67100,~~219~~401

5489,~~459~~297

1211,~~760~~104

Income before taxes

2226,~~141~~914

1911,~~153~~362

215,~~988~~552

4370,~~284~~106

3142,~~755~~078

1128,~~529~~028

Income before taxes was $2226.19 million for the ~~second~~third quarter of 2012, an increase of $315.06 million compared to the ~~second~~third quarter of 2011. For the ~~six~~nine months ended ~~June~~September 30, 2012, income before taxes was $4370.31 million, an increase of $1128.50 million compared with the ~~six~~nine months ended ~~June~~September 30, 2011. Income before taxes for both periods increased ~~due~~ primarily due to an increase in net interest income and a decrease in the provision for loan losses. For the nine months ended September 30, 2012, those effects were partially offset by an increase in noninterest expense.

Net interest income increased $69.76 million for the ~~second~~third quarter of 2012 and $1424.75 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The increase for both periods was due primarily to increased interest income on the loan portfolio, resulting from higher average loan volumes compared with the corresponding periods in 2011 and decreased interest expense resulting from lower market interest rates.

Provision for loan losses decreased by $31.75 million for the ~~second~~third quarter of 2012 and $89.16 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The decrease in the provision for loan losses for both periods was primarily due to lower levels of non-performing loans compared into the ~~first~~respective ~~half~~periods of ~~2012~~2011. The economic and financial environment for banking in Texas showed signs of improvement in the first ~~half~~nine months of 2012, as labor market recovery and rising asset values combined to raise consumer and business confidence.

Noninterest income ~~decreased~~increased $03.86 million for the ~~second~~third quarter of 2012, ~~but~~and ~~increased~~ $1.5.0 million for the ~~six~~nine months ended ~~June~~ September 30, 2012 compared with the corresponding periods in 2011. ~~During the second quarter of 2012, the banking segment recorded a credit-related other-than-temporary impairment of $2.1 million on certain auction rate bonds held by the Bank.~~ The increase for ~~the~~both ~~six~~periods ~~months ended June 30, 2012~~ related to an increase in intercompany financing charges due to an increase in the amount of the lending commitment on the PrimeLending warehouse line of credit.

Noninterest expense ~~increased~~ decreased $60.68 million for the ~~second~~third quarter of 2012, ~~and~~but increased $1211.71 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The ~~increases~~decrease ~~were~~for the third quarter of 2012 was primarily due to ~~increases~~a decrease in repossession and foreclosure expense. The increase for the nine months ended September 30, 2012 was primarily due to the increase in employees’ compensation and benefits.

4749

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

	Three Months Ended June 30,2012 v. 2011									Six Months Ended June 30,2012 v. 2011
	Three Months Ended September 30,2012 v. 2011									Nine Months Ended September 30,2012 v. 2011
	Change Due To(1)									Change Due To(1)
	Volume			Yield/Rate			Change			Volume			Yield/Rate			Change
Interest income
Loans	$	58,~~764~~537		$	(~~398~~617	)	$	57,~~366~~920		$	1322,~~660~~192		$	(~~881~~1,493	)	$	1220,~~779~~699
Investment securities(2)		(~~1,230~~900	)		(~~664~~469	)		(1,~~894~~369	)		(23,~~319~~356	)		(~~873~~1,206	)		(34,~~192~~562	)
Federal funds sold and securities purchased under agreements to resell		10(2	)		~~(44~~43	)		~~(34~~41	)		(~~315~~268	)		(~~162~~169	)		(~~477~~437	)
Interest-bearing deposits in other financial institutions		(474	)		(92	)		(1372	)		(~~135~~209	)		(2220	)		(~~157~~229	)
Other		~~118~~236			(~~100~~207	)		1829			~~116~~350			(88293	)		2857
Total interest income(2)		47,~~658~~797			(1,~~215~~248	)		36,~~443~~549			1118,~~007~~709			(23,~~026~~181	)		815,~~981~~528
Interest expense
Deposits		(~~139~~60	)		(3,~~026~~150	)		(3,~~165~~210	)		~~100~~31			(58,~~586~~728	)		(58,~~486~~697	)
Notes payable and other borrowings		~~212~~467			(~~155~~324	)		57143			~~176~~605			(~~158~~444	)		18161
Total interest expense		73407			(3,~~181~~474	)		(3,~~108~~067	)		~~276~~636			(59,~~744~~172	)		(58,~~468~~536	)
Net interest income(2)	$	47,~~585~~390		$	12,~~966~~226		$	69,~~551~~616		$	1018,~~731~~073		$	35,~~718~~991		$	1424,~~449~~064

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

(2)	Taxable equivalent.

Taxable equivalent net interest income increased $69.6 million for the ~~second~~third quarter of 2012 compared with the ~~second~~third quarter of 2011. Increases in the volume of interest-earning assets, primarily loans, increased taxable equivalent net interest income by $4.7.8 million, while increases in the volume of interest-bearing liabilities, primarily notes payable and other borrowings, reduced taxable equivalent net interest income by $0.14 million. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $1.2 million, primarily due to lower yields on the loan portfolio and the investment securities portfolio. Changes in rates paid on interest-bearing liabilities increased taxable equivalent net interest income by $3.25 million, primarily due to a decrease in market interest rates on deposits during the ~~second~~third quarter of 2012 compared with prevailing market rates during the ~~second~~third quarter of 2011.

Taxable equivalent net interest income increased $1424.41 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding period in 2011. Increases in the volume of interest-earning assets, primarily loans, increased taxable equivalent net interest income by $1118.07 million, while increases in the volume of interest-bearing liabilities reduced taxable equivalent net interest income by $0.36 million. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $23.02 million, primarily due to lower yields on the loan portfolio and the investment securities portfolio. Changes in rates paid on interest-bearing liabilities increased taxable equivalent net interest income by $59.72 million, primarily due to a decrease in market interest rates on deposits during the first ~~half~~nine months of 2012 compared with prevailing market rates during the first ~~half~~nine months of 2011.

4850

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

	Three Months EndedJune 30, 2012								Three Months EndedJune 30, 2011
	Three Months Ended September 30, 2012								Three Months Ended September 30, 2011
	AverageOutstandingBalance			InterestEarned orPaid		AnnualizedYield orRate			AverageOutstandingBalance			~~InterestEarnedor~~InterestEarned ~~Paid~~orPaid		AnnualizedYield orRate
Assets
Interest-earning assets
Loans, gross(1)	$	3,~~720~~999,~~938~~992		$	4953,~~426~~532		5.3432	%	$	3,~~289~~367,~~452~~883		$	4445,~~060~~612		5.37	%
Investment securities - taxable		548,547			3,109		2.27	%		720,601			4,797		2.66	%
Investment securities—taxable		546,674			3,136		2.29	%		611,134			4,758		3.11	%
Investment securities - non-taxable(2)		235,120			3,312		5.63	%		241,374			3,518		5.83	%
Investment securities—non-taxable(2)		210,311			3,229		6.14	%		242,264			2,976		4.91	%
Federal funds sold and securities purchased under agreements to resell		2544,~~270~~653			68237		12.0811	%		2345,~~003~~159			~~102~~196		1.7872	%
Interest-bearing deposits in other financial institutions		~~248~~240,~~268~~105			~~168~~164		0.27	%		~~253~~349,~~663~~786			~~181~~236		0.2927	%
Other		2437,~~824~~098			~~160~~172		21.5885	%		1314,~~544~~052			~~142~~143		4.1907	%
Interest-earning assets, gross		45,~~802~~078,~~967~~833			5660,~~243~~470		4.7174	%		4,~~541~~630,~~637~~278			5253,~~800~~921		4.6662	%
Allowance for loan losses		(6057,~~966~~692	)							(6568,~~605~~380	)
Interest-earning assets, net		45,~~742~~021,~~001~~141								4,~~476~~561,~~032~~898
Noninterest-earning assets		~~483~~511,~~581~~101								~~479~~487,~~533~~125
Total assets	$	5,~~225~~532,~~582~~242							$	45,~~955~~049,~~565~~023
Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,~~777~~893,~~532~~466			43,~~365~~805		0.4639	%	$	3,~~848~~926,~~823~~994			7,~~530~~015		0.7871	%
Notes payable and other borrowings		~~541~~700,~~454~~404			~~356~~421		0.2624	%		~~316~~261,~~278~~045			~~299~~278		0.3842	%
Total interest-bearing liabilities(3)		4,~~318~~593,~~986~~870			4,~~721~~226		0.4437	%		4,~~165~~188,~~101~~039			7,~~829~~293		0.7569	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		~~242~~245,~~201~~823								~~216~~257,~~039~~151
Other liabilities		5865,~~227~~366								3651,~~024~~168
Total liabilities		4,~~619~~905,~~414~~059								4,~~417~~496,~~164~~358
Shareholders’ equity		~~606~~627,~~168~~183								~~538~~552,~~401~~665
Total liabilities and shareholders’ equity	$	5,~~225~~532,~~582~~242							$	45,~~955~~049,~~565~~023
Net interest income(2)				$	5156,~~522~~244							$	4446,~~971~~628
Net interest spread(2)							4.2737	%							3.9193	%
Net interest margin(2)							4.3141	%							34.9700	%

(1)	Average loans include non-accrual loans.

(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $1.1 million and $1.20 million for the ~~second~~third quarter of 2012 and 2011, respectively.

(3) Excludes the allocation of interest expense on PlainsCapital Corporation debt totaling $0.5 million ~~each~~and $0.6 million for the ~~second~~third quarter of 2012 and 2011, respectively.

4951

	Six Months EndedJune 30, 2012								Six Months EndedJune 30, 2011
	Nine Months Ended September 30, 2012								Nine Months Ended September 30, 2011
	AverageOutstandingBalance			InterestEarned orPaid		AnnualizedYield orRate			AverageOutstandingBalance			InterestEarned orPaid		AnnualizedYield orRate
Assets
Interest-earning assets
Loans, gross(1)	$	3,~~702~~802,~~586~~445		$	98151,~~259~~791		5.3433	%	$	3,~~193~~252,~~647~~364		$	85131,~~480~~092		5.4039	%
Investment securities - taxable		546,819			6,283		2.30	%		733,442			9,166		2.50	%
Investment securities—taxable		546,770			9,419		2.30	%		692,225			13,924		2.68	%
Investment securities - non-taxable(2)		237,234			6,468		5.45	%		237,184			6,777		5.71	%
Investment securities—non-taxable(2)		228,194			9,696		5.67	%		238,896			9,753		5.44	%
Federal funds sold and securities purchased under agreements to resell		1726,~~194~~414			93330		1.0967	%		3840,~~240~~571			~~570~~767		32.0153	%
Interest-bearing deposits in other financial institutions		~~254~~249,~~157~~439			~~334~~498		0.2627	%		349,~~997~~926			~~491~~727		0.28	%
Other		2025,~~017~~752			~~314~~486		32.1452	%		14,~~234~~172			~~286~~429		4.0204	%
Interest-earning assets, gross		4,~~778~~879,~~007~~014			~~111~~172,~~751~~220		4.7072	%		4,~~566~~588,~~744~~154			~~102~~156,~~770~~692		4.5457	%
Allowance for loan losses		(6361,~~727~~701	)							(6465,~~751~~974	)
Interest-earning assets, net		4,~~714~~817,~~280~~313								4,~~501~~522,~~993~~180
Noninterest-earning assets		~~493~~499,~~239~~237								~~471~~476,~~085~~491
Total assets	$	5,~~207~~316,~~519~~550							$	4,~~973~~998,~~078~~671
Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,~~845~~861,~~977~~922			913,~~616~~421		0.5046	%	$	3,~~820~~856,~~738~~546			1522,~~102~~118		0.8077	%
Notes payable and other borrowings		~~458~~539,~~751~~890			~~677~~1,098		0.3027	%		~~362~~328,~~220~~125			~~659~~937		0.3738	%
Total interest-bearing liabilities(3)		4,~~304~~401,~~728~~812			1014,~~293~~519		0.4844	%		4,~~182~~184,~~958~~671			1523,~~761~~055		0.7674	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		~~243~~244,~~505~~284								~~219~~231,~~183~~978
Other liabilities		6062,~~958~~437								3540,~~164~~557
Total liabilities		4,~~609~~708,~~191~~533								4,~~437~~457,~~305~~206
Shareholders’ equity		~~598~~608,~~328~~017								~~535~~541,~~773~~465
Total liabilities and shareholders’ equity	$	5,~~207~~316,~~519~~550							$	4,~~973~~998,~~078~~671
Net interest income(2)				$	~~101~~157,~~458~~701							$	87133,~~009~~637
Net interest spread(2)							4.2228	%							3.7883	%
Net interest margin(2)							4.2732	%							3.8489	%

(1)	Average loans include non-accrual loans.

(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $23.~~2 million and $2.~~3 million ~~for~~ each offor the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, respectively.

(3) Excludes the allocation of interest expense on PlainsCapital Corporation debt totaling $01.94 million and $1.19 million for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, respectively.

The banking segment’s net interest margin shown above exceeds our consolidated net interest margin. Our consolidated net interest margin includes the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the financial advisory segment, as well as the borrowing costs of PlainsCapital at the holding company level, both of which reduce our consolidated net interest margin. In addition, the banking segment’s interest earning assets include lines of credit extended to subsidiaries, the yields on which increase the banking segment’s net interest margin. Such yields and costs are eliminated from the consolidated financial statements.

5052

Mortgage Origination Segment

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

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
							Variance									Variance
	2012			2011			2012 v. 2011			2012			2011			2012 v. 2011
Net interest income (expense)	$	(810,~~126~~331	)	$	(34,~~770~~027	)	$	(46,~~356~~304	)	$	(1323,~~638~~970	)	$	(711,~~305~~197	)	$	(612,~~333~~773	)
Provision for loan losses		—			~~(12~~—	)		12—			—			(12	)		12
Noninterest income		~~139~~180,~~121~~625			79108,~~176~~279			5972,~~945~~346			~~257~~437,~~203~~828			~~140~~249,~~837~~069			~~116~~188,~~366~~759
Noninterest expense		~~112~~142,~~278~~289			7192,~~768~~467			4049,~~510~~822			~~214~~356,~~404~~629			~~129~~221,~~929~~506			84135,~~475~~123
Income before taxes	$	1828,~~717~~005		$	311,~~650~~785		$	1516,~~067~~220		$	2957,~~161~~229		$	316,~~615~~378		$	2540,~~546~~851

Mortgage loan origination volumes are shown in the following table (in ~~millions~~thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
					Variance						Variance
	2012		2011		2012 v. 2011		2012		2011		2012 v. 2011
Mortgage loan origination volume	$	3,~~119~~884,761	$	12,~~977~~490,363	$	1,~~142~~394,398	$	59,~~877~~761,360	$	36,~~518~~008,678	$	23,~~359~~752,682

~~In recent years,~~ PrimeLending ~~has~~continued ~~added~~to ~~staff~~open ~~and opened~~ mortgage banking offices on an opportunistic basis. ~~This~~during the first nine months of 2011. ~~increase~~Since inthe ~~staff~~third ~~has~~quarter ~~led~~of to2011 ~~increased~~the ~~market~~number ~~share~~of PrimeLending’s mortgage banking offices and mortgage loan originators has not materially changed. As a ~~higher~~result, ~~volume~~increases ofin the company’s mortgage loan originations inand ~~the~~market share during the first ~~half~~nine months of 2012 compared to the first ~~half~~nine months of 2011 can be primarily attributed to increased mortgage banker productivity. InContributing ~~addition,~~to athis ~~more~~increased productivity was the continued favorable interest rate environment ~~contributed~~during to the ~~higher~~ ~~volume~~first nine months of 2012, which has increased mortgage ~~originations~~origination volume in the industry. We expect our rate of mortgage loan origination growth to moderate throughout the remainder of 2012, and ~~mortgage~~to ~~loan~~continue ~~originations during this time~~ to be primarily generated by our existing mortgage bankers.

The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate fluctuations. We typically experience increased loan origination volume from purchases of homes during the spring and summer, when more people tend to move and buy or sell homes. A decrease in interest rates tends to result in increased refinancings. During the ~~second~~ third quarter of 2012, home purchases and refinancings by dollar volume were ~~67.47~~57% and ~~32.53~~43%, respectively, of total mortgage loan origination volume. For the ~~six~~nine months ended ~~June~~September 30, 2012, home purchases and refinancings by dollar volume were ~~61.45~~59% and ~~38.55~~41%, respectively, of total mortgage loan origination volume. PrimeLending’s home purchase volume inas ~~relation~~a topercentage of its total volume is greater than the national market average, primarily as a result of PrimeLending’s focus on builder and realtor relationships.

Income before taxes was $1828.70 million for the ~~second~~third quarter of 2012 and $2957.2 million for the ~~six~~ nine months ended ~~June~~September 30, 2012, an increase of $1516.12 million and $2540.58 million, respectively, compared with the corresponding periods in 2011. The increases were due primarily to increases in noninterest income, partially offset by increases in noninterest expense. Employees’ compensation and benefits and other expenses accounted for the majority of the increase in noninterest expense.

Noninterest income increased $5972.93 million for the ~~second~~third quarter of 2012 and $~~116~~188.48 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The increase ~~for~~ for both periods in noninterest income, which is comprised of net gains on the sale of loans and mortgage origination fees, was primarily due to higher volumes of mortgage loan originations. Mortgage loan origination volume increased $1.4 billion, or 56%, for the third quarter of 2012 and $3.8 billion, or 62%, for the nine months ended September 30, 2012, compared with the corresponding periods in 2011. In addition, the average net gain on sale per loan was greater for the three and ~~six~~ nine months ended ~~June~~ September 30, 2012. ~~Mortgage~~As ~~loan~~a ~~origination~~result ~~volume~~of recent mortgage interest rates reaching historic lows and increased ~~$1.1~~customer ~~billion~~demand for mortgage origination services, orPrimeLending ~~57.76%~~has ~~for~~been able to increase the ~~second~~average ~~quarter~~sales ofmargin ~~2012~~on ~~and~~its mortgage $2loans, while remaining competitive with other mortgage lenders.4 ~~billion~~In addition, orPrimeLending ~~67.06%~~also ~~for~~improved ~~the~~its ~~six~~sales ~~months~~margin ~~ended~~by ~~June 30,~~selling ~~2012~~a ~~compared~~larger ~~with~~volume of loans directly to the ~~corresponding~~ ~~periods~~secondary market rather than through correspondent channels in 2012 compared to 2011.

~~Employees’~~53 compensation and benefits increased $28.6 million for the second quarter of 2012 and $61.5 million for the six months ended June 30, 2012 compared with the corresponding periods in 2011. These increases were primarily attributable to an increase in the volume of mortgage loan originations during the first half of 2012 compared with the first half of 2011, which resulted in higher variable costs for commissions. In addition, costs for salaries and employee benefits increased as a result of the hiring of additional staff in recent years. Staffing levels were increased primarily to address growing compliance and information technology needs and the addition of mortgage origination offices.

~~Other~~Employees’ ~~expenses~~compensation and benefits increased $834.05 million for the ~~second~~third quarter of 2012 and $1696.5 0 million for the ~~six~~nine months ended ~~June~~ September 30, 2012 compared with the corresponding periods in 2011. ~~The~~These ~~increase~~increases ~~for~~were ~~both periods was~~ primarily attributable to aan ~~higher~~increase ~~number of loans originated~~ in the volume of mortgage ~~origination~~loan ~~segment~~originations ~~where~~during the ~~customer~~first ~~chose~~nine tomonths ~~accept~~of ~~a higher~~2012 ~~interest~~compared ~~rate~~with on the ~~loan~~first innine ~~return~~months ~~for~~of ~~our~~2011, ~~payment~~which ofresulted ~~the~~in ~~customer’s~~higher ~~closing~~variable ~~costs,~~commission ~~which~~expense. weThe ~~expensed~~higher ascommission ~~unreimbursed~~expense ~~closing~~was ~~costs.~~also ~~Our~~partially ~~unreimbursed~~due ~~closing~~to ~~costs~~an ~~for~~increase in the ~~first~~average ~~half~~commission ofrate ~~2012~~paid ~~increased~~to ~~both~~mortgage asbankers. ~~result~~In ofaddition, ancosts ~~increase in the~~for ~~volume~~salaries ofand ~~mortgage~~employee ~~loans~~benefits ~~originated~~increased as ~~well~~a asresult anof ~~increase in~~ the ~~percentage~~hiring of ~~customers~~additional ~~who~~staff. ~~chose~~Staffing ~~this~~levels ~~option,~~were ~~which~~increased ~~percentage~~primarily ~~has~~to ~~increased~~support asthe ~~interest~~greater ~~rates~~loan ~~have~~origination ~~reached~~volume ~~historical~~and ~~lows.~~address growing compliance and information technology needs.

InOther ~~addition,~~ expenses ~~resulting~~increased ~~from~~$9.4 ~~additions~~million tofor the ~~mortgage~~third ~~origination~~quarter ~~segment’s~~of ~~indemnification~~2012 ~~liability~~and ~~increased~~$25.9 ~~during~~million for the ~~first~~nine ~~half~~months ofended ~~2012~~September 30, ~~primarily~~2012 compared aswith athe ~~result~~corresponding ofperiods ~~an increase~~ in ~~investor~~ ~~claims over previous estimates~~2011. The ~~mortgage~~increase ~~origination segment may be responsible~~ for ~~errors~~both orperiods ~~omissions~~was ~~relating~~primarily toattributable ~~its representations and warranties that the loans sold meet certain requirements, including representations as~~ to ~~underwriting~~ ~~standards~~a ~~and~~higher ~~the~~number ~~validity~~ of ~~certain~~loans ~~borrower~~originated ~~representations~~ in ~~connection with~~ the ~~loan. If determined to be at fault, the~~ mortgage origination segment ~~either~~where ~~repurchases~~ the ~~loans~~customer ~~from~~chose ~~the~~to ~~investors~~accept ~~or reimburses the investors’ losses (~~a ~~“make-whole”~~higher ~~payment).~~interest ~~The~~rate ~~mortgage~~on ~~origination~~the loan ~~segment~~in ~~has~~return ~~established an indemnification liability~~ for ~~such~~our ~~probable~~payment ~~losses~~of ~~based upon, among other things,~~ the ~~level~~customer’s ofclosing ~~current unresolved repurchase requests~~costs, ~~the~~which ~~volume~~we ~~of estimated~~expensed ~~probable~~as ~~future~~unreimbursed ~~repurchase~~closing ~~requests,~~costs. ~~our~~Our ~~ability~~unreimbursed toclosing ~~cure~~costs ~~the~~for ~~defects identified in~~ the ~~repurchase~~first ~~requests,~~nine ~~and~~months ~~the severity~~ of ~~the~~2012 ~~estimated~~increased ~~loss~~both ~~upon~~as ~~repurchase.~~result ~~Provisions~~of ~~for~~an ~~indemnification~~increase ~~losses~~in ~~were~~the ~~$4.8~~volume ~~million~~of ~~and $7.3 million~~mortgage ~~for~~loans ~~the~~originated ~~three~~as ~~and~~well ~~six~~as ~~months~~an ~~ended~~increase ~~June~~in ~~30, 2012, respectively. For~~ the ~~three~~percentage ~~and~~of ~~six~~customers ~~months~~who ~~ended~~chose ~~June~~this 30option, ~~2011,~~which ~~provisions~~percentage ~~for~~has ~~indemnification~~increased ~~losses~~as ~~were~~interest ~~$0.4~~rates ~~million~~have ~~and~~reached ~~$0.8~~historical ~~million, respectively~~lows.

In addition, expenses resulting from additions to the mortgage origination segment’s indemnification liability increased during the first nine months of 2012. The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the loans from the investors or reimburses the investors’ losses (a “make-whole” payment). The mortgage origination segment has established an indemnification liability for such probable losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Provisions for indemnification losses were $6.1 million and $13.3 million for the three and nine months ended September 30, 2012, respectively. Approximately $5.0 million and $10.5 million of the provisions for the three and nine months ended September 30, 2012, respectively, were recorded to address an increase in investor claims over previous estimates related to mortgage loans originated by PrimeLending between 2005 and 2008. Historically, PrimeLending has experienced greater indemnification losses on loans originated between 2005 and 2008, both on individual loans and relative to total loans originated, when compared to loans originated subsequent to 2008. For the three and nine months ended September 30, 2011, provisions for indemnification losses were $0.6 million and $1.4 million, respectively. While we believe we have an appropriate liability for indemnification losses as of September 30, 2012, additional provisions may be necessary in the future.

Financial Advisory Segment

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

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
						Variance								Variance
	2012			2011		2012 v. 2011			2012			2011		2012 v. 2011
Net interest income	$	32,~~349~~895		$	23,~~965~~416	$	~~384~~(521	)	$	69,~~447~~341		$	59,~~782~~204	$	~~665~~137
Provision for loan losses		(~~115~~124	)		—		(~~115~~124	)		23(101	)		—		23(101	)
Noninterest income		2625,~~136~~639			2225,~~279~~783		~~3,857~~(144	)		5177,~~994~~635			4167,~~466~~245		10,~~528~~390
Noninterest expense		2826,~~264~~632			2426,~~491~~092		~~3,773~~540			5582,~~677~~281			4673,~~981~~015		89,~~696~~266
Income before taxes	$	12,~~336~~026		$	~~753~~3,107	$	~~583~~(1,081	)	$	24,~~741~~796		$	~~267~~3,434	$	21,~~474~~362

Income before taxes ~~increased~~decreased $01.61 million for the ~~second~~third quarter of 2012, ~~and~~but increased $21.54 million for the ~~six~~nine months ~~ended~~ ~~June~~ended September 30, 2012 compared with the corresponding periods in 2011. The decrease for the third quarter of 2012 was primarily due to the decrease in net interest income and the increase in noninterest expense. The increase for the nine months ended September 30, 2012 was due primarily to ~~increases~~the increase in noninterest income, ~~partially~~which was almost entirely offset by ~~increases~~the increase in noninterest expense.

The majority of noninterest income is generated from fees and commissions earned from investment advisory and securities brokerage activities, which ~~increased~~decreased $30.91 million for the ~~second~~third quarter of 2012, ~~and~~but increased $10.54 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. The increase ~~for both periods~~ was attributable to increased activity in the public finance market during the first ~~half~~nine months of 2012 that resulted in higher public finance advisory revenues.

Noninterest expense increased $30.85 million for the ~~second~~third quarter of 2012 and $89.73 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the corresponding periods in 2011. Employees’ compensation and benefits accounted for the majority of the increase in noninterest expense for the first nine months of 2012 primarily due to increases in compensation costs that vary with noninterest income, which increased for ~~both~~the ~~periods~~period.

52 54.1

Financial Condition

The following discussion contains a more detailed analysis of our financial condition at ~~June~~September 30, 2012 and as compared to December 31, 2011.

Securities Portfolio

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

The securities portfolio consists of three major components: trading securities, securities available for sale, and securities held to maturity. Trading securities are carried at fair market value, marked to market through operations and primarily held at First Southwest, which as a broker-dealer is required to carry its securities at fair value. These trading securities are used to support sales, underwriting and other customer activities. Securities that may be sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. The table below summarizes our securities portfolio (in thousands):

	June 30,2012		December 31,2011
	September 30,		December 31,
Trading securities, at fair value	$	49,277	$	58,957
	2012		2011
Trading securities, at fair value	$	45,156	$	58,957
Securities available for sale, at fair value
U.S. government agencies
Bonds		~~266~~391,~~970~~306		183,850
Mortgage-backed securities		36,~~499~~811		36,270
Collateralized mortgage obligations		~~159~~120,~~598~~159		262,078
States and political subdivisions		7167,~~640~~405		74,344
Auction rate bonds		8624,~~004~~157		44,544
		620,711		601,086
		639,838		601,086
Securities held to maturity, at amortized cost
U.S. government agencies
Mortgage-backed securities		5,~~618~~209		6,639
Collateralized mortgage obligations		1310,~~050~~915		15,974
States and political subdivisions		~~106~~101,~~496~~347		111,924
Auction rate bonds		—		45,173
		125,164		179,710
		117,471		179,710
Total securities portfolio	$	~~795~~802,~~152~~465	$	839,753

5355

We had a net unrealized gain of $511.69 million related to the available for sale investment portfolio at ~~June~~ September 30, 2012~~, net of an unrealized loss of $3~~.8 ~~million related to auction rate securities upon which the credit-related portion of an other-than-temporary impairment (“OTTI”) has been recognized in earnings.~~ We had a net unrealized gain of $6.8 million related to the available for sale investment portfolio at December 31, 2011, net of an unrealized loss of $2.0 million related to auction rate securities upon which the credit-related portion of OTTI has been recognized in earnings.

The market value of ~~securities~~ held to maturity securities at ~~June~~September 30, 2012 was $89.15 million above book value. At December 31, 2011, the market value of held to maturity securities was $9.0 million above book value.

We hold securities issued by Access to Loans for Learning Student Loan Corporation that exceed 10% of our shareholders’ equity. The aggregate carrying value and aggregate estimated market value of the securities at June 30, 2012, was $86.0 million.

Loan Portfolio

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

	June 30,2012			December 31,2011
	September 30,			December 31,
	2012			2011
Commercial and industrial
Commercial	$	1,~~466~~485,~~219~~353		$	1,473,564
Lease financing		27,~~531~~185			32,604
Securities (including margin loans)		~~305~~264,~~808~~050			319,895
Real estate		1,~~221~~183,~~609~~969			1,221,726
Construction and land development		~~252~~271,~~709~~524			273,949
Consumer		27,~~569~~664			29,429
Loans, gross		3,~~301~~259,~~445~~745			3,351,167
Allowance for loan losses		(6059,~~010~~453	)		(67,495	)
Loans, net	$	3,~~241~~200,~~435~~292		$	3,283,672

Banking Segment

The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. The banking segment’s total loans, net of the allowance for loan losses, were $34.92 billion and $3.7 billion as of ~~June~~September 30, 2012 and December 31, 2011, respectively. The banking segment’s loan portfolio includes warehouse lines of credit extended to PrimeLending and First Southwest. Advances under these lines of credit were $01.92 billion and $0.7 billion at ~~June~~September 30, 2012 and December 31, 2011, respectively, and are eliminated from net loans on our consolidated balance sheet.

The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. At ~~June~~September 30, 2012, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate loan portfolio. The areas of concentration within our real estate portfolio were construction and land development loans and non-construction commercial real estate loans. At ~~June~~September 30, 2012, construction and land development loans were 8% of total loans, while non-construction commercial real estate loans were 2827% of total loans. The banking segment’s loan concentrations were within regulatory guidelines as of ~~June~~September 30, 2012.

~~Mortgage~~56 ~~Origination Segment~~

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale were $969.7 million and $775.3 million as of June 30, 2012 and December 31, 2011, respectively.

Mortgage Origination Segment

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale were $1.3 billion and $775.3 million as of September 30, 2012 and December 31, 2011, respectively.

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

	June 30,		December 31,
	September 30,2012		December 31,2011
	2012		2011
Loans held for sale
Unpaid principal balance	$	~~942~~1,~~626~~291,569	$	752,796
Fair value adjustment		2743,~~100~~329		22,515
	$	~~969~~1,~~726~~334,898	$	775,311
Pipeline loans
Unpaid principal balance	$	1,~~283~~418,~~727~~494	$	687,890
Fair value adjustment		2339,~~651~~245		10,096
	$	1,~~307~~457,~~378~~739	$	697,986

The fair value adjustment made to the unpaid principal balance of pipeline loans shown in the previous table reflects assumptions regarding projected loan closing rates.

Financial Advisory Segment

The loan portfolio of the financial advisory segment consists primarily of margin loans to customers and correspondents. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as First Southwest’s internal policies. The financial advisory segment’s total loans, net of the allowance for loan losses, were $~~302~~260.21 million and $317.0 million as of ~~June~~September 30, 2012 and December 31, 2011, respectively. ~~The~~ The decrease was primarily attributable to decreased borrowings in margin accounts held by First Southwest customers and correspondents.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans held for investment. Our management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our Board of Directors and the Directors’ Loan Review Committee of the Bank’s Board of Directors.

5557

We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic and is individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in our estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segment adjusted for changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and business conditions and developments that affect the collectability of the portfolio; the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations of credit and changes in the level of such concentrations.

We have designed our loan review program to identify and monitor problem loans by maintaining a credit grading process, ensuring that timely and appropriate changes are made to the loans with assigned risk grades and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impairment when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. We review on an individual basis all loan relationships over $0.2 million that exhibit probable or observed credit weaknesses, the top 25 loan relationships by dollar amount in each market we serve, and additional relationships necessary to achieve adequate coverage of our various lending markets.

The allowance is subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing portfolio as of ~~June~~September 30, 2012, additional provisions for losses on existing loans may be necessary in the future. We recorded net charge-offs in the amount of $43.84 million for the ~~second~~third quarter of 2012 and $4.98 million for the ~~second~~third quarter of 2011. For the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, net charge-offs were $1316.16 million and $1015.64 million, respectively. Our allowance for loan losses totaled $6059.05 million at ~~June~~September 30, 2012 and $67.5 million at December 31, 2011. The ratio of the allowance for loan losses to total loans held for investment at ~~June~~September 30, 2012 and December 31, 2011 was 1.82% and 2.01%, respectively, reflecting lower levels of non-performing loans.

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

The provision for loan losses, primarily in the banking segment, was $58.65 million for the ~~six~~nine months ended ~~June~~September 30, 2012, a decrease of $89.17 million compared with the ~~six~~nine months ended ~~June~~ September 30, 2011. The decrease was primarily a result of a decrease in non-performing loans during the first ~~half~~nine months of 2012 compared with the first ~~half~~nine months of 2011 due to improving economic conditions in Texas.

5658

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Balance at beginning of period

6160,~~409~~010

6568,~~940~~308

67,495

65,169

Provisions charged to operating expenses

32,~~419~~876

74,~~238~~500

58,~~640~~516

1318,~~738~~238

Recoveries of loans previously charged off

Commercial and industrial

~~312~~328

~~195~~332

~~771~~1,099

~~401~~733

Real estate

~~329~~9

2391

~~346~~355

~~172~~263

Construction and land development

~~142~~19

~~159~~33

~~143~~162

~~164~~197

Consumer

44(4

)

2129

6157

Total recoveries

~~789~~364

~~421~~452

1,~~281~~645

~~798~~1,250

Loans charged off

Commercial and industrial

32,~~657~~354

31,~~675~~940

79,~~639~~993

79,~~730~~670

Real estate

1,~~858~~412

~~358~~538

23,~~021~~433

~~775~~1,313

Construction and land development

7823

12,~~241~~703

4,~~715~~738

25,~~812~~515

Consumer

148

1763

3139

80143

Total charge-offs

53,~~607~~797

5,~~291~~244

1418,~~406~~203

1116,~~397~~641

Net charge-offs

(43,~~818~~433

)

(4,~~870~~792

)

(1316,~~125~~558

)

(1015,~~599~~391

)

Balance at end of period

6059,~~010~~453

68,~~308~~016

6059,~~010~~453

68,~~308~~016

Net charge-offs to average loans outstanding

0.5842

0.6461

0.7967

0.7167

The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, are presented in the table below (dollars in thousands).

	June 30,2012					December 31,2011
	September 30,					December 31,
	Reserve		% ofGrossLoans			Reserve		% ofGrossLoans
	2012					2011
Commercial and industrial	$	36,373		54.51	%	$	38,196		54.49	%
			% of					% of
Real estate (including construction and land development)		23,532		44.66	%		28,971		44.63	%
			Gross					Gross
Consumer

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

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