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 ~~March~~June 3130, 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 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 ~~May~~August 1, 2012, there were 34,~~444~~462,~~693~~390 shares of the registrant’s Original Common Stock, $0.001 par value, and 0no shares of the registrant’s Common Stock, $0.001 par value, outstanding, including 2,~~379~~377,~~636~~809 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 ~~March~~June 3130, 2012

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1.	Financial Statements
Unaudited Consolidated Interim Financial Statements
Consolidated Balance Sheets, March 31, 2012 and December 31, 2011		3
Consolidated Balance Sheets, June 30, 2012 and December 31, 2011			3
Consolidated Statements of Income, Three Months Ended March 31, 2012 and 2011		4
Consolidated Statements of Income, Three and Six Months Ended June 30, 2012 and 2011			4
Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2012 and 2011		5
Consolidated Statements of Comprehensive Income, Three and Six Months Ended June 30, 2012 and 2011			5
Consolidated Statements of Shareholders’ Equity, Three Months Ended March 31, 2012 and 2011		6
Consolidated Statements of Shareholders’ Equity, Six Months Ended June 30, 2012 and 2011			6
Consolidated Statements of Cash Flows, Three Months Ended March 31, 2012 and 2011		7
Consolidated Statements of Cash Flows, Six Months Ended June 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		36
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
Item 3. Quantitative and Qualitative Disclosures about Market Risk		56
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		62
Item 4. Controls and Procedures		59
Item 4.	Controls and Procedures		65
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		59
Item 1.	Legal Proceedings		65
Item 1A. Risk Factors		60
Item 1A.	Risk Factors		66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		67
Item 3. Defaults Upon Senior Securities		62
Item 3.	Defaults Upon Senior Securities		68
Item 4. Mine Safety Disclosures		62
Item 4.	Mine Safety Disclosures		68
Item 5. Other Information		62
Item 5.	Other Information		68
Item 6. Exhibits		62
Item 6.	Exhibits		68
Signatures		63	69

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets

	March 31. 2012			December 31,
	June 30. 2012(Unaudited)			December 31,2011
	(Unaudited)			2011
	(In thousands)
Assets
Cash and due from banks	$	~~244~~231,~~864~~646		$	344,647
Federal funds sold and securities purchased under agreements to resell		1953,~~858~~085			3,347
Loans held for sale		~~853~~970,~~801~~632			776,372
Securities
Trading, at fair market value		6649,~~804~~277			58,957
Available for sale, amortized cost $610,257 and $594,287, respectively		616,609			601,086
Available for sale, amortized cost $615,107 and $594,287, respectively		620,711			601,086
Held to maturity, fair market value $184,433 and $188,736, respectively		175,647			179,710
Held to maturity, fair market value $133,227 and $188,736, respectively		125,164			179,710
		859,060			839,753
		795,152			839,753
Loans, net of unearned income		3,~~330~~301,~~664~~445			3,351,167
Allowance for loan losses		(6160,~~409~~010	)		(67,495	)
Loans, net		3,~~269~~241,~~255~~435			3,283,672
Broker-dealer and clearing organization receivables		~~196~~122,~~990~~740			111,690
Fee award receivable		17,~~706~~408			18,002
Investment in unconsolidated subsidiaries		2,012			2,012
Premises and equipment, net		9293,~~335~~693			92,906
Accrued interest receivable		15,~~313~~318			16,175
Other real estate owned		2326,~~590~~229			30,254
Goodwill, net		35,880			35,880
Other intangible assets, net		10,~~997~~610			11,385
Other assets		~~145~~229,~~896~~853			133,925
Total assets	$	5,~~787~~845,~~557~~693		$	5,700,020
Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	~~265~~237,~~036~~413		$	328,858
Interest-bearing		3,~~903~~715,~~740~~265			3,917,348
Total deposits		43,~~168~~952,~~776~~678			4,246,206
Broker-dealer and clearing organization payables		~~220~~254,~~012~~448			186,483
Short-term borrowings		~~606~~819,~~774~~181			476,439
Capital lease obligations		1211,~~008~~893			12,121
Notes payable		5149,~~828~~174			54,966
Junior subordinated debentures		67,012			67,012
Other liabilities		~~120~~126,~~185~~979			137,509
Total liabilities		5,~~246~~281,~~595~~365			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; 32,255,311 and 31,920,732 shares issued, respectively		32			32
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
Common Stock, $0.001 par value per share, authorized 150,000,000 shares; 0 shares issued		—			—
Surplus		~~159~~161,~~835~~011			156,123
Retained earnings		~~262~~284,~~411~~740			244,291
Accumulated other comprehensive income		4,~~857~~056			4,587
		541,203			519,101
		563,907			519,101
Unearned ESOP shares (190,254 shares)		(2,070	)		(2,070	)
Total PlainsCapital Corporation shareholders’ equity		~~539~~561,~~133~~837			517,031
Noncontrolling interest		12,~~829~~491			2,253
Total shareholders’ equity		~~540~~564,~~962~~328			519,284
Total liabilities and shareholders’ equity	$	5,~~787~~845,~~557~~693		$	5,700,020

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income— - Unaudited

(In thousands, except per share amounts)

	Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Interest income:
Loans, including fees	$	48,~~600~~245		$	4244,~~204~~636	$	96,845		$	86,840
Securities
Taxable		3,~~412~~332			45,~~606~~093		6,744			9,699
Tax-exempt		2,~~475~~596			2,~~387~~605		5,071			4,992
Federal funds sold and securities purchased under agreements to resell		86146			~~1,092~~660		232			1,752
Interest-bearing deposits with banks		~~173~~215			~~314~~193		388			507
Other		12,~~810~~067			1,~~400~~531		3,877			2,931
Total interest income		56,~~556~~601			5254,~~003~~718		113,157			106,721
Interest expense
Deposits		54,~~265~~379			7,~~528~~496		9,644			15,024
Short-term borrowings		~~428~~565			~~398~~374		993			772
Capital lease obligations		~~143~~141			~~136~~135		284			271
Notes payable		~~723~~672			~~810~~805		1,395			1,615
Junior subordinated debentures		~~648~~644			~~621~~627		1,292			1,248
Other		~~140~~215			8596		355			181
Total interest expense		76,~~347~~616			9,~~578~~533		13,963			19,111
Net interest income		49,~~209~~985			4245,~~425~~185		99,194			87,610
Provision for loan losses		23,~~221~~419			67,~~500~~238		5,640			13,738
Net interest income after provision for loan losses		46,~~988~~566			3537,~~925~~947		93,554			73,872
Noninterest income
Service charges on depositor accounts		2,~~096~~067			12,~~842~~025		4,163			3,867
Net gains from sale of loans		99,718			44,334
Net realized gains on sale of securities		—			1,245		—			1,245
Mortgage loan origination fees		18,325			17,292
Other-than-temporary impairment
Trust fees		1,031			1,006
Total other-than-temporary impairment losses on securities		(4,876	)		—		(4,876	)		—
Investment advisory fees and commissions		17,453			12,011
Portion of loss recognized in other comprehensive income		2,788			—		2,788			—
Securities brokerage fees and commissions		7,142			6,186
Net other-than-temporary impairment losses recognized in earnings		(2,088	)		—		(2,088	)		—
Other		4,341			2,669
Net gains from sale of loans		118,675			60,641		218,393			104,975
Total noninterest income		150,106			85,340
Mortgage loan origination fees		20,407			18,180		38,732			35,472
Noninterest expense
Trust fees		1,045			1,044		2,076			2,050
Employees’ compensation and benefits		105,774			66,346
Investment advisory fees and commissions		19,680			16,256		37,133			28,267
Occupancy and equipment, net		17,082			15,398
Securities brokerage fees and commissions		6,143			5,221		13,285			11,407
Professional services		8,175			6,046
Other		2,490			2,977		6,831			5,646
Deposit insurance premiums		996			1,856
Total noninterest income		168,419			107,589		318,525			192,929
Repossession and foreclosure, net of recoveries		5,918			1,880
Noninterest expense
Other		26,157			17,515
Employees’ compensation and benefits		112,403			78,412		218,177			144,758
Total noninterest expense		164,102			109,041
Occupancy and equipment, net		17,760			15,812		34,842			31,210
Income before income taxes		32,992			12,224
Professional services		11,031			6,592		19,206			12,638
Income tax provision		11,254			4,508
Deposit insurance premium		907			1,234		1,903			3,090
Net income		21,738			7,716
Repossession and foreclosure, net of recoveries		1,682			732		7,600			2,612
Less: Net income attributable to noncontrolling interest		481			122
Other		29,008			19,148		55,165			36,663
Net income attributable to PlainsCapital Corporation		21,257			7,594
Total noninterest expense		172,791			121,930		336,893			230,971
Dividends on preferred stock and other		1,094			1,400
Income before income taxes		42,194			23,606		75,186			35,830
Income applicable to PlainsCapital Corporation common shareholders	$	20,163		$	6,194
Income tax provision		15,962			7,992		27,216			12,500
Earnings per share
Net income		26,232			15,614		47,970			23,330
Basic	$	0.61		$	0.19
Less: Net income attributable to noncontrolling interest		1,155			184		1,636			306
Diluted	$	0.59		$	0.18
Net income attributable to PlainsCapital Corporation		25,077			15,430		46,334			23,024
Dividends on preferred stock and other		692			1,403		1,786			2,803
Income applicable to PlainsCapital Corporation common shareholders	$	24,385		$	14,027	$	44,548		$	20,221
Earnings per common share
Basic	$	0.73		$	0.43	$	1.35		$	0.62
Diluted	$	0.72		$	0.42	$	1.32		$	0.60
Dividends per common share	$	0.06		$	0.05	$	0.12		$	0.10

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income— - Unaudited

(In thousands)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net income	$	2126,~~738~~232		$	715,~~716~~614		$	47,970		$	23,330
Other comprehensive income (loss)
Unrealized losses on securities available for sale, net of tax of $98 and $2,138		(182	)		(3,982	)
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 held in trust for the Supplemental Executive
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
Retirement Plan, net of tax of $244 and $104		452			193
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 $0 and $18		—			(34	)
Comprehensive income		25,431			18,594			47,439			22,487
Comprehensive income		22,008			3,893
Less: comprehensive income attributable to noncontrolling interest		1,155			184			1,636			306
Less: comprehensive income attributable to noncontrolling interest		481			122
Comprehensive income applicable to PlainsCapital Corporation	$	24,276		$	18,410		$	45,803		$	22,181
Comprehensive income applicable to PlainsCapital Corporation common shareholders	$	21,527		$	3,771

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity— - Unaudited

	PlainsCapital Corporation Shareholders
	Preferred Stock				Common Stock						Retained			AccumulatedOther Comprehensive			UnearnedESOP			Noncontrolling
														Accumulated Other			Unearned
	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		—		3437		—			—			—			—			3437
Vesting of stock-based compensation		—		—		83,713		—		—		—			—			—			—			—
Stock-based compensation expense		—		—		—		—		~~451~~1,109		—			—			—			—			~~451~~1,109
ESOP activity		—		—		—		—		—		—24			—			—			—			—24
Dividends on common stock ($0.05 per share)		—		—		—		—		—		(1,702	)		—			—			—			(1,702	)
Dividends on common stock ($0.10 per share)		—		—		—		—		—		(3,408	)		—			—			—			(3,408	)
Dividends on preferred stock		—		—		—		—		—		(12,~~194~~388	)		—			—			—			(12,~~194~~388	)
Preferred stock discount and accretion		—		~~206~~415		—		—		—		(~~206~~415	)		—			—			—			—
Cash received from noncontrolling interest		—		—		—		—		—		—			—			—			49598			49598
Cash distributions to noncontrolling interest		—		—		—		—		—		—			—			—			(~~153~~359	)		(~~153~~359	)
Net income		—		—		—		—		—		723,~~594~~024			—			—			~~122~~306			723,~~716~~330
Other comprehensive loss		—		—		—		—		—		—			(~~3,823~~843	)		—			—			(~~3,823~~843	)
Balance, March 31, 2011		92,013	$	89,399		31,866,787	$	32	$	153,774	$	211,278		$	(4,104	)	$	(2,528	)	$	803		$	448,654
Balance, June 30, 2011		92,013	$	89,608		31,866,787	$	32	$	154,435	$	223,623		$	(1,124	)	$	(2,528	)	$	1,330		$	465,376
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		—		—		8090,~~579~~779		—		~~539~~656		—			—			—			—			~~539~~656
Vesting of stock-based compensation		—		—		7584,~~429~~753		—		—		—			—			—			—			—
Stock-based compensation expense		—		—		—		—		~~673~~1,732		—			—			—			—			~~673~~1,732
ESOP activity		—		—		178,571		—		2,500		1223			—			—			—			2,~~512~~523
Dividends on common stock ($0.06 per share)		—		—		—		—		—		(2,055	)		—			—			—			(2,055	)
Dividends on common stock ($0.12 per share)		—		—		—		—		—		(4,122	)		—			—			—			(4,122	)
Dividends on preferred stock		—		—		—		—		—		(1,~~094~~786	)		—			—			—			(1,~~094~~786	)
Cash received from noncontrolling interest		—		—		—		—		—		—			—			—			~~110~~116			~~110~~116
Cash distributions to noncontrolling interest		—		—		—		—		—		—			—			—			(1,~~015~~514	)		(1,~~015~~514	)
Net income		—		—		—		—		—		2146,~~257~~334			—			—			~~481~~1,636			2147,~~738~~970
Other comprehensive income		—		—		—		—		—		—			270			—			—			270
Other comprehensive loss		—		—		—		—		—		—			(531	)		—			—			(531	)
Balance, March 31, 2012		114,068	$	114,068		32,255,311	$	32	$	159,835	$	262,411		$	4,857		$	(2,070	)	$	1,829		$	540,962
Balance, June 30, 2012		114,068	$	114,068		32,274,835	$	32	$	161,011	$	284,740		$	4,056		$	(2,070	)	$	2,491		$	564,328

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In thousands)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2012			2011
Operating Activities
Net income	$	2147,~~738~~970		$	723,~~716~~330
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses		25,~~221~~640			613,~~500~~738
Net losses on other real estate owned		56,~~474~~786			12,~~460~~010
Depreciation and amortization		612,~~339~~411			816,~~584~~229
Stock-based compensation expense		~~673~~1,732			~~470~~1,128
Loss on sale of premises and equipment		44			5
Net realized losses (gains) on securities		2,088			(1,245	)
Stock dividends received on securities		(4	)		(7	)
Loss on sale of premises and equipment		156			131
Deferred income taxes		73			5,176
Stock dividends received on securities		(9	)		(13	)
Net change in prepaid FDIC assessments		915			1,566
Deferred income taxes		(2,358	)		3,387
Net change in assets segregated for regulatory purposes		—			(13,000	)
Net change in prepaid FDIC assessments		1,740			2,706
Net change in trading securities		(79,~~847~~680	)		(255,~~705~~905	)
Net change in broker-dealer and clearing organization receivables		(8511,~~300~~050	)		(3224,~~557~~772	)
Net change in fee award receivable		~~296~~594			~~312~~619
Net change in broker-dealer and clearing organization payables		3367,~~529~~965			4261,~~355~~776
Net change in other assets		(510,~~875~~245	)		(5,~~313~~815	)
Net change in other liabilities		(159,~~954~~405	)		(5951,~~141~~489	)
Net gains from sale of loans		(99218,~~718~~393	)		(44104,~~334~~975	)
Loans originated for sale		(25,~~733~~829,~~126~~090	)		(13,~~471~~407,~~560~~745	)
Proceeds from loans sold		25,~~750~~843,~~386~~584			13,~~536~~424,~~012~~069
Net cash provided by (used in) operating activities		(~~126~~80,~~136~~204	)		(4152,~~461~~836	)
Investing Activities
Net change in securities purchased under resale agreements		(437,~~028~~553	)		7554,~~402~~570
Proceeds from maturities and principal reductions of securities held to maturity		49,~~172~~230			911,~~083~~857
Proceeds from sales, maturities and principal reductions of securities available for sale		98250,~~876~~489			98244,~~256~~073
Purchases of securities held to maturity		—			(1,031	)
Purchases of securities available for sale		(~~116~~290,~~384~~678	)		(~~265~~360,~~372~~641	)
Net change in loans		1130,~~498~~058			~~144~~(4,~~451~~824	)
Purchases of premises and equipment and other assets		(512,~~102~~848	)		(1721,~~471~~481	)
Proceeds from sales of premises and equipment and other real estate owned		24,~~237~~644			68,~~258~~460
Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock		4(11,922	)		~~2,164~~34
Net cash provided by (used in) investing activities		(858,~~727~~580	)		51(68,~~740~~983	)
Financing Activities
Net change in deposits		(77293,~~430~~528	)		~~193~~44,~~731~~213
Net change in short-term borrowings		~~130~~342,~~335~~742			(89127,~~207~~357	)
Proceeds from notes payable		—			14,~~500~~000
Payments on notes payable		(35,~~138~~792	)		(35,~~081~~677	)
Proceeds from issuance of common stock		3,~~039~~156			1518
Dividends paid		(46,~~225~~984	)		(25,~~896~~796	)
Net cash received from (distributed to) noncontrolling interest		(~~905~~1,398	)		~~(104~~239	)
Other, net		(~~113~~228	)		(~~114~~229	)
Net cash provided by (used in) financing activities		4737,~~563~~968			99(90,~~844~~589	)
Net change in cash and cash equivalents		(87100,~~300~~816	)		~~110~~(212,~~123~~408	)
Cash and cash equivalents at beginning of period		347,189			359,335
Cash and cash equivalents at end of period	$	~~259~~246,~~889~~373		$	~~469~~146,~~458~~927
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	714,~~801~~897		$	1121,~~482~~693
Income taxes	$	432,~~134~~174		$	12,~~090~~497
Supplemental Schedule of Noncash Activities
Conversion of loans to other real estate owned	$	17,~~007~~097		$	26,~~568~~105

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements –- Unaudited

~~March~~June 3130, 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 ~~three~~six month periods ended ~~March~~June 3130, 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. ~~PlainsCapital~~ ~~owns a 69.7% membership interest in Hester Capital Management, LLC (“Hester Capital”).~~ The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”), PNB Aero Services, Inc. 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 owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC (“Ventures”). Through a series limited liability company structure, Ventures establishes separate operating divisions with select business partners, such as home builders, real estate brokers and financial institutions, to originate residential mortgage loans.

~~After~~On ~~the~~May 8, ~~close~~2012, ofwe ~~business~~entered oninto ~~December 31,~~an ~~2008,~~Agreement ~~First~~and ~~Southwest~~Plan of Merger with Hilltop Holdings, Inc., (“Hilltop”) and a ~~diversified,~~wholly ~~private investment~~owned ~~banking~~subsidiary ~~corporation~~of Hilltop, ~~headquartered~~whereby inif ~~Dallas,~~the ~~Texas~~merger ~~merged~~(the ~~into~~“Merger”) ~~FSWH~~contemplated ~~Acquisition~~therein ~~LLC~~were consummated, aPlainsCapital ~~wholly~~would ~~owned~~merge into a subsidiary of ~~the~~Hilltop, ~~Bank. Following~~which subsidiary would survive the ~~merger~~transaction, ~~FSWH~~and ~~Acquisition~~each ~~LLC~~share ~~changed~~of ~~its~~our ~~name~~common stock would be converted into the right to ~~“First~~receive ~~Southwest~~0.776 ~~Holdings~~shares of Hilltop’s common stock and a cash payment of $9.00, ~~LLC~~subject to certain adjustments.” The ~~principal~~ ~~subsidiaries~~Merger ofis ~~First~~subject ~~Southwest~~to ~~are~~the ~~First~~approval ~~Southwest~~of ~~Company~~the ~~(“FSC”)~~shareholders of PlainsCapital, athe ~~broker-dealer~~approval ~~registered~~by ~~with~~shareholders of Hilltop of the ~~SEC~~issuance ~~and~~of ~~the~~shares ~~Financial~~in ~~Industry~~connection ~~Regulatory~~with ~~Authority~~the ~~(“FINRA”)~~Merger, ~~and~~regulatory ~~First~~approval ~~Southwest~~and ~~Asset~~other ~~Management,~~customary ~~Inc~~closing conditions., ~~a registered~~If ~~investment~~completed, ~~advisor~~the ~~under~~Merger ~~the~~would ~~Investment~~constitute ~~Advisors~~a ~~Act~~change of ~~1940~~control.

~~The~~In ~~acquisition~~July ~~cost of First Southwest Holdings~~2012, ~~Inc. was approximately $62.2 million. In addition,~~ PlainsCapital ~~placed approximately 1.7 million shares of PlainsCapital common stock~~sold, ~~valued~~ at approximately ~~$19.2~~carrying ~~million as of December 31~~value, ~~2008,~~its ~~into~~controlling ~~escrow.~~membership ~~The~~interest ~~percentage~~in ofHester ~~shares~~Capital ~~to be released from escrow and distributed to former First Southwest stockholders will be determined based upon~~Management, ~~among~~LLC ~~other~~(“Hester ~~factors,~~Capital”) ~~the valuation of certain auction rate bonds held by First Southwest prior~~ to ~~the~~an ~~merger~~unrelated ~~(or~~third ~~repurchased~~party. ~~from investors~~The ~~following~~operations ~~the closing~~ of ~~the~~Hester ~~merger)~~Capital aswere ofnot ~~the~~significant ~~last~~to ~~day~~PlainsCapital ~~of December 2012~~ or, ~~if applicable, the aggregate sales price of such auction rate bonds prior~~ to ~~such~~PlainsCapital’s ~~date.~~financial ~~Any~~advisory ~~shares issued out of the escrow will be accounted for as additional acquisition cost~~segment.

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

After the close of business on December 31, 2008, First Southwest Holdings, Inc., a diversified, private investment banking corporation headquartered in Dallas, Texas merged into FSWH Acquisition LLC, a wholly owned subsidiary of the Bank. Following the merger, FSWH Acquisition LLC changed its name to “First Southwest Holdings, LLC.” The principal subsidiaries of First Southwest are First Southwest Company (“FSC”), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”), and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

The acquisition cost of First Southwest Holdings, Inc. was approximately $62.2 million. In addition, PlainsCapital placed approximately 1.7 million shares of PlainsCapital common stock, valued at approximately $19.2 million as of December 31, 2008, into escrow. The percentage of shares to be released from escrow and distributed to former First Southwest stockholders will be determined based upon, among other factors, the valuation of certain auction rate bonds held by First Southwest prior to the merger (or repurchased from investors following the closing of the merger) as of the last day of December 2012 or, if applicable, the aggregate sales price of such auction rate bonds prior to such date. Any shares issued out of the escrow will be accounted for as additional acquisition cost.

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 ~~Retirement~~Pension Plan.

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

	March 31,2012			December 31,2011
Unrealized gain on securities available for sale	$	4,795		$	5,718
Unrealized loss on securities for which the credit portion of an
OTTI has been recognized in earnings		(687	)		(1,428	)
Unrealized gain on securities held in trust for the Supplemental
Executive Retirement Plan		749			297
	$	4,857		$	4,587

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

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


	June 30,			December 31,
	2012			2011
Unrealized gain on securities available for sale	$	6,142		$	5,718
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		413			297

	$	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 ~~March~~June 3130, 2012, and December 31, 2011 ~~are~~ are summarized as follows (in thousands):

	Available for Sale
			Recognized in AOCI
	AmortizedCost		GrossUnrealizedGains		GrossUnrealizedLosses			OTTI			Fair Value
As of March 31, 2012
As of June 30, 2012
U. S. government agencies
Bonds	$	~~244~~266,~~485~~595	$	~~190~~674	$	(~~1,406~~299	)	$	—		$	~~243~~266,~~269~~970
Mortgage-backed securities		33,~~690~~480		23,~~331~~019		~~(74~~—	)		—			3536,~~947~~499
Collateralized mortgage obligations		~~216~~158,~~993~~501		1,~~891~~278		(~~589~~181	)		—			~~218~~159,~~295~~598
States and political subdivisions		6866,~~547~~682		54,~~056~~981		(23	)		—			7371,~~580~~640
Auction rate bonds		4689,~~542~~849		—		—			(13,~~024~~845	)		4586,~~518~~004
Totals	$	~~610~~615,~~257~~107	$	9,~~468~~952	$	(~~2,092~~503	)	$	(13,~~024~~845	)	$	~~616~~620,~~609~~711
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 March 31, 2012
As of June 30, 2012
U. S. government agencies
Mortgage-backed securities	$	65,~~135~~618	$	—		$	65,~~135~~618	$	~~528~~475	$	(65	)	$	6,~~657~~088
Collateralized mortgage obligations		1413,~~459~~050		—			1413,~~459~~050		~~313~~244		(4745	)		1413,~~725~~249
States and political subdivisions		~~109~~106,~~704~~496		—			~~109~~106,~~704~~496		7,~~625~~399		(65	)		~~117~~113,~~323~~890
Auction rate bonds		45,383		(34	)		45,349		379		—			45,728
Totals	$	125,164	$	—		$	125,164	$	8,118	$	(55	)	$	133,227
Totals	$	175,681	$	(34	)	$	175,647	$	8,845	$	(59	)	$	184,433
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

In the previous table, amounts shown as unrealized losses recognized in AOCI resulting from OTTI relate to OTTI recognized on auction rate bonds classified both as available for sale and held to maturity during the year ended December 31, 2011. The Bank did not incur OTTI in either of the three months ended March 31, 2012 or 2011.

2. Securities (continued)

~~Information~~In ~~regarding~~the ~~securities,~~second ~~including~~quarter ~~those~~of ~~for~~2012, ~~which~~ the credit~~-related~~ ~~portion~~ratings of anall ~~OTTI~~of ~~has~~the auction rate bonds held by the Bank were ~~been~~downgraded. ~~recorded~~In inresponse ~~earnings~~to the deterioration of the creditworthiness of the issuer of the auction rate bonds evidenced by the downgrade, ~~which~~the ~~were~~Bank intransferred 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 ~~position~~of as$2.8 ofmillion ~~March 31~~that was included, ~~2012~~net ~~and~~of ~~December 31~~tax, ~~2011,~~in isaccumulated ~~shown~~other incomprehensive ~~the~~income ~~following~~at ~~tables~~June 30, ~~(dollars~~2012, inwhich ~~thousands):~~reduced shareholders’ equity.

	As of March 31, 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		20	$	203,143	$	1,406		—	$	—	$	—
Unrealized loss for more than twelve months		—		—		—		—		—		—
		20		203,143		1,406		—		—		—
Mortgage-backed securities
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		1		4,370		74		1		4,404		83
		1		4,370		74		1		4,404		83
Collateralized mortgage obligations
Unrealized loss for less than twelve months		16		99,869		589		15		106,887		1,083
Unrealized loss for more than twelve months		—		—		—		1		552		1
		16		99,869		589		16		107,439		1,084
States and political subdivisions
Unrealized loss for less than twelve months		1		126		7		3		635		13
Unrealized loss for more than twelve months		1		1,535		16		4		4,380		35
		2		1,661		23		7		5,015		48
Auction rate bonds
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		2		23,047		1,046		3		44,544		1,998
		2		23,047		1,046		3		44,544		1,998
Total available for sale
Unrealized loss for less than twelve months		37		303,138		2,002		18		107,522		1,096
Unrealized loss for more than twelve months		4		28,952		1,136		9		53,880		2,117
		41	$	332,090	$	3,138		27	$	161,402	$	3,213
Held to maturity
U. S. government agencies
Mortgage-backed securities
Unrealized loss for less than twelve months		1	$	491	$	6		1	$	491	$	6
Unrealized loss for more than twelve months		—		—		—		—		—		—
		1		491		6		1		491		6
Collateralized mortgage obligations
Unrealized loss for less than twelve months		1		4,962		47		1		5,337		88
Unrealized loss for more than twelve months		—		—		—		—		—		—
		1		4,962		47		1		5,337		88
States and political subdivisions
Unrealized loss for less than twelve months		3		1,467		1		—		—		—
Unrealized loss for more than twelve months		1		206		5		6		2,498		10
		4		1,673		6		6		2,498		10
Auction rate bonds
Unrealized loss for less than twelve months		—		—		—		—		—		—
Unrealized loss for more than twelve months		1		4,494		43		2		10,081		199
		1		4,494		43		2		10,081		199
Total held to maturity
Unrealized loss for less than twelve months		5		6,920		54		2		5,828		94
Unrealized loss for more than twelve months		2		4,700		48		8		12,579		209
		7	$	11,620	$	102		10	$	18,407	$	303

In addition, the Bank determined that certain senior auction rate bonds had incurred other-than-temporary impairment. In order to 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 approximately $4.9 million on auction rate bonds for the three and six months ended June 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 approximately $2.1 million for the three and six months ended June 30, 2012, and was recorded in operating results. The remaining $2.8 million of the OTTI has been recognized in other comprehensive income. The Bank did not incur OTTI in either of the three or six months ended June 30, 2011.

As noted above, the Bank has incurred OTTI on securities classified both as held to maturity and 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 March 31, 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 March 31, 2012 and December 31, 2011, the securities included in the previous table represented 42.91% and 22.77%, respectively, of the fair value of the Bank’s securities portfolio. At March 31, 2012 and December 31, 2011, total impairment represented 0.94% and 1.96%, respectively, of the fair value of the underlying securities, and 0.40% 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 March 31, 2012.

2. Securities (continued)

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

	March 31,2012		December 31,2011
	As of June 30, 2012						As of December 31, 2011
Balance at beginning of period	$	5,305	$	—
	Number ofSecurities		Fair Value		UnrealizedLosses		Number ofSecurities		Fair Value		UnrealizedLosses
Additions for credit-related OTTI not previously recognized		—		5,305
Available for sale
Balance at end of period	$	5,305	$	5,305
U. S. government agencies
Bonds
Unrealized loss for less than twelve months		9	$	123,836	$	299		—	$	—	$	—
Unrealized loss for more than twelve months		—		—		—		—		—		—
		9		123,836		299		—		—		—
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		10		40,177		177		15		106,887		1,083
Unrealized loss for more than twelve months		1		9,537		4		1		552		1
		11		49,714		181		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		16		4		4,380		35
		2		1,657		23		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		2		20,788		746		3		44,544		1,998
		5		78,784		3,968		3		44,544		1,998
Total available for sale
Unrealized loss for less than twelve months		23		222,136		3,705		18		107,522		1,096
Unrealized loss for more than twelve months		4		31,855		766		9		53,880		2,117
		27	$	253,991	$	4,471		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		4,540		45		1		5,337		88
Unrealized loss for more than twelve months		—		—		—		—		—		—
		1		4,540		45		1		5,337		88
States and political subdivisions
Unrealized loss for less than twelve months		1		541		—		—		—		—
Unrealized loss for more than twelve months		1		206		5		6		2,498		10
		2		747		5		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		3		5,572		50		2		5,828		94
Unrealized loss for more than twelve months		1		206		5		8		12,579		209
		4	$	5,778	$	55		10	$	18,407	$	303

The amortized cost and fair value of securities, excluding trading securities, as of March 31, 2012 are shown by contractual maturity below (in thousands).

	Securities Available forSale				Securities Held toMaturity
	AmortizedCost		Fair Value		CarryingValue		Fair Value
Due in one year or less	$	2,136	$	2,145	$	5,623	$	5,703
Due after one year through five years		12,970		13,179		4,333		4,501
Due after five years through ten years		666		685		14,486		15,163
Due after ten years		343,802		346,358		130,612		137,684
		359,574		362,367		155,054		163,051
Mortgage-backed securities		33,690		35,947		6,135		6,657
Collateralized mortgage obligations		216,993		218,295		14,458		14,725
	$	610,257	$	616,609	$	175,647	$	184,433

The Bank did not sell securities in either of the three months ended March 31, 2012 or 2011. The Bank determines the cost of securities sold by specific identification.

FSC realized net gains on its trading securities portfolio of $1.2 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.

Securities with a carrying amount of approximately $680.4 million and $685.9 million (fair value of approximately $665.1 million and $624.4 million) at March 31, 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.

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 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 30, 2012 and December 31, 2011, the securities included in the previous table represented 34.45% and 22.77%, respectively, of the fair value of the Bank’s securities portfolio. At June 30, 2012 and December 31, 2011, total impairment represented 1.74% and 1.96%, respectively, of the fair value of the underlying securities, and 0.60% 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 30, 2012.

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


	June 30, 2012		December 31, 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		—

Balance at end of period	$	7,393	$	5,305

The amortized cost and fair value of securities, excluding trading securities, as of June 30, 2012 are shown by contractual maturity below (in thousands).


	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Carrying Value		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

The Bank did not sell securities in either of the three or six months ended June 30, 2012. For both the three and six months ended June 30, 2011, the Bank received proceeds from the sale of available for sale securities of $76.2 million and realized gross gains of $1.2 million. The Bank determines the cost of securities sold by specific identification.

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 ~~March~~June 3130, 2012 and December 31, 2011, are as follows (in thousands):

	March 31,2012			December 31,2011
	June 30,2012			December 31,2011
Commercial and industrial
Commercial	$	1,~~464~~466,~~898~~219		$	1,473,564
Lease financing		2927,~~425~~531			32,604
Securities (primarily margin loans)		~~314~~305,~~830~~808			319,895
Real estate		1,~~212~~221,~~272~~609			1,221,726
Construction and land development		~~281~~252,~~847~~709			273,949
Consumer		27,~~392~~569			29,429
		3,330,664			3,351,167
		3,301,445			3,351,167
Allowance for loan losses		(6160,~~409~~010	)		(67,495	)
	$	3,~~269~~241,~~255~~435		$	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~~ 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~~ 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 ~~governed~~forth byin ~~adherence to~~ 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 March 31, 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 March 31, 2012
Commercial and industrial
Secured by receivables	$	15,249	$	11,797	$	—	$	11,797	$	—	$	12,352
Secured by equipment		917		917		—		917		—		590
Unsecured		6,663		1,816		—		1,816		—		2,285
Lease financing		877		877		—		877		—		1,219
All other commercial and industrial		2,729		1,859		870		2,729		—		2,789
Real estate
Secured by commercial properties		32,464		20,786		7,297		28,083		1,692		28,333
Secured by residential properties		10,722		6,253		3,285		9,538		232		9,529
Construction and land development
Residential construction loans		482		482		—		482		—		1,072
Commercial construction loans and land development		27,956		19,382		—		19,382		—		21,996
Consumer		—		—		—		—		—		—
	$	98,059	$	64,169	$	11,452	$	75,621	$	1,924	$	80,165
	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 months ended March 31, 2012 and 2011, respectively. Interest income recorded on non-accrual loans for the three months ended March 31, 2012 and 2011 was nominal. At March 31, 2012, PlainsCapital had no unadvanced commitments to borrowers whose loans have been restructured in TDRs.

3. Loans and Allowance for Loan Losses (continued)

~~Non~~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 ~~March~~June 3130, 2012 and December 31, 2011 are summarized by class in the following ~~table~~tables (in thousands):

	March 31,2012		December 31,2011
	UnpaidContractualPrincipal Balance		RecordedInvestment withNo Allowance		RecordedInvestment withAllowance		TotalRecordedInvestment		RelatedAllowance		AverageRecordedInvestment
Commercial and industrial
As of June 30, 2012
Secured by receivables	$	11,797	$	12,707
Commercial and industrial
Secured by equipment		917		263
Secured by receivables	$	15,345	$	8,460	$	—	$	8,460	$	—	$	10,683
Unsecured		1,816		2,720
Secured by equipment		311		311		—		311		—		287
Lease financing		877		1,561
Unsecured		6,541		168		1,526		1,694		162		2,224
All other commercial and industrial		897		1,000
Lease financing		877		877		—		877		—		1,219
Real estate
All other commercial and industrial		2,185		1,331		854		2,185		—		2,517
Secured by commercial properties		25,215		26,611
Real estate
Secured by residential properties		7,924		4,612
Secured by commercial properties		20,836		10,450		8,311		18,761		1,669		23,672
Construction and land development
Secured by residential properties		11,740		9,211		—		9,211		—		9,365
Residential construction loans		482		1,465
Construction and land development
Commercial construction loans and land development		19,153		24,376
Residential construction loans		1,189		1,189		—		1,189		—		1,426
Consumer		—		—
Commercial construction loans and land development		26,801		18,160		—		18,160		—		21,385
	$	69,078	$	75,315
Consumer		—		—		—		—		—		—
	$	85,825	$	50,157	$	10,691	$	60,848	$	1,831	$	72,778

PlainsCapital classifies loan modifications as TDRs when it concludes that it has both 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.


	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
As of December 31, 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

~~PlainsCapital~~Interest ~~did~~income ~~not~~recorded ~~grant~~on ~~any~~accruing ~~TDRs~~impaired ~~during~~loans was approximately $0.1 million and $0.2 million for the three and six months ended ~~March~~ June 3130, 2012., ~~None~~respectively, ofand ~~the~~$0.1 ~~TDRs~~million ~~granted~~and ~~during~~$0.3 million for the ~~twelve~~three and six months ~~preceding~~ended ~~March~~June 3130, ~~2012~~2011, ~~had~~respectively. aInterest ~~payment~~income ~~that~~recorded ~~was~~on atnon-accrual ~~least~~loans ~~30 days~~for ~~past due during~~ the three and six months ended ~~March~~June 3130, 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)

AnNon-accrual ~~analysis~~loans ~~of the aging of PlainsCapital’s loan portfolio~~ as of ~~March~~June 3130, 2012 and December 31, 2011 isare ~~shown~~summarized by class in the following ~~tables~~table (in thousands):

	Loans Past Due30-89 Days		Loans Past Due90 Days or More		TotalPast Due Loans		CurrentLoans		Total Loans
	June 30,		December 31,
As of March 31, 2012
	2012		2011
Commercial and industrial
Secured by receivables	$	38,~~938~~460	$	812,~~872~~707	$	~~12,810~~	$	~~684,477~~	$	~~697,287~~
Secured by equipment		~~1,117~~311		~~211~~263		~~1,328~~		~~153,513~~		~~154,841~~
Unsecured		851,667		962,720		~~181~~		~~117,597~~		~~117,778~~
Lease financing		~~1,120~~877		~~877~~1,561		~~1,997~~		~~27,428~~		~~29,425~~
All other commercial and industrial		~~308~~854		~~870~~1,000		~~1,178~~		~~808,644~~		~~809,822~~
Real estate
Secured by commercial properties		215,~~744~~984		1826,~~212~~611		~~20,956~~		~~914,845~~		~~935,801~~
Secured by residential properties		58,~~794~~287		4,~~163~~612		~~9,957~~		~~266,514~~		~~276,471~~
Construction and land development
Residential construction loans		1,~~458~~189		—1,465		~~1,458~~		~~46,716~~		~~48,174~~
Commercial construction loans and land development		217,~~334~~936		1824,~~826~~376		~~21,160~~		~~212,513~~		~~233,673~~
Consumer		~~102~~—		—		~~102~~		~~27,290~~		~~27,392~~
	$	1955,~~000~~565	$	5275,~~127~~315	$	~~71,127~~	$	~~3,259,537~~	$	~~3,330,664~~
	Loans Past Due30-89 Days		Loans Past Due90 Days or More		Total Past DueLoans		CurrentLoans		Total Loans
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

NoPlainsCapital ~~accruing~~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 ~~were~~by 90reducing interest rates and/or lengthening loan amortization schedules. PlainsCapital also reconfigures a single loan into two or more ~~days~~loans ~~past~~(“A/B ~~due~~Note”). atThe ~~either~~typical ~~March 31,~~A/B ~~2012~~Note restructure results in a “bad” loan which is charged off and a “good” loan or ~~December 31,~~loans ~~2011~~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.

3. Loans and Allowance for Loan Losses (continued)

For the three and six months ended June 30, 2012, information regarding TDRs granted is shown in the following tables (in thousands):


	Recorded Investment in Loans Modified by
	A/B Note		Interest Rate Adjustment		Payment Term Extension		Total Modifications
Three 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


	Recorded Investment in Loans Modified by
	A/B Note		Interest Rate Adjustment		Payment Term Extension		Total Modifications
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

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)

An analysis of the aging of PlainsCapital’s loan portfolio as of June 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 June 30, 2012
Commercial and industrial
Secured by receivables	$	5,770	$	4,814	$	10,584	$	689,515	$	700,099	$	—
Secured by equipment		418		273		691		179,769		180,460		—
Unsecured		47		114		161		112,476		112,637		—
Lease financing		721		888		1,609		25,922		27,531		11
All other commercial and industrial		246		889		1,135		777,696		778,831		35
Real estate
Secured by commercial properties		1,372		11,992		13,364		934,365		947,729		—
Secured by residential properties		3,611		3,910		7,521		266,359		273,880		—
Construction and land development
Residential construction loans		258		238		496		34,003		34,499		—
Commercial construction loans and land development		332		17,301		17,633		200,577		218,210		—
Consumer		103		2		105		27,464		27,569		2

	$	12,878	$	40,421	$	53,299	$	3,248,146	$	3,301,445	$	48


	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 risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass – normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass – high risk.

Special Mention – A “Special Mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset 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.

1618

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 ~~March~~June 3130, 2012 and December 31, 2011 by class (in thousands):

	Pass		~~SpecialMention~~Special Mention		Substandard		Total
As of March 31, 2012
As of June 30, 2012
Commercial and industrial
Secured by receivables	$	~~667~~662,~~910~~809	$	17,~~204~~638	$	2829,~~173~~652	$	~~697~~700,~~287~~099
Secured by equipment		~~152~~171,~~692~~350		—1,723		27,~~149~~387		~~154~~180,~~841~~460
Unsecured		~~115~~97,~~962~~705		—192		114,~~816~~740		~~117~~112,~~778~~637
Lease financing		26,~~072~~282		—		31,~~353~~249		2927,~~425~~531
All other commercial and industrial		~~785~~769,~~935~~564		8564		239,~~802~~203		~~809~~778,~~822~~831
Real estate
Secured by commercial properties		~~900~~921,~~404~~715		32,~~242~~917		3223,~~155~~097		~~935~~947,~~801~~729
Secured by residential properties		~~266~~262,~~503~~277		—		911,~~968~~603		~~276~~273,~~471~~880
Construction and land development
Residential construction loans		4733,~~692~~310		—		~~482~~1,189		4834,~~174~~499
Commercial construction loans and land development		~~207~~194,~~612~~008		—		2624,~~061~~202		~~233~~218,~~673~~210
Consumer		27,~~392~~569		—		—		27,~~392~~569
	$	3,~~198~~166,~~174~~589	$	412,~~531~~534	$	~~127~~122,~~959~~322	$	3,~~330~~301,~~664~~445
	Pass		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


	Pass		Special Mention		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

3. Loans and Allowance for Loan Losses (continued)

Net investment in lease financing at ~~March~~June 3130, 2012 and December 31, 2011 is shown in the following table (in thousands).

	March 31,			December 31,
	June 30,			December 31,
	2012			2011
Future minimum lease payments	$	2927,~~933~~986		$	33,565
Unguaranteed residual value		~~150~~141			136
Guaranteed residual value		2,~~269~~116			2,333
Initial direct costs, net of amortization		5855			79
Unearned income		(2,~~985~~767	)		(3,509	)
	$	2927,~~425~~531		$	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 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 ~~design~~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.

1820

3. Loans and Allowance for Loan Losses (continued)

~~Homogenous~~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 ~~homogenous~~ 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 ~~March~~June 3130, 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			~~RealEstate~~Real Estate			Construction andLand Development			Consumer			~~Unallocated~~Total			~~Total~~
Three Months Ended March 31, 2012
Three Months Ended June 30, 2012
Balance at beginning of period	$	3835,~~196~~781		$	1514,~~703~~817		$	1310,~~268~~689		$	~~328~~122		$	—61,409		$	~~67,495~~
Provision charged to operations		14,~~108~~100			~~(740~~724	)		2(1,~~057~~396	)		(~~204~~9	)		—3,419			~~2,221~~
Loans charged off		(3,~~982~~657	)		(~~163~~1,858	)		(~~4,637~~78	)		(1714	)		—(5,607	)		~~(8,799~~	)
Recoveries on charged off loans		~~459~~312			17329			1142			156			—789			~~492~~
Balance at end of period	$	3536,~~781~~536		$	14,~~817~~012		$	109,~~689~~357		$	~~122~~105		$	—60,010		$	~~61,409~~

	Commercial andIndustrial			~~RealEstate~~Real Estate			Construction andLand Development			Consumer			~~Unallocated~~Total			~~Total~~
Three Months Ended March 31, 2011
Six Months Ended June 30, 2012
Balance at beginning of period	$	4138,~~687~~196		$	1115,~~732~~703		$	1113,~~227~~268		$	~~523~~328		$	—67,495		$	~~65,169~~
Provision charged to operations		35,~~024~~208			(~~188~~16	)		~~3,575~~661			(35213	)		~~124~~5,640			~~6,500~~
Loans charged off		(47,~~055~~639	)		(~~417~~2,021	)		(14,~~571~~715	)		(6331	)		—(14,406	)		~~(6,106~~	)
Recoveries on charged off loans		~~206~~771			~~149~~346			5143			1721			—1,281			~~377~~
Balance at end of period	$	4036,~~862~~536		$	1114,~~276~~012		$	139,~~236~~357		$	~~442~~105		$	~~124~~60,010		$	~~65,940~~

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


	Commercial and Industrial			Real Estate			Construction and Land Development			Consumer			Unallocated			Total
Three Months Ended June 30, 2011
Balance at beginning of period	$	40,862		$	11,276		$	13,236		$	442		$	124		$	65,940
Provision charged to operations		4,780			(90	)		2,705			(44	)		(113	)		7,238
Loans charged off		(3,675	)		(358	)		(1,241	)		(17	)		—			(5,291	)
Recoveries on charged off loans		195			23			159			44			—			421

Balance at end of period	$	42,162		$	10,851		$	14,859		$	425		$	11		$	68,308

	Commercial andIndustrial			Real Estate			Construction andLand Development			Consumer			~~Total~~Unallocated		Total
As of March 31, 2012
Six Months Ended June 30, 2011
Loans individually evaluated for impairment	$	18,136		$	37,621		$	19,864		$	—		$	75,621
Balance at beginning of period	$	41,687		$	11,732		$	11,227		$	523		$	0	$	65,169
Loans collectively evaluated for impairment		1,791,017			1,174,651			261,983			27,392			3,255,043
Provision charged to operations		7,804			(278	)		6,280			(79	)		11		13,738
	$	1,809,153		$	1,212,272		$	281,847		$	27,392		$	3,330,664
Loans charged off		(7,730	)		(775	)		(2,812	)		(80	)		—		(11,397	)
Recoveries on charged off loans		401			172			164			61			—		798
Balance at end of period	$	42,162		$	10,851		$	14,859		$	425		$	11	$	68,308

	Commercial andIndustrial		Real Estate		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

3. Loans and Allowance for Loan Losses (continued)

As of ~~March~~June 3130, 2012 and December 31, 2011, the ~~allowance for~~ loan ~~losses~~portfolio was distributed by ~~portfolio~~ portfolio segment and impairment methodology as shown below (in thousands):

	Commercial andIndustrial		~~RealEstate~~Real Estate		Construction andLand Development		Consumer		Total
As of March 31, 2012
As of June 30, 2012
Loans individually evaluated for impairment	$	—13,527	$	127,~~924~~972	$	—19,349	$	—	$	160,~~924~~848
Loans collectively evaluated for impairment		351,~~781~~786,031		121,~~893~~193,637		10233,~~689~~360		~~122~~27,569		593,~~485~~240,597
	$	351,~~781~~799,558	$	141,~~817~~221,609	$	10252,~~689~~709	$	~~122~~27,569	$	613,~~409~~301,445
	Commercial andIndustrial		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


	Commercial and Industrial		Real Estate		Construction and Land 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 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 and Industrial		Real Estate		Construction and Land Development		Consumer		Total
As of June 30, 2012
Loans individually evaluated for impairment	$	162	$	1,669	$	—	$	—	$	1,831
Loans collectively evaluated for impairment		36,374		12,343		9,357		105		58,179

	$	36,536	$	14,012	$	9,357	$	105	$	60,010


	Commercial and Industrial		Real Estate		Construction and Land 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 ~~March~~June 3130, 2012 and December 31, 2011 are summarized as follows (in thousands):

	March 31,		December 31,
	June 30,2012		December 31,2011
	2012		2011
Noninterest-bearing demand	$	237,413	$	328,858
Noninterest-bearing demand	$	265,036	$	328,858
Interest-bearing:
NOW accounts		~~127~~109,~~792~~031		117,395
Money market		2,~~111~~071,~~587~~370		2,090,172
Brokered—money market		224,243		224,925
Brokered - money market		226,127		224,925
Demand		6548,~~601~~661		53,650
Savings		~~173~~163,~~622~~805		171,088
Time—$100,000 and over		828,104		840,837
Time - $100,000 and over		732,827		840,837
Time—other		206,519		216,836
Time - other		199,762		216,836
Brokered—time		166,272		202,445
Brokered - time		163,682		202,445
	$	43,~~168~~952,~~776~~678	$	4,246,206

5. Short-Term Borrowings

Short-term borrowings at ~~March~~June 3130, 2012 and December 31, 2011 were as follows (in thousands):

	March 31,		December 31,
	June 30,		December 31,
	2012		2011
Federal funds purchased	$	~~189~~214,~~950~~375	$	211,025
Securities sold under agreements to repurchase		~~217~~129,~~624~~206		134,114
Federal Home Loan Bank (FHLB) notes		~~100~~400,000		50,000
Short-term bank loans		9975,~~200~~600		81,300
	$	~~606~~819,~~774~~181	$	476,439

2022

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):

	Three Months EndedMarch 31,
	Six Months Ended June 30,
	2012			2011
Average balance during the period	$	~~403~~368,~~759~~238		$	~~480~~435,~~141~~077
Average interest rate during the period		0.22	%		0.2324	%
	March 31,			December 31,
	2012			2011
Average interest rate at end of period		0.24	%		0.20	%
Securities underlying the agreements at end of period
Carrying value	$	178,635		$	95,993
Estimated fair value	$	226,190		$	142,866

The estimated fair value of securities underlying repurchase agreements above includes approximately $46.8 million of securities owned by FSC customers and pledged to FSC as collateral for margin loans as of March 31, 2012. FSC is permitted to sell or re-pledge customer securities held as collateral for margin loans under the terms of the margin loan agreements between FSC and its customers.


	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):

	Three Months EndedMarch 31,
	Six Months Ended June 30,
	2012			2011
Average balance during the period	$	25134,~~549~~341		$	4334,~~889~~392
Average interest rate during the period		0.1214	%		0.42	%
	March 31,			December 31,
	2012			2011
Average interest rate at end of period		0.10	%		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 March 31, 2012 and December 31, 2011 was 1.19% and 1.33%, respectively.


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

21FSC 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 ~~March~~June 3130, 2012 and December 31, 2011 consisted of the following (in thousands):

		$xxx,xxx,xxx		$xxx,xxx,xxx
	June 30,2012		December 31,2011
	March 31,		December 31,
Term note with JPMorgan Chase, due July 31, 2013. Principal payments of $0.9 million and interest are payable quarterly.	$	14,160	$	15,930
	2012		2011
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, 2012. Principal payments of $0.9 million and interest are payable quarterly.	$	15,045	$	15,930
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
Revolving credit line with JPMorgan Chase not to exceed $5.0 million. Facility matures July 31, 2012 with interest payable quarterly.		5,000		5,000
Term note with JPMorgan Chase, due October 27, 2015. Principal payments of $25,000 and interest are payable quarterly.		400		450
Term note with JPMorgan Chase, due July 31, 2012. Principal payments of $0.5 million and interest are payable semi-annually.		2,000		2,500
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.		16,000		18,000
Term note with JPMorgan Chase, due October 27, 2015. Principal payments of $25,000 and interest are payable quarterly.		425		450
First Southwest nonrecourse notes, due January 25, 2035 with interest payable quarterly.		11,614		13,086
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.		17,000		18,000
	$	49,174	$	54,966
First Southwest nonrecourse notes, due January 25, 2035 with interest payable quarterly.		12,358		13,086
	$	51,828	$	54,966

The previous table reflects July 2012 amendments to loan agreements ~~underlying~~between ~~the~~PlainsCapital and JPMorgan Chase ~~debt~~Bank, ~~include~~NA ~~certain~~(“JPMorgan Chase”) ~~restrictive~~governing ~~covenants,~~PlainsCapital’s ~~including~~existing ~~limitations~~line onof ~~the ability~~credit toand ~~incur~~term ~~additional~~notes. ~~debt,~~The ~~limitations~~amendments onextended the ~~disposition~~maturity of ~~assets~~PlainsCapital’s ~~and~~line ~~requirements~~of tocredit ~~maintain~~and ~~various~~term ~~financial~~notes ~~ratios~~expiring July 31, ~~including~~2012, ato ~~non-performing~~July 31, ~~asset~~2013 ~~ratio~~and, atwhere ~~acceptable~~noted ~~levels.~~in Atthe previous ~~March 31~~table, ~~2012,~~reflected a reduction to the ~~Bank’s~~principal ~~non-performing asset~~balance ~~ratio~~outstanding. ~~was~~The inremaining ~~compliance~~provisions ~~with~~of the ~~non-performing~~loan ~~asset~~agreements ~~ratio~~were ~~covenant~~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 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. Income Taxes

PlainsCapital’s effective tax rate was 3437.1183% and 3633.8886% for the three months ended ~~March~~June 3130, 2012 and 2011, respectively. ~~The~~ ~~decrease in~~ For the ~~effective~~six ~~tax rate was primarily due to lower non-deductible expenses in the three~~ months ended ~~March~~June 3130, 2012, ~~compared~~and to2011, ~~the~~PlainsCapital’s ~~same~~effective ~~period~~tax inrate ~~2011~~was 36.20% Inand ~~addition~~34.89%, ~~the~~respectively. ~~effective~~The ~~tax~~increase ~~rate~~in ~~for~~ the ~~three~~effective ~~months ended~~tax ~~March 31,~~rate ~~2011~~ was ~~affected~~primarily bydue to certain discrete items regarding non-deductible expenses recorded in the ~~income~~second quarter of 2012 and lower projected tax ~~provision~~exempt income in ~~the~~2012 ~~first~~compared ~~quarter~~to of 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.

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 $256.50 million and $33.0 million at ~~March~~June 3130, 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.

8. Commitments and Contingencies (continued)

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 and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under noncancelable operating leases with remaining terms, including renewal options, of 1 to 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 $6.0 6 million and $5.68 million for the three months ended ~~March~~June 3130, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, rental expense was approximately $12.6 and $11.4 million, respectively.

9. Financial Instruments with Off-Balance Sheet Risk

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

~~Commitments~~25 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 $920.0 million at March 31, 2012. The Bank had outstanding standby letters of credit of $45.8 million at March 31, 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.

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 30, 2012. The Bank had outstanding standby letters of credit of $44.8 million at June 30, 2012.

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 ~~March~~June 3130, 2012, a total of 43.06 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 $01.70 million and $0.56 million for the three months ended ~~March~~June 3130, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, stock-based compensation cost was $1.7 million and $1.1 million, respectively.

At ~~March~~June 3130, 2012, unrecognized cost related to unvested restricted stock and restricted stock units was $4.4 2 million and $48.9 million, respectively. The vesting of the unvested restricted stock and restricted stock units will automatically accelerate in full under certain conditions. ~~Upon a change in control of PlainsCapital, the entire unrecognized cost related to both unvested restricted stock and restricted stock units would be recognized in noninterest expense immediately.~~ 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 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.

~~PlainsCapital~~26 approved the grant of 344,311 restricted stock units to certain employees effective April 1, 2012. The estimated grant date fair value of the restricted stock units is $4.8 million. The grants vest in 5 years and are subject to the accelerated vesting conditions discussed previously.

Information regarding unvested restricted stock and restricted stock units for the three months ended March 31, 2012 is as follows:

	UnvestedRestrictedStock			WeightedAverage GrantDate Fair Value		RestrictedStock Units			WeightedAverage GrantDate Fair Value
Outstanding, January 1		528,532		$	11.45		590,149		$	11.91
Granted		—			0.00		—			0.00
Vested		(75,429	)		11.33		—			0.00
Cancellations and expirations		—			0.00		(3,500	)		12.07
Outstanding, March 31		453,103		$	11.46		586,649		$	11.91

10. Stock-Based Compensation (continued)

Information regarding unvested restricted stock ~~options~~and restricted stock units for the ~~three~~six months ended ~~March~~ June 3130, 2012 is as follows:

				Weighted
	UnvestedRestrictedStock			WeightedAverage GrantDate Fair Value		RestrictedStock Units			WeightedAverage GrantDate Fair Value
				Average
Outstanding, January 1		528,532		$	11.45		590,149		$	11.91
				Exercise
Granted		7,497			15.18		344,811			14.00
	Shares			Price
Vested		(84,753	)		11.33		—			0.00
Outstanding, January 1		647,053		$	10.04
Cancellations and expirations		—			0.00		(3,500	)		12.07
Exercised		(80,579	)		6.69
Outstanding, June 30		451,276		$	11.53		931,460		$	12.68
Cancellations and expirations		(47,913	)		9.89
Outstanding, March 31		518,561		$	10.57

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


	Shares			Weighted Average Exercise Price
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 March 31, 2012
	At June 30, 2012
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	~~225~~227,~~870~~098		4	%	$	~~549~~570,~~734~~720		910.7405	%
Tier 1 capital (to risk-weighted assets)		~~175~~179,~~957~~296		4	%		~~549~~570,~~734~~720		12.5073	%
Total capital (to risk-weighted assets)		~~351~~358,~~913~~592		8	%		~~604~~626,~~810~~809		13.7598	%
PlainsCapital Corporation:
Tier 1 capital (to average assets)	$	~~226~~227,~~335~~554		4	%	$	~~553~~578,~~810~~380		910.7917	%
Tier 1 capital (to risk-weighted assets)		~~176~~179,~~422~~756		4	%		~~553~~578,~~810~~380		12.5687	%
Total capital (to risk-weighted assets)		~~352~~359,~~844~~511		8	%		~~619~~644,~~230~~211		14.0434	%


	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	%

2528

11. Regulatory Matters (continued)

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

	At March 31, 2012
	At June 30, 2012
	Required					Actual
	Amount		Ratio			Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	~~282~~283,~~338~~872		5	%	$	~~549~~570,~~734~~720		910.7405	%
Tier 1 capital (to risk-weighted assets)		~~263~~268,~~935~~944		6	%		~~549~~570,~~734~~720		12.5073	%
Total capital (to risk-weighted assets)		~~439~~448,~~891~~240		10	%		~~604~~626,~~810~~809		13.7598	%
	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	%

	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.

~~Pursuant~~As toa ~~the~~mortgage ~~net capital requirements of the Exchange Act~~originator, ~~FSC~~PrimeLending ~~has~~is ~~elected~~subject to ~~determine~~minimum ~~its~~ net ~~capital~~worth requirements ~~using~~ ~~the~~established ~~alternative~~by ~~method.~~both ~~Accordingly,~~the ~~FSC~~United isStates ~~required~~Department toof ~~maintain~~Housing ~~minimum~~and ~~net~~Urban Development ~~capital,~~(“HUD”) asand ~~defined in Rule 15c3-1, equal to~~ the ~~greater~~Government ofNational ~~$250,000~~Mortgage orAssociation 2%(“GNMA”). ofOn ~~aggregate~~an ~~debit~~annual ~~balances~~basis, asPrimeLending ~~defined~~submits inaudited ~~Rule~~financial ~~15c3-3.~~statements Atto ~~March 31,~~HUD ~~2012,~~and ~~FSC~~GNMA ~~had~~documenting ~~net capital~~PrimeLending’s ofcompliance ~~$58.4~~with ~~million;~~ the minimum net worth ~~capital~~requirements. ~~requirement~~In ~~was~~addition, ~~$4.1~~PrimeLending ~~million;~~monitors ~~net~~compliance ~~capital~~on ~~maintained~~an byongoing ~~FSC~~basis ~~was~~and, ~~28%~~as of ~~aggregate~~June ~~debits;~~30, ~~and~~2012, PrimeLending’s net ~~capital~~worth inexceeded ~~excess~~the ofamounts ~~the~~required ~~minimum~~by ~~requirement~~both ~~was~~HUD ~~$54.3~~and ~~million~~GNMA.

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”). PrimeLending determines its compliance with the minimum net worth requirements on an annual basis. As of December 31, 2011, PrimeLending was required to have net worth of $1.0 million under HUD regulations, including $0.2 million of cash or cash equivalents, and $2.6 million under GNMA regulations, including approximately $0.5 million of cash or cash equivalents. As of December 31, 2011, 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 ~~March~~June 3130, 2012, approximately $6282.98 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve.

At ~~March~~June 3130, 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 (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.

2629

12. Shareholders’ Equity (continued)

The dividend rate on the Series C Preferred ~~stock~~Stock was 32.~~826~~427% for the three months ended ~~March~~June 3130, 2012. The dividend rate is 2.~~423~~626% for the period from ~~April~~July 1, 2012 to ~~June~~September 30, 2012 as a result of ~~increased~~a ~~levels~~slight decrease in the level of QSBL ~~over~~at ~~the~~March ~~Baseline~~31, 2012, compared to December 31, 2011.

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

FSC was not required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 of the Exchange Act at ~~March~~June 3130, 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 or securities in a special reserve account for the benefit of proprietary accounts of introducing broker-dealers at ~~March~~June 3130, 2012 or December 31, 2011.

14. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables at ~~March~~June 3130, 2012 and December 31, 2011 consisted of the following (in thousands):

	March 31,		December 31,
	June 30,2012		December 31,2011
	2012		2011
Receivables
Securities borrowed	$	~~127~~102,~~361~~222	$	94,044
Securities failed to deliver		513,~~558~~155		11,476
Clearing organizations		647,~~035~~323		6,141
Due from dealers		3640		29
	$	~~196~~122,~~990~~740	$	111,690
Payables
Securities loaned	$	~~165~~174,~~456~~041	$	120,658
Correspondents		5164,~~774~~974		56,645
Securities failed to receive		214,~~463~~030		8,114
Clearing organizations		~~319~~1,403		1,066
	$	~~220~~254,~~012~~448	$	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.

2730

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 ~~March~~June 3130, 2012, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $~~852~~969.87 million, while the unpaid principal balance of those loans was $~~828~~942.6 million. 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 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 ~~March~~June 3130, 2012, the Bank held certain senior 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.

2831

15. Fair Value Measurements (continued)

Information regarding the significant unobservable inputs used to estimate the fair value of the auction rate bonds at ~~March~~June 3130, 2012 is shown in the following table.

	Liquidity Spread (bps)						Credit Spread (bps)						Workout (~~Years~~Yrs)
	Low		High		Weighted Avg		Low		High		Weighted Avg		Low		High		Weighted Avg
Senior Auction Rate Bonds		200		250		225		5131		~~1217~~1069		~~159~~462		43.0		54.0		43.5
Subordinate Auction Rate Bonds		200		250		225		~~274~~266		~~1841~~1169		~~711~~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).

	Auction
	AuctionRate Bonds
	Rate Bonds
Balance, January 1, 2012	$	44,544
Unrealized gains in other comprehensive income, net		974
Other-than-temporary impairment losses recognized in earnings		(2,088	)
Balance, March 31, 2012	$	45,518
Unrealized losses in other comprehensive income, net		(1,848	)
Transfers from held to maturity		45,396
Balance, June 30, 2012	$	86,004

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

	At March 31, 2012
	At June 30, 2012
	Level 1		Level 2		Level 3		Total
	Level 1Inputs		Level 2Inputs		Level 3Inputs		TotalFair Value
	Inputs		Inputs		Inputs		Fair Value
Loans held for sale	$	—	$	969,726	$	—	$	969,726
Loans held for sale	$	—	$	852,751	$	—	$	852,751
Securities available for sale		—		534,707		86,004		620,711
Securities available for sale		—		571,091		45,518		616,609
Trading securities		—		49,277		—		49,277
Trading securities		—		66,804		—		66,804
Derivative assets		—		23,961		—		23,961
Derivative assets		—		11,491		—		11,491
Time deposits		—		1,086		—		1,086
Time deposits		—		1,094		—		1,094
Trading liabilities		—		2,444		—		2,444
Trading liabilities		—		5,218		—		5,218
Derivative liabilities		—		5,583		—		5,583
Derivative liabilities		—		9		—		9

	Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option
	Changes in Fair Value for Assets and Liabilities Reported at Fair Valueunder Fair Value Option
	Three Months Ended March 31, 2012						Three Months Ended March 31, 2011
	Three Months Ended June 30, 2012						Three Months Ended June 30, 2011
			Other		Total				Other			Total
	Net Gains fromSale of Loans		OtherNoninterestIncome		TotalChanges inFair Value		Net Gains fromSale of Loans		OtherNoninterestIncome			TotalChanges inFair Value
	Net Gains from		Noninterest		Changes in		Net Gains from		Noninterest			Changes in
Loans held for sale	$	2,933	$	—	$	2,933	$	2,754	$	—		$	2,754
	Sale of Loans		Income		Fair Value		Sale of Loans		Income			Fair Value
Time deposits		—		9		9		—		(1	)		(1	)
Loans held for sale	$	1,652	$	—	$	1,652	$	568	$	—		$	568
	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
Time deposits		—		4		4		—		(2	)		(2	)
	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	)

15. Fair Value Measurements (continued)

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 ~~March~~June 3130, 2012, loans with a carrying amount of $1110.47 million had been reduced by allocations of the allowance for loan losses of $1.98 million, resulting in a reported fair value of $98.59 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 ~~March~~June 3130, 2012, the estimated fair value of other real estate owned was $2326.6 2 million.

2933

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 March 31, 2012

At June 30, 2012

Estimated Fair Value

CarryingAmount

Level 1Inputs

Level 2Inputs

Level 3Inputs

Total

Financial assets

Cash and short-term investments

~~264~~284,~~722~~731

—

~~264~~284,~~722~~731

Loans held for sale

~~853~~970,~~801~~632

—

~~853~~970,~~801~~632

—

~~853~~970,~~801~~632

Securities

~~859~~795,~~060~~152

—

~~776~~717,~~600~~211

9186,~~246~~004

~~867~~803,~~846~~215

Loans, net

3,~~269~~241,~~255~~435

—

98,~~528~~860

3,~~288~~244,~~686~~531

3,~~298~~253,~~214~~391

Broker-dealer and clearing organization receivables

~~196~~122,~~990~~740

—

~~196~~122,~~990~~740

—

~~196~~122,~~990~~740

Fee award receivable

17,~~706~~408

—

17,~~706~~408

—

17,~~706~~408

Cash surrender value of life insurance policies

23,~~504~~743

—

23,~~504~~743

—

23,~~504~~743

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

1123,~~491~~961

—

1123,~~491~~961

—

1123,~~491~~961

Accrued interest receivable

15,~~313~~318

—

15,~~313~~318

—

15,~~313~~318

Financial liabilities

Deposits

43,~~168~~952,~~776~~678

—

43,~~175~~958,~~849~~027

—

43,~~175~~958,~~849~~027

Broker-dealer and clearing organization payables

~~220~~254,~~012~~448

—

~~220~~254,~~012~~448

—

~~220~~254,~~012~~448

Other trading liabilities

52,~~218~~444

—

52,~~218~~444

—

52,~~218~~444

Short-term borrowings

~~606~~819,~~774~~181

—

~~606~~819,~~774~~181

—

~~606~~819,~~774~~181

Debt

~~118~~116,~~840~~186

—

~~118~~116,~~840~~186

—

~~118~~116,~~840~~186

Forward purchase commitments

95,583

—

95,583

—

95,583

Accrued interest payable

2,~~498~~019

—

2,~~498~~019

—

2,~~498~~019

	At December 31, 2011
			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
	CarryingAmount		Level 1Inputs		Level 2Inputs		Level 3Inputs		Total
	Amount		Inputs		Inputs		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

3034

16. Derivative Financial Instruments

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

Derivative Instruments and the Fair Value Option

As discussed in Note 15, PrimeLending elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides PrimeLending the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions. PrimeLending provides IRLCs to its customers and executes forward purchase commitments to sell mortgage loans. The fair values of both IRLCs and purchase commitments are recorded in other assets or other liabilities, as appropriate. For the three months ended ~~March~~June 3130, 2012 and 2011, changes in the fair values of ~~these~~ these derivative instruments produced net gains of approximately $46.79 million and $02.53 million, respectively. For the six months ended June 30, 2012 and 2011, changes in the fair value of these instruments produced net gains of $11.6 million and $2.8 million, respectively. The net gains were recorded as a component of gain on sale of loans.

Derivative positions at ~~March~~June 3130, 2012 and December 31, 2011 are presented in the following table (in thousands):

At March 31, 2012

At December 31, 2011

At June 30, 2012

At December 31, 2011

Notional

Estimated

Notional

Estimated

NotionalAmount

EstimatedFair Value

NotionalAmount

EstimatedFair Value

Amount

Fair Value

Amount

Fair Value

Derivative instruments

IRLCs

~~869~~1,~~766~~283,727

1023,~~526~~651

687,890

10,096

Interest rate swaps

1,969

7156

1,969

Forward purchase commitments

~~992~~1,~~283~~366,267

~~885~~(5,329

)

675,794

(3,339

)

3135

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

		$xxxx,xxxx,xxx		$xxxx,xxxx,xxx			$xxxx,xxxx,xxx			$xxxx,xxxx,xxx			$xxxx,xxxx,xxx
	Three Months Ended June 30, 2012
	Three Months Ended March 31, 2012
	Banking		MortgageOrigination			FinancialAdvisory			IntercompanyEliminations			PlainsCapitalConsolidated
			Mortgage			Financial			Intercompany			PlainsCapital
Interest income	$	55,117	$	6,889		$	4,459		$	(9,864	)	$	56,601
	Banking		Origination			Advisory			Eliminations			Consolidated
Interest expense		5,201		15,015			1,110			(14,710	)		6,616
Interest income	$	54,446	$	7,257		$	4,038		$	(9,185	)	$	56,556
Net interest income (expense)		49,916		(8,126	)		3,349			4,846			49,985
Interest expense		6,047		12,767			941			(12,408	)		7,347
Provision for loan losses		3,534		—			(115	)		—			3,419
Net interest income (expense)		48,399		(5,510	)		3,097			3,223			49,209
Noninterest income		8,213		139,121			26,136			(5,051	)		168,419
Provision for loan losses		2,083		—			138			—			2,221
Noninterest expense		32,454		112,278			28,264			(205	)		172,791
Noninterest income		9,591		118,082			25,858			(3,425	)		150,106
Income before taxes		22,141		18,717			1,336			—			42,194
Noninterest expense		34,765		102,127			27,412			(202	)		164,102
Income tax provision		8,317		7,124			521			—			15,962
Income before taxes		21,142		10,445			1,405			—			32,992
Consolidated net income		13,824		11,593			815			—			26,232
Income tax provision		6,562		4,210			482			—			11,254
Less: net income attributable to noncontrolling interest		—		1,129			26			—			1,155
Consolidated net income		14,580		6,235			923			—			21,738
Net income attributable to PlainsCapital Corporation	$	13,824	$	10,464		$	789		$	—		$	25,077
Less: net income attributable to noncontrolling interest		—		446			35			—			481
Net income attributable to PlainsCapital Corporation	$	14,580	$	5,789		$	888		$	—		$	21,257

Balance Sheet Data


	Six Months Ended June 30, 2012
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	109,563	$	14,146		$	8,497	$	(19,049	)	$	113,157
Interest expense		11,247		27,784			2,050		(27,118	)		13,963


Net interest income (expense)		98,316		(13,638	)		6,447		8,069			99,194
Provision for loan losses		5,617		—			23		—			5,640
Noninterest income		17,804		257,203			51,994		(8,476	)		318,525
Noninterest expense		67,219		214,404			55,677		(407	)		336,893


Income before taxes		43,284		29,161			2,741		—			75,186
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

		$xxxx,xxxx,xxx		$xxxx,xxxx,xxx		$xxxx,xxxx,xxx		$xxxx,xxxx,xxx			$xxxx,xxxx,xxx
	March 31, 2012
			Mortgage		Financial		All Other and			PlainsCapital
	Banking		Origination		Advisory		Eliminations			Consolidated
Cash and due frombanks	$	242,215	$	46,593	$	5,221	$	(49,165	)	$	244,864
Loans held for sale		1,050		852,751		—		—			853,801
Securities		796,037		—		63,023		—			859,060
Loans, net		3,741,405		1,848		311,465		(785,463	)		3,269,255
Broker-dealer and clearing organization receivables		—		—		196,990		—			196,990
Investment in subsidiaries		237,088		—		—		(237,088	)		—
Goodwill and other intangible assets, net		7,862		23,706		15,309		—			46,877
Other assets		198,546		32,928		58,959		26,277			316,710
Total assets	$	5,224,203	$	957,826	$	650,967	$	(1,045,439	)	$	5,787,557
Deposits	$	4,151,782	$	—	$	73,262	$	(56,268	)	$	4,168,776
Broker-dealer and clearing organization payables		—		—		220,012		—			220,012
Short-term borrowings		406,613		—		200,161		—			606,774
Notes payable		—		775,425		19,634		(743,231	)		51,828
Junior subordinated debentures		—		—		—		67,012			67,012
Other liabilities		70,258		62,261		47,402		(47,728	)		132,193
PlainsCapital Corporation shareholders’ equity		595,550		118,535		90,496		(265,448	)		539,133
Noncontrolling interest		—		1,605		—		224			1,829
Total liabilities and shareholders’ equity	$	5,224,203	$	957,826	$	650,967	$	(1,045,439	)	$	5,787,557

17. Segment and Related Information (continued)

Income Statement Data

		$xxxx,xxxx,x		$xxxx,xxxx,x			$xxxx,xxxx,x			$xxxx,xxxx,x			$xxxx,xxxx,x
	Three Months Ended June 30, 2011
	Three Months Ended March 31, 2011
	Banking		MortgageOrigination			FinancialAdvisory			IntercompanyEliminations			PlainsCapitalConsolidated
			Mortgage			Financial			Intercompany			PlainsCapital
Interest income	$	51,627	$	5,439		$	3,760		$	(6,108	)	$	54,718
	Banking		Origination			Advisory			Eliminations			Consolidated
Interest expense		8,385		9,209			795			(8,856	)		9,533
Interest income	$	48,893	$	3,867		$	3,566		$	(4,323	)	$	52,003
Net interest income (expense)		43,242		(3,770	)		2,965			2,748			45,185
Interest expense		8,418		7,451			784			(7,075	)		9,578
Provision for loan losses		7,250		(12	)		—			—			7,238
Net interest income (expense)		40,475		(3,584	)		2,782			2,752			42,425
Noninterest income		8,985		79,176			22,279			(2,851	)		107,589
Provision for loan losses		6,500		—			—			—			6,500
Noninterest expense		25,824		71,768			24,491			(153	)		121,930
Noninterest income		7,329		61,674			19,191			(2,854	)		85,340
Income before taxes		19,153		3,650			753			50			23,606
Noninterest expense		28,089		58,482			22,716			(246	)		109,041
Income tax provision		6,499		1,238			255			—			7,992
Income before taxes		13,215		(392	)		(743	)		144			12,224
Consolidated net income		12,654		2,412			498			50			15,614
Income tax provision		4,931		(146	)		(277	)		—			4,508
Less: net income attributable to noncontrolling interest		—		110			74			—			184
Consolidated net income		8,284		(246	)		(466	)		144			7,716
Net income attributable to PlainsCapital Corporation	$	12,654	$	2,302		$	424		$	50		$	15,430
Less: net income attributable to noncontrolling interest		—		69			53			—			122
Net income attributable to PlainsCapital Corporation	$	8,284	$	(315	)	$	(519	)	$	144		$	7,594
Balance Sheet Data
	December 31, 2011
			Mortgage			Financial			All Other and			PlainsCapital
	Banking		Origination			Advisory			Eliminations			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


	Six Months Ended June 30, 2011
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	100,519	$	9,306		$	7,327	$	(10,431	)	$	106,721
Interest expense		16,886		16,611			1,545		(15,931	)		19,111

Net interest income (expense)		83,633		(7,305	)		5,782		5,500			87,610
Provision for loan losses		13,750		(12	)		0		0			13,738
Noninterest income		16,331		140,837			41,466		(5,705	)		192,929
Noninterest expense		54,459		129,929			46,981		(398	)		230,971

Income before taxes		31,755		3,615			267		193			35,830
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

Balance Sheet Data


	June 30, 2012
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	225,209	$	54,767	$	6,330	$	(54,660	)	$	231,646
Loans held for sale		906		969,726		—		—			970,632
Securities		748,267		—		46,885		—			795,152
Loans, net		3,849,411		1,838		302,184		(911,998	)		3,241,435
Broker-dealer and clearing organization receivables		—		—		122,740		—			122,740
Investment in subsidiaries		255,831		—		—		(255,831	)		—
Goodwill and other intangible assets, net		7,862		23,706		14,922		—			46,490
Other assets		287,499		44,309		74,346		31,444			437,598

Total assets	$	5,374,985	$	1,094,346	$	567,407	$	(1,191,045	)	$	5,845,693


Deposits	$	3,967,970	$	—	$	61,956	$	(77,248	)	$	3,952,678
Broker-dealer and clearing organization payables		—		—		254,448		—			254,448
Short-term borrowings		725,907		—		93,274		—			819,181
Notes payable		—		888,732		18,620		(858,178	)		49,174
Junior subordinated debentures		—		—		—		67,012			67,012
Other liabilities		66,459		71,310		46,884		(45,781	)		138,872
PlainsCapital Corporation shareholders’ equity		614,649		132,002		92,225		(277,039	)		561,837
Noncontrolling interest		—		2,302		—		189			2,491

Total liabilities and shareholders’ equity	$	5,374,985	$	1,094,346	$	567,407	$	(1,191,045	)	$	5,845,693


	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

18. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share for the three and six months ended ~~March 31~~June, 2012 and 2011 (in thousands, except share and per share ~~data~~amounts).

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Income applicable to PlainsCapital Corporation common shareholders	$	2024,~~163~~385	$	614,~~194~~027	$	44,548	$	20,221
Less: income applicable to participating securities		~~702~~842		~~217~~518		1,544		727
Income applicable to PlainsCapital Corporation common shareholders for basic earnings per common share	$	1923,~~461~~543	$	513,~~977~~509	$	43,004	$	19,494
Weighted-average shares outstanding		3233,~~991~~217,~~399~~711		32,~~773~~847,~~614~~678		33,104,555		32,810,850
Less: participating securities included in weighted-average shares outstanding		1,~~147~~146,~~615~~858		1,~~148~~213,~~095~~192		1,147,237		1,180,823
Weighted-average shares outstanding for basic earnings per common share		3132,~~843~~070,~~784~~853		31,~~625~~634,~~519~~486		31,957,318		31,630,027
Basic earnings per common share	$	0.6173	$	0.1943	$	1.35	$	0.62
Income applicable to PlainsCapital Corporation common shareholders	$	2024,~~163~~385	$	614,~~194~~027	$	44,548	$	20,221
Weighted-average shares outstanding		3132,~~843~~070,~~784~~853		31,~~625~~634,~~519~~486		31,957,318		31,630,027
Dilutive effect of contingently issuable shares due to First Southwest acquisition		1,~~562~~215,~~651~~395		1,722,152		1,215,395		1,722,152
Dilutive effect of stock options and non-vested stock awards		~~517~~702,~~915~~557		~~175~~219,~~847~~728		607,796		198,787
Weighted-average shares outstanding for diluted earnings per common share		33,~~924~~988,~~350~~805		33,~~523~~576,~~518~~366		33,780,509		33,550,966
Diluted earnings per common share	$	0.5972	$	0.1842	$	1.32	$	0.60

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 42265,~~000~~179 ~~and 266,259~~ for the three and six months ended ~~March 31,~~June ~~2012 and 2011~~30, ~~respectively~~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 months ended June 30, 2012.

19. Recently ~~Issued~~Adopted Accounting Standards

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

In April 2011, the FASB amended the Receivables Topic of the ASC to clarify when creditors should classify loan modifications as TDRs (“TDR Amendment”). The TDR Amendment requires creditors to separately conclude that a creditor has granted a concession to a debtor and that the debtor is experiencing financial difficulties in order to classify a loan modification as a troubled debt restructuring. The TDR Amendment became effective for PlainsCapital on July 1, 2011, and has been applied retrospectively to January 1, 2011. The adoption of the TDR Amendment did not have a significant effect on PlainsCapital’s financial position, results of operations or cash flows.

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.

3439

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.

~~20.~~40 ~~Subsequent Events~~

On May 8, 2012, we entered into an Agreement and Plan of Merger with Hilltop Holdings Inc. (“Hilltop”) and a wholly owned subsidiary of Hilltop, whereby if the merger (the “Merger”) contemplated therein were consummated, PlainsCapital would become a wholly owned subsidiary of Hilltop 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. The Merger is subject to the approval of the shareholders of both Hilltop and PlainsCapital, regulatory approval and other customary closing conditions. If effected, we anticipate that the Merger would constitute a change of control.

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 months ended ~~March~~June 3130, 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, ~~expectations concerning~~ the ~~hiring of additional mortgage bankers, the~~ expected dividend rate on our Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), expectations concerning the ~~contemplated~~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 appropriateness of our allowance for loan losses and provision for loan losses, and the collectability of margin loans. We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

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

(1) ~~changes~~fluctuations in the ~~default~~market ~~rate~~price of ~~our~~Hilltop ~~loans~~common stock and ~~risks~~the ~~associated~~related ~~with~~effect ~~concentration~~on inthe ~~real~~market ~~estate~~value ~~related~~of ~~loans~~the merger consideration that common shareholders will receive upon completion of the Merger;

(2) ~~changes~~business inuncertainties ~~general~~and ~~economic,~~contractual ~~market~~restrictions ~~and~~while ~~business~~the ~~conditions~~Merger inis ~~areas or markets where we compete~~pending;

(3) ~~changes~~the inpossibility that the ~~interest~~proposed ~~rate~~Merger ~~environment;~~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) ~~cost~~the ~~and~~anticipated ~~availability~~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) ~~changes~~the inability ~~state~~to promptly and ~~federal~~effectively combine ~~laws,~~the ~~regulations~~businesses ~~or policies affecting one or more~~ of ~~our~~PlainsCapital ~~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”)~~Hilltop;

(6) ~~changes~~reputational inrisks ~~the auction rate securities we hold~~ and ~~their~~the ~~markets,~~reaction ~~including~~of ~~ongoing~~the ~~liquidity~~companies’ ~~problems~~respective customers ~~related~~to ~~thereto and~~ the ~~credit ratings thereof~~Merger;

~~(7)~~41 ~~our participation in governmental programs including the Small Business Lending Fund (“SBLF”);~~

(87) ~~approval~~diversion of ~~new,~~management ortime ~~changes~~on ~~in,~~Merger ~~accounting~~related ~~policies and practices~~issues; ~~and~~

(98) ~~competition~~changes ~~for~~in ~~our~~the ~~banking,~~default ~~mortgage~~rate ~~origination~~of ~~and~~our ~~financial~~loans ~~advisory segments from other banks~~ and ~~financial~~risks ~~institutions~~associated aswith ~~well as~~concentration ~~insurance~~in ~~companies,~~real ~~mortgage~~estate ~~originators,~~related ~~investment~~loans; ~~banking and financial advisory firms, asset-based non-bank lenders and government agencies.~~

(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 ~~March~~June 3130, 2012, on a consolidated basis, we had total assets of approximately $5.8 billion, total deposits of approximately $4.20 billion, total loans, including loans held for sale, of approximately $4.23 billion, and shareholders’ equity of approximately $~~539~~561.18 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~~ were consummated, PlainsCapital would ~~become~~merge into a ~~wholly owned~~ 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 is subject to the approval of the shareholders of ~~both~~PlainsCapital, the approval by shareholders of Hilltop ~~and~~of ~~PlainsCapital~~the issuance of shares in connection with the Merger, regulatory approval and other customary closing conditions. If ~~effected~~completed, ~~we anticipate that~~ the Merger would constitute a change of control.

We 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 ~~quarter~~half of 2012, we generated $4999.2 million in net interest income, compared with $4287.46 million in the first ~~quarter~~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 3.7576% for the ~~first~~six ~~quarter~~months ofended June 30, 2012, as compared to 3.4660% for the ~~first~~six ~~quarter~~months ofended 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 ~~quarter~~half of 2012, we generated $~~118~~257.01 million in combined net gains from sale of loans and mortgage loan origination fees, aan 9183.5508% increase ~~over~~compared to the ~~first~~six-month ~~quarter~~period ofended 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 ~~quarter~~half of 2012, compared to the ~~same~~six-month period inended 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 7867.9106% in the first ~~quarter~~half of 2012 compared to the ~~first~~six-month ~~quarter~~period ofended 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)~~42 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 $24.6 million and $18.2 million in investment advisory fees and commissions and securities brokerage fees and commissions during the first quarter of 2012 and 2011, respectively. Activity in the public finance market improved during the first quarter of 2012, leading to an increase in public finance advisory revenues.

In(ii) ~~the~~Investment ~~aggregate,~~advisory wefees ~~generated~~and ~~$150.1~~commissions ~~million~~and securities brokerage fees and ~~$85~~commissions.3 ~~million~~Through inour ~~noninterest~~wholly ~~income~~owned ~~during~~subsidiary, ~~the~~First ~~first quarter~~Southwest, ofwe ~~2012~~provide public finance advisory and ~~2011,~~various ~~respectively.~~investment ~~The~~banking ~~increase~~and inbrokerage ~~noninterest~~services. ~~income~~We ~~was~~generated ~~primarily~~$50.4 ~~due~~million toand an$39.7 ~~increase~~million in ~~net~~investment ~~gains~~advisory onfees ~~the~~and ~~sale~~commissions ofand ~~mortgage~~securities ~~loans.~~brokerage ~~Noninterest~~fees ~~income~~and ~~represented~~commissions ~~75.31%~~during the six months ended June 30, 2012 and 662011, respectively.~~79%~~ ofActivity ~~net~~in ~~revenues~~the ~~(net~~public ~~interest~~finance ~~income~~market ~~plus noninterest~~improved ~~income)~~ during the first ~~quarter~~half of 2012, ~~and~~leading ~~the~~to ~~first~~an ~~quarter~~increase ofin ~~2011,~~public ~~respectively.~~finance advisory revenues.

WeIn ~~also~~the ~~incur~~aggregate, ~~noninterest~~we ~~expenses~~generated $318.5 million and $192.9 million in noninterest income during the ~~operation~~ ofsix ~~our~~months ~~businesses.~~ended ~~Our~~June 30, ~~businesses~~2012 ~~engage~~and 2011, respectively. The increase in ~~labor~~noninterest ~~intensive~~income ~~activities~~was primarily ~~and,~~due ~~consequently,~~to ~~employees’~~an ~~compensation~~increase ~~and~~in ~~benefits~~net ~~represent~~gains on the ~~majority~~sale of ~~our~~mortgage ~~noninterest expenses~~loans. ~~Employees’~~Noninterest ~~compensation~~income ~~and~~represented ~~benefits were 64~~76.4625% and 6068.8577% of ~~total~~net revenues (net interest income plus noninterest ~~expense~~income) ~~for~~during the ~~first~~six ~~quarter~~months ofended June 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 64.76% and 62.67% of total noninterest expense for the six months ended June 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. 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 March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Banking segment	$	2122,~~142~~141	$	1319,~~215~~153		$	43,284	$	31,755
Mortgage Origination segment		1018,~~445~~717		~~(392~~3,650	)		29,161		3,615
Financial Advisory segment		1,~~405~~336		~~(743~~753	)		2,741		267
Intercompany eliminations		—		~~144~~50			—		193
Income before taxes	$	3242,~~992~~194	$	1223,~~224~~606		$	75,186	$	35,830

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 ~~Accounting Standards Codification~~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.

We43 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.

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 ~~first~~second quarter of 2012 was $2125.31 million, or $0.5972 per diluted share, compared to $715.64 million, or $0.1842 per diluted share, for the ~~first~~second quarter of 2011. Net income for the six months ended June 30, 2012 was $46.3 million, or $1.32 per diluted share, compared to $23.0 million, or $0.60 per diluted share, for the six months ended June 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 Ended
	Three Months EndedJune 30,2012 v. 2011			Six Months EndedJune 30,2012 v. 2011
	March 31,
Net interest income	$	4,800		$	11,584
	2012 v. 2011
Provision for loan losses		3,819			8,098
Net interest income	$	6,784
Net gains from sale of loans and mortgage loan origination fees		60,261			116,678
Provision for loan losses		4,279
Investment advisory and brokerage fees and commissions		4,346			10,744
Net gains from sale of loans and mortgage loan origination fees		56,417
Employees’ compensation and benefits		(33,991	)		(73,419	)
Investment advisory and brokerage fees and commissions		6,398
Other noninterest expenses		(16,870	)		(32,503	)
Employees’ compensation and benefits		(39,428	)
All other (including tax effects)		(12,718	)		(17,872	)
Other noninterest expenses		(15,633	)
	$	9,647		$	23,310
All other (including tax effects)		(5,154	)
	$	13,663

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

	Three Months Ended			Year Ended			Three Months Ended
	Six Months EndedJune 30,2012			Year EndedDecember 31,2011			Six Months EndedJune 30,2011
	March 31,			December 31,			March 31,
Return on average shareholders’ equity		17.38	%		11.27	%		10.28	%
	2012			2011			2011
Return on average assets		1.63	%		0.98	%		0.87	%
Return on average shareholders’ equity		16.29	%		11.27	%		6.87	%
Net interest margin (taxable equivalent)		3.76	%		3.71	%		3.60	%
Return on average assets		1.50	%		0.98	%		0.57	%
Leverage ratio		10.17	%		9.67	%		9.21	%
Net interest margin (taxable equivalent)		3.75	%		3.71	%		3.46	%
Leverage ratio		9.79	%		9.67	%		8.76	%

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. The leverage ratio is discussed in the “Liquidity and Capital Resources” section below.

3944

Net Interest Income

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

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
					Variance							Variance
	2012		2011		2012 v. 2011			2012		2011		2012 v. 2011
Interest income
Loans, including fees	$	48,~~600~~245	$	4244,~~204~~636	$	63,~~396~~609		$	96,845	$	86,840	$	10,005
Securities		3,~~412~~332		45,~~606~~093		(1,~~194~~761	)		6,744		9,699		(2,955	)
Securities—tax exempt		2,475		2,387		88
Securities - tax exempt		2,596		2,605		(9	)		5,071		4,992		79
Federal funds sold and securities purchased under agreements to resell		86146		~~1,092~~660		(~~1,006~~514	)		232		1,752		(1,520	)
Interest-bearing deposits with banks		~~173~~215		~~314~~193		~~(141~~22	)		388		507		(119	)
Other		1,810		1,400		410
Other securities		2,067		1,531		536			3,877		2,931		946
Total interest income		56,~~556~~601		5254,~~003~~718		41,~~553~~883			113,157		106,721		6,436
Interest expense
Deposits		54,~~265~~379		7,~~528~~496		(23,~~263~~117	)		9,644		15,024		(5,380	)
Notes payable and other borrowings		2,~~082~~237		2,~~050~~037		32200			4,319		4,087		232
Total interest expense		76,~~347~~616		9,~~578~~533		(2,~~231~~917	)		13,963		19,111		(5,148	)
Net interest income	$	49,~~209~~985	$	4245,~~425~~185	$	64,~~784~~800		$	99,194	$	87,610	$	11,584

Net interest income increased $64.8 million infor the ~~first~~second quarter of 2012 and $11.6 million for the six months ended June 30, 2012, compared with the ~~first~~corresponding ~~quarter~~periods ofin 2011. The increase ~~was~~for ~~primarily~~both periods was due to ~~the~~increases ~~increase~~ in loan ~~volume~~volumes within the banking segment and isdecreases ~~discussed~~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 $~~150~~168.14 million infor the ~~first~~second quarter of 2012 compared with $85107.36 million infor the ~~first~~second quarter of 2011, an increase of $6460.8 million. Noninterest income was $318.5 million for the six months ended June 30, 2012 compared with $192.9 million for the six months ended June 30, 2011, an increase of $125.6 million. The increase for both periods was primarily due to increased mortgage loan origination volume, which increased 7857.9176% induring the ~~first~~second quarter of 2012 and 67.06% during the six months ended June 30, 2012 compared with the ~~first quarter~~corresponding ofperiods in 2011. The increased mortgage loan origination volume resulted from PrimeLending’s efforts to add staff and open mortgage banking offices in recent years, in addition to a more favorable interest rate environment in the first ~~quarter~~ half of 2012, compared to the same period in 2011. The increased mortgage origination volume led to higher combined net gains on the sale of mortgage loans and mortgage loan origination fees during the first ~~quarter~~half of 2012.

4045

Noninterest Expense

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

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
					Variance							Variance
	2012		2011		2012 v. 2011			2012		2011		2012 v. 2011
Noninterest expense
Employees’ compensation and benefits	$	~~105~~112,~~774~~403	$	6678,~~346~~412	$	3933,~~428~~991		$	218,177	$	144,758	$	73,419
Occupancy and equipment, net		17,~~082~~760		15,~~398~~812		1,~~684~~948			34,842		31,210		3,632
Professional services		811,~~175~~031		6,~~046~~592		24,~~129~~439			19,206		12,638		6,568
Deposit insurance premium		~~996~~907		1,~~856~~234		(~~860~~327	)		1,903		3,090		(1,187	)
Repossession and foreclosure, net of recoveries		51,~~918~~682		~~1,880~~732		~~4,038~~950			7,600		2,612		4,988
Other		2629,~~157~~008		1719,~~515~~148		89,~~642~~860			55,165		36,663		18,502
Total noninterest expense	$	~~164~~172,~~102~~791	$	~~109~~121,~~041~~930	$	5550,~~061~~861		$	336,893	$	230,971	$	105,922

Noninterest expense increased $5550.19 million for the ~~first~~second quarter of 2012 and $105.9 million for the six months ended June 30, 2012 compared with the ~~first~~corresponding ~~quarter~~periods ofin 2011. The largest components of the increase were employees’ compensation and benefits, other expenses, professional services, and repossession and foreclosure, ~~net of recoveries~~expenses.

Employees’ compensation and benefits increased $3934.40 million for the ~~first~~second quarter of 2012 ~~compared~~and ~~with the first quarter of 2011~~$73.4 ~~The~~million ~~increase~~for ~~was~~the ~~primarily~~six ~~attributable~~months toended ~~increased~~June ~~costs~~30, ~~in the~~2012 ~~mortgage~~compared ~~origination~~with ~~segment from~~ the ~~hiring~~corresponding ofperiods ~~additional staff~~ in ~~recent years~~2011. The ~~additional~~increase ~~staff,~~for ~~coupled~~both ~~with~~periods was primarily attributable to an increase in the volume of mortgage loan originations during the first ~~quarter~~half of 2012 compared with the first ~~quarter~~half of 2011, ~~resulted~~ which resulted in the mortgage origination segment incurring higher variable costs for commissions,. asIn ~~well~~addition, ~~as higher fixed~~ 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 $89.69 million for the ~~first~~second quarter of 2012 ~~compared~~and ~~with~~$18.5 million for the ~~first~~six ~~quarter~~months ofended June 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 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 ~~quarter~~ half 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 ~~tended~~increased ~~to increase~~ as interest rates have ~~approached~~ 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.

~~Repossession~~Professional ~~and~~services ~~foreclosure,~~increased ~~net~~$4.4 million for the second quarter of ~~recoveries,~~2012 ~~increased~~and $46.06 million for the ~~first~~six ~~quarter~~months ofended June 30, 2012 compared with the ~~first~~ ~~quarter~~corresponding ofperiods in 2011. The increase for both periods was primarily attributable to ~~valuation~~professional ~~adjustments~~fees and appraisal and inspection fees attributable to the ~~fair~~mortgage ~~value~~origination segment, as well as $1.5 million of ~~other~~professional ~~real~~fees ~~estate~~related ~~owned~~to the Merger discussed in Note 1.

4146

Lines of Business

Banking Segment

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

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
					Variance							Variance
	2012		2011		2012 v. 2011			2012		2011		2012 v. 2011
Net interest income	$	4849,~~399~~916	$	4043,~~475~~242	$	76,~~924~~674		$	98,316	$	83,633	$	14,683
Provision for loan losses		23,~~083~~534		67,~~500~~250		(43,~~417~~716	)		5,617		13,750		(8,133	)
Noninterest income		98,~~591~~213		78,~~329~~985		~~2,262~~(772	)		17,804		16,331		1,473
Noninterest expense		3432,~~765~~454		2825,~~089~~824		6,~~676~~630			67,219		54,459		12,760
Income before taxes	$	2122,~~142~~141	$	1319,~~215~~153	$	72,~~927~~988		$	43,284	$	31,755	$	11,529

Income before taxes was $2122.1 million for the ~~first~~second quarter of 2012, an increase of $73.90 million compared to the ~~first~~second quarter of 2011. ~~The~~For ~~increase~~the six months ended June 30, 2012, income before taxes was $43.3 million, an increase of $11.5 million compared with the six months ended June 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, partially offset by an increase in noninterest expense.

Net interest income increased $76.97 million for the ~~first~~second quarter of 2012 and $14.7 million for the six months ended June 30, 2012 compared with the corresponding ~~first~~periods ~~quarter~~in of 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 ~~first~~corresponding ~~quarter~~periods ofin 2011.

Provision for loan losses decreased by $43.47 million for the ~~first~~second quarter of 2012 ~~compared~~and $8.1 million for the six months ended June 30, 2012 compared with the ~~first~~corresponding ~~quarter~~periods ofin 2011. The decrease in the provision for loan losses for both periods was primarily due to lower levels of non-performing loans in the first ~~quarter~~half of 2012. The economic and financial environment for banking in Texas showed signs of improvement in the first half of 2012, as labor market recovery and rising asset values combined to raise consumer and business confidence.

Noninterest income ~~increased~~decreased $20.38 million for the ~~first~~second quarter of 2012, but increased $1.5 million for the six months ended June 30, 2012 compared with the ~~first~~corresponding periods in 2011. During the second quarter of ~~2011~~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 ~~was~~for ~~primarily~~the ~~attributable to~~six ~~increases~~months inended ~~the~~June 30, ~~fair~~2012 ~~value~~related ofto ~~securities~~an ~~acquired~~increase in intercompany ~~satisfaction~~financing ofcharges adue ~~debt~~to ~~previously~~an ~~contracted~~increase ~~and~~in ~~currently~~the ~~classified~~lending ascommitment ~~trading~~on ~~securities~~the PrimeLending warehouse line of credit.

Noninterest expense increased $6.76 million for the ~~first~~second quarter of 2012 and $12.7 million for the six months ended June 30, 2012 compared with the ~~first~~corresponding ~~quarter~~periods ofin 2011. The ~~increase~~increases ~~was~~were primarily due to increases in employees’ compensation and benefits.

4247

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

	Three Months Ended March 31,
	Three Months Ended June 30,2012 v. 2011									Six Months Ended June 30,2012 v. 2011
	2012 v. 2011
	Change Due To(1)									Change Due To(1)
	Change Due To(1)
	Volume			Yield/Rate			Change			Volume			Yield/Rate			Change
	Volume			Yield/Rate			Change
Interest income
Interest income
Loans	$	5,764		$	(398	)	$	5,366		$	13,660		$	(881	)	$	12,779
Loans	$	7,990		$	(577	)	$	7,413
Investment securities(2)		(1,230	)		(664	)		(1,894	)		(2,319	)		(873	)		(3,192	)
Investment securities(2)		(1,088	)		(210	)		(1,298	)
Federal funds sold and securities purchased under agreements to resell		10			(44	)		(34	)		(315	)		(162	)		(477	)
Federal funds sold and securities purchased under agreements to resell		(394	)		(48	)		(442	)
Interest-bearing deposits in other financial institutions		(4	)		(9	)		(13	)		(135	)		(22	)		(157	)
Interest-bearing deposits in other financial institutions		(132	)		(12	)		(144	)
Other		118			(100	)		18			116			(88	)		28
Other		3			6			9
Total interest income(2)		4,658			(1,215	)		3,443			11,007			(2,026	)		8,981
Total interest income(2)		6,379			(841	)		5,538
Interest expense
Interest expense
Deposits		(139	)		(3,026	)		(3,165	)		100			(5,586	)		(5,486	)
Deposits		247			(2,568	)		(2,321	)
Notes payable and other borrowings		212			(155	)		57			176			(158	)		18
Notes payable and other borrowings		(29	)		(10	)		(39	)
Total interest expense		73			(3,181	)		(3,108	)		276			(5,744	)		(5,468	)
Total interest expense		218			(2,578	)		(2,360	)
Net interest income(2)	$	4,585		$	1,966		$	6,551		$	10,731		$	3,718		$	14,449
Net interest income(2)	$	6,161		$	1,737		$	7,898

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

(2)	Taxable equivalent.

Taxable equivalent net interest income increased $76.96 million for the ~~first~~second quarter of 2012 compared with the ~~first~~second quarter of 2011. Increases in the volume of interest-earning assets, primarily loans, increased taxable equivalent net interest income by $6.4.7 million, while increases in the volume of interest-bearing liabilities, primarily ~~deposits~~notes payable and other borrowings, reduced taxable equivalent net interest income by $0.21 million. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $01.82 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 $23.62 million, primarily due to a decrease in market interest rates on deposits during the ~~first~~second quarter of 2012 compared with prevailing market rates during the ~~first~~second quarter of 2011.

43Taxable equivalent net interest income increased $14.4 million for the six months ended June 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 $11.0 million, while increases in the volume of interest-bearing liabilities reduced taxable equivalent net interest income by $0.3 million. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $2.0 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 $5.7 million, primarily due to a decrease in market interest rates on deposits during the first half of 2012 compared with prevailing market rates during the first half of 2011.

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

	Three Months Ended								Three Months Ended
	Three Months EndedJune 30, 2012								Three Months EndedJune 30, 2011
	March 31,2012								March 31,2011
	AverageOutstandingBalance			InterestEarned orPaid		AnnualizedYield orRate			AverageOutstandingBalance			InterestEarnedor Paid		AnnualizedYield orRate
	Average			Interest		Annualized			Average			Interest		Annualized
	Outstanding			Earned or		Yield or			Outstanding			Earned or		Yield or
	Balance			Paid		Rate			Balance			Paid		Rate
Assets
Interest-earning assets
Loans, gross(1)	$	3,~~685~~720,~~972~~938		$	4849,~~833~~426		5.3334	%	$	3,~~096~~289,~~778~~452		$	4144,~~420~~060		5.4237	%
Investment securities—taxable		545,090			3,174		2.33	%		746,426			4,369		2.34	%
Investment securities - taxable		548,547			3,109		2.27	%		720,601			4,797		2.66	%
Investment securities—non-taxable(2)		239,347			3,157		5.28	%		232,948			3,260		5.60	%
Investment securities - non-taxable(2)		235,120			3,312		5.63	%		241,374			3,518		5.83	%
Federal funds sold and securities purchased under agreements to resell		925,~~118~~270			2668		1.1508	%		5323,~~646~~003			~~468~~102		31.5478	%
Interest-bearing deposits in other financial institutions		~~260~~248,~~047~~268			~~166~~168		0.2627	%		~~447~~253,~~402~~663			~~310~~181		0.2829	%
Other		1524,~~209~~824			~~154~~160		42.0558	%		1413,~~932~~544			~~145~~142		34.8819	%
Interest-earning assets, gross		4,~~754~~802,~~783~~967			5556,~~510~~243		4.7071	%		4,~~592~~541,~~132~~637			4952,~~972~~800		4.4166	%
Allowance for loan losses		(6660,~~489~~966	)							(6365,~~888~~605	)
Interest-earning assets, net		4,~~688~~742,~~294~~001								4,~~528~~476,~~244~~032
Noninterest-earning assets		~~501~~483,~~162~~581								~~462~~479,~~541~~533
Total assets	$	5,~~189~~225,~~456~~582							$	4,~~990~~955,~~785~~565
Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,~~914~~777,~~421~~532			54,~~251~~365		0.5446	%	$	3,~~792~~848,~~341~~823			7,~~572~~530		0.8178	%
Notes payable and other borrowings		~~376~~541,~~048~~454			~~321~~356		0.3426	%		~~408~~316,~~673~~278			~~360~~299		0.3638	%
Total interest-bearing liabilities(3)		4,~~290~~318,~~469~~986			54,~~572~~721		0.5244	%		4,~~201~~165,~~014~~101			7,~~932~~829		0.7775	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		~~244~~242,~~809~~201								~~222~~216,~~363~~039
Other liabilities		6358,~~689~~227								3436,~~292~~024
Total liabilities		4,~~598~~619,~~967~~414								4,~~457~~417,~~669~~164
Shareholders’ equity		~~590~~606,~~489~~168								~~533~~538,~~116~~401
Total liabilities and shareholders’ equity	$	5,~~189~~225,~~456~~582							$	4,~~990~~955,~~785~~565
Net interest income(2)				$	4951,~~938~~522							$	4244,~~040~~971
Net interest spread(2)							4.1827	%							3.6491	%
Net interest margin(2)							4.2231	%							3.7197	%

(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 ~~for~~and ~~each~~$1.2 ofmillion for the ~~three~~second ~~months~~quarter ~~ended~~of ~~March 31,~~ 2012 and 2011, respectively.

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


	Six Months Ended June 30, 2012								Six Months Ended June 30, 2011
	Average Outstanding Balance			Interest Earned or Paid		Annualized Yield or Rate			Average Outstanding Balance			Interest Earned or Paid		Annualized Yield or Rate

Assets
Interest-earning assets
Loans, gross(1)	$	3,702,586		$	98,259		5.34	%	$	3,193,647		$	85,480		5.40	%
Investment securities - taxable		546,819			6,283		2.30	%		733,442			9,166		2.50	%
Investment securities - non-taxable(2)		237,234			6,468		5.45	%		237,184			6,777		5.71	%
Federal funds sold and securities purchased under agreements to resell		17,194			93		1.09	%		38,240			570		3.01	%
Interest-bearing deposits in other financial institutions		254,157			334		0.26	%		349,997			491		0.28	%
Other		20,017			314		3.14	%		14,234			286		4.02	%

Interest-earning assets, gross		4,778,007			111,751		4.70	%		4,566,744			102,770		4.54	%
Allowance for loan losses		(63,727	)							(64,751	)

Interest-earning assets, net		4,714,280								4,501,993
Noninterest-earning assets		493,239								471,085

Total assets	$	5,207,519							$	4,973,078


Liabilities and Shareholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,845,977			9,616		0.50	%	$	3,820,738			15,102		0.80	%
Notes payable and other borrowings		458,751			677		0.30	%		362,220			659		0.37	%

Total interest-bearing liabilities(3)		4,304,728			10,293		0.48	%		4,182,958			15,761		0.76	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		243,505								219,183
Other liabilities		60,958								35,164

Total liabilities		4,609,191								4,437,305
Shareholders’ equity		598,328								535,773

Total liabilities and shareholders’ equity	$	5,207,519							$	4,973,078


Net interest income(2)				$	101,458							$	87,009

Net interest spread(2)							4.22	%							3.78	%
Net interest margin(2)							4.27	%							3.84	%

(1)	Average loans include non-accrual loans.

(2)	Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $2.2 million and $2.3 million for each of the six months ended June 30, 2012 and 2011, respectively.

(3)	Excludes the allocation of interest expense on PlainsCapital Corporation debt totaling $0.9 million and $1.1 million for the six months ended June 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.

4450

Mortgage Origination Segment

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

Filing Compare · PLAINSCAPITAL CORP