Hilltop Holdings Inc. - FORM 8-K/A - EX-99.2

Attached files

file	filename
8-K/A - 8-K/A - Hilltop Holdings Inc.	a2212808z8-ka.htm
EX-23.1 - EX-23.1 - Hilltop Holdings Inc.	a2212808zex-23_1.htm
EX-99.3 - EX-99.3 - Hilltop Holdings Inc.	a2212808zex-99_3.htm
EX-99.1 - EX-99.1 - Hilltop Holdings Inc.	a2212808zex-99_1.htm

Exhibit 99.2

Unaudited Consolidated Interim Financial Statements

PlainsCapital Corporation and subsidiaries

Three and Nine Months Ended September 30, 2012 and 2011

PlainsCapital Corporation and Subsidiaries

Consolidated Balance Sheets

	September 30, 2012			December 31,
	(Unaudited)			2011
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	355,302		$	344,647
Federal funds sold and securities purchased under agreements to resell	55,441			3,347
Assets segregated for regulatory purposes	2,800			—
Loans held for sale	1,335,687			776,372
Securities
Trading, at fair market value	45,156			58,957
Available for sale, amortized cost $627,919 and $594,287, respectively	639,838			601,086
Held to maturity, fair market value $127,017 and $188,736, respectively	117,471			179,710
	802,465			839,753
Loans, net of unearned income	3,259,745			3,351,167
Allowance for loan losses	(59,453		)	(67,495		)
Loans, net	3,200,292			3,283,672

Broker-dealer and clearing organization receivables	174,595			111,690
Fee award receivable	17,107			18,002
Investment in unconsolidated subsidiaries	2,012			2,012
Premises and equipment, net	96,941			92,906
Accrued interest receivable	15,557			16,175
Other real estate owned	26,314			30,254
Goodwill, net	31,568			35,880
Other intangible assets, net	10,222			11,385
Other assets	223,712			133,925
Total assets	$	6,350,015		$	5,700,020

Liabilities and Shareholders’ Equity
Deposits
Noninterest-bearing	$	240,240		$	328,858
Interest-bearing	4,085,847			3,917,348
Total deposits	4,326,087			4,246,206

Broker-dealer and clearing organization payables	219,450			186,483
Short-term borrowings	898,344			476,439
Capital lease obligations	11,775			12,121
Notes payable	45,620			54,966
Junior subordinated debentures	67,012			67,012
Other liabilities	178,003			137,509
Total liabilities	5,746,291			5,180,736

Commitments and contingencies

Shareholders’ equity
PlainsCapital Corporation shareholders’ equity
Preferred stock, $1.00 par value per share, authorized 50,000,000 shares; Series C, 114,068 shares issued	114,068			114,068
Original Common Stock, $0.001 par value per share, authorized 100,000,000 shares; 32,357,629 and 31,920,732 shares issued, respectively	32			32
Common Stock, $0.001 par value per share, authorized 150,000,000 shares; 0 shares issued	—			—
Surplus	162,697			156,123
Retained earnings	318,200			244,291
Accumulated other comprehensive income	8,300			4,587
	603,297			519,101
Unearned ESOP shares (190,254 shares)	(2,070		)	(2,070		)
Total PlainsCapital Corporation shareholders’ equity	601,227			517,031
Noncontrolling interest	2,497			2,253
Total shareholders’ equity	603,724			519,284
Total liabilities and shareholders’ equity	$	6,350,015		$	5,700,020

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Income—Unaudited

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest income:
Loans, including fees	$	51,281		$	46,051		$	148,126		$	132,891
Securities
Taxable	3,216			4,904			9,960			14,603
Tax-exempt	2,445			2,130			7,516			7,122
Federal funds sold and securities purchased under agreements to resell	501			916			733			2,668
Interest-bearing deposits with banks	199			243			587			750
Other	1,683			2,009			5,560			4,940
Total interest income	59,325			56,253			172,482			162,974

Interest expense
Deposits	3,817			7,013			13,461			22,037
Short-term borrowings	549			349			1,542			1,121
Capital lease obligations	141			133			425			404
Notes payable	639			777			2,034			2,392
Junior subordinated debentures	647			622			1,939			1,870
Other	105			166			460			347
Total interest expense	5,898			9,060			19,861			28,171

Net interest income	53,427			47,193			152,621			134,803
Provision for loan losses	2,876			4,500			8,516			18,238
Net interest income after provision for loan losses	50,551			42,693			144,105			116,565

Noninterest income
Service charges on depositor accounts	2,018			2,207			6,181			6,074
Net realized gains (losses) on sale of securities	(2,601		)	288			(2,601		)	1,533
Other-than-temporary impairment
Total other-than-temporary impairment losses on securities	—			(6,218		)	(4,876		)	(6,218		)
Portion of loss recognized in other comprehensive income	—			2,318			2,788			2,318
Net other-than-temporary impairment losses recognized in earnings	—			(3,900		)	(2,088		)	(3,900		)
Net gains from sale of loans	157,410			91,916			375,803			196,891
Mortgage loan origination fees	23,172			17,041			61,904			52,513
Trust fees	1,016			1,073			3,092			3,123
Investment advisory fees and commissions	18,686			18,275			55,819			46,542
Securities brokerage fees and commissions	5,653			6,246			18,938			17,653
Other	2,827			2,760			9,658			8,406
Total noninterest income	208,181			135,906			526,706			328,835

Noninterest expense
Employees’ compensation and benefits	134,046			94,145			352,223			238,903
Occupancy and equipment, net	18,968			15,889			53,810			47,099
Professional services	11,246			8,333			30,452			20,971
Deposit insurance premium	835			837			2,738			3,927
Repossession and foreclosure, net of recoveries	670			5,829			8,270			8,441
Other	36,022			27,088			91,187			63,751
Total noninterest expense	201,787			152,121			538,680			383,092

Income before income taxes	56,945			26,478			132,131			62,308
Income tax provision	19,354			9,215			46,570			21,715

Net income	37,591			17,263			85,561			40,593
Less: Net income attributable to noncontrolling interest	1,321			570			2,957			876

Net income attributable to PlainsCapital Corporation	36,270			16,693			82,604			39,717
Dividends on preferred stock and other	748			3,609			2,534			6,412
Income applicable to PlainsCapital Corporation common shareholders	$	35,522		$	13,084		$	80,070		$	33,305

Earnings per common share
Basic	$	1.07		$	0.40		$	2.42		$	1.02
Diluted	$	1.03		$	0.39		$	2.35		$	0.99
Dividends per common share	$	0.06		$	0.05		$	0.18		$	0.15

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income—Unaudited

(In thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Net income	$	37,591	$	17,263		$	85,561	$	40,593
Other comprehensive income (loss)
Unrealized gains on securities available for sale, net of tax of $2,210, $3,508, $1,862 and $3,000	4,104		6,515			3,457		5,569
Unrealized gains (losses) on securities held in trust for the Supplemental Executive Pension Plan, net of tax of $76, ($486), $138 and ($407)	140		(903		)	256		(755		)
Unrealized loss on customer-related cash flow hedges, net of tax of ($24)	—		—			—		(45		)
Comprehensive income	41,835		22,875			89,274		45,362
Less: comprehensive income attributable to noncontrolling interest	1,321		570			2,957		876
Comprehensive income applicable to PlainsCapital Corporation	$	40,514	$	22,305		$	86,317	$	44,486

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity—Unaudited

	PlainsCapital Corporation Shareholders
	Preferred Stock					Common Stock					Retained			Accumulated Other Comprehensive			Unearned 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
Redemption of Series A and Series B preferred stock	(92,013	)	(92,013		)	—	—		—		—			—			—			—			(92,013		)
Sale of Series C preferred stock	114,068		114,068			—	—		—		—			—			—			—			114,068
Stock option plans’ activity, including compensation expense	—		—			45,663	—		319		—			—			—			—			319
Vesting of stock-based compensation	—		—			85,213	—		—		—			—			—			—			—
Stock-based compensation expense	—		—			—	—		1,780		—			—			—			—			1,780
ESOP activity	—		—			—	—		—		35			—			—			—			35
Dividends on common stock ($0.15 per share)	—		—			—	—		—		(5,117		)	—			—			—			(5,117		)
Dividends on preferred stock	—		—			—	—		—		(3,592		)	—			—			—			(3,592		)
Preferred stock discount and accretion	—		2,820			—	—		—		(2,820		)	—			—			—			—
Cash received from noncontrolling interest	—		—			—	—		—		—			—			—			944			944
Cash distributions to noncontrolling interest	—		—			—	—		—		—			—			—			(652		)	(652		)
Net income	—		—			—	—		—		39,717			—			—			876			40,593
Other comprehensive income	—		—			—	—		—		—			4,769			—			—			4,769

Balance, September 30, 2011	114,068		$	114,068		31,911,704	$	32	$	155,388	$	235,009		$	4,488		$	(2,528	)	$	1,953		$	508,410

Balance, January 1, 2012	114,068		$	114,068		31,920,732	$	32	$	156,123	$	244,291		$	4,587		$	(2,070	)	$	2,253		$	519,284
Stock option plans’ activity, including compensation expense	—		—			173,573	—		1,514		—			—			—			—			1,514
Vesting of stock-based compensation	—		—			84,753	—		—		—			—			—			—			—
Stock-based compensation expense	—		—			—	—		2,560		—			—			—			—			2,560
ESOP activity	—		—			178,571	—		2,500		34			—			—			—			2,534
Dividends on common stock ($0.18 per share)	—		—			—	—		—		(6,195		)	—			—			—			(6,195		)
Dividends on preferred stock	—		—			—	—		—		(2,534		)	—			—			—			(2,534		)
Cash received from noncontrolling interest	—		—			—	—		—		—			—			—			316			316
Cash distributions to noncontrolling interest	—		—			—	—		—		—			—			—			(2,840		)	(2,840		)
Sale of majority-owned subsidiary	—		—			—	—		—		—			—			—			(189		)	(189		)
Net income	—		—			—	—		—		82,604			—			—			2,957			85,561
Other comprehensive income	—		—			—	—		—		—			3,713			—			—			3,713

Balance, September 30, 2012	114,068		$	114,068		32,357,629	$	32	$	162,697	$	318,200		$	8,300		$	(2,070	)	$	2,497		$	603,724

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Consolidated Statements of Cash Flows—Unaudited

(In thousands)

	Nine Months Ended September 30,
	2012			2011
Operating Activities
Net income	$	85,561		$	40,593
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses	8,516			18,238
Net losses on other real estate owned	6,980			7,352
Depreciation and amortization	17,881			22,247
Stock-based compensation expense	2,560			1,799
Net realized losses (gains) on securities	4,689			2,367
Loss on sale of premises and equipment	975			178
Gain on sale of majority-owned subsidiary	(74		)	—
Stock dividends received on securities	(23		)	(17		)
Deferred income taxes	(3,645		)	(746		)
Net change in prepaid FDIC assessments	2,490			3,446
Net change in assets segregated for regulatory purposes	(2,800		)	—
Net change in trading securities	13,801			(28,275		)
Net change in broker-dealer and clearing organization receivables	(62,905		)	(80,434		)
Net change in fee award receivable	895			922
Net change in other assets	(53,244		)	(6,612		)
Net change in broker-dealer and clearing organization payables	32,967			76,662
Net change in other liabilities	39,905			(19,969		)
Net gains from sale of loans	(375,803		)	(196,891		)
Loans originated for sale	(9,706,400		)	(5,870,405		)
Proceeds from loans sold	9,515,877			5,848,913
Net cash provided by (used in) operating activities	(471,797		)	(180,632		)

Investing Activities
Net change in securities purchased under resale agreements	(34,976		)	82,464
Proceeds from maturities and principal reductions of securities held to maturity	16,888			20,657
Proceeds from sales, maturities and principal reductions of securities available for sale	515,601			478,773
Purchases of securities held to maturity	—			(1,031		)
Purchases of securities available for sale	(511,761		)	(534,902		)
Net change in loans	64,556			(24,080		)
Purchases of premises and equipment and other assets	(20,245		)	(24,952		)
Proceeds from sales of premises and equipment and other real estate owned	8,337			11,020
Net proceeds from sale of majority-owned subsidiary	3,934			—
Net cash received (paid) for Federal Home Loan Bank and Federal Reserve Bank stock	(27,292		)	3,341
Net cash provided by (used in) investing activities	15,042			11,290

Financing Activities
Net change in deposits	79,881			456,001
Net change in short-term borrowings	421,905			(175,229		)
Proceeds from notes payable	—			4,000
Payments on notes payable	(9,346		)	(10,197		)
Payments to redeem preferred stock	—			(92,013		)
Proceeds from issuance of preferred stock	—			114,068
Proceeds from issuance of common stock	4,014			300
Dividends paid	(9,056		)	(9,256		)
Net cash received from (distributed to) noncontrolling interest	(2,524		)	292
Other, net	(346		)	(347		)
Net cash provided by (used in) financing activities	484,528			287,619

Net change in cash and cash equivalents	27,773			118,277
Cash and cash equivalents at beginning of period	347,189			359,335
Cash and cash equivalents at end of period	$	374,962		$	477,612

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	21,173		$	30,496
Income taxes	$	44,138		$	2,575

Supplemental Schedule of Noncash Activities
Conversion of loans to other real estate owned	$	11,029		$	27,630
Capital leases	$	—		$	887

See accompanying notes.

PlainsCapital Corporation and Subsidiaries

Notes to Consolidated Interim Financial Statements — Unaudited

September 30, 2012

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

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

The consolidated interim financial statements of PlainsCapital and subsidiaries are unaudited, but in the opinion of management, contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results of the interim periods presented. The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions 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 Exhibit 99.2 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”) and 100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”), PNB Aero Services, Inc. and PCB-ARC, Inc. The Bank has a 100% membership interest in First Southwest Holdings, LLC (“First Southwest”) and PlainsCapital Securities, LLC, as well as a 51% voting interest in PlainsCapital Insurance Services, LLC.

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.

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, primarily home builders, to originate residential mortgage loans.

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 merge into a subsidiary of Hilltop, which subsidiary would survive the transaction, and each share of our common stock would be converted into the right to receive 0.776 shares of Hilltop’s common stock and a cash payment of $9.00, subject to certain adjustments. The shareholders of PlainsCapital have approved the Merger, and the shareholders of Hilltop have approved the issuance of shares in connection with the Merger. The Merger is subject to receipt of regulatory approval and satisfaction of other customary closing conditions. If completed, the Merger would constitute a change in control of PlainsCapital.

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

In July 2012, PlainsCapital sold, at approximately carrying value, its controlling membership interest in Hester Capital Management, LLC (“Hester Capital”) to an unrelated third party. The operations of Hester Capital were not significant to PlainsCapital or to PlainsCapital’s financial advisory segment.

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

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

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

	September 30, 2012		December 31, 2011
Unrealized gain on securities available for sale	$	7,706	$	5,718
Unrealized gain (loss) on securities for which the credit portion of an OTTI has been recognized in earnings	41		(1,428		)
Unrealized gain on securities held in trust for the Supplemental Executive Pension Plan	553		297
	$	8,300	$	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 September 30, 2012, and December 31, 2011 are summarized as follows (in thousands):

	Available for Sale
			Recognized in AOCI
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			OTTI			Fair Value
As of September 30, 2012
U. S. government agencies
Bonds	$	390,250	$	1,082	$	(26	)	$	—		$	391,306
Mortgage-backed securities	33,275		3,536		—			—			36,811
Collateralized mortgage obligations	118,866		1,342		(49		)	—			120,159
States and political subdivisions	61,435		5,973		(3		)	—			67,405
Auction rate bonds	24,093		—		—			64			24,157
Totals	$	627,919	$	11,933	$	(78	)	$	64		$	639,838

As of December 31, 2011
U. S. government agencies
Bonds	$	183,191	$	659	$	—		$	—		$	183,850
Mortgage-backed securities	33,897		2,456		(83		)	—			36,270
Collateralized mortgage obligations	260,878		2,284		(1,084		)	—			262,078
States and political subdivisions	69,779		4,613		(48		)	—			74,344
Auction rate bonds	46,542		—		—			(1,998		)	44,544
Totals	$	594,287	$	10,012	$	(1,215	)	$	(1,998	)	$	601,086

	Held to Maturity
	Amortized Cost		OTTI Unrealized Loss Recognized in AOCI			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of September 30, 2012
U. S. government agencies
Mortgage-backed securities	$	5,209	$	—		$	5,209	$	449	$	(5	)	$	5,653
Collateralized mortgage obligations	10,915		—			10,915		223		(20		)	11,118
States and political subdivisions	101,347		—			101,347		8,901		(2		)	110,246
Auction rate bonds	—		—			—		—		—			—
Totals	$	117,471	$	—		$	117,471	$	9,573	$	(27	)	$	127,017

As of December 31, 2011
U. S. government agencies
Mortgage-backed securities	$	6,639	$	—		$	6,639	$	547	$	(6	)	$	7,180
Collateralized mortgage obligations	15,974		—			15,974		419		(88		)	16,305
States and political subdivisions	111,924		—			111,924		7,209		(10		)	119,123
Auction rate bonds	45,372		(199		)	45,173		955		—			46,128
Totals	$	179,909	$	(199	)	$	179,710	$	9,130	$	(104	)	$	188,736

2. Securities (continued)

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

In addition, the Bank determined that certain senior auction rate bonds had incurred other-than-temporary impairment. In order to determine the amount of the OTTI, the Bank evaluated the historical and projected performance of the underlying student loan collateral, the extent of the government guarantee, expenses associated with the trust that issued the securities, the expected cash flows from the auction rate bonds and other factors. As a result of this evaluation, the Bank determined that it incurred OTTI of $0 and approximately $4.9 million on auction rate bonds for the three and nine months ended September 30, 2012. The credit-related portion of the OTTI, calculated as the difference between the securities’ amortized cost basis and the present value of the securities’ expected future cash flows, was $0 and approximately $2.1 million for the three and nine months ended September 30, 2012, and was recorded in operating results. The remaining $2.8 million of the OTTI for the nine months ended September 30, 2012 has been recognized in other comprehensive income. The Bank incurred OTTI of $6.2 million for the three and nine months ended September 30, 2011. The credit related portion of the OTTI was approximately $3.9 million for the three and nine months ended and was recorded in operating results, while the remaining OTTI of $2.3 million was recorded in other comprehensive income.

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

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

	Nine Months Ended September 30,			Twelve Months Ended December 31,
	2012			2011
Balance at beginning of period	$	5,305		$	—
Additions for credit-related OTTI not previously recognized	1,156			5,305
Additional increases to credit loss on OTTI previously recognized	932			—
Reductions for securities sold during the period (realized)	(2,847		)	—
Balance at end of period	$	4,546		$	5,305

2. Securities (continued)

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

	As of September 30, 2012					As of December 31, 2011
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Available for sale
U. S. government agencies
Bonds
Unrealized loss for less than twelve months	1	$	24,969	$	26	—	$	—	$	—
Unrealized loss for more than twelve months	—	—		—		—	—		—
	1	24,969		26		—	—		—
Mortgage-backed securities
Unrealized loss for less than twelve months	—	—		—		—	—		—
Unrealized loss for more than twelve months	—	—		—		1	4,404		83
	—	—		—		1	4,404		83
Collateralized mortgage obligations
Unrealized loss for less than twelve months	8	33,666		47		15	106,887		1,083
Unrealized loss for more than twelve months	1	6,568		2		1	552		1
	9	40,234		49		16	107,439		1,084
States and political subdivisions
Unrealized loss for less than twelve months	—	—		—		3	635		13
Unrealized loss for more than twelve months	1	133		3		4	4,380		35
	1	133		3		7	5,015		48
Auction rate bonds
Unrealized loss for less than twelve months	—	—		—		—	—		—
Unrealized loss for more than twelve months	1	16,841		155		3	44,544		1,998
	1	16,841		155		3	44,544		1,998
Total available for sale
Unrealized loss for less than twelve months	9	58,635		73		18	107,522		1,096
Unrealized loss for more than twelve months	3	23,542		160		9	53,880		2,117
	12	$	82,177	$	233	27	$	161,402	$	3,213

Held to maturity
U. S. government agencies
Mortgage-backed securities
Unrealized loss for less than twelve months	1	$	491	$	5	1	$	491	$	6
Unrealized loss for more than twelve months	—	—		—		—	—		—
	1	491		5		1	491		6
Collateralized mortgage obligations
Unrealized loss for less than twelve months	1	3,316		20		1	5,337		88
Unrealized loss for more than twelve months	—	—		—		—	—		—
	1	3,316		20		1	5,337		88
States and political subdivisions
Unrealized loss for less than twelve months	3	1,875		—		—	—		—
Unrealized loss for more than twelve months	1	208		2		6	2,498		10
	4	2,083		2		6	2,498		10
Auction rate bonds
Unrealized loss for less than twelve months	—	—		—		—	—		—
Unrealized loss for more than twelve months	—	—		—		2	10,081		199
	—	—		—		2	10,081		199
Total held to maturity
Unrealized loss for less than twelve months	5	5,682		25		2	5,828		94
Unrealized loss for more than twelve months	1	208		2		8	12,579		209
	6	$	5,890	$	27	10	$	18,407	$	303

2. Securities (continued)

As noted above, the Bank has incurred OTTI on securities classified as available for sale. Subject to the discussion of OTTI above, management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Bank expects to receive full value for the securities. As of September 30, 2012, management does not intend to sell any of the securities classified as available for sale in the previous table and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. As of September 30, 2012 and December 31, 2011, the securities included in the previous table represented 11.48% and 22.77%, respectively, of the fair value of the Bank’s securities portfolio. At September 30, 2012 and December 31, 2011, total impairment represented 0.30% and 1.96%, respectively, of the fair value of the underlying securities, and 0.03% 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 September 30, 2012.

The amortized cost and fair value of securities, excluding trading securities, as of September 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	$	3,095	$	3,195	$	4,766	$	4,833
Due after one year through five years	12,055		12,277		3,915		4,038
Due after five years through ten years	664		689		14,140		14,872
Due after ten years	459,964		466,707		78,526		86,503
	475,778		482,868		101,347		110,246

Mortgage-backed securities	33,275		36,811		5,209		5,653
Collateralized mortgage obligations	118,866		120,159		10,915		11,118
	$	627,919	$	639,838	$	117,471	$	127,017

Excluding the auction rate bonds described previously, the Bank did not sell securities in either of the three or nine months ended September 30, 2012. For the three and nine months ended September 30, 2011, the Bank received proceeds from the sale of available for sale securities of $152.3 million and $228.5 million, respectively, and realized gross gains of $0.3 million and $1.5 million, respectively. The Bank determines the cost of securities sold by specific identification.

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

Securities with a carrying amount of approximately $472.5 million and $685.9 million (fair value of approximately $493.2 million and $701.8 million) at September 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 September 30, 2012 and December 31, 2011, are as follows (in thousands):

	September 30, 2012			December 31, 2011
Commercial and industrial
Commercial	$	1,485,353		$	1,473,564
Lease financing	27,185			32,604
Securities (primarily margin loans)	264,050			319,895
Real estate	1,183,969			1,221,726
Construction and land development	271,524			273,949
Consumer	27,664			29,429
	3,259,745			3,351,167
Allowance for loan losses	(59,453		)	(67,495		)
	$	3,200,292		$	3,283,672

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

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

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

3. Loans and Allowance for Loan Losses (continued)

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

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
As of September 30, 2012
Commercial and industrial
Secured by receivables	$	13,062	$	6,065	$	6,016	$	12,081	$	468
Secured by equipment	5,939		217		5,722		5,939		643
Unsecured	6,559		289		1,423		1,712		786
Lease financing	791		791		—		791		—
All other commercial and industrial	4,126		1,279		2,847		4,126		427
Real estate
Secured by commercial properties	18,468		6,710		9,683		16,393		970
Secured by residential properties	9,130		7,153		—		7,153		—
Construction and land development
Residential construction loans	949		949		—		949		—
Commercial construction loans and land development	26,512		17,871		—		17,871		—
Consumer	—		—		—		—		—
	$	85,536	$	41,324	$	25,691	$	67,015	$	3,294

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
As of December 31, 2011
Commercial and industrial
Secured by receivables	$	13,991	$	11,037	$	1,869	$	12,906	$	392
Secured by equipment	263		263		—		263		—
Unsecured	6,753		192		2,561		2,753		837
Lease financing	1,561		1,561		—		1,561		—
All other commercial and industrial	2,848		1,963		885		2,848		—
Real estate
Secured by commercial properties	32,888		16,547		12,035		28,582		2,664
Secured by residential properties	10,812		9,519		—		9,519		—
Construction and land development
Residential construction loans	1,662		1,662		—		1,662		—
Commercial construction loans and land development	28,547		6,690		17,920		24,610		4,894
Consumer	—		—		—		—		—
	$	99,325	$	49,434	$	35,270	$	84,704	$	8,787

3. Loans and Allowance for Loan Losses (continued)

Average investment in impaired loans for the three and nine months ended September 30, 2012 and 2011 are summarized by class in the following table (in thousands):

	Three Months Ended September 30, 2012		Nine Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2011
Commercial and industrial
Secured by receivables	$	10,271	$	12,494	$	6,866	$	10,914
Secured by equipment	3,125		3,101		392		575
Unsecured	1,703		2,233		4,899		2,249
Lease financing	834		1,176		1,886		3,932
All other commercial and industrial	3,156		3,487		898		4,391
Real estate
Secured by commercial properties	17,577		22,488		18,553		17,439
Secured by residential properties	8,182		8,336		8,515		9,713
Construction and land development
Residential construction loans	1,069		1,306		847		1,354
Commercial construction loans and land development	18,016		21,241		43,624		44,982
Consumer	—		—		116		118
	$	63,933	$	75,862	$	86,596	$	95,667

Interest income recorded on accruing impaired loans was approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively, and $0.3 million and $0.6 million for the three and nine months ended September 30, 2011, respectively. Interest income recorded on non-accrual loans for the three and nine months ended September 30, 2012 and 2011 was nominal. At September 30, 2012, PlainsCapital had no unadvanced commitments to borrowers whose loans have been restructured in TDRs.

3. Loans and Allowance for Loan Losses (continued)

Non-accrual loans as of September 30, 2012 and December 31, 2011 are summarized by class in the following table (in thousands):

	September 30, 2012		December 31, 2011
Commercial and industrial
Secured by receivables	$	12,081	$	12,707
Secured by equipment	5,939		263
Unsecured	1,694		2,720
Lease financing	791		1,561
All other commercial and industrial	2,847		1,000
Real estate
Secured by commercial properties	13,708		26,611
Secured by residential properties	6,231		4,612
Construction and land development
Residential construction loans	949		1,465
Commercial construction loans and land development	17,651		24,376
Consumer	—		—
	$	61,891	$	75,315

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

3. Loans and Allowance for Loan Losses (continued)

Information regarding TDRs granted for the nine months ended September 30, 2012 and 2011 is shown in the following tables. There were no TDRs granted for the three months ended September 30, 2012 or 2011.

	Recorded Investment in Loans Modified by
	A/B Note		Interest Rate Adjustment		Payment Term Extension		Total Modifications
Nine Months Ended September 30, 2012
Commercial and industrial
Secured by receivables	$	—	$	—	$	498	$	498
Secured by equipment	—		—		—		—
Unsecured	—		—		—		—
Lease financing	—		—		—		—
All other commercial and industrial	—		—		—		—
Real estate	—		—		—		—
Secured by commercial properties	—		—		2,370		2,370
Secured by residential properties	—		—		1,548		1,548
Construction and land development	—		—		—		—
Residential construction loans	—		—		949		949
Commercial construction loans and land development	—		—		—		—
Consumer	—		—		—		—
	$	—	$	—	$	5,365	$	5,365

	Recorded Investment in Loans Modified by
	A/B Note		Interest Rate Adjustment		Payment Term Extension		Total Modifications
Nine Months Ended September 30, 2011
Commercial and industrial
Secured by receivables	$	—	$	—	$	—	$	—
Secured by equipment	—		—		—		—
Unsecured	—		—		2,666		2,666
Lease financing	—		—		—		—
All other commercial and industrial	246		—		1,621		1,867
Real estate	—		—		—		—
Secured by commercial properties	—		—		—		—
Secured by residential properties	203		—		—		203
Construction and land development	—		—		—		—
Residential construction loans	—		647		—		647
Commercial construction loans and land development	478		—		—		478
Consumer	—		—		—		—
	$	927	$	647	$	4,287	$	5,861

3. Loans and Allowance for Loan Losses (continued)

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

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

	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial and industrial
Secured by receivables	—	$	—	—	$	—
Secured by equipment	—	—		1	228
Unsecured	—	—		—	—
Lease financing	—	—		—	—
All other commercial and industrial	—	—		—	—
Real estate	—	—		—	—
Secured by commercial properties	—	—		—	—
Secured by residential properties	—	—		—	—
Construction and land development	—	—		—	—
Residential construction loans	—	—		—	—
Commercial construction loans and land development	3	16,671		4	16,910
Consumer	—	—		—	—
	3	$	16,671	5	$	17,138

3. Loans and Allowance for Loan Losses (continued)

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

	Loans Past Due 30-89 Days		Loans Past Due 90 Days or More		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans Past Due 90 Days or More
As of September 30, 2012
Commercial and industrial
Secured by receivables	$	2,986	$	3,241	$	6,227	$	679,690	$	685,917	$	—
Secured by equipment	192		182		374		183,773		184,147		—
Unsecured	150		—		150		120,468		120,618		—
Lease financing	779		791		1,570		25,615		27,185		—
All other commercial and industrial	179		15		194		758,527		758,721		15
Real estate
Secured by commercial properties	1,414		1,177		2,591		910,172		912,763		—
Secured by residential properties	1,874		2,351		4,225		266,981		271,206		—
Construction and land development
Residential construction loans	—		—		—		39,732		39,732		—
Commercial construction loans and land development	589		16,966		17,555		214,237		231,792		—
Consumer	76		—		76		27,588		27,664		—
	$	8,239	$	24,723	$	32,962	$	3,226,783	$	3,259,745	$	15

	Loans Past Due 30-89 Days		Loans Past Due 90 Days or More		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans Past Due 90 Days or More
As of December 31, 2011
Commercial and industrial
Secured by receivables	$	2,168	$	7,961	$	10,129	$	685,075	$	695,204	$	—
Secured by equipment	1,151		218		1,369		133,290		134,659		—
Unsecured	34		8		42		113,481		113,523		—
Lease financing	2,965		1,561		4,526		28,078		32,604		—
All other commercial and industrial	5,119		968		6,087		843,986		850,073		—
Real estate
Secured by commercial properties	531		19,105		19,636		921,613		941,249		—
Secured by residential properties	3,604		3,924		7,528		272,949		280,477		—
Construction and land development
Residential construction loans	1,745		—		1,745		46,810		48,555		—
Commercial construction loans and land development	43		24,164		24,207		201,187		225,394		—
Consumer	79		—		79		29,350		29,429		—
	$	17,439	$	57,909	$	75,348	$	3,275,819	$	3,351,167	$	—

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

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

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

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

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 September 30, 2012 and December 31, 2011 by class (in thousands):

	Pass		Special Mention		Substandard		Total
As of September 30, 2012
Commercial and industrial
Secured by receivables	$	654,174	$	8,320	$	23,423	$	685,917
Secured by equipment	174,922		1,588		7,637		184,147
Unsecured	105,724		166		14,728		120,618
Lease financing	26,185		—		1,000		27,185
All other commercial and industrial	750,296		324		8,101		758,721
Real estate
Secured by commercial properties	890,374		925		21,464		912,763
Secured by residential properties	262,339		306		8,561		271,206
Construction and land development
Residential construction loans	38,783		—		949		39,732
Commercial construction loans and land development	211,720		—		20,072		231,792
Consumer	27,664		—		—		27,664
	$	3,142,181	$	11,629	$	105,935	$	3,259,745

	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 September 30, 2012 and December 31, 2011 is shown in the following table (in thousands).

	September 30, 2012			December 31, 2011
Future minimum lease payments	$	27,791		$	33,565
Unguaranteed residual value	141			136
Guaranteed residual value	2,113			2,333
Initial direct costs, net of amortization	69			79
Unearned income	(2,929		)	(3,509		)
	$	27,185		$	32,604

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

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

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

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

3. Loans and Allowance for Loan Losses (continued)

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

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

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

	Commercial and Industrial			Real Estate			Construction and Land Development			Consumer			Total
Three Months Ended September 30, 2012
Balance at beginning of period	$	36,536		$	14,012		$	9,357		$	105		$	60,010
Provision charged to operations	1,920			1,151			(274		)	79			2,876
Loans charged off	(2,354		)	(1,414		)	(21		)	(8		)	(3,797		)
Recoveries on charged off loans	328			9			19			8			364
Balance at end of period	$	36,430		$	13,758		$	9,081		$	184		$	59,453

	Commercial and Industrial			Real Estate			Construction and Land Development			Consumer			Total
Nine Months Ended September 30, 2012
Balance at beginning of period	$	38,196		$	15,703		$	13,268		$	328		$	67,495
Provision charged to operations	7,128			1,135			387			(134		)	8,516
Loans charged off	(9,993		)	(3,435		)	(4,736		)	(39		)	(18,203		)
Recoveries on charged off loans	1,099			355			162			29			1,645
Balance at end of period	$	36,430		$	13,758		$	9,081		$	184		$	59,453

	Commercial and Industrial			Real Estate			Construction and Land Development			Consumer			Unallocated		Total
Three Months Ended September 30, 2011
Balance at beginning of period	$	42,162		$	10,851		$	14,859		$	425		$	11	$	68,308
Provision charged to operations	(1,093		)	1,016			4,557			(7		)	27		4,500
Loans charged off	(1,919		)	(539		)	(2,724		)	(62		)	—		(5,244		)
Recoveries on charged off loans	316			91			34			11			—		452
Balance at end of period	$	39,466		$	11,419		$	16,726		$	367		$	38	$	68,016

	Commercial and Industrial			Real Estate			Construction and Land Development			Consumer			Unallocated		Total
Nine Months Ended September 30, 2011
Balance at beginning of period	$	41,687		$	11,732		$	11,227		$	523		$	—	$	65,169
Provision charged to operations	6,711			738			10,837			(86		)	38		18,238
Loans charged off	(9,649		)	(1,314		)	(5,536		)	(142		)	—		(16,641		)
Recoveries on charged off loans	717			263			198			72			—		1,250
Balance at end of period	$	39,466		$	11,419		$	16,726		$	367		$	38	$	68,016

3. Loans and Allowance for Loan Losses (continued)

As of September 30, 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		Total
As of September 30, 2012
Loans individually evaluated for impairment	$	24,649	$	23,546	$	18,820	$	—	$	67,015
Loans collectively evaluated for impairment	1,751,939		1,160,423		252,704		27,664		3,192,730
	$	1,776,588	$	1,183,969	$	271,524	$	27,664	$	3,259,745

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

	Commercial and Industrial		Real Estate		Construction and Land Development		Consumer		Total
As of September 30, 2012
Loans individually evaluated for impairment	$	2,324	$	970	$	—	$	—	$	3,294
Loans collectively evaluated for impairment	34,106		12,788		9,081		184		56,159
	$	36,430	$	13,758	$	9,081	$	184	$	59,453

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

	September 30, 2012		December 31, 2011
Noninterest-bearing demand	$	240,240	$	328,858
Interest-bearing:
NOW accounts	117,608		117,395
Money market	2,100,211		2,090,172
Brokered—money market	265,265		224,925
Demand	71,138		53,650
Savings	187,313		171,088
Time—$100,000 and over	714,474		840,837
Time—other	191,962		216,836
Brokered—time	437,876		202,445
	$	4,326,087	$	4,246,206

5. Short-Term Borrowings

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

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

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):

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

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

5. Short-Term Borrowings (continued)

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):

	Nine Months Ended September 30,
	2012			2011
Average balance during the period	$	252,099		$	28,187
Average interest rate during the period	0.15		%	0.39		%

	September 30, 2012			December 31, 2011
Average interest rate at end of period	0.13		%	0.10		%

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

6. Notes Payable

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

	September 30, 2012		December 31, 2011
Term note with JPMorgan Chase, due July 31, 2013. Principal payments of $0.9 million and interest are payable quarterly.	$	12,390	$	15,930
Revolving credit line with JPMorgan Chase not to exceed $5.0 million. Facility matures July 31, 2013 with interest payable quarterly.	5,000		5,000
Term note with JPMorgan Chase, due July 31, 2013. Principal payment of $0.5 million is due annually and interest is payable semi-annually.	2,000		2,500
Term note with JPMorgan Chase, due October 27, 2015. Principal payments of $25,000 and interest are payable quarterly.	375		450
Subordinated note with JPMorgan Chase, not to exceed $20 million. Facility matures October 27, 2015 with principal payments of $1.0 million and interest payable quarterly.	15,000		18,000
First Southwest nonrecourse notes, due January 25, 2035 with interest payable quarterly.	10,855		13,086
	$	45,620	$	54,966

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

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

7. Income Taxes

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

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

8. Commitments and Contingencies

The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $1.0 million and $33.0 million at September 30, 2012 and December 31, 2011, respectively.

Legal Matters

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

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

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

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

Other Contingencies

The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the loans from the investors or reimburses the investors’ losses (a “make-whole” payment). The mortgage origination segment has established an indemnification liability for such probable losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. The liability for the indemnification reserve totaled $17.4 million as of September 30, 2012 and $8.1 million as of December 31, 2011.

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

9. Financial Instruments with Off-Balance Sheet Risk

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

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 September 30, 2012. The Bank had outstanding standby letters of credit of $45.9 million at September 30, 2012.

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

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

10. Stock-Based Compensation

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

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

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

Stock-based compensation cost was approximately $0.9 million and $0.7 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, stock-based compensation cost was $2.6 million and $1.8 million, respectively.

At September 30, 2012, unrecognized cost related to unvested restricted stock and restricted stock units was $3.9 million and $8.4 million, respectively. The vesting of the unvested restricted stock and restricted stock units will automatically accelerate in full under certain conditions. If and when our common stock is listed and traded on an exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the entire unrecognized cost related to unvested restricted stock would be recognized in noninterest expense immediately. Upon a change in control of PlainsCapital, the entire unrecognized cost related to both unvested restricted stock and restricted stock units would be recognized in noninterest expense immediately. As discussed in Note 1, the Merger, if completed, would constitute a change in control of PlainsCapital.

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

	2012				2012
	Unvested Restricted Stock		Weighted Average Grant Date Fair Value		Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding, January 1	528,532		$	11.45	590,149		$	11.91
Granted	7,497		15.18		344,811		14.00
Vested	(84,753	)	11.33		—		—
Cancellations and expirations	—		—		(3,500	)	12.07
Outstanding, September 30	451,276		$	11.53	931,460		$	12.68

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

	2012
	Shares		Weighted Average Exercise Price
Outstanding, January 1	647,053		$	10.04
Exercised	(185,924	)	8.15
Cancellations and expirations	(47,913	)	9.89
Outstanding, September 30	413,216		$	10.91

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 September 30, 2012
	Required							Actual
	Amount			Ratio				Amount					Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	236,699		4		%		$				592,538	10.01		%
Tier 1 capital (to risk-weighted assets)	187,742			4		%		592,538					12.62		%
Total capital (to risk-weighted assets)	375,484			8		%		651,227					13.87		%

PlainsCapital Corporation:
Tier 1 capital (to average assets)	$	237,168		4		%		$			618,121		10.43		%
Tier 1 capital (to risk-weighted assets)	188,226			4		%		618,121					13.14		%
Total capital (to risk-weighted assets)	376,451			8		%		685,960					14.58		%

	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	%

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 September 30, 2012
	Required				Actual
	Amount		Ratio		Amount		Ratio
PlainsCapital Bank:
Tier 1 capital (to average assets)	$	295,874	5	%	$	592,538	10.01	%
Tier 1 capital (to risk-weighted assets)	281,613		6	%	592,538		12.62	%
Total capital (to risk-weighted assets)	469,355		10	%	651,227		13.87	%

	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 September 30, 2012, FSC had net capital of $62.8 million; the minimum net capital requirement was $3.8 million; net capital maintained by FSC was 33% of aggregate debits; and net capital in excess of the minimum requirement was $59.0 million.

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

12. Shareholders’ Equity

The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At September 30, 2012, approximately $104.1 million of retained earnings was available for dividend declaration without prior approval from the Federal Reserve.

At September 30, 2012, $114.1 million of our Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”) was outstanding under the Small Business Lending Fund program (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.

12. Shareholders’ Equity (continued)

The dividend rate on the Series C Preferred Stock was 2.626% for the three months ended September 30, 2012. The dividend rate is 2.730% for the period from October 1, 2012 to December 31, 2012 as a result of a slight decrease in the level of QSBL at June 30, 2012, compared to the Baseline.

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

13. Assets Segregated for Regulatory Purposes

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

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

14. Broker-Dealer and Clearing Organization Receivables and Payables

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

	September 30,		December 31,
	2012		2011
Receivables
Securities borrowed	$	101,147	$	94,044
Securities failed to deliver	31,447		11,476
Clearing organizations	41,960		6,141
Due from dealers	41		29
	$	174,595	$	111,690
Payables
Securities loaned	$	143,529	$	120,658
Correspondents	43,905		56,645
Securities failed to receive	30,194		8,114
Clearing organizations	1,822		1,066
	$	219,450	$	186,483

15. Fair Value Measurements

Fair Value Measurements and Disclosures

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

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 September 30, 2012, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $1.335 billion, while the unpaid principal balance of those loans was $1.292 billion. At December 31, 2011, the aggregate fair value of PrimeLending loans held for sale accounted for under the Fair Value Option was $775.3 million, while the unpaid principal balance 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 September 30, 2012, the Bank held certain subordinated 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.

15. Fair Value Measurements (continued)

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

	Liquidity Spread (bps)			Credit Spread (bps)			Workout (Yrs)
	Low	High	Weighted Avg	Low	High	Weighted Avg	Low	High	Weighted Avg
Auction Rate Bonds	200	250	225	236	1001	516	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
	Rate Bonds
Balance, January 1, 2012	$	44,544
Other-than-temporary impairment losses recognized in earnings	(2,088		)
Realized loss recognized in earnings (Realized loss on sale of securities)	(2,601		)
Unrealized gains in other comprehensive income, net	2,061
Transfers from held to maturity	45,396
Sale of securities	(63,155		)
Balance, September 30, 2012	$	24,157

The following table presents information regarding financial assets and liabilities measured at fair value on a recurring basis.

	At September 30, 2012
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Loans held for sale	$	—	$	1,334,898	$	—	$	1,334,898
Securities available for sale	—		615,681		24,157		639,838
Trading securities	—		45,156		—		45,156
Derivative assets	—		41,282		—		41,282
Mortgage servicing asset	—		—		899		899
Time deposits	—		1,080		—		1,080
Trading liabilities	—		3,474		—		3,474
Derivative liabilities	—		25,656		—		25,656

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

15. Fair Value Measurements (continued)

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

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

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

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

Impaired Loans — PlainsCapital reports impaired loans at fair value through allocations of the allowance for loan losses. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At September 30, 2012, loans with a carrying amount of $25.7 million had been reduced by allocations of the allowance for loan losses of $3.3 million, resulting in a reported fair value of $22.4 million.

Other Real Estate Owned — PlainsCapital reports other real estate owned at fair value less estimated cost to sell. Any excess of recorded investment over fair value less cost to sell is charged against the allowance for loan losses when property is initially transferred to other real estate. Subsequent to the initial transfer to other real estate, valuation adjustments are charged against earnings. PlainsCapital determines fair value using Level 2 inputs consisting of independent appraisals. At September 30, 2012, the estimated fair value of other real estate owned was $26.3 million.

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 September 30, 2012
			Estimated Fair Value
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Financial assets
Cash and short-term investments	$	410,743	$	410,743	$	—	$	—	$	410,743
Loans held for sale	1,335,687		—		1,335,687		—		1,335,687
Securities	802,465		—		787,854		24,157		812,011
Loans, net	3,200,292		—		22,397		3,200,312		3,222,709
Broker-dealer and clearing organization receivables	174,595		—		174,595		—		174,595

Fee award receivable	17,107		—		17,107		—		17,107
Cash surrender value of life insurance policies	23,941		—		23,941		—		23,941
Interest rate swaps, interest rate lock commitments (“IRLCs”) and forward purchase commitments	41,282		—		41,282		—		41,282
Mortgage servicing asset	899		—		—		899		899
Accrued interest receivable	15,557		—		15,557		—		15,557

Financial liabilities
Deposits	4,326,087		—		4,352,132		—		4,352,132
Broker-dealer and clearing organization payables	219,450		—		219,450		—		219,450
Other trading liabilities	3,474		—		3,474		—		3,474
Short-term borrowings	898,344		—		898,344		—		898,344
Debt	112,632		—		112,632		—		112,632

Forward purchase commitments	25,656		—		25,656		—		25,656
Accrued interest payable	1,641		—		1,641		—		1,641

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

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

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

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

16. Derivative Financial Instruments

The Bank, FSC 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 and FSC provide IRLCs to their customers and execute forward purchase commitments to sell mortgage loans. The fair values of both IRLCs and purchase commitments are recorded in other assets or other liabilities, as appropriate. Changes in the fair values of these derivative instruments produced a net loss of $2.7 million for the three months ended September 30, 2012, and a net gain of $1.2 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012 and 2011, changes in the fair value of these instruments produced net gains of $8.9 million and $4.0 million, respectively. The net gains or losses were recorded as a component of gain on sale of loans or in other noninterest income, as appropriate.

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

	At September 30, 2012					At December 31, 2011
	Notional		Estimated			Notional		Estimated
	Amount		Fair Value			Amount		Fair Value
Derivative instruments
IRLCs	$	1,477,203	$	40,119		$	687,890	$	10,096
Interest rate swaps	1,969		42			1,969		82
Forward purchase commitments	1,633,171		(24,534		)	675,794		(3,339		)

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.

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

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

Income Statement Data

	Three Months Ended September 30, 2012
	Banking		Mortgage Origination			Financial Advisory			Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	59,364	$	10,666		$	3,785		$	(14,490	)	$	59,325
Interest expense	4,687		20,997			890			(20,676		)	5,898
Net interest income (expense)	54,677		(10,331		)	2,895			6,186			53,427
Provision for loan losses	3,000		—			(124		)	—			2,876
Noninterest income	8,328		180,625			25,639			(6,411		)	208,181
Noninterest expense	33,091		142,289			26,632			(225		)	201,787
Income before taxes	$	26,914	$	28,005		$	2,026		$	—		$	56,945

	Nine Months Ended September 30, 2012
	Banking		Mortgage Origination			Financial Advisory			Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	168,929	$	24,811		$	12,282		$	(33,540	)	$	172,482
Interest expense	15,934		48,781			2,941			(47,795		)	19,861
Net interest income (expense)	152,995		(23,970		)	9,341			14,255			152,621
Provision for loan losses	8,617		—			(101		)	—			8,516
Noninterest income	26,129		437,828			77,635			(14,886		)	526,706
Noninterest expense	100,401		356,629			82,281			(631		)	538,680
Income before taxes	$	70,106	$	57,229		$	4,796		$	—		$	132,131

17. Segment and Related Information (continued)

Income Statement Data

	Three Months Ended September 30, 2011
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	52,935	$	5,872		$	4,245	$	(6,799	)	$	56,253
Interest expense	7,882		9,899			829		(9,550		)	9,060
Net interest income (expense)	45,053		(4,027		)	3,416		2,751			47,193
Provision for loan losses	4,500		—			—		—			4,500
Noninterest income	4,699		108,279			25,783		(2,855		)	135,906
Noninterest expense	33,890		92,467			26,092		(328		)	152,121
Income before taxes	$	11,362	$	11,785		$	3,107	$	224		$	26,478

	Nine Months Ended September 30, 2011
	Banking		Mortgage Origination			Financial Advisory		Intercompany Eliminations			PlainsCapital Consolidated
Interest income	$	153,460	$	15,175		$	11,569	$	(17,230	)	$	162,974
Interest expense	24,915		26,372			2,365		(25,481		)	28,171
Net interest income (expense)	128,545		(11,197		)	9,204		8,251			134,803
Provision for loan losses	18,250		(12		)	—		—			18,238
Noninterest income	21,080		249,069			67,245		(8,559		)	328,835
Noninterest expense	89,297		221,506			73,015		(726		)	383,092
Income before taxes	$	42,078	$	16,378		$	3,434	$	418		$	62,308

17. Segment and Related Information (continued)

Balance Sheet Data

	September 30, 2012
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	350,998	$	81,632	$	4,195	$	(81,523	)	$	355,302
Loans held for sale	789		1,334,898		—		—			1,335,687
Securities	757,798		—		44,667		—			802,465
Loans, net	4,153,706		1,607		260,115		(1,215,136		)	3,200,292
Broker-dealer and clearing organization receivables	—		—		174,595		—			174,595
Investment in subsidiaries	279,122		—		—		(279,122		)	—
Goodwill and other intangible assets, net	7,862		23,706		10,222		—			41,790
Other assets	242,606		54,143		116,606		26,529			439,884
Total assets	$	5,792,881	$	1,495,986	$	610,400	$	(1,549,252	)	$	6,350,015
Deposits	$	4,327,923	$	—	$	73,332	$	(75,168	)	$	4,326,087
Broker-dealer and clearing organization payables	—		—		219,450		—			219,450
Short-term borrowings	741,062		—		157,282		—			898,344
Notes payable	—		1,235,487		17,213		(1,207,080		)	45,620
Junior subordinated debentures	—		—		—		67,012			67,012
Other liabilities	83,675		106,795		53,184		(53,876		)	189,778
PlainsCapital Corporation shareholders’ equity	640,221		151,207		89,939		(280,140		)	601,227
Noncontrolling interest	—		2,497		—		—			2,497
Total liabilities and shareholders’ equity	$	5,792,881	$	1,495,986	$	610,400	$	(1,549,252	)	$	6,350,015

	December 31, 2011
	Banking		Mortgage Origination		Financial Advisory		All Other and Eliminations			PlainsCapital Consolidated
Cash and due from banks	$	341,821	$	48,715	$	4,424	$	(50,313	)	$	344,647
Loans held for sale	1,061		775,311		—		—			776,372
Securities	783,586		—		56,167		—			839,753
Loans, net	3,685,013		1,848		316,992		(720,181		)	3,283,672
Broker-dealer and clearing organization receivables	—		—		111,690		—			111,690
Investment in subsidiaries	230,389		—		—		(230,389		)	—
Goodwill and other intangible assets, net	7,862		23,706		15,697		—			47,265
Other assets	186,737		25,850		51,873		32,161			296,621
Total assets	$	5,236,469	$	875,430	$	556,843	$	(968,722	)	$	5,700,020
Deposits	$	4,238,662	$	—	$	68,778	$	(61,234	)	$	4,246,206
Broker-dealer and clearing organization payables	—		—		186,483		—			186,483
Short-term borrowings	347,559		—		128,880		—			476,439
Notes payable	—		705,715		19,432		(670,181		)	54,966
Junior subordinated debentures	—		—		—		67,012			67,012
Other liabilities	68,357		57,481		64,088		(40,296		)	149,630
PlainsCapital Corporation shareholders’ equity	581,891		110,311		89,182		(264,353		)	517,031
Noncontrolling interest	—		1,923		—		330			2,253
Total liabilities and shareholders’ equity	$	5,236,469	$	875,430	$	556,843	$	(968,722	)	$	5,700,020

18. Earnings per Common Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Income applicable to PlainsCapital Corporation common shareholders	$	35,522	$	13,084	$	80,070	$	33,305
Less: income applicable to participating securities	1,225		485		2,769		1,209
Income applicable to PlainsCapital Corporation common shareholders for basic earnings per common share	$	34,297	$	12,599	$	77,301	$	32,096
Weighted-average shares outstanding	33,248,474		32,872,729		33,152,878		32,831,703
Less: participating securities included in weighted-average shares outstanding	1,146,897		1,219,727		1,147,122		1,193,934
Weighted-average shares outstanding for basic earnings per common share	32,101,577		31,653,002		32,005,756		31,637,769
Basic earnings per common share	$	1.07	$	0.40	$	2.42	$	1.02
Income applicable to PlainsCapital Corporation common shareholders	$	35,522	$	13,084	$	80,070	$	33,305
Weighted-average shares outstanding	32,101,577		31,653,002		32,005,756		31,637,769
Dilutive effect of contingently issuable shares due to First Southwest acquisition	1,398,904		1,562,651		1,398,904		1,562,651
Dilutive effect of stock options and non-vested stock awards	858,926		314,819		694,441		246,337
Weighted-average shares outstanding for diluted earnings per common share	34,359,407		33,530,472		34,099,101		33,446,757
Diluted earnings per common share	$	1.03	$	0.39	$	2.35	$	0.99

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 152,679 for the three and nine months ended September 30, 2011. The exercise price of the excluded options exceeded the estimated average market price of PlainsCapital stock in the periods shown. Accordingly, the assumed exercise of the excluded options would have been antidilutive. No such options were excluded from the calculation of weighted average shares outstanding for the three and nine months ended September 30, 2012.

19. Recently Adopted Accounting Standards

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

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

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.

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