UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

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

For ~~the~~the quarterly period ended ~~September~~June 30, ~~2014~~2015

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

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

Commission File Number: 1-31987

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)

~~Maryland~~
Maryland		84-1477939
(State or other jurisdiction of incorporation or ~~organization)~~		(I.R.S. Employer Identification No.)
organization)

200 Crescent Court, Suite 1330
~~Dallas, TX~~
Dallas, TX		75201
(Address of principal executive offices)		(Zip Code)

(214) 855-2177

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐

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

~~Large accelerated filer~~ x
Large accelerated filer ☒		Accelerated filer £☐

Non-accelerated filer ☐ £		~~Smaller reporting company~~ £
(Do not check if a smaller reporting company)		Smaller reporting company ☐

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

The number of shares of the ~~registrant’s~~registrant's common stock outstanding at ~~November 5, 2014~~July 29, 2015 was ~~90,181,888.~~99,517,560.

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2014~~2015

TABLE OF CONTENTS


PART I –— FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income ~~(Loss)~~	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92

Item 4.	Controls and Procedures	95


~~Item 2.~~PART II — OTHER INFORMATION		~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
		51
Item 1.	Legal Proceedings	96

Item 3.1A.	~~Quantitative and Qualitative Disclosures About Market~~ Risk Factors	86 96

Item 4.2.	~~Controls~~Unregistered Sales of Equity Securities and ~~Procedures~~Use of Proceeds	88 97

~~PART II – OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~	88

~~Item 1A.~~	~~Risk Factors~~	88

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	92

Item 6.	Exhibits	92 98

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE ~~SHEETS~~SHEETS

(in thousands, except share and per share data)

(Unaudited)

September 30,

December 31,

2014

2013

(Unaudited)

Assets

Cash and due from banks

$
635,933

$
713,099

Federal funds sold and securities purchased under agreements to resell Securities:

11,655

32,924

Trading, at fair value

66,102

58,846

Available for sale, at fair value (amortized cost of $1,152,117 and $1,256,862, respectively)

1,146,101

1,203,143

Held to maturity, at amortized cost (fair value of $119,901)

120,139

—

1,332,342

1,261,989

Loans held for sale

1,272,813

1,089,039

Non-covered loans, net of unearned income

3,768,843

3,514,646

Allowance for non-covered loan losses

(39,027
)
(33,241
)
Non-covered loans, net

3,729,816

3,481,405

Covered loans, net of allowance of $3,761 and $1,061, respectively

747,514

1,005,308

Broker-dealer and clearing organization receivables

223,679

119,317

Insurance premiums receivable

27,155

25,597

Deferred policy acquisition costs

21,754

20,991

Premises and equipment, net

205,734

200,706

FDIC indemnification asset

149,788

188,291

Covered other real estate owned

126,798

142,833

Mortgage servicing rights

41,907

20,149

Other assets

339,197

279,745

Goodwill

251,808

251,808

Other intangible assets, net

62,509

70,921

Total assets

$
9,180,402

$
8,904,122

Liabilities and Stockholders’ Equity

Deposits:

Noninterest-bearing

$
1,988,066

$
1,773,749

Interest-bearing

4,248,216

4,949,169

Total deposits

6,236,282

6,722,918

Broker-dealer and clearing organization payables

243,835

129,678

Reserve for losses and loss adjustment expenses

32,460

27,468

Unearned insurance premiums

93,500

88,422

Short-term borrowings

845,984

342,087

Notes payable

55,684

56,327

Junior subordinated debentures

67,012

67,012

Other liabilities

181,901

158,288

Total liabilities

7,756,658

7,592,200

Commitments and contingencies (see Notes 11 and 12)

Stockholders’ equity:

Hilltop stockholders’ equity:

Preferred stock, $0.01 par value, 10,000,000 shares authorized;

Series B, liquidation value per share of $1,000; 114,068 shares issued and outstanding

114,068

114,068

Common stock, $0.01 par value, 125,000,000 and 100,000,000 shares authorized; 90,179,596 and 90,175,688 shares issued and outstanding, respectively

902

902

Additional paid-in capital

1,390,830

1,388,641

Accumulated other comprehensive loss

(3,727
)
(34,863
)
Accumulated deficit

(79,098
)
(157,607
)
Total Hilltop stockholders’ equity

1,422,975

1,311,141

Noncontrolling interest

769

781

Total stockholders’ equity

1,423,744

1,311,922

Total liabilities and stockholders’ equity

$
9,180,402

$
8,904,122


	June 30,		December 31,
	2015		2014
Assets
Cash and due from banks	$	583,043	$	782,473
Federal funds sold		22,814		30,602
Securities purchased under agreements to resell		79,153		—
Assets segregated for regulatory purposes		188,094		76,013
Securities:
Trading, at fair value		265,429		65,717
Available for sale, at fair value (amortized cost of $765,392 and $924,755 respectively)		763,463		925,535
Held to maturity, at amortized cost (fair value of $313,529 and $118,345, respectively)		312,960		118,209
		1,341,852		1,109,461

Loans held for sale		1,397,617		1,309,693
Non-covered loans, net of unearned income		4,956,969		3,920,476
Allowance for non-covered loan losses		(40,484)		(37,041)
Non-covered loans, net		4,916,485		3,883,435

Covered loans, net of allowance of $934 and $4,611, respectively		493,299		638,029
Broker-dealer and clearing organization receivables		2,070,770		167,884
Premises and equipment, net		206,411		206,991
FDIC indemnification asset		102,381		130,437
Covered other real estate owned		125,510		136,945
Other assets		636,183		458,862
Goodwill		251,808		251,808
Other intangible assets, net		61,778		59,783
Total assets	$	12,477,198	$	9,242,416

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	2,135,988	$	2,076,385
Interest-bearing		4,660,449		4,293,507
Total deposits		6,796,437		6,369,892

Broker-dealer and clearing organization payables		2,048,176		179,042
Short-term borrowings		1,100,025		762,696
Securities sold, not yet purchased, at fair value		135,592		48
Notes payable		245,420		56,684
Junior subordinated debentures		67,012		67,012
Other liabilities		409,904		345,803
Total liabilities		10,802,566		7,781,177
Commitments and contingencies (see Notes 13 and 14)
Stockholders' equity:
Hilltop stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; Series B, liquidation value per share of $1,000; 114,068 shares issued and outstanding at December 31, 2014		—		114,068
Common stock, $0.01 par value, 125,000,000 shares authorized; 99,515,048 and 90,181,888 shares issued and outstanding, respectively		995		902
Additional paid-in capital		1,582,655		1,390,788
Accumulated other comprehensive income (loss)		(1,105)		651
Retained earnings (accumulated deficit)		90,376		(45,957)
Deferred compensation employee stock trust, net		1,182		—
Employee stock trust (29,589 shares, at cost)		(590)		—
Total Hilltop stockholders' equity		1,673,513		1,460,452
Noncontrolling interests		1,119		787
Total stockholders' equity		1,674,632		1,461,239
Total liabilities and stockholders' equity	$	12,477,198	$	9,242,416

See accompanying ~~notes.~~notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013		2015		2014		2015		2014
Interest income:
Loans, including fees	$	80,719	$	68,585	$	252,667	$	198,684	$	96,967	$	92,204	$	184,355	$	171,948
Securities borrowed										9,675		1,878		19,693		3,342
Securities:
Taxable	7,688		7,202		22,894		19,594			6,227		7,618		13,276		15,206
Tax-exempt	1,150		1,052		3,579		3,588			1,557		1,187		3,298		2,429
Federal funds sold and securities purchased under agreements to resell	10		35		43		91
Interest-bearing deposits with banks	303		282		1,215		857
Other	3,347		2,546		9,055		7,660			1,236		1,521		2,709		3,311
Total interest income	93,217		79,702		289,453		230,474			115,662		104,408		223,331		196,236

Interest expense:
Deposits	4,117		3,685		10,972		10,541			3,900		3,096		8,215		6,855
Securities loaned										6,889		927		14,395		1,765
Short-term borrowings	665		384		1,599		1,488			1,143		542		2,167		939
Notes payable	633		2,294		1,913		6,924			2,289		632		2,958		1,280
Junior subordinated debentures	594		591		1,765		1,811			595		587		1,180		1,171
Other	1,448		832		3,577		2,108			179		178		357		359
Total interest expense	7,457		7,786		19,826		22,872			14,995		5,962		29,272		12,369

Net interest income	85,760		71,916		269,627		207,602			100,667		98,446		194,059		183,867
Provision for loan losses	4,033		10,658		12,808		34,952			158		5,533		2,845		8,775
Net interest income after provision for loan losses	81,727		61,258		256,819		172,650			100,509		92,913		191,214		175,092

Noninterest income:
Net realized gains on securities	—		1,142		—		1,142			—		—		4,403		—
Net gains from sale of loans and other mortgage production income	108,621		105,337		293,786		375,464			147,175		106,054		267,720		185,165
Mortgage loan origination fees	17,593		22,091		46,920		63,679			20,958		16,983		35,547		29,327
Net insurance premiums earned	41,821		39,982		122,917		116,045			40,318		40,777		79,885		81,096
Securities commissions and fees										41,137		6,994		84,188		13,992
Investment and securities advisory fees and commissions	24,055		22,310		67,654		70,283			29,665		15,270		54,587		29,607
Bargain purchase gain	—		12,585		—		12,585			—		—		80,657		—
Other	20,045		11,648		54,239		28,408			22,147		17,203		46,626		34,194
Total noninterest income	212,135		215,095		585,516		667,606			301,400		203,281		653,613		373,381

Noninterest expense:
Employees’ compensation and benefits	126,406		119,176		357,280		368,081
Employees' compensation and benefits										200,381		124,445		382,954		230,874
Loss and loss adjustment expenses	22,629		24,631		76,241		93,976			41,241		35,275		60,101		53,612
Policy acquisition and other underwriting expenses	11,571		11,739		34,910		34,169			11,740		11,652		23,414		23,339
Occupancy and equipment, net	25,345		20,974		77,445		60,540			30,842		25,762		60,027		52,100
Other	68,793		40,072		172,709		135,217			69,113		54,078		141,297		103,916
Total noninterest expense	254,744		216,592		718,585		691,983			353,317		251,212		667,793		463,841

Income before income taxes	39,118		59,761		123,750		148,273			48,592		44,982		177,034		84,632
Income tax expense	14,010		20,115		44,658		52,594			18,137		16,294		33,557		30,648

Net income	25,108		39,646		79,092		95,679			30,455		28,688		143,477		53,984
Less: Net income attributable to noncontrolling interest	296		339		583		1,207			405		177		758		287

Income attributable to Hilltop	24,812		39,307		78,509		94,472			30,050		28,511		142,719		53,697
Dividends on preferred stock	1,426		1,133		4,278		2,985			428		1,426		1,854		2,852
Income applicable to Hilltop common stockholders	$	23,386	$	38,174	$	74,231	$	91,487	$	29,622	$	27,085	$	140,865	$	50,845

Earnings per common share:
Basic	$	0.26	$	0.45	$	0.82	$	1.09	$	0.30	$	0.30	$	1.41	$	0.56
Diluted	$	0.26	$	0.43	$	0.82	$	1.05	$	0.30	$	0.30	$	1.40	$	0.56

Weighted average share information:
Basic	89,711		83,493		89,709		83,490			99,486		89,709		99,613		89,708
Diluted	90,558		90,460		90,570		90,251			100,410		90,569		100,507		90,576

See accompanying ~~notes.~~notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (LOSS)~~INCOME

(in thousands)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

Net income

$
25,108

$
39,646

$
79,092

$
95,679

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale, net of tax of $(656), $1,135, $16,565 and $(13,641), respectively

(1,226
)
2,109

31,136

(25,332
)
Comprehensive income

23,882

41,755

110,228

70,347

Less: comprehensive income attributable to noncontrolling interest

296

339

583

1,207

Comprehensive income applicable to Hilltop

$
23,586

$
41,416

$
109,645

$
69,140

Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

Net income

$
30,455

$
28,688

$
143,477

$
53,984

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of tax of $(3,829), $7,638, $625 and $17,221, respectively

(6,855)

13,553

1,058

32,362

Reclassification adjustment for gains included in net income, net of tax of $(1,589)

—

—

(2,814)

—

Comprehensive income

23,600

42,241

141,721

86,346

Less: comprehensive income attributable to noncontrolling interest

405

177

758

287

Comprehensive income applicable to Hilltop

$
23,195

$
42,064

$
140,963

$
86,059

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ ~~EQUITY~~EQUITY

(in thousands)

(Unaudited)

Accumulated

Total

Additional

Other

Hilltop

Total

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

Noncontrolling

Stockholders’

Shares

Amount

Shares

Amount

Capital

Income (Loss)

Deficit

Equity

Interest

Equity

Balance, December 31, 2012

114

$
114,068

83,487

$
835

$
1,304,448

$
8,094

$
(282,949
)
$
1,144,496

$
2,054

$
1,146,550

Net income

—

—

—

—

—

—

94,472

94,472

1,207

95,679

Other comprehensive loss

—

—

—

—

—

(25,332
)
—

(25,332
)
—

(25,332
)
Stock-based compensation expense

—

—

—

—

1,071

—

—

1,071

—

1,071

Common stock issued to board members

—

—

7

—

96

—

—

96

—

96

Issuance of restricted common stock

—

—

465

5

(5
)
—

—

—

—

—

Dividends on preferred stock

—

—

—

—

(2,985
)
—

—

(2,985
)
—

(2,985
)
Cash distributions to noncontrolling interest

—

—

—

—

—

—

—

—

(2,383
)
(2,383
)
Balance, September 30, 2013

114

$
114,068

83,959

$
840

$
1,302,625

$
(17,238
)
$
(188,477
)
$
1,211,818

$
878

$
1,212,696

Balance, December 31, 2013

114

$
114,068

90,176

$
902

$
1,388,641

$
(34,863
)
$
(157,607
)
$
1,311,141

$
781

$
1,311,922

Net income

—

—

—

—

—

—

78,509

78,509

583

79,092

Other comprehensive income

—

—

—

—

—

31,136

—

31,136

—

31,136

Stock-based compensation expense

—

—

—

—

3,316

—

—

3,316

—

3,316

Common stock issued to board members

—

—

7

—

162

—

—

162

—

162

Forfeiture of restricted common stock awards

—

—

(3
)
—

(12
)
—

—

(12
)
—

(12
)
Dividends on preferred stock

—

—

—

—

(4,278
)
—

—

(4,278
)
—

(4,278
)
Issuance of common stock

—

—

—

—

3,001

—

—

3,001

—

3,001

Cash distributions to noncontrolling interest

—

—

—

—

—

—

—

—

(595
)
(595
)
Balance, September 30, 2014

114

$
114,068

90,180

$
902

$
1,390,830

$
(3,727
)
$
(79,098
)
$
1,422,975

$
769

$
1,423,744

Accumulated

Retained

Deferred






Total






Additional

Other

Earnings

Compensation

Employee

Hilltop

Total

Preferred Stock

Common Stock

Paid-in

Comprehensive

(Accumulated

Employee Stock

Stock Trust

Stockholders’

Noncontrolling

Stockholders’

Shares

Amount

Shares

Amount

Capital

Income (Loss)

Deficit)

Trust, Net

Shares

Amount

Equity

Interest

Equity

Balance, December 31, 2013

114

$
114,068

90,176

$
902

$
1,388,641

$
(34,863)

$
(157,607)

$
—

—

$
—

$
1,311,141

$
781

$
1,311,922

Net income

—

—

—

—

—

—

53,697

—

—

—

53,697

287

53,984

Other comprehensive income

—

—

—

—

—

32,362

—

—

—

—

32,362

—

32,362

Stock-based compensation expense

—

—

—

—

1,979

—

—

—

—

—

1,979

—

1,979

Common stock issued to board members

—

—

5

—

115

—

—

—

—

—

115

—

115

Dividends on preferred stock

—

—

—

—

(2,852)

—

—

—

—

—

(2,852)

—

(2,852)

Cash distributions to noncontrolling interest

—

—

—

—

—

—

—

—

—

—

—

(348)

(348)

Balance, June 30, 2014

114

$
114,068

90,181

$
902

$
1,387,883

$
(2,501)

$
(103,910)

$
—

—

$
—

$
1,396,442

$
720

$
1,397,162

Balance, December 31, 2014

114

$
114,068

90,182

$
902

$
1,390,788

$
651

$
(45,957)

$
—

—

$
—

$
1,460,452

$
787

$
1,461,239

Net income

—

—

—

—

—

—

142,719

—

—

—

142,719

758

143,477

Other comprehensive loss

—

—

—

—

—

(1,756)

—

—

—

—

(1,756)

—

(1,756)

Issuance of common stock

—

—

10,101

101

199,932

—

—

—

—

—

200,033

—

200,033

Stock-based compensation expense

—

—

—

—

4,253

—

—

—

—

—

4,253

—

4,253

Common stock issued to board members

—

—

6

—

113

—

—

—

—

—

113

—

113

Dividends on preferred stock

—

—

—

—

—

—

(1,854)

—

—

—

(1,854)

—

(1,854)

Redemption of preferred stock

(114)

(114,068)

—

—

—

—

—

—

—

—

(114,068)

—

(114,068)

Repurchase of common stock

—

—

(774)

(8)

(12,431)

—

(4,532)

—

—

—

(16,971)

—

(16,971)

Deferred compensation plan

—

—

—

—

—

—

—

1,182

30

(590)

592

—

592

Cash distributions to noncontrolling interest

—

—

—

—

—

—

—

—

—

—

—

(426)

(426)

Balance, June 30, 2015

—

$
—

99,515

$
995

$
1,582,655

$
(1,105)

$
90,376

$
1,182

30

$
(590)

$
1,673,513

$
1,119

$
1,674,632

See accompanying ~~notes.~~notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH ~~FLOWS~~FLOWS

(in thousands)

(Unaudited)

Nine Months Ended September 30,

2014

2013

Operating Activities

Net income

$
79,092

$
95,679

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for loan losses

12,808

34,952

Depreciation, amortization and accretion, net

(63,367
)
(24,788
)
Net realized gains on securities

—

(1,142
)
Bargain purchase gain

—

(12,585
)
Deferred income taxes

6,418

(11,423
)
Other, net

16,669

3,914

Net change in trading securities

(7,256
)
46,859

Net change in broker-dealer and clearing organization receivables

(164,497
)
2,796

Net change in other assets

(40,193
)
22,851

Net change in broker-dealer and clearing organization payables

261,206

(37,386
)
Net change in loss and loss adjustment expense reserve

4,992

(2,745
)
Net change in unearned insurance premiums

5,078

9,466

Net change in other liabilities

20,233

(18,510
)
Net gains from sale of loans

(293,786
)
(375,464
)
Loans originated for sale

(7,954,706
)
(9,427,627
)
Proceeds from loans sold

8,067,301

10,157,410

Net cash provided by (used in) operating activities

(50,008
)
462,257

Investing Activities

Proceeds from maturities and principal reductions of securities held to maturity

2,821

—

Proceeds from sales, maturities and principal reductions of securities available for sale

152,537

211,732

Purchases of securities held to maturity

(123,021
)
—

Purchases of securities available for sale

(48,730
)
(255,142
)
Net change in loans

106,335

(48,859
)
Purchases of premises and equipment and other assets

(32,581
)
(20,264
)
Proceeds from sales of premises and equipment and other real estate owned

55,097

7,641

Net cash paid (received) for Federal Home Loan Bank and Federal Reserve Bank stock

(28,383
)
89

Net cash from FNB Transaction

—

362,695

Net cash provided by investing activities

84,075

257,892

Financing Activities

Net change in deposits

(633,685
)
(1,476
)
Net change in short-term borrowings

503,897

(422,953
)
Proceeds from notes payable

2,000

1,000

Payments on notes payable

(2,643
)
(2,428
)
Dividends paid on preferred stock

(4,194
)
(1,852
)
Net cash distributed to noncontrolling interest

(595
)
(2,383
)
Other, net

2,718

(243
)
Net cash used in financing activities

(132,502
)
(430,335
)

Net change in cash and cash equivalents

(98,435
)
289,814

Cash and cash equivalents, beginning of period

746,023

726,460

Cash and cash equivalents, end of period

$
647,588

$
1,016,274

Supplemental Disclosures of Cash Flow Information

Cash paid for interest

$
20,935

$
22,513

Cash paid for income taxes, net of refunds

$
19,893

$
52,752

Supplemental Schedule of Non-Cash Activities

Conversion of loans to other real estate owned

$
44,815

$
6,019

Six Months Ended June 30,


2015

2014

Operating Activities

Net income

$
143,477

$
53,984

     Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for loan losses

2,845

8,775

Depreciation, amortization and accretion, net

(36,557)

(48,612)

Net realized gains on securities

(4,403)

—

Bargain purchase gain

(80,657)

—

Deferred income taxes

(2,691)

4,842

Other, net

(2,810)

2,191

Net change in securities purchased under agreements to resell

(34,412)

—

Net change in assets segregated for regulatory purposes

69,529

(3,998)

Net change in trading securities

66,356

(2,817)

Net change in broker-dealer and clearing organization receivables

(929,477)

(146,643)

Net change in FDIC Indemnification Asset

28,882

15,024

Net change in other assets

(69,150)

(39,844)

Net change in broker-dealer and clearing organization payables

1,021,493

177,748

Net change in other liabilities

(13,349)

18,512

Net gains from sales of loans

(267,720)

(185,165)

Loans originated for sale

(6,858,751)

(4,927,983)

Proceeds from loans sold

6,993,935

4,782,239

Net cash provided by (used in) operating activities

26,540

(291,747)

Investing Activities

Proceeds from maturities and principal reductions of securities held to maturity

23,509

911

Proceeds from sales, maturities and principal reductions of securities available for sale

548,280

97,867

Purchases of securities held to maturity

(146,433)

(66,207)

Purchases of securities available for sale

(16,725)

(47,557)

Net change in loans

244,681

68,552

Purchases of premises and equipment and other assets

(14,394)

(19,815)

Proceeds from sales of premises and equipment and other real estate owned

70,767

38,281

Proceeds from redemption of bank owned life insurance

822

—

Net cash paid for Federal Home Loan Bank and Federal Reserve Bank stock

(14,313)

(31,440)

Net cash from acquisition

41,097

—

Net cash provided by investing activities

737,291

40,592

Financing Activities

Net change in deposits

(1,123,301)

(647,143)

Net change in short-term borrowings

173,089

845,106

Proceeds from notes payable

150,078

1,000

Payments on notes payable

(35,970)

(1,743)

Redemption of preferred stock

(114,068)

—

Payments to repurchase common stock

(16,971)

—

Dividends paid on preferred stock

(3,280)

(2,768)

Net cash distributed to noncontrolling interest

(426)

(348)

Other, net

(200)

(187)

Net cash provided by (used in) financing activities

(971,049)

193,917

Net change in cash and cash equivalents

(207,218)

(57,238)

Cash and cash equivalents, beginning of period

813,075

746,023

Cash and cash equivalents, end of period

$
605,857

$
688,785

Supplemental Disclosures of Cash Flow Information

Cash paid for interest

$
27,662

$
13,046

Cash paid for income taxes, net of refunds

$
95,708

$
5,582

Supplemental Schedule of Non-Cash Activities

Conversion of loans to other real estate owned

$
37,241

$
34,391

Common stock issued in acquisition

$
200,626

$
—

See accompanying ~~notes.~~notes.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting and Reporting ~~Policies~~Policies

Nature of Operations

Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. ~~On November 30, 2012, Hilltop acquired~~The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital ~~Corporation pursuant to a plan~~Bank (the “Bank”). In addition, the Company provides an array of ~~merger whereby PlainsCapital Corporation merged with~~financial products and ~~into a wholly owned subsidiary of Hilltop (the “PlainsCapital Merger”), which continued as the surviving entity under the name “PlainsCapital Corporation” (“PlainsCapital”).~~services through its broker-dealer, mortgage origination and insurance subsidiaries.

The Company ~~has two~~provides its products and services through three primary operating ~~business units,~~subsidiaries, PlainsCapital Corporation (“PlainsCapital”), Hilltop Securities Holdings LLC (“Hilltop Securities”) and National Lloyds Corporation (“NLC”). PlainsCapital is a financial holding company, 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 and treasury management ~~capital equipment leasing,~~primarily in Texas and residential mortgage lending throughout the United States. Hilltop Securities is a holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income ~~sales, asset management,~~securities, equity trading, clearing, securities lending, structured finance and ~~correspondent clearing services.~~retail brokerage services throughout the United States. NLC is a property and casualty insurance holding company, headquartered in Waco, Texas, that provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States.

On September 13, 2013 (the “Bank Closing Date”), PlainsCapital Bank (the “Bank”) assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank (“FNB”) from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver, and reopened former FNB branches acquired from the FDIC under the “PlainsCapital Bank” name (the “FNB Transaction”). Pursuant to the Purchase and Assumption Agreement (the “P&A Agreement”), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned (“OREO”) that the Bank acquired, as further described in Note 2 to the consolidated financial statements. The fair value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits. TheJanuary 1, 2015, Hilltop completed its acquisition of ~~FNB’s expansive branch network allowed the Bank to increase its presence in Texas to include the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.~~

~~On March 31, 2014, the Company entered into a definitive merger agreement with~~ SWS Group, Inc. (“SWS”) ~~providing for the merger of~~in a stock and cash transaction, whereby SWS merged with and into ~~Peruna LLC,~~Hilltop Securities, a wholly owned subsidiary of Hilltop initially formed for the purpose of facilitating this ~~transaction.~~transaction (the "SWS Merger"). SWS’s broker-dealer subsidiaries, Southwest Securities (“Southwest Securities”) and SWS ~~stockholders will~~Financial Services, Inc. (“SWS Financial”), became subsidiaries of Hilltop Securities. Immediately following the SWS Merger, SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS Merger, each outstanding share of SWS common stock was converted into the right to receive ~~per share consideration of~~ 0.2496 shares of Hilltop common stock and $1.94 ofin cash, equating to ~~$6.94~~$6.92 per share based on Hilltop’s closing price on ~~September 30, 2014. The~~December 31, 2014 and resulting in an aggregate purchase price of $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3 million associated with Hilltop’s existing investment in SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the SWS Merger, the merger consideration is subject to change, and is therefore, preliminary as of the date of this report. Based on preliminary purchase date valuations, the fair value of the ~~merger consideration will fluctuate with the market price~~assets acquired was $3.3 billion, including $707.5 million in securities,$863.8 million in non-covered loans and $1.2 billion in broker-dealer and clearing organization receivables. The fair value of ~~Hilltop common stock. The Company intends to fund the cash portion~~liabilities assumed was $2.9 billion, consisting primarily of ~~the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals~~deposits of $1.3 billion and ~~approval of the stockholders of SWS,~~$1.1 billion in broker-dealer and ~~is expected to be completed prior to the end of 2014.~~clearing organization payables.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2013.~~2014 (“2014 Form 10-K”). Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

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, the fair values of

Table of Contents

financial instruments, the amounts receivable from the Federal Deposit Insurance Corporation (the “FDIC”) under ~~the~~ loss-share agreements ~~with the FDIC (“FDIC~~(the “FDIC Indemnification Asset”), reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability, and the potential impairment of assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the SWS Merger purchase date valuations associated with loans and taxes are considered preliminary because management’s review and approval of certain key assumptions is not complete.

The operations of SWS were included in the Company’s operating results beginning January 1, 2015 and such operations included a preliminary bargain purchase gain of $82.8 million as disclosed in the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2015. During the quarter ended June 30, 2015, the estimated fair value of the customer relationship intangible asset acquired as of January 1, 2015 was adjusted in accordance with the Business Combinations Topic of the Accounting Standards Codification (“ASC”) as a result of management’s review and approval of certain key assumptions that existed as of January 1, 2015. This adjustment resulted in a decrease in the preliminary bargain purchase gain associated with the SWS Merger to $80.7 million. This change is reflected in the consolidated statements of operations within noninterest income during the six months ended June 30, 2015. The adjustment to the preliminary bargain purchase gain decreased net income for the three months ended March 31, 2015 by $2.1 million as compared with amounts previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015. Additionally, certain amounts previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 within the consolidated balance sheet as of March 31, 2015, the related statement of comprehensive income, stockholders’ equity and cash flows for the three months ended March 31, 2015, as well as the notes to the consolidated financial statements, will be revised in future filings.

Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation.

Management made significant estimates and exercised significant judgment in estimating fair values and accounting associated with the FNB Transaction during the third quarter of 2013 due to the short time period between the Bank Closing Date and September 30, 2013. The Bank Closing Date valuations related to loans, FDIC Indemnification Asset, covered OREO, other intangible assets, assumed liabilities and taxes were considered preliminary at September 30, 2013. The operations of FNB were included in the Company’s operating results beginning September 14, 2013 and such operations included a preliminary bargain purchase gain of $3.3 million, before income taxes of $1.2 million, as disclosed in the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 12, 2013.

During the quarter ended December 31, 2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were adjusted in accordance with the Business Combinations Topic of the Accounting Standards Codification (“ASC”) as a result of additional information obtained about the facts and circumstances that existed as of the Bank Closing Date primarily related to the fair values of loans, covered OREO, FDIC Indemnification Asset, premises and equipment and other intangible assets. These adjustments resulted in an increase in the preliminary bargain purchase gain associated with the FNB Transaction to $12.6 million, before income taxes of $4.5 million. This change is reflected in the revised consolidated statements of operations within noninterest income during the three and nine months ended September 30, 2013. In the aggregate, the adjustments to the preliminary bargain purchase gain and related revisions to the accretion of discount on loans and other items increased net income for the three and nine months ended September 30, 2013 by $6.3 million as compared with amounts previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. Additionally, certain amounts previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 within the consolidated balance sheet as of September 30, 2013, the related statements of comprehensive income (loss), stockholders’ equity and cash flows for the three and nine months ended September 30, 2013, as well as the notes to the consolidated financial statements, have been revised accordingly.

Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of 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”)~~, PCB-ARC, Inc.~~ and ~~RGV-ARC, Inc. The Bank~~ has a 100% membership interest in PlainsCapital Securities, LLC.

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC (“Ventures”).

Hilltop has a 100% membership interest in Hilltop Securities, which operates through its wholly-owned subsidiaries, First Southwest Holdings, LLC (“First Southwest”), Southwest Securities and ~~PlainsCapital~~SWS Financial (collectively, the “Hilltop Broker-Dealers”). The principal subsidiaries of First Southwest are First Southwest Company, LLC (“FSC”), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), and First Southwest Asset Management, LLC, a registered investment advisor under the Investment Advisors Act of 1940. Southwest Securities ~~LLC.~~is a broker-dealer registered with the SEC and FINRA and a member of the NYSE, and SWS Financial is an introducing broker-dealer that is also registered with the SEC and FINRA.

Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”).

~~PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC (“Ventures”).~~

The principal subsidiaries of First Southwest are First Southwest Company (“FSC”), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority and a member of the New York Stock Exchange, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The consolidated 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”) ASC.

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

Table of Contents

2. ~~Acquisitions~~Acquisition

~~FNB Transaction~~SWS Merger

On ~~the Bank Closing Date, the Bank assumed substantially all~~January 1, 2015, Hilltop completed its acquisition of ~~the liabilities, including all of the deposits,~~SWS in a stock and ~~acquired substantially all of the assets of FNB from the FDIC~~cash transaction as discussed in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subjectNote 1 to the ~~loss-share agreements as “covered loans”~~consolidated financial statements. The operations of SWS are included in the Company’s operating results beginning January 1, 2015. Such operating results include a preliminary bargain purchase gain of $80.7 million and ~~“covered OREO”, respectively, and these assets~~ are ~~presented as separate line items~~not necessarily indicative of future operating results. SWS’s results of operations prior to the acquisition date are not included in the Company’s consolidated ~~balance sheet. Collectively, covered loans and covered OREO are referred to as “covered assets”.~~

In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.operating results.

The ~~FNB Transaction~~SWS Merger was accounted for using the ~~purchase~~acquisition method of accounting, and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components of the consideration paid are shown in the following table (in thousands).


Fair value of preliminary consideration paid:
Common stock issued	$	200,626
Cash		78,217
Fair value of Hilltop’s existing investment in SWS		70,282
Total preliminary consideration paid	$	349,125

The resulting preliminary fair values as of the ~~Bank Closing Date using~~identifiable assets acquired, and liabilities assumed, of SWS at January 1, 2015 are summarized in the following table (in thousands).


Cash and due from banks	$	119,314
Federal funds sold and securities purchased agreements to resell		44,741
Assets segregated for regulatory purposes		181,610
Securities		707,476
Non-covered loans, net		863,819
Broker-dealer and clearing organization receivables		1,221,793
Other assets		157,594
Total identifiable assets acquired		3,296,347

Deposits		(1,287,509)
Broker-dealer and clearing organization payables		(1,109,978)
Short-term borrowings		(164,240)
Securities sold, not yet purchased, at fair value		(140,409)
Notes payable		(76,643)
Other liabilities		(87,786)
Total liabilities assumed		(2,866,565)
Preliminary estimated bargain purchase gain		(80,657)
		349,125
Less Hilltop existing investment in SWS		(70,282)
Net identifiable assets acquired	$	278,843

The preliminary bargain purchase gain represents the excess of the preliminary estimated fair value of the underlying net tangible assets and intangible assets over the preliminary merger consideration. The SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code, therefore no income taxes were recorded in connection with the preliminary bargain purchase gain. The Company used significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. Because management’s review and approval of certain key assumptions is not complete, the purchase date valuations related to loans and taxes are considered preliminary and could differ significantly when finalized. The ~~amounts~~preliminary bargain purchase gain was primarily driven by the Company’s ability to realize acquired deferred tax assets through its consolidated core earnings and the decline in the price of the Company’s common stock between the date the fixed conversion ratio was agreed upon and the closing date.

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Included within the fair value of other assets in the table above are ~~subject to adjustments based upon final settlement~~identifiable intangible assets recorded in connection with the ~~FDIC.~~SWS Merger. The ~~terms~~allocation to intangible assets is as follows (in thousands).

Transaction and integration related expenses associated with the SWS Merger of $4.5 million and $0.4 million during the ~~P&A Agreement provide~~three months ended June 30, 2015 and 2014, respectively, and $14.5 million and $0.4 million during the six months ended June 30, 2015 and 2014, respectively, are included in noninterest expense within the consolidated statements of operations. Such expenses were for professional services and other incremental employee and contractual costs associated with the ~~FDIC to indemnify the Bank against claims with respect to liabilities and assets~~integration of ~~FNB or any of its affiliates not assumed or otherwise purchased by the Bank and with respect to certain other claims by third parties.~~SWS’s operations.

In connection with the SWS Merger, Hilltop acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition. The following table presents details on acquired loans at the acquisition date (in thousands).

Loans, excluding

PCI

Total

PCI Loans

Loans

Loans

Commercial and industrial (1)

$
447,959

$
9,850

$
457,809

Real estate

324,477

62,218

386,695

Construction and land development

14,708

1,391

16,099

Consumer

3,216

—

3,216

Total

$
790,360

$
73,459

$
863,819

(1) Acquired loans include margin loans to customers and correspondents of $269.4 million associated with acquired broker-dealer operations, none of which are PCI loans.

The following table presents information about the PCI loans at acquisition (in thousands).


Contractually required principal and interest payments	$	120,078
Nonaccretable difference		32,040
Cash flows expected to be collected		88,038
Accretable difference		14,579
Fair value of loans acquired with a deterioration of credit quality	$	73,459

The following table presents information about the acquired loans without credit impairment at acquisition (in thousands).


Contractually required principal and interest payments	$	901,672
Contractual cash flows not expected to be collected		39,721
Fair value at acquisition		790,360

Pro Forma Results of Operations

The results of operations acquired in the ~~FNB Transaction are~~SWS Merger have been included in the Company’s ~~operating~~consolidated financial results ~~beginning September 14, 2013.~~since January 1, 2015. The following table discloses the impact of SWS on the Company’s results of operations. The table presents pro forma results had the SWS Merger taken place on January 1, 2014 and includes the estimated impact of purchase accounting adjustments (in thousands). The purchase accounting adjustments reflect the impact of ~~assets and assumption~~recording the acquired loans at fair value, including the estimated accretion of ~~certain liabilities~~the purchase discount on the loan portfolio. Accretion estimates were based on the acquisition date purchase discount on the loan portfolio, as it was not practicable to determine the amount of ~~FNB from the FDIC, as receiver, was sufficiently significant to require disclosure of historical financial statements and related~~discount that would have been recorded based on economic conditions that existed on January 1, 2014. The pro forma ~~financial disclosure. Due to the nature and magnitude~~results do not include any potential operating cost savings as a result of the FNB Transaction, coupled with the federal assistance and protection resulting from the FDIC loss-share agreements, historical financial information of FNB is not relevant to future operations. The Company has omitted certain historical financial information and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions (“SAB 1:K”), and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant engages in an acquisition of a significant amount of assets of a troubled financial institution for which audited financial statements are not reasonably available and in which federal assistance is so persuasive as to substantially reduce the relevance of such information to an assessment of future operations.

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SWS Merger. Further, certain costs associated with any integration activities are also not reflected in the pro forma results. Pro forma results exclude nonrecurring items resulting directly from the SWS Merger that do not have a continuing impact on results of operations. The pro forma results are not necessarily indicative of what would have occurred had the SWS Merger taken place on the indicated date.


	Three Months Ended			Six Months Ended
	June 30, 2014			June 30, 2014
Net interest income	$	115,795	$	215,637
Other revenues		255,537		480,852
Net income		31,416		56,147

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

3. Fair Value Measurements

Fair Value Measurements and Disclosures

The Company 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 GAAP and expands 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.

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 the Company 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 (such as interest rates, yield curves, prepayment speeds, default rates, credit risks and loss severities), 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.

·~~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, yield curves, prepayment speeds, default rates, credit risks, loss severities, etc.), 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

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and retained mortgage servicing rights (“MSR”) asset at fair value, under the provisions of the Fair Value Option. The Company 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. ~~The Company determines~~At June 30, 2015, the aggregate fair value of ~~the financial instruments~~PrimeLending’s mortgage loans held for sale accounted for under the ~~provisions of the~~ Fair Value Option ~~in compliance with~~was $1.36 billion, and the ~~provisions~~unpaid principal balance of ~~the Fair Value Topic of the ASC discussed above.~~

those loans was $1.32 billion. At ~~September 30,~~December 31, 2014, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was ~~$1.25~~$1.27 billion, and the unpaid principal balance of those loans was $1.20 billion. At December 31, 2013, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.09 billion, and the unpaid principal balance of those loans was $1.07$1.22 billion. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

On October 2, 2014, Hilltop exercised its warrant to purchase 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share (the “SWS Warrant”) and paid the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under its credit agreement with SWS. Following the

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exercise of the SWS Warrant, Hilltop owned approximately 21% of the outstanding shares of SWS common stock as of October 2, 2014. Contemporaneous with the exercise of the SWS Warrant, Hilltop changed the accounting method for its investment in SWS common stock and elected to account for its investment in accordance with the provisions of the Fair Value Option as permitted by GAAP. Hilltop had previously accounted for its investment in SWS common stock as an available for sale security. Under the Fair Value Option, Hilltop’s investment in SWS common stock is recorded at fair value effective October 2, 2014, with changes in fair value being recorded in other noninterest income within the consolidated statements of operations rather than as a component of other comprehensive income. At December 31, 2014, the fair value of Hilltop’s investment in SWS common stock was $70.3 million and is included in other assets within the consolidated balance sheet.

The Company 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 and data from independent pricing services.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).

	Level 1		Level 2		Level 3		Total
September 30, 2014	Inputs		Inputs		Inputs		Fair Value
									Level 1		Level 2		Level 3		Total
June 30, 2015									Inputs		Inputs		Inputs		Fair Value
Trading securities	$	36	$	66,066	$	—	$	66,102	$	7,043	$	258,370	$	16	$	265,429
Available for sale securities	23,983		1,060,835		61,283		1,146,101			13,948		749,515		—		763,463
Loans held for sale	—		1,235,870		13,763		1,249,633			—		1,341,768		19,123		1,360,891
Derivative assets	—		25,268		—		25,268			—		44,335		—		44,335
Mortgage servicing rights asset	—		—		41,907		41,907
MSR asset										—		—		44,985		44,985
Trading liabilities	—		47		—		47			33,792		101,800		—		135,592
Derivative liabilities	—		3,718		6,827		10,545			—		6,749		—		6,749

	Level 1		Level 2		Level 3		Total
December 31, 2013	Inputs		Inputs		Inputs		Fair Value
Trading securities	$	33	$	58,813	$	—	$	58,846
Available for sale securities	22,079		1,121,011		60,053		1,203,143
Loans held for sale	—		1,061,310		27,729		1,089,039
Derivative assets	—		23,564		—		23,564
Mortgage servicing rights asset	—		—		20,149		20,149
Trading liabilities	—		46		—		46
Derivative liabilities	—		139		5,600		5,739


	Level 1		Level 2		Level 3			Total
December 31, 2014	Inputs		Inputs		Inputs			Fair Value
Trading securities	$	39	$	65,678	$	—	$	65,717
Available for sale securities		13,762		911,773		—		925,535
Loans held for sale		—		1,263,135		9,017		1,272,152
Derivative assets		—		23,805		—		23,805
MSR asset		—		—		36,155		36,155
Investment in SWS common stock		70,282		—		—		70,282
Trading liabilities		—		48		—		48
Derivative liabilities		—		12,849		—		12,849

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The following tables include a ~~roll forward~~rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).

Total Gains or Losses

(Realized or Unrealized)

Balance at

Included in Other

Beginning of

Purchases/

Sales/

Included in

Comprehensive

Balance at

Period

Additions

Reductions

Net Income

Income (Loss)

End of Period

Three months ended September 30, 2014

Available for sale securities

$
63,819

$
—

$
—

$
639

$
(3,175
)
$
61,283

Loans held for sale

10,409

6,110

(1,600
)
(1,156
)
—

13,763

Mortgage servicing rights asset

35,877

18,982

(11,387
)
(1,565
)
—

41,907

Derivative liabilities

(6,300
)
(177
)
—

(350
)
—

(6,827
)
Total

$
103,805

$
24,915

$
(12,987
)
$
(2,432
)
$
(3,175
)
$
110,126

Nine months ended September 30, 2014

Available for sale securities

$
60,053

$
—

$
—

$
1,848

$
(618
)
$
61,283

Loans held for sale

27,729

16,531

(31,203
)
706

—

13,763

Mortgage servicing rights asset

20,149

33,790

(11,387
)
(645
)
—

41,907

Derivative liabilities

(5,600
)
(177
)
—

(1,050
)
—

(6,827
)
Total

$
102,331

$
50,144

$
(42,590
)
$
859

$
(618
)
$
110,126

Three months ended September 30, 2013

Available for sale securities

$
55,510

$
—

$
—

$
551

$
3,541

$
59,602

Mortgage servicing rights asset

7,111

4,079

—

2,211

—

13,401

Derivative liabilities

(4,939
)
—

—

(225
)
—

(5,164
)
Total

$
57,682

$
4,079

$
—

$
2,537

$
3,541

$
67,839

Nine months ended September 30, 2013

Available for sale securities

$
56,277

$
—

$
—

$
1,594

$
1,731

$
59,602

Mortgage servicing rights asset

2,080

8,384

—

2,937

—

13,401

Derivative liabilities

(4,490
)
—

—

(674
)
—

(5,164
)
Total

$
53,867

$
8,384

$
—

$
3,857

$
1,731

$
67,839


							Total Gains or Losses
							(Realized or Unrealized)
	Balance at								Included in Other
	Beginning of		Purchases/		Sales/		Included in		Comprehensive		Balance at
	Period		Additions		Reductions		Net Income		Income (Loss)		End of Period
Three months ended June 30, 2015
Trading securities	$	5,932	$	—	$	(3,397)	$	(2,519)	$	—	$	16
Loans held for sale		19,495		17,473		(9,453)		(8,392)		—		19,123
MSR asset		31,648		9,406		—		3,931		—		44,985
Total	$	57,075	$	26,879	$	(12,850)	$	(6,980)	$	—	$	64,124

Six months ended June 30, 2015
Trading securities	$	—	$	7,301	$	(3,397)	$	(3,888)	$	—	$	16
Loans held for sale		9,017		28,609		(9,724)		(8,779)		—		19,123
MSR asset		36,155		12,096		—		(3,266)		—		44,985
Total	$	45,172	$	48,006	$	(13,121)	$	(15,933)	$	—	$	64,124

Three months ended June 30, 2014
Available for sale securities	$	64,098	$	—	$	—	$	616	$	(895)	$	63,819
Loans held for sale		26,826		5,522		(24,009)		2,070		—		10,409
MSR asset		29,939		7,376		—		(1,438)		—		35,877
Derivative liabilities		(5,950)		—		—		(350)		—		(6,300)
Total	$	114,913	$	12,898	$	(24,009)	$	898	$	(895)	$	103,805

Six months ended June 30, 2014
Available for sale securities	$	60,053	$	—	$	—	$	1,209	$	2,557	$	63,819
Loans held for sale		27,729		10,422		(29,603)		1,861		—		10,409
MSR asset		20,149		14,808		—		920		—		35,877
Derivative liabilities		(5,600)		—		—		(700)		—		(6,300)
Total	$	102,331	$	25,230	$	(29,603)	$	3,290	$	2,557	$	103,805

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

All net realized and unrealized gains (losses) in the ~~tables~~table above are reflected in the accompanying consolidated financial statements. ~~The unrealized gains (losses) relate to financial instruments still held at September 30, 2014.~~ The available for sale securities noted in the table above reflect Hilltop’s note receivable from SWS and the SWS Warrant. On October 2, 2014, as previously discussed, Hilltop exercised the SWS Warrant ~~(defined hereinafter) as discussed~~ in ~~Note 4~~full and paid the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the ~~consolidated financial statements.~~credit agreement.

For Level 3 financial instruments measured at fair value on a recurring basis at ~~September~~June 30, ~~2014,~~2015, the significant unobservable inputs used in the fair value measurements were as follows.

			~~Weighted~~
~~Financial instrument~~	~~Valuation Technique~~	~~Unobservable Input~~	~~Average / Range~~
~~Available for sale securities - note receivable~~	~~Discounted cash flow~~	~~Discount rate~~	~~8.45%~~

~~Available for sale securities - warrant~~	~~Binomial model~~	~~SWS common stock price volatility~~	~~29.0%~~

~~Loans held for sale~~	~~Discounted cash flow / Market comparable~~	~~Projected price~~	~~89 - 91%~~

~~Mortgage servicing rights asset~~	~~Discounted cash flow~~	~~Constant prepayment rate~~	~~9.51%~~
		~~Discount rate~~	~~11.03%~~

~~Derivative liabilities~~	~~Discounted cash flow~~	~~Discount rate~~	~~14 - 28%~~
		~~Time to receive full payment of cash flows~~	~~10.5 - 13.75 years~~

Hilltop’s note receivable is valued using a cash flow model that estimates yield based on comparable securities in the market. The interest rate used to discount cash flows is the most significant unobservable input. An increase or decrease in the discount rate would result in a corresponding decrease or increase, respectively, in the fair value measurement of the note receivable.

The SWS Warrant is valued utilizing a binomial model. The underlying SWS common stock price and its related volatility, an unobservable input, are the most significant inputs into the model, and, therefore, decreases or increases to the SWS common stock price would result in a significant change in the fair value measurement of the SWS Warrant.


			Range
Financial instrument	Valuation Technique	Unobservable Input	(Weighted-Average)
Trading securities	Discounted cash flow	Discount rate	8	-	17	%	(	10	%)

Loans held for sale	Discounted cash flow / Market comparable	Projected price	88	-	96	%	(	95	%)

MSR asset	Discounted cash flow	Constant prepayment rate			10.41		%
		Discount rate			10.96		%

The fair value of certain loans held for sale that are either non-standard (i.e. loans that cannot be sold through normal sale channels) or non-performing is measured using unobservable inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.

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Trading securities include corporate debt securities that are valued using a discounted cash flow model with observable market data; however, due to the distressed nature of these bonds, the Company has determined that these securities should be valued as a Level 3 financial instrument.

The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.

Derivative liabilities in the tables above include a derivative option agreement (“Fee Award Option”) entered into by First Southwest and valued using discounted cash flows and probability of exercise.

The Company had no transfers between Levels 1 and 2 during the periods presented.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The following ~~tables present~~table presents the changes in fair value for instruments that are reported at fair value 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, 2014

Three Months Ended September 30, 2013

Other

Total

Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value
��
Gains (Losses)

Income

Fair Value

Loans held for sale

$
(15,250
)
$
—

$
(15,250
)
$
44,395

$
—

$
44,395

Mortgage servicing rights asset

(1,565
)
—

(1,565
)
2,211

—

2,211

Time deposits

—

—

—

—

—

—


	Three Months Ended June 30, 2015						Three Months Ended June 30, 2014
	��		Other		Total				Other		Total
	Net		Noninterest		Changes in		Net		Noninterest		Changes in
	Gains (Losses)		Income		Fair Value		Gains (Losses)		Income		Fair Value
Loans held for sale	$	(9,063)	$	—	$	(9,063)	$	35,651	$	—	$	35,651
MSR asset		3,931		—		3,931		(1,438)		—		(1,438)

Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option

Nine Months Ended September 30, 2014

Nine Months Ended September 30, 2013

Other

Total

Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value

Gains (Losses)

Income

Fair Value

Loans held for sale

$
24,918

$
—

$
24,918

$
2,754

$
—

$
2,754

Mortgage servicing asset

(645
)
—

(645
)
2,937

—

2,937

Time deposits

—

—

—

—

12

12


	Six Months Ended June 30, 2015						Six Months Ended June 30, 2014
			Other		Total				Other		Total
	Net		Noninterest		Changes in		Net		Noninterest		Changes in
	Losses		Income		Fair Value		Gains		Income		Fair Value
Loans held for sale	$	(15,758)	$	—	$	(15,758)	$	40,169	$	—	$	40,169
MSR asset		(3,266)		—		(3,266)		920		—		920

The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all of the assets acquired and liabilities assumed in the SWS Merger was determined at the acquisition date. In addition, 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 — The Company reports impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. ~~Purchased credit impaired (“PCI”)~~PCI loans with a fair value of $172.9 million, $822.8 million and ~~$822.8~~$73.5 million were acquired by the Company upon completion of the merger with PlainsCapital ~~Merger~~(the “PlainsCapital Merger”), the FDIC-assisted transaction (the “FNB Transaction”) whereby the Bank acquired certain assets and assumed certain liabilities of First National Bank (“FNB”) and the ~~FNB Transaction, respectively.~~SWS Merger, respectively (collectively, the “Bank Transactions”). Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated significant unobservable inputs regarding default rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for in pools (“Pooled Loans”), and estimated collateral values.

At ~~September~~June 30, ~~2014,~~2015, estimates for these significant unobservable inputs ~~included estimated weighted average default rates, loss severity rates and prepayment speed assumptions of 46%, 52% and 0%, respectively, for those PCI loans acquired in~~were as follows.


	PCI Loans
	PlainsCapital		FNB		SWS
	Merger		Transaction		Merger
Weighted average default rate	47	%	59	%	48	%
Weighted average loss severity rate	54	%	40	%	36	%
Weighted average prepayment speed	0	%	5	%	0	%

At June 30, 2015, the ~~PlainsCapital Merger and 63%, 38% and 4%, respectively, for those PCI loans acquired in the FNB Transaction. The~~ resulting weighted average expected loss on PCI loans associated with ~~each of~~ the PlainsCapital Merger, ~~and the~~ FNB Transaction and SWS Merger was ~~24%.~~25%, 23% and 17%, respectively.

The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company ~~will order~~

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orders an updated appraisal of the fair value of the collateral. ~~Since~~Because the Company obtains updated appraisals when evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.

Other Real Estate Owned — The Company reports ~~OREO~~other real estate owned (“OREO”) at fair value less estimated cost to sell. Any excess of recorded investment over fair value, less cost to sell, is charged against either the allowance for loan losses or the related PCI pool discount when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The Company considers a number of factors in determining the extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. At ~~September~~June 30, ~~2014,~~2015, the most significant unobservable input used in the determination of fair value of OREO was a discount to independent appraisals for estimated holding periods of OREO properties. Such discount was 1% per month for estimated holding periods of 6 to 24 months. Level 3 inputs were used to determine the initial fair value at acquisition of a large group of smaller balance properties that were acquired in the FNB Transaction. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share agreements. At

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~September~~ June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the estimated fair value of covered OREO was ~~$126.8~~$125.5 million and ~~$142.8~~$136.9 million, respectively, and the underlying fair value measurements utilize Level 2 and Level 3 inputs. The fair value of non-covered OREO at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013~~2014 was ~~$2.3~~$0.9 million and ~~$4.8~~$0.8 million, respectively, and is included in other assets within the consolidated balance sheets. Level 3 inputs were used to determine the initial fair value at acquisition of properties totaling $5.6 million that were acquired in the SWS Merger. During the reported periods, all fair value measurements for non-covered OREO subsequent to initial recognition utilized Level 2 inputs.

The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in thousands).

									Total Gains (Losses) for the						Total Gains (Losses) for the
	Level 1		Level 2		Level 3		Total		Three Months Ended September 30,						Nine Months Ended September 30,														Total Gains (Losses) for the				Total Gains (Losses) for the
September 30, 2014	Inputs		Inputs		Inputs		Fair Value		2014			2013			2014			2013
																					Level 1		Level 2		Level 3		Total		Three Months Ended June 30,				Six Months Ended June 30,
June 30, 2015																					Inputs		Inputs		Inputs		Fair Value		2015		2014		2015		2014
Non-covered impaired loans	$	—	$	—	$	30,061	$	30,061	$	(1,714	)	$	(2,352	)	$	(2,151	)	$	(3,011	)	$	—	$	—	$	66,273	$	66,273	$	(578)	$	(222)	$	(229)	$	(437)
Covered impaired loans	—		—		74,015		74,015		242			—			(2,790		)	—				—		—		76,384		76,384		431		(1,341)		3,649		(3,032)
Non-covered other real estate owned	—		—		—		—		(210		)	(1,381		)	(321		)	(1,571		)		—		—		—		—		—		(9)		(28)		(111)
Covered other real estate owned	—		45,050		20,803		65,853		(14,440		)	—			(17,399		)	—				—		16,656		—		16,656		(3,108)		(2,528)		(4,058)		(2,959)

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 3 to the consolidated financial statements included in ~~our Annual Report on~~the Company’s 2014 Form ~~10-K for the year ended December 31, 2013.~~10-K.

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The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).

			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3						Estimated Fair Value
September 30, 2014	Amount		Inputs		Inputs		Inputs		Total
											Carrying		Level 1		Level 2		Level 3
June 30, 2015											Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	647,588	$	647,588	$	—	$	—	$	647,588	$	605,857	$	605,857	$	—	$	—	$	605,857
Held to maturity securities	120,139		—		119,901		—		119,901			312,960		—		313,529		—		313,529
Loans held for sale	23,180		—		23,180		—		23,180			36,726		—		36,726		—		36,726
Non-covered loans, net	3,729,816		—		341,846		3,406,917		3,748,763			4,916,485		—		626,810		4,312,845		4,939,655
Covered loans, net	747,514		—		—		823,111		823,111			493,299		—		—		623,324		623,324
Broker-dealer and clearing organization receivables	223,679		—		223,679		—		223,679			2,070,770		—		2,070,770		—		2,070,770
FDIC indemnification asset	149,788		—		—		149,788		149,788			102,381		—		—		102,381		102,381
Other assets	63,925		—		42,301		21,624		63,925			60,094		—		43,708		16,386		60,094

Financial liabilities:
Deposits	6,236,282		—		6,238,982		—		6,238,982			6,796,437		—		6,801,653		—		6,801,653
Broker-dealer and clearing organization payables	243,835		—		243,835		—		243,835			2,048,176		—		2,048,176		—		2,048,176
Short-term borrowings	845,984		—		845,984		—		845,984			1,100,025		—		1,100,025		—		1,100,025
Debt	122,696		—		116,007		—		116,007			312,432		—		305,772		—		305,772
Other liabilities	2,251		—		2,251		—		2,251			3,753		—		3,753		—		3,753

			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2013	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	746,023	$	746,023	$	—	$	—	$	746,023
Non-covered loans, net	3,481,405		—		281,712		3,119,319		3,401,031
Covered loans, net	1,005,308		—		—		997,371		997,371
Broker-dealer and clearing organization receivables	119,317		—		119,317		—		119,317
FDIC indemnification asset	188,291		—		—		188,291		188,291
Other assets	66,055		—		43,946		22,109		66,055

Financial liabilities:
Deposits	6,722,019		—		6,722,909		—		6,722,909
Broker-dealer and clearing organization payables	129,678		—		129,678		—		129,678
Short-term borrowings	342,087		—		342,087		—		342,087
Debt	123,339		—		114,671		—		114,671
Other liabilities	3,362		—		3,362		—		3,362


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2014	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	813,075	$	813,075	$	—	$	—	$	813,075
Held to maturity securities		118,209		—		118,345		—		118,345
Loans held for sale		37,541		—		37,541		—		37,541
Non-covered loans, net		3,883,435		—		378,425		3,528,769		3,907,194
Covered loans, net		638,029		—		—		767,751		767,751
Broker-dealer and clearing organization receivables		167,884		—		167,884		—		167,884
FDIC indemnification asset		130,437		—		—		130,437		130,437
Other assets		59,432		—		43,937		15,495		59,432

Financial liabilities:
Deposits		6,369,892		—		6,365,555		—		6,365,555
Broker-dealer and clearing organization payables		179,042		—		179,042		—		179,042
Short-term borrowings		762,696		—		762,696		—		762,696
Debt		123,696		—		117,028		—		117,028
Other liabilities		2,144		—		2,144		—		2,144

Table of Contents

4. Securities

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~The fair value of trading securities are summarized as follows (in thousands).


	June 30,		December 31,
	2015		2014
U.S. Treasury securities	$	6,021	$	—
U.S. government agencies:
Bonds		32,464		—
Residential mortgage-backed securities		22,858		25,058
Collateralized mortgage obligations		1,260		—
Commercial mortgage-backed securities		15		—
Corporate debt securities		67,217		4
States and political subdivisions		68,516		40,616
Unit investment trusts		33,085		—
Private-label securitized product		32,281		—
Other		1,712		39
Totals	$	265,429	$	65,717

~~4. Securities~~

The Hilltop Broker-Dealers may purchase securities at a future date at the then-current market price to facilitate customer transactions. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheet, had a value of $135.6 million at June 30, 2015.

The amortized cost and fair value of ~~securities, excluding trading~~available for sale and held to maturity securities are summarized as follows (in thousands). ~~No securities were classified as held to maturity at December 31, 2013.~~

	Available for Sale
			Gross		Gross					Available for Sale
	Amortized		Unrealized		Unrealized							Gross		Gross
September 30, 2014	Cost		Gains		Losses			Fair Value
										Amortized		Unrealized		Unrealized
June 30, 2015										Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	44,709	$	149	$	(64	)	$	44,794	$	19,384	$	226	$	(3)	$	19,607
U.S. government agencies:
Bonds	637,882		1,397		(18,522		)	620,757			389,007		1,336		(6,495)		383,848
Residential mortgage-backed securities	53,780		1,626		(401		)	55,005			48,761		1,058		(158)		49,661
Collateralized mortgage obligations	100,938		137		(4,093		)	96,982			67,018		143		(2,710)		64,451
Corporate debt securities	95,251		4,795		(128		)	99,918			100,947		4,099		(278)		104,768
States and political subdivisions	141,813		1,917		(1,007		)	142,723			125,963		1,672		(1,082)		126,553
Commercial mortgage-backed securities	596		60		—			656			579		48		—		627
Equity securities	20,558		3,425		—			23,983			13,733		451		(236)		13,948
Note receivable	44,522		5,327		—			49,849
Warrant	12,068		—		(634		)	11,434
Totals	$	1,152,117	$	18,833	$	(24,849	)	$	1,146,101	$	765,392	$	9,033	$	(10,962)	$	763,463

	Available for Sale
	Amortized		Unrealized		Unrealized
December 31, 2013	Cost		Gains		Losses			Fair Value
U.S. Treasury securities	$	43,684	$	82	$	(238	)	$	43,528
U.S. government agencies:
Bonds	717,909		550		(55,727		)	662,732
Residential mortgage-backed securities	59,936		735		(584		)	60,087
Collateralized mortgage obligations	124,502		349		(4,390		)	120,461
Corporate debt securities	72,376		4,610		(378		)	76,608
States and political subdivisions	162,955		388		(6,508		)	156,835
Commercial mortgage-backed securities	691		69		—			760
Equity securities	20,067		2,012		—			22,079
Note receivable	42,674		5,235		—			47,909
Warrant	12,068		76		—			12,144
Totals	$	1,256,862	$	14,106	$	(67,825	)	$	1,203,143

	Held to Maturity
	Amortized		Unrealized		Unrealized
September 30, 2014	Cost		Gains		Losses			Fair Value
U.S. Treasury securities	$	25,010	$	—	$	(1	)	$	25,009
U.S. government agencies:
Residential mortgage-backed securities	30,183		275		—			30,458
Collateralized mortgage obligations	58,825		—		(528		)	58,297
States and political subdivisions	6,121		30		(14		)	6,137
Totals	$	120,139	$	305	$	(543	)	$	119,901

Available for sale securities included 1,475,387 shares of SWS common stock, a $50.0 million aggregate principal amount note issued by SWS and a warrant to purchase 8,695,652 shares of SWS common stock (the “SWS Warrant”). SWS issued the note in July 2011 under a credit agreement pursuant to a senior unsecured loan from Hilltop. The note bore interest at a rate of 8.0% per annum, was prepayable by SWS subject to certain conditions after three years, and had a maturity of five years. The SWS Warrant provided for the purchase of 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-dilution adjustments. On October 2, 2014, as discussed in Note 23 to the consolidated financial statements, Hilltop exercised the SWS Warrant in full and paid the aggregate exercise price by the


	Available for Sale
	Amortized		Unrealized		Unrealized
December 31, 2014	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	19,382	$	264	$	(33)	$	19,613
U.S. government agencies:
Bonds		522,008		1,749		(7,516)		516,241
Residential mortgage-backed securities		51,363		1,672		(137)		52,898
Collateralized mortgage obligations		89,291		133		(2,300)		87,124
Corporate debt securities		93,406		5,125		(59)		98,472
States and political subdivisions		135,419		2,083		(717)		136,785
Commercial mortgage-backed securities		593		47		—		640
Equity securities		13,293		469		—		13,762
Totals	$	924,755	$	11,542	$	(10,762)	$	925,535

Table of Contents


	Held to Maturity
	Amortized		Unrealized		Unrealized
June 30, 2015	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	50,295	$	12	$	(2)	$	50,305
U.S. government agencies:
Bonds		32,372		156		—		32,528
Residential mortgage-backed securities		29,268		465		(6)		29,727
Collateralized mortgage obligations		189,791		534		(583)		189,742
States and political subdivisions		11,234		30		(37)		11,227
Totals	$	312,960	$	1,197	$	(628)	$	313,529

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Consequently, Hilltop beneficially owned approximately 21% of the outstanding shares of SWS common stock as of October 4, 2014.


	Held to Maturity
	Amortized		Unrealized		Unrealized
December 31, 2014	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	25,008	$	—	$	(6)	$	25,002
U.S. government agencies:
Residential mortgage-backed securities		29,782		528		—		30,310
Collateralized mortgage obligations		57,328		—		(430)		56,898
States and political subdivisions		6,091		47		(3)		6,135
Totals	$	118,209	$	575	$	(439)	$	118,345

Information regarding available for sale securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).

September 30, 2014

December 31, 2013

Number of

Unrealized

Number of

Unrealized

Securities

Fair Value

Losses

Securities

Fair Value

Losses

Available for Sale

U.S. treasury securities:

Unrealized loss for less than twelve months

4

$
7,378

$
52

6

$
12,748

$
238

Unrealized loss for twelve months or longer

2

2,005

12

—

—

—

6

9,383

64

6

12,748

238

U.S. government agencies:

Bonds:

Unrealized loss for less than twelve months

5

64,792

208

35

526,817

45,274

Unrealized loss for twelve months or longer

27

439,772

18,314

5

90,931

10,453

32

504,564

18,522

40

617,748

55,727

Residential mortgage-backed securities:

Unrealized loss for less than twelve months

—

—

—

2

2,194

54

Unrealized loss for twelve months or longer

4

10,870

401

3

9,309

530

4

10,870

401

5

11,503

584

Collateralized mortgage obligations:

Unrealized loss for less than twelve months

1

10,915

69

7

84,054

4,320

Unrealized loss for twelve months or longer

8

63,839

4,024

2

4,995

70

9

74,754

4,093

9

89,049

4,390

Corporate debt securities:

Unrealized loss for less than twelve months

4

4,837

21

7

10,754

378

Unrealized loss for twelve months or longer

1

1,891

107

—

—

—

5

6,728

128

7

10,754

378

States and political subdivisions:

Unrealized loss for less than twelve months

1

500

—

46

30,245

669

Unrealized loss for twelve months or longer

96

64,343

1,007

150

96,882

5,839

97

64,843

1,007

196

127,127

6,508

Warrants:

Unrealized loss for less than twelve months

1

11,434

634

—

—

—

Unrealized loss for twelve months or longer

—

—

—

—

—

—

1

11,434

634

—

—

—

Total available for sale:

Unrealized loss for less than twelve months

16

99,856

984

103

666,812

50,933

Unrealized loss for twelve months or longer

138

582,720

23,865

160

202,117

16,892

154

$
682,576

$
24,849

263

$
868,929

$
67,825

	September 30, 2014					December 31, 2013
	Number of			Unrealized		Number of			Unrealized		June 30, 2015					December 31, 2014
	Securities	Fair Value		Losses		Securities	Fair Value		Losses		Number of			Unrealized		Number of			Unrealized
Held to Maturity
											Securities	Fair Value		Losses		Securities	Fair Value		Losses
Available for sale
U.S. treasury securities:
Unrealized loss for less than twelve months											2	$	2,456	$	3	4	$	7,703	$	27
Unrealized loss for twelve months or longer											—		—		—	1		1,706		6
											2		2,456		3	5		9,409		33
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months											16		295,023		4,699	3		34,847		153
Unrealized loss for twelve months or longer											3		43,557		1,796	22		373,035		7,363
											19		338,580		6,495	25		407,882		7,516
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	1	$	25,009	$	1	—	$	—	$	—	4		9,970		158	—		—		—
Unrealized loss for twelve months or longer	—	—		—		—	—		—		—		—		—	4		11,056		137
	1	25,009		1		—	—		—		4		9,970		158	4		11,056		137
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	2	58,297		528		—	—		—		2		477		—	3		7,141		40
Unrealized loss for twelve months or longer	—	—		—		—	—		—		7		49,344		2,710	8		61,108		2,260
	2	58,297		528		—	—		—		9		49,821		2,710	11		68,249		2,300
Corporate debt securities:
Unrealized loss for less than twelve months											16		15,806		192	—		—		—
Unrealized loss for twelve months or longer											1		1,912		86	1		1,939		59
											17		17,718		278	1		1,939		59
States and political subdivisions:
Unrealized loss for less than twelve months	6	3,411		14		—	—		—		32		22,181		171	7		4,432		7
Unrealized loss for twelve months or longer	—	—		—		—	—		—		52		35,220		911	81		54,178		710
	6	3,411		14		—	—		—		84		57,401		1,082	88		58,610		717
Total held to maturity:
Equity securities:
Unrealized loss for less than twelve months	9	86,717		543		—	—		—		3		6,833		211	—		—		—
Unrealized loss for twelve months or longer	—	—		—		—	—		—		2		260		25	—		—		—
	9	$	86,717	$	543	—	$	—	$	—	5		7,093		236	—		—		—
Total available for sale:
Unrealized loss for less than twelve months											75		352,746		5,434	17		54,123		227
Unrealized loss for twelve months or longer											65		130,293		5,528	117		503,022		10,535
											140	$	483,039	$	10,962	134	$	557,145	$	10,762

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


	June 30, 2015					December 31, 2014
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Held to Maturity
U.S. treasury securities:
Unrealized loss for less than twelve months	1	$	25,289	$	2	1	$	25,002	$	6
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	1		25,289		2	1		25,002		6
U.S. government agencies:
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	1		1,412		6	—		—		—
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	1		1,412		6	—		—		—
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	4		71,190		583	2		56,898		430
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	4		71,190		583	2		56,898		430
States and political subdivisions:
Unrealized loss for less than twelve months	10		5,094		37	4		1,899		3
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	10		5,094		37	4		1,899		3
Total held to maturity:
Unrealized loss for less than twelve months	16		102,985		628	7		83,799		439
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	16	$	102,985	$	628	7	$	83,799	$	439

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, the Company did not record any other-than-temporary impairments. While all of the investments are monitored for potential other-than-temporary impairment, the Company’s analysis and experience indicate that these available for sale investments generally do not present a significant risk of other-than-temporary-impairment, as fair ~~value should~~values frequently recover over time. Factors considered in the Company’s analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness, and forecasted performance of the investee. While some of the securities held in the investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not believed to be significant enough to warrant other-than-temporary impairment of the securities. The Company does not intend, nor does the Company believe that is it likely that the Company will be required, to sell these securities before the recovery of the cost basis. Therefore, management does not believe any other-than-temporary impairments exist at ~~September~~June 30, ~~2014.~~2015.

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and available for sale equity securities, ~~and the available for sale SWS Warrant,~~ at ~~September~~June 30, ~~2014~~2015 are shown by contractual maturity below (in thousands).


	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized				Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	122,236	$	122,520	$	—	$	—	$	29,629	$	29,845	$	51,684	$	51,699
Due after one year through five years	116,726		125,768		25,010		25,009			77,962		81,538		19,076		19,222
Due after five years through ten years	65,790		67,928		1,203		1,203			73,429		75,314		2,329		2,333
Due after ten years	659,425		641,825		4,918		4,934			454,281		448,079		20,812		20,806
	964,177		958,041		31,131		31,146			635,301		634,776		93,901		94,060

Residential mortgage-backed securities	53,780		55,005		30,183		30,458			48,761		49,661		29,268		29,727
Collateralized mortgage obligations	100,938		96,982		58,825		58,297			67,018		64,451		189,791		189,742
Commercial mortgage-backed securities	596		656		—		—			579		627		—		—
	$	1,119,491	$	1,110,684	$	120,139	$	119,901	$	751,659	$	749,515	$	312,960	$	313,529

The Company realized a net ~~gains~~loss of $0.6 million and a net gain of $0.8 million from its trading securities portfolio during the three months ended June 30, 2015 and 2014, respectively, and net gains of ~~$0.2~~$2.8 million and ~~$1.6~~$1.4 million during the ~~three and nine~~six months ended ~~September~~June 30, ~~2014, respectively,~~2015 and ~~a net gain of $0.1 million and a net loss of $2.6 million during the three and nine months ended September 30, 2013,~~2014, respectively, which are recorded as a component of other noninterest income within the consolidated statements of operations.

Table of Contents

Securities with a carrying amount of ~~$910.2~~$846.1 million and ~~$1.0 billion~~$895.5 million (with a fair value of ~~$929.3~~$839.8 million and ~~$938.1~~$890.3 million, respectively) at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, 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.

Mortgage-backed securities and collateralized mortgage obligations consist principally of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States.

At ~~September~~both June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, NLC had investments on deposit in custody for various state insurance departments with carrying values of ~~$9.3 million and $9.4 million, respectively.~~$9.2 million.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses

Non-covered loans refer to loans not covered by the FDIC loss-share agreements. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands).

	September 30,			December 31,
	2014			2013			June 30,		December 31,
Commercial and industrial	$	1,677,389		$	1,637,266
							2015		2014
Commercial and industrial (1)							$	2,201,067	$	1,758,851
Real estate	1,606,718			1,457,253				2,174,902		1,694,835
Construction and land development	429,216			364,551				531,079		413,643
Consumer	55,520			55,576				49,921		53,147
	3,768,843			3,514,646				4,956,969		3,920,476
Allowance for non-covered loan losses	(39,027		)	(33,241		)		(40,484)		(37,041)
Total non-covered loans, net of allowance	$	3,729,816		$	3,481,405		$	4,916,485	$	3,883,435

(1)

Includes margin loans to customers and correspondents of $626.8 million and $378.4 million at June 30, 2015 and December 31, 2014, respectively.

The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. 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 orand complexity of the credit. The financial components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and statement of operations ratios. The Bank’s loan policy provides specific underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. The guidelines for each individual portfolio segment set forth permissible and impermissible loan types. With respect to each loan type, the guidelines within the Bank’s loan policy provide minimum requirements for the underwriting factors listed above. The Bank’s underwriting procedures also include an analysis of any collateral and guarantor. Collateral analysis includes a complete description of the collateral, as well as ~~determining~~determined 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 cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. The Bank’s underwriting standards are governed by adherence to its loan policy. The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided.

The Bank maintains a 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.

Table of Contents

In connection with the ~~PlainsCapital Merger and the FNB Transaction,~~Bank Transactions, the Company acquired non-covered loans both with and without evidence of credit quality deterioration since origination. The following table presents the carrying values and the outstanding balances of the non-covered PCI loans (in thousands).

September 30,

December 31,

2014

2013

Carrying amount

$
53,383

$
100,392

Outstanding balance

73,787

141,983


	June 30,		December 31,
	2015		2014
Carrying amount	$	98,766	$	48,909
Outstanding balance		129,125		67,740

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013			2014			2013			2015		2014		2015		2014
Balance, beginning of period	$	11,904		$	20,118		$	17,601		$	17,553		$	24,477	$	17,713	$	12,814	$	17,601
Additions	—			1,923			—			1,923				—		—		14,579		—
Increases in expected cash flows	4,270			4,697			13,886			16,834
Reclassifications from (to) nonaccretable difference, net(1)														4,660		6,141		4,940		9,616
Disposals of loans	(744		)	(441		)	(4,928		)	(2,273		)		(2,329)		(3,581)		(2,778)		(4,184)
Accretion	(2,199		)	(4,854		)	(13,328		)	(12,594		)		(4,640)		(8,369)		(7,387)		(11,129)
Balance, end of period	$	13,231		$	21,443		$	13,231		$	21,443		$	22,168	$	11,904	$	22,168	$	11,904

(1)

Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts. Reclassifications to nonaccretable difference occur when accruing loans are moved to nonaccrual and expected cash flows are no longer predictable and the accretable yield is eliminated.

The remaining nonaccretable difference for non-covered PCI loans was ~~$19.4~~$38.3 million and ~~$38.6~~$18.4 million at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively.

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.

Non-covered impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans.

The amounts shown in following tables include loans accounted for on an individual basis, as well as ~~acquired loans accounted for in pools (“~~Pooled ~~Loans”).~~Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level. Non-covered impaired loans are summarized by class in the following tables (in thousands).

Unpaid

Recorded

Recorded

Total

Contractual

Investment with

Investment with

Recorded

Related

September 30, 2014

Principal Balance

No Allowance

Allowance

Investment

Allowance

Commercial and industrial:

Secured

$
50,070

$
12,966

$
12,253

$
25,219

$
3,406

Unsecured

4,334

286

—

286

—

Real estate:

Secured by commercial properties

30,202

4,490

18,537

23,027

1,659

Secured by residential properties

4,893

1,932

1,192

3,124

59

Construction and land development:

Residential construction loans

—

—

—

—

—

Commercial construction loans and land development

17,163

9,032

1,450

10,482

164

Consumer

6,354

317

2,338

2,655

421

$
113,016

$
29,023

$
35,770

$
64,793

$
5,709

	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related		Unpaid		Recorded		Recorded		Total
December 31, 2013	Principal Balance		No Allowance		Allowance		Investment		Allowance
											Contractual		Investment with		Investment with		Recorded		Related
June 30, 2015											Principal Balance		No Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Secured	$	63,636	$	21,540	$	17,147	$	38,687	$	3,126	$	67,387	$	19,005	$	14,557	$	33,562	$	3,476
Unsecured	11,865		336		1,204		1,540		15			3,714		70		—		70		—
Real estate:
Secured by commercial properties	49,437		20,317		16,070		36,387		339			84,179		36,522		25,108		61,630		2,125
Secured by residential properties	5,407		1,745		1,648		3,393		39			21,061		12,067		3,602		15,669		162
Construction and land development:
Residential construction loans	33		—		—		—		—			534		123		228		351		4
Commercial construction loans and land development	48,628		15,337		4,592		19,929		39			9,090		4,135		1,494		5,629		165
Consumer	7,946		4,509		—		4,509		—			4,799		1,104		61		1,165		37
	$	186,952	$	63,784	$	40,661	$	104,445	$	3,558	$	190,764	$	73,026	$	45,050	$	118,076	$	5,969

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related
December 31, 2014	Principal Balance		No Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Secured	$	51,036	$	14,096	$	11,783	$	25,879	$	3,341
Unsecured		4,120		92		68		160		—
Real estate:
Secured by commercial properties		29,865		7,243		15,536		22,779		1,878
Secured by residential properties		4,701		1,583		1,390		2,973		85
Construction and land development:
Residential construction loans		—		—		—		—		—
Commercial construction loans and land development		16,108		8,062		1,819		9,881		154
Consumer		5,785		171		1,967		2,138		282
	$	111,615	$	31,247	$	32,563	$	63,810	$	5,740

Average investment in non-covered impaired loans is summarized by class in the following table (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013		2015		2014		2015		2014
Commercial and industrial:
Secured	$	24,897	$	55,797	$	31,953	$	62,399	$	36,525	$	29,852	$	29,721	$	31,631
Unsecured	395		1,826		913		2,548			35		865		115		1,022
Real estate:
Secured by commercial properties	23,715		45,114		29,707		48,798			62,439		27,120		42,205		30,395
Secured by residential properties	3,611		5,400		3,259		5,682			18,553		4,541		9,321		3,745
Construction and land development:
Residential construction loans	—		—		—		354			292		—		176		—
Commercial construction loans and land development	10,674		25,916		15,206		28,502			7,942		13,313		7,755		15,398
Consumer	2,872		4,715		3,582		4,720			1,357		3,410		1,652		3,799
	$	66,164	$	138,768	$	84,620	$	153,003	$	127,143	$	79,101	$	90,945	$	85,990

Non-covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).


	September 30,		December 31,		June 30,		December 31,
	2014		2013		2015		2014
Commercial and industrial:
Secured	$	17,050	$	15,430	$	23,283	$	16,488
Unsecured	286		1,300			70		160
Real estate:
Secured by commercial properties	464		2,638			4,048		438
Secured by residential properties	1,269		398			866		1,253
Construction and land development:
Residential construction loans	—		—			123		—
Commercial construction loans and land development	783		112			130		703
Consumer	—		—			21		—
	$	19,852	$	19,878	$	28,541	$	19,042

At ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, non-covered non-accrual loans included non-covered PCI loans of ~~$8.5~~$9.6 million and ~~$15.8~~$6.6 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably estimated. In addition to the non-covered non-accrual loans in the table above, ~~$4.4~~$1.7 million and ~~$3.5~~$3.0 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively.

Table of Contents

Interest income including recoveries and cash payments recorded on non-covered ~~accruing~~ impaired loans ~~and on non-covered non-accrual loans~~ was ~~$0.1~~$1.8 million and ~~$2.6~~$1.1 million ~~for~~during the three ~~and nine~~ months ended ~~September~~June 30, 2015 and 2014, ~~respectively. Interest income recorded on non-covered accruing impaired loans~~respectively, and ~~on non-covered non-accrual loans for~~$2.4 million and $2.5 million during the ~~three and nine~~six months ended ~~September~~June 30, ~~2013 was nominal.~~2015 and 2014, respectively.

The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank 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

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

~~Information regarding~~The outstanding balance of TDRs granted in the six months ended June 30, 2014 is shown in the following ~~tables~~table (in thousands). There were no TDRs granted ~~for~~during the three months ended ~~September~~June 30, 2015 and June 30, 2014. The TDR granted during the three months ended March 31, 2015 was paid off as of June 30, 2015. At ~~September~~June 30, ~~2014,~~2015, the Bank had nonominal unadvanced commitments to borrowers whose loans have been restructured in TDRs. At December 31, ~~2013,~~2014, the Bank had $0.5 million in ~~such~~ unadvanced ~~commitments.~~

Recorded Investment in Loans Modified by

Interest Rate

Payment Term

Total

Nine months ended September 30, 2014

A/B Note

Adjustment

Extension

Modification

Commercial and industrial:

Secured

$
—

$
—

$
—

$
—

Unsecured

—

—

—

—

Real estate:

Secured by commercial properties

—

—

326

326

Secured by residential properties

—

—

253

253

Construction and land development:

Residential construction loans

—

—

—

—

Commercial construction loans and land development

—

—

133

133

Consumer

—

—

—

—

$
—

$
—

$
712

$
712

Recorded Investment in Loans Modified by

Interest Rate

Payment Term

Total

Three months ended September 30, 2013

A/B Note

Adjustment

Extension

Modification

Commercial and industrial:

Secured

$
—

$
—

$
333

$
333

Unsecured

—

—

—

—

Real estate:

Secured by commercial properties

—

—

—

—

Secured by residential properties

—

—

—

—

Construction and land development:

Residential construction loans

—

—

—

—

Commercial construction loans and land development

—

—

—

—

Consumer

—

—

—

—

$
—

$
—

$
333

$
333

Recorded Investment in Loans Modified by

Interest Rate

Payment Term

Total

Nine months ended September 30, 2013

A/B Note

Adjustment

Extension

Modification

Commercial and industrial:

Secured

$
—

$
—

$
9,764

$
9,764

Unsecured

—

—

—

—

Real estate:

Secured by commercial properties

—

—

276

276

Secured by residential properties

—

—

905

905

Construction and land development:

Residential construction loans

—

—

—

—

Commercial construction loans and land development

—

—

500

500

Consumer

—

—

—

—

$
—

$
—

$
11,445

$
11,445

~~Table of Contents~~commitments to borrowers whose loans have been restructured in TDRs.

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


	Recorded Investment in Loans Modified by
			Interest Rate		Payment Term		Total
Six months ended June 30, 2014	A/B Note		Adjustment		Extension		Modification
Commercial and industrial:
Secured	$	—	$	—	$	—	$	—
Unsecured		—		—		—		—
Real estate:
Secured by commercial properties		—		—		336		336
Secured by residential properties		—		—		258		258
Construction and land development:
Residential construction loans		—		—		—		—
Commercial construction loans and land development		—		—		138		138
Consumer		—		—		—		—
	$	—	$	—	$	732	$	732

There were no TDRs granted in the ~~twelve~~three months ~~preceding September~~ended June 30, ~~2014~~2015 and ~~2013,~~2014, for which a payment was at least 30 days past due in the three and ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively.

An analysis of the aging of the Bank’s non-covered loan portfolio is shown in the following tables (in thousands).

															Accruing Loans
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due																Accruing Loans (Non-PCI)
September 30, 2014	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
																	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due
June 30, 2015																	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial and industrial:
Secured	$	4,285	$	868	$	7,910	$	13,063	$	1,541,305	$	16,335	$	1,570,703	$	—	$	17,216	$	666	$	8,408	$	26,290	$	2,069,732	$	15,756	$	2,111,778	$	—
Unsecured	155		33		—		188		106,316		182		106,686		—			4		—		—		4		89,285		—		89,289		—
Real estate:
Secured by commercial properties	289		—		—		289		1,101,362		22,563		1,124,214		—			282		—		—		282		1,409,976		61,224		1,471,482		—
Secured by residential properties	1,396		72		49		1,517		479,037		1,950		482,504		—			574		207		397		1,178		687,356		14,886		703,420		341
Construction and land development:
Residential construction loans	—		—		—		—		64,288		—		64,288		—			166		—		—		166		78,435		228		78,829		—
Commercial construction loans and land development	49		—		650		699		354,531		9,698		364,928		—			2,062		—		—		2,062		444,681		5,507		452,250		—
Consumer	206		40		—		246		52,619		2,655		55,520		—			327		233		—		560		48,196		1,165		49,921		—
	$	6,380	$	1,013	$	8,609	$	16,002	$	3,699,458	$	53,383	$	3,768,843	$	—	$	20,631	$	1,106	$	8,805	$	30,542	$	4,827,661	$	98,766	$	4,956,969	$	341

Accruing Loans

Loans Past Due

Loans Past Due

Loans Past Due

Total

Current

PCI

Total

Past Due

December 31, 2013

30-59 Days

60-89 Days

90 Days or More

Past Due Loans

Loans

Loans

Loans

90 Days or More

Commercial and industrial:

Secured

$
2,171

$
277

$
1,354

$
3,802

$
1,492,793

$
35,372

$
1,531,967

$
272

Unsecured

333

9

60

402

103,453

1,444

105,299

59

Real estate:

Secured by commercial properties

192

—

132

324

1,044,437

36,255

1,081,016

—

Secured by residential properties

1,045

36

203

1,284

371,958

2,995

376,237

203

Construction and land development:

Residential construction loans

415

—

—

415

64,664

—

65,079

—

Commercial construction loans and land development

41

881

112

1,034

278,621

19,817

299,472

—

Consumer

201

60

—

261

50,806

4,509

55,576

—

$
4,398

$
1,263

$
1,861

$
7,522

$
3,406,732

$
100,392

$
3,514,646

$
534

Table of Contents


															Accruing Loans (Non-PCI)
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due
December 31, 2014	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial and industrial:
Secured	$	6,073	$	964	$	8,022	$	15,059	$	1,620,000	$	13,374	$	1,648,433	$	—
Unsecured		35		3		—		38		110,312		68		110,418		—
Real estate:
Secured by commercial properties		67		—		—		67		1,173,504		22,341		1,195,912		—
Secured by residential properties		454		1,187		—		1,641		495,472		1,810		498,923		—
Construction and land development:
Residential construction loans		175		—		—		175		64,871		—		65,046		—
Commercial construction loans and land development		4,319		—		575		4,894		334,525		9,178		348,597		—
Consumer		414		37		—		451		50,558		2,138		53,147		—
	$	11,537	$	2,191	$	8,597	$	22,325	$	3,849,242	$	48,909	$	3,920,476	$	—

In addition to the non-covered loans shown in the table above, $30.7 million and $19.2 million of loans included in loans held for sale were 90 days past due and accruing interest at June 30, 2015 and December 31, 2014, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

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 in the state and local markets.

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

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

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.

PCI — – “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in thousands).

September 30, 2014

Pass

Special Mention

Substandard

PCI

Total

Commercial and industrial:

Secured

$
1,518,321

$
2,967

$
33,080

$
16,335

$
1,570,703

Unsecured

106,400

—

104

182

106,686

Real estate:

Secured by commercial properties

1,097,637

717

3,297

22,563

1,124,214

Secured by residential properties

475,967

—

4,587

1,950

482,504

Construction and land development:

Residential construction loans

64,288

—

—

—

64,288

Commercial construction loans and land development

353,782

—

1,448

9,698

364,928

Consumer

52,814

—

51

2,655

55,520

$
3,669,209

$
3,684

$
42,567

$
53,383

$
3,768,843

December 31, 2013	Pass		Special Mention		Substandard		PCI		Total

June 30, 2015											Pass		Special Mention		Substandard		PCI		Total
Commercial and industrial:
Secured	$	1,450,734	$	16,840	$	29,021	$	35,372	$	1,531,967	$	2,029,443	$	3,818	$	62,761	$	15,756	$	2,111,778
Unsecured	103,674		12		169		1,444		105,299			89,210		—		79		—		89,289
Real estate:
Secured by commercial properties	1,038,930		4,436		1,395		36,255		1,081,016			1,385,374		2,105		22,779		61,224		1,471,482
Secured by residential properties	367,758		—		5,484		2,995		376,237			683,407		1,347		3,780		14,886		703,420
Construction and land development:
Residential construction loans	65,079		—		—		—		65,079			78,478		—		123		228		78,829
Commercial construction loans and land development	275,808		3,384		463		19,817		299,472			446,124		—		619		5,507		452,250
Consumer	51,052		1		14		4,509		55,576			48,679		—		77		1,165		49,921
	$	3,353,035	$	24,673	$	36,546	$	100,392	$	3,514,646	$	4,760,715	$	7,270	$	90,218	$	98,766	$	4,956,969

December 31, 2014

Pass

Special Mention

Substandard

PCI

Total

Commercial and industrial:

Secured

$
1,566,208

$
1,105

$
67,746

$
13,374

$
1,648,433

Unsecured

110,256

—

94

68

110,418

Real estate:

Secured by commercial properties

1,151,454

712

21,405

22,341

1,195,912

Secured by residential properties

492,549

—

4,564

1,810

498,923

Construction and land development:

Residential construction loans

65,046

—

—

—

65,046

Commercial construction loans and land development

338,078

—

1,341

9,178

348,597

Consumer

50,968

—

41

2,138

53,147

$
3,774,559

$
1,817

$
95,191

$
48,909

$
3,920,476

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company’s Board of Directors and the 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 Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated credit losses are the probable current amount of loans that the Company 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, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs of loans acquired in the Bank Transactions that occurred prior to ~~the PlainsCapital Merger~~their acquisition represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on acquired loans charged-off subsequent to ~~the PlainsCapital Merger~~their acquisition are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount. The Bank’s loan portfolio is designated into two populations: acquired loans and originated loans. The allowance for loan losses is calculated separately for acquired and originated loans.

~~Originated Loans~~

The Company has 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. Impaired loans that are equal to or greater than $0.5 million are 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

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

is collateral dependent. Specific reserves are provided in the 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, adjusted for qualitative or environmental factors. The Bank uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.

While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon which the Company determines 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 the volume and severity of past due, nonaccrual and classified loans;~~

·~~changes in the nature, volume and terms of loans in the portfolio;~~

·~~changes in lending policies and procedures;~~

·~~changes in economic and business conditions and developments that affect the collectability of the portfolio;~~

·~~changes in lending management and staff;~~

·~~changes in the loan review system and the degree of oversight by the Bank’s board of directors; and~~

·~~any concentrations of credit and changes in the level of such concentrations.~~

Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.

The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status 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.

Homogeneous loans, such as 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 homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At September 30, 2014 and December 31, 2013, there were no material delinquencies in these types of loans.

~~Acquired Loans~~

Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in each of the FNB Transaction and the SWS Merger are accounted for both in pools and at the individual loan level. Cash flows expected to be collected are recast quarterly for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions ~~similar~~(similar to those used for the initial fair value ~~estimate.~~estimate). Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any

Table of Contents

previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield, which will be taken into income over the remaining life of the loan.

The allowance for both originated and acquired loans 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 non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).

Commercial and

Construction and

Three months ended September 30, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Balance, beginning of period

$
18,062

$
9,998

$
8,086

$
285

$
36,431

Provision charged to operations

2,302

1,064

395

425

4,186

Loans charged off

(1,976
)
(28
)
—

(116
)
(2,120
)
Recoveries on charged off loans

457

31

18

24

530

Balance, end of period

$
18,845

$
11,065

$
8,499

$
618

$
39,027

Commercial and

Construction and

Nine months ended September 30, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Balance, beginning of period

$
16,865

$
8,331

$
7,957

$
88

$
33,241

Provision charged to operations

5,876

2,689

361

731

9,657

Loans charged off

(5,707
)
(100
)
—

(275
)
(6,082
)
Recoveries on charged off loans

1,811

145

181

74

2,211

Balance, end of period

$
18,845

$
11,065

$
8,499

$
618

$
39,027

Commercial and

Construction and

Three months ended September 30, 2013

Industrial

Real Estate

Land Development

Consumer

Total

Balance, beginning of period

$
13,806

$
5,339

$
7,050

$
42

$
26,237

Provision charged to operations

8,879

1,776

6

(3
)
10,658

Loans charged off

(3,220
)
(53
)
(524
)
(3
)
(3,800
)
Recoveries on charged off loans

42

26

2

15

85

Balance, end of period

$
19,507

$
7,088

$
6,534

$
51

$
33,180

	Commercial and						Construction and
Nine months ended September 30, 2013	Industrial			Real Estate			Land Development			Consumer			Total
																Commercial and				Construction and
Three Months Ended June 30, 2015																Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	1,845		$	977		$	582		$	5		$	3,409		$	20,643	$	12,704	$	5,842	$	176	$	39,365
Provision charged to operations	22,519			6,033			6,323			77			34,952
Provision charged to (recapture from) operations																	(2,442)		1,863		1,003		163		587
Loans charged off	(7,314		)	(149		)	(524		)	(74		)	(8,061		)		(678)		(92)		—		(146)		(916)
Recoveries on charged off loans	2,457			227			153			43			2,880				1,330		90		—		28		1,448
Balance, end of period	$	19,507		$	7,088		$	6,534		$	51		$	33,180		$	18,853	$	14,565	$	6,845	$	221	$	40,484


	Commercial and				Construction and
Six Months Ended June 30, 2015	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	18,999	$	11,131	$	6,450	$	461	$	37,041
Provision charged to (recapture from) operations		(570)		3,669		395		(113)		3,381
Loans charged off		(1,620)		(369)		—		(180)		(2,169)
Recoveries on charged off loans		2,044		134		—		53		2,231
Balance, end of period	$	18,853	$	14,565	$	6,845	$	221	$	40,484

~~Table of Contents~~


	Commercial and				Construction and
Three Months Ended June 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	16,726	$	9,682	$	8,096	$	141	$	34,645
Provision charged to (recapture from) operations		3,631		306		(51)		197		4,083
Loans charged off		(2,924)		(72)		—		(85)		(3,081)
Recoveries on charged off loans		629		82		41		32		784
Balance, end of period	$	18,062	$	9,998	$	8,086	$	285	$	36,431

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


	Commercial and				Construction and
Six Months Ended June 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	16,865	$	8,331	$	7,957	$	88	$	33,241
Provision charged to (recapture from) operations		3,574		1,625		(34)		306		5,471
Loans charged off		(3,731)		(72)		—		(159)		(3,962)
Recoveries on charged off loans		1,354		114		163		50		1,681
Balance, end of period	$	18,062	$	9,998	$	8,086	$	285	$	36,431

The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

	Commercial and				Construction and
September 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
											Commercial and				Construction and
June 30, 2015											Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	8,354	$	1,450	$	783	$	—	$	10,587	$	18,958	$	103	$	—	$	—	$	19,061
Loans collectively evaluated for impairment	1,652,518		1,580,755		418,735		52,865		3,704,873			2,166,353		2,098,689		525,344		48,756		4,839,142
PCI Loans	16,517		24,513		9,698		2,655		53,383			15,756		76,110		5,735		1,165		98,766
	$	1,677,389	$	1,606,718	$	429,216	$	55,520	$	3,768,843	$	2,201,067	$	2,174,902	$	531,079	$	49,921	$	4,956,969

Commercial and

Construction and

December 31, 2013

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
2,273

$
373

$
112

$
—

$
2,758

Loans collectively evaluated for impairment

1,598,177

1,417,630

344,622

51,067

3,411,496

PCI Loans

36,816

39,250

19,817

4,509

100,392

$
1,637,266

$
1,457,253

$
364,551

$
55,576

$
3,514,646


	Commercial and				Construction and
December 31, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	11,842	$	1,420	$	703	$	—	$	13,965
Loans collectively evaluated for impairment		1,733,567		1,669,264		403,762		51,009		3,857,602
PCI Loans		13,442		24,151		9,178		2,138		48,909
	$	1,758,851	$	1,694,835	$	413,643	$	53,147	$	3,920,476

Table of Contents

The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

Commercial and

Construction and

September 30, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
421

$
—

$
—

$
—

$
421

Loans collectively evaluated for impairment

15,439

9,347

8,335

197

33,318

PCI Loans

2,985

1,718

164

421

5,288

$
18,845

$
11,065

$
8,499

$
618

$
39,027

	Commercial and				Construction and
December 31, 2013	Industrial		Real Estate		Land Development		Consumer		Total
											Commercial and				Construction and
June 30, 2015											Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	421	$	—	$	—	$	—	$	421	$	917	$	—	$	—	$	—	$	917
Loans collectively evaluated for impairment	13,724		7,953		7,918		88		29,683			15,377		12,278		6,676		184		34,515
PCI Loans	2,720		378		39		—		3,137			2,559		2,287		169		37		5,052
	$	16,865	$	8,331	$	7,957	$	88	$	33,241	$	18,853	$	14,565	$	6,845	$	221	$	40,484

Commercial and



Construction and




December 31, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
421

$
—

$
—

$
—

$
421

Loans collectively evaluated for impairment

15,658

9,168

6,296

179

31,301

PCI Loans

2,920

1,963

154

282

5,319

$
18,999

$
11,131

$
6,450

$
461

$
37,041

6. Covered Assets and Indemnification Asset

~~As discussed in Note 2 to the consolidated financial statements,~~On September 13, 2013, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB in an FDIC-assisted ~~transaction~~transaction. As part of the Purchase and Assumption Agreement by and among the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A Agreement”), the Bank and the FDIC entered into loss-share agreements covering future losses incurred on ~~September 13, 2013.~~certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as “covered loans” and “covered OREO”, respectively, and these assets are presented as separate line items in the Company’s consolidated balance sheets. Collectively, covered loans and covered OREO are referred to as “covered assets”. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from ~~the Bank~~September 13, 2013 (the “Bank Closing ~~Date,~~Date”), and the loss recovery provisions to the FDIC are in effect for 8 years 10 and 10 years, respectively, from the Bank Closing Date. The asset arising from the loss-share agreements, ~~which we refer~~referred to as the “FDIC Indemnification Asset,” is measured separately from the covered loan portfolio because the agreements are not contractually embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.

In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ~~ten~~10 years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Covered Loans and Allowance for Covered Loan Losses

Loans acquired in the FNB Transaction that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may be received from the FDIC.

The Bank’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were preliminarily segregated between those considered to be PCI loans and those without credit impairment at acquisition.

In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. The Company’s accounting policies for acquired covered loans, including covered PCI loans, are consistent with that of acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose

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of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.

The following table presents the carrying value of the covered loans summarized by portfolio segment (in thousands).


	September 30,			December 31,			June 30,		December 31,
	2014			2013			2015		2014
Commercial and industrial	$	33,510		$	66,943		$	20,640	$	30,780
Real estate	637,297			787,982				427,518		552,850
Construction and land development	80,468			151,444				46,075		59,010
Consumer	—			—				—		—
Total covered loans	751,275			1,006,369
								494,233		642,640
Allowance for covered loans	(3,761		)	(1,061		)		(934)		(4,611)
Total covered loans, net of allowance	$	747,514		$	1,005,308		$	493,299	$	638,029

The following table presents the carrying value and the outstanding contractual balance of the covered PCI loans (in thousands).


	September 30,		December 31,		June 30,		December 31,
	2014		2013		2015		2014
Carrying amount	$	527,748	$	729,156	$	311,126	$	435,388
Outstanding balance	797,799		1,022,514			537,856		685,393

Changes in the accretable yield for the covered PCI loans were as follows (in thousands).


	Three Months Ended			Nine Months Ended			Three Months Ended June 30,				Six Months Ended June 30,
	September 30, 2014			September 30, 2014			2015		2014		2015		2014
Balance, beginning of period	$	186,141		$	156,548		$	193,997	$	176,469	$	193,493	$	156,548
Increases in expected cash flows	25,026			82,607
Transfer of loans to covered OREO	(281		)	5,091
Reclassifications from (to) nonaccretable difference, net(1)								9,737		26,871		26,001		57,581
Transfer of loans to covered OREO(2)								327		111		1,499		5,372
Accretion	(18,146		)	(51,506		)		(18,080)		(17,310)		(35,012)		(33,360)
Balance, end of period	$	192,740		$	192,740		$	185,981	$	186,141	$	185,981	$	186,141

(1)

(2)

Transfer of loans to covered OREO is the difference between the value removed from the pool and the expected cash flows for the loan.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The remaining nonaccretable difference for covered PCI loans was ~~$368.2~~$300.7 million and ~~$517.9~~$382.5 million at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively. During the three and six months ended June 30, 2015 and 2014, a combination of factors affecting the inputs to the Bank’s quarterly recast process led to the reclassifications from nonaccretable difference to accretable yield. These transfers resulted from revised cash flows that reflect better-than-expected performance of the covered PCI loan portfolio as a result of the Bank’s strategic decision to dedicate resources to the liquidation of covered loans during the noted periods.

Covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. Substantially all covered impaired loans are PCI loans. The amounts shown in following tables include Pooled Loans, as well as loans accounted for on an individual basis. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level.

Table of Contents

Covered impaired loans are summarized by class in the following tables (in thousands).

	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related		Unpaid		Recorded		Recorded		Total
September 30, 2014	Principal Balance		No Allowance		Allowance		Investment		Allowance
											Contractual		Investment with		Investment with		Recorded		Related
June 30, 2015											Principal Balance		No Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Secured	$	29,812	$	16,977	$	—	$	16,977	$	—	$	20,749	$	8,831	$	795	$	9,626	$	104
Unsecured	15,103		6,697		882		7,579		882			11,397		3,408		92		3,500		1
Real estate:
Secured by commercial properties	444,761		225,555		53,890		279,445		1,208			301,832		121,529		29,735		151,264		319
Secured by residential properties	254,400		152,003		9,400		161,403		817			206,865		109,214		6,282		115,496		135
Construction and land development:
Residential construction loans	3,060		1,637		—		1,637		—			1,809		914		—		914		—
Commercial construction loans and land development	120,344		51,492		13,515		65,007		765			76,884		10,084		24,778		34,862		326
Consumer	—		—		—		—		—			—		—		—		—		—
	$	867,480	$	454,361	$	77,687	$	532,048	$	3,672	$	619,536	$	253,980	$	61,682	$	315,662	$	885

Unpaid

Recorded

Recorded

Total

Contractual

Investment with

Investment with

Recorded

Related

December 31, 2013

Principal Balance

No Allowance

Allowance

Investment

Allowance

Commercial and industrial:

Secured

$
43,957

$
28,611

$
—

$
28,611

$
—

Unsecured

16,280

9,008

882

9,890

882

Real estate:

Secured by commercial properties

528,825

365,346

—

365,346

—

Secured by residential properties

289,094

199,581

—

199,581

—

Construction and land development:

Residential construction loans

8,920

5,280

—

5,280

—

Commercial construction loans and land development

183,117

121,363

—

121,363

—

Consumer

—

—

—

—

—

$
1,070,193

$
729,189

$
882

$
730,071

$
882


	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related
December 31, 2014	Principal Balance		No Allowance		Allowance		Investment		Allowance
Commercial and industrial:
Secured	$	26,447	$	7,436	$	6,636	$	14,072	$	265
Unsecured		14,111		2,107		4,697		6,804		882
Real estate:
Secured by commercial properties		387,302		193,111		35,142		228,253		2,381
Secured by residential properties		235,505		129,571		12,918		142,489		937
Construction and land development:
Residential construction loans		2,749		1,018		354		1,372		69
Commercial construction loans and land development		94,949		45,646		—		45,646		—
Consumer		—		—		—		—		—
	$	761,063	$	378,889	$	59,747	$	438,636	$	4,534

Average investment in covered impaired loans is summarized by class in the following table (in thousands).

Three Months Ended

Nine Months Ended

September 30, 2014

September 30, 2014

Commercial and industrial:

Secured

$
17,953

$
22,794

Unsecured

7,994

8,735

Real estate:

Secured by commercial properties

297,511

322,396

Secured by residential properties

168,636

180,492

Construction and land development:

Residential construction loans

2,356

3,459

Commercial construction loans and land development

71,795

93,185

Consumer

—

—

$
566,245

$
631,061


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Commercial and industrial:
Secured	$	10,947	$	20,585	$	11,849	$	23,770
Unsecured		4,199		8,688		5,152		9,149
Real estate:
Secured by commercial properties		165,012		327,508		189,759		340,462
Secured by residential properties		121,668		182,264		128,993		187,725
Construction and land development:
Residential construction loans		1,107		3,669		1,143		4,178
Commercial construction loans and land development		36,972		84,800		40,254		99,973
Consumer		—		—		—		—
	$	339,905	$	627,514	$	377,150	$	665,257

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

September 30,

December 31,

2014

2013

Commercial and industrial:

Secured

$
1,003

$
91

Unsecured

883

882

Real estate:

Secured by commercial properties

36,237

40

Secured by residential properties

1,051

209

Construction and land development:

Residential construction loans

1,102

575

Commercial construction loans and land development

14

—

Consumer

—

—

$
40,290

$
1,797


	June 30,		December 31,
	2015		2014
Commercial and industrial:
Secured	$	590	$	442
Unsecured		6		883
Real estate:
Secured by commercial properties		11,488		30,823
Secured by residential properties		2,186		1,046
Construction and land development:
Residential construction loans		801		1,018
Commercial construction loans and land development		25		11
Consumer		—		—
	$	15,096	$	34,223

At ~~September~~June 30, 2015 and December 31, 2014, covered non-accrual loans included covered PCI loans of ~~$36.6~~$11.0 million and $31.2 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these covered PCI loans can no longer be reasonably estimated.

Interest income recorded on covered accruing impaired loans and on covered non-accrual loans ~~for~~during the three and ~~nine~~six months ended ~~September~~June 30, 2015 and 2014 was nominal. Except as noted above, covered PCI loans are considered to be performing due to the application of the accretion method. ~~Additionally,~~

The Bank classifies loan modifications of covered loans as TDRs in a manner consistent with that of non-covered loans as discussed in Note 5 to the consolidated financial statements. The outstanding balance of TDRs granted in the three and six months ended June 30, 2015 is shown in the following tables (in thousands). Pooled Loans are not in the scope of the disclosure requirements for TDRs. There were no ~~acquired covered performing~~TDRs granted during the period from September 14, 2013 through June 30, 2014. At June 30, 2015, the Bank had nominal unadvanced commitments to borrowers whose loans have been ~~modified~~restructured in TDRs.


	Recorded Investment in Loans Modified by
			Interest Rate		Payment Term		Total
Three Months Ended June 30, 2015	A/B Note		Adjustment		Extension		Modification
Commercial and industrial:
Secured	$	—	$	—	$	—	$	—
Unsecured		—		—		—		—
Real estate:
Secured by commercial properties		—		—		—		—
Secured by residential properties		121		136		—		257
Construction and land development:
Residential construction loans		—		—		—		—
Commercial construction loans and land development		—		—		—		—
Consumer		—		—		—		—
	$	121	$	136	$	—	$	257

Table of Contents


	Recorded Investment in Loans Modified by
			Interest Rate		Payment Term		Total
Six Months Ended June 30, 2015	A/B Note		Adjustment		Extension		Modification
Commercial and industrial:
Secured	$	—	$	—	$	—	$	—
Unsecured		—		—		—		—
Real estate:
Secured by commercial properties		—		—		566		566
Secured by residential properties		121		136		280		537
Construction and land development:
Residential construction loans		—		—		—		—
Commercial construction loans and land development		—		—		—		—
Consumer		—		—		—		—
	$	121	$	136	$	846	$	1,103

The following table presents information regarding TDRs granted in the three and six months ended June 30, 2015 for which a ~~TDR.~~payment was at least 30 days past due in the three months ended June 30, 2015 (dollars in thousands).


	Number of	Recorded
	Loans	Investment
Commercial and industrial:
Secured	—	$	—
Unsecured	—		—
Real estate:
Secured by commercial properties	1		566
Secured by residential properties	1		280
Construction and land development:
Residential construction loans	—		—
Commercial construction loans and land development	—		—
Consumer	—		—
	2	$	846

An analysis of the aging of the Bank’s covered loan portfolio is shown in the following tables (in thousands).

															Accruing Loans
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due																Accruing Loans
September 30, 2014	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
																	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		(Non‑PCI) Past Due
June 30, 2015																	30‑59 Days		60‑89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial and industrial:
Secured	$	3	$	11	$	993	$	1,007	$	7,428	$	15,963	$	24,398	$	11	$	—	$	—	$	590	$	590	$	6,013	$	9,035	$	15,638	$	—
Unsecured	—		97		—		97		1,436		7,579		9,112		—			—		—		5		5		1,502		3,495		5,002		—
Real estate:
Secured by commercial properties	396		—		105		501		51,704		278,959		331,164		—			134		254		103		491		33,690		150,802		184,983		—
Secured by residential properties	1,437		608		880		2,925		143,478		159,730		306,133		519			1,568		1,276		1,596		4,440		125,251		112,844		242,535		258
Construction and land development:
Residential construction loans	219		—		994		1,213		547		535		2,295		—			—		—		801		801		265		114		1,180		—
Commercial construction loans and land development	52		16		12		80		13,111		64,982		78,173		12			35		—		8		43		10,016		34,836		44,895		—
Consumer	—		—		—		—		—		—		—		—			—		—		—		—		—		—		—		—
	$	2,107	$	732	$	2,984	$	5,823	$	217,704	$	527,748	$	751,275	$	542	$	1,737	$	1,530	$	3,103	$	6,370	$	176,737	$	311,126	$	494,233	$	258

Accruing Loans

Loans Past Due

Loans Past Due

Loans Past Due

Total

Current

PCI

Total

Past Due

December 31, 2013

30-59 Days

60-89 Days

90 Days or More

Past Due Loans

Loans

Loans

Loans

90 Days or More

Commercial and industrial:

Secured

$
3,904

$
10

$
81

$
3,995

$
20,918

$
28,520

$
53,433

$
—

Unsecured

10

259

—

269

3,351

9,890

13,510

—

Real estate:

Secured by commercial properties

999

—

40

1,039

63,780

365,306

430,125

—

Secured by residential properties

1,679

678

209

2,566

155,919

199,372

357,857

—

Construction and land development:

Residential construction loans

1,861

—

576

2,437

5,026

4,705

12,168

—

Commercial construction loans and land development

244

20

—

264

17,649

121,363

139,276

—

Consumer

—

—

—

—

—

—

—

—

$
8,697

$
967

$
906

$
10,570

$
266,643

$
729,156

$
1,006,369

$
—

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


															Accruing Loans
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		(Non‑PCI) Past Due
December 31, 2014	30‑59 Days		60‑89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial and industrial:
Secured	$	—	$	—	$	454	$	454	$	8,681	$	13,630	$	22,765	$	11
Unsecured		10		—		—		10		1,200		6,805		8,015		—
Real estate:
Secured by commercial properties		876		—		105		981		41,576		227,772		270,329		—
Secured by residential properties		3,089		493		405		3,987		137,342		141,192		282,521		48
Construction and land development:
Residential construction loans		—		—		896		896		390		354		1,640		—
Commercial construction loans and land development		39		25		8		72		11,663		45,635		57,370		8
Consumer		—		—		—		—		—		—		—		—
	$	4,014	$	518	$	1,868	$	6,400	$	200,852	$	435,388	$	642,640	$	67

The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk grading matrix used for non-covered loans, as described in Note 5 to the consolidated financial statements. The following tables present the internal risk grades of covered loans in the portfolio by class (in thousands).

September 30, 2014	Pass		Special Mention		Substandard		PCI		Total

June 30, 2015											Pass		Special Mention		Substandard		PCI		Total
Commercial and industrial:
Secured	$	6,229	$	—	$	2,206	$	15,963	$	24,398	$	5,102	$	—	$	1,501	$	9,035	$	15,638
Unsecured	1,309		—		224		7,579		9,112			1,502		—		5		3,495		5,002
Real estate:
Secured by commercial properties	43,379		—		8,826		278,959		331,164			28,920		—		5,261		150,802		184,983
Secured by residential properties	138,612		—		7,791		159,730		306,133			121,741		—		7,950		112,844		242,535
Construction and land development:
Residential construction loans	658		—		1,102		535		2,295			265		—		801		114		1,180
Commercial construction loans and land development	10,486		—		2,705		64,982		78,173			8,095		—		1,964		34,836		44,895
Consumer	—		—		—		—		—			—		—		—		—		—
	$	200,673	$	—	$	22,854	$	527,748	$	751,275	$	165,625	$	—	$	17,482	$	311,126	$	494,233

December 31, 2013

Pass

Special Mention

Substandard

PCI

Total

Commercial and industrial:

Secured

$
24,152

$
—

$
761

$
28,520

$
53,433

Unsecured

3,040

—

580

9,890

13,510

Real estate:

Secured by commercial properties

59,343

3,310

2,166

365,306

430,125

Secured by residential properties

155,439

—

3,046

199,372

357,857

Construction and land development:

Residential construction loans

6,087

—

1,376

4,705

12,168

Commercial construction loans and land development

17,806

—

107

121,363

139,276

Consumer

—

—

—

—

—

$
265,867

$
3,310

$
8,036

$
729,156

$
1,006,369


December 31, 2014	Pass		Special Mention		Substandard		PCI		Total
Commercial and industrial:
Secured	$	7,712	$	—	$	1,423	$	13,630	$	22,765
Unsecured		1,210		—		—		6,805		8,015
Real estate:
Secured by commercial properties		35,973		—		6,584		227,772		270,329
Secured by residential properties		133,756		—		7,573		141,192		282,521
Construction and land development:
Residential construction loans		268		—		1,018		354		1,640
Commercial construction loans and land development		9,501		—		2,234		45,635		57,370
Consumer		—		—		—		—		—
	$	188,420	$	—	$	18,832	$	435,388	$	642,640

The Bank’s impairment methodology for the covered loans is consistent with that of non-covered loans as discussed in Note 5 to the consolidated financial statements. To the extent there is experienced or projected credit deterioration on the acquired covered loan pools subsequent to amounts estimated at the previous quarterly recast date and expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Additionally, provision for credit losses will be recorded on advances on covered loans subsequent to the acquisition date in a manner consistent with the allowance for non-covered loan losses.

Table of Contents

Changes in the allowance for covered loan losses, distributed by portfolio segment, are shown below (in thousands).

Commercial and

Construction and

Three months ended September 30, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Balance, beginning of period

$
1,146

$
2,551

$
418

$
—

$
4,115

Provision charged to operations

(211
)
(342
)
400

—

(153
)
Loans charged off

—

(169
)
(32
)
—

(201
)
Recoveries on charged off loans

—

—

—

—

—

Balance, end of period

$
935

$
2,040

$
786

$
—

$
3,761

	Commercial and						Construction and
Nine months ended September 30, 2014	Industrial			Real Estate			Land Development			Consumer		Total
															Commercial and				Construction and
Three months ended June 30, 2015															Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	1,053		$	8		$	—		$	—	$	1,061		$	364	$	927	$	97	$	—	$	1,388
Provision charged to operations	(27		)	2,245			933			—		3,151
Provision charged to (recapture from) operations																(202)		(474)		247		—		(429)
Loans charged off	(91		)	(213		)	(147		)	—		(451		)		(53)		(83)		(9)		—		(145)
Recoveries on charged off loans	—			—			—			—		—				21		99		—		—		120
Balance, end of period	$	935		$	2,040		$	786		$	—	$	3,761		$	130	$	469	$	335	$	—	$	934


	Commercial and				Construction and
Six months ended June 30, 2015	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	1,193	$	3,334	$	84	$	—	$	4,611
Provision charged to (recapture from) operations		(131)		(665)		260		—		(536)
Loans charged off		(953)		(2,299)		(9)		—		(3,261)
Recoveries on charged off loans		21		99		—		—		120
Balance, end of period	$	130	$	469	$	335	$	—	$	934

~~Table of Contents~~


	Commercial and				Construction and
Three months ended June 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	932	$	1,696	$	37	$	—	$	2,665
Provision charged to operations		214		855		381		—		1,450
Loans charged off		—		—		—		—		—
Recoveries on charged off loans		—		—		—		—		—
Balance, end of period	$	1,146	$	2,551	$	418	$	—	$	4,115

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~


	Commercial and				Construction and
Six months ended June 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Balance, beginning of period	$	1,053	$	8	$	—	$	—	$	1,061
Provision charged to operations		184		2,587		533		—		3,304
Loans charged off		(91)		(44)		(115)		—		(250)
Recoveries on charged off loans		—		—		—		—		—
Balance, end of period	$	1,146	$	2,551	$	418	$	—	$	4,115

The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

	Commercial and				Construction and
September 30, 2014	Industrial		Real Estate		Land Development		Consumer		Total
											Commercial and				Construction and
June 30, 2015											Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	915	$	—	$	801	$	—	$	1,716	$	510	$	—	$	801	$	—	$	1,311
Loans collectively evaluated for impairment	9,053		198,608		14,150		—		221,811			7,600		163,872		10,324		—		181,796
PCI Loans	23,542		438,689		65,517		—		527,748			12,530		263,646		34,950		—		311,126
	$	33,510	$	637,297	$	80,468	$	—	$	751,275	$	20,640	$	427,518	$	46,075	$	—	$	494,233

Commercial and

Construction and

December 31, 2013

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
—

$
—

$
—

$
—

$
—

Loans collectively evaluated for impairment

28,533

223,304

25,376

—

277,213

PCI Loans

38,410

564,678

126,068

—

729,156

$
66,943

$
787,982

$
151,444

$
—

$
1,006,369


	Commercial and				Construction and
December 31, 2014	Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	—	$	—	$	801	$	—	$	801
Loans collectively evaluated for impairment		10,345		183,886		12,220		—		206,451
PCI Loans		20,435		368,964		45,989		—		435,388
	$	30,780	$	552,850	$	59,010	$	—	$	642,640

The allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

Commercial and

Construction and

September 30, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
—

$
—

$
—

$
—

$
—

Loans collectively evaluated for impairment

53

15

21

—

89

PCI Loans

882

2,025

765

—

3,672

$
935

$
2,040

$
786

$
—

$
3,761

	Commercial and				Construction and
December 31, 2013	Industrial		Real Estate		Land Development		Consumer		Total
											Commercial and				Construction and
June 30, 2015											Industrial		Real Estate		Land Development		Consumer		Total
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment	171		8		—		—		179			25		15		9		—		49
PCI Loans	882		—		—		—		882			105		454		326		—		885
	$	1,053	$	8	$	—	$	—	$	1,061	$	130	$	469	$	335	$	—	$	934

Table of Contents

Commercial and



Construction and




December 31, 2014

Industrial

Real Estate

Land Development

Consumer

Total

Loans individually evaluated for impairment

$
—

$
—

$
—

$
—

$
—

Loans collectively evaluated for impairment

46

16

15

—

77

PCI Loans

1,147

3,318

69

—

4,534

$
1,193

$
3,334

$
84

$
—

$
4,611

Covered Other Real Estate Owned

A summary of the activity in covered OREO is as follows (in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013			2014			2013			2015		2014		2015		2014
Balance, beginning of period	$	142,174		$	—		$	142,833		$	—		$	137,703	$	152,310	$	136,945	$	142,833
Fair value of assets acquired as of Bank Closing Date	—			135,187			—			135,187
Additions to covered OREO	10,214			—			42,206			—				12,021		8,802		36,063		31,992
Dispositions of covered OREO	(11,150		)	(1,326		)	(40,842		)	(1,326		)		(21,106)		(16,410)		(43,440)		(29,692)
Valuation adjustments in the period	(14,440		)	—			(17,399		)	—				(3,108)		(2,528)		(4,058)		(2,959)
Balance, end of period	$	126,798		$	133,861		$	126,798		$	133,861		$	125,510	$	142,174	$	125,510	$	142,174

During the three and ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, the Bank wrote down certain covered OREO assets to fair value to reflect new appraisals on certain OREO acquired in the FNB Transaction and OREO acquired from the foreclosure on certain FNB loans acquired in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired assets upon acquisition, in some cases additional downward valuations were required.

These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the OREO, including in some cases the intended use of the OREO due to the availability of more information as well as the passage of time. The process of determining fair value is subjective in nature and requires the use of significant estimates and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent information, that its

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments requires that the decreases to fair value be recorded at the time such new information is received, while increases to fair value are recorded when the asset is subsequently sold. All of the impairments recorded during the three and six months ended ~~September~~June 30, 2015 and 2014 related to covered assets subject to the loss-share agreements with the FDIC.

FDIC Indemnification Asset

A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).



	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013		2014			2013		2015		2014		2015		2014
Balance, beginning of period	$	175,114		$	—	$	188,291		$	—	$	107,567	$	188,736	$	130,437	$	188,291
Fair value of assets acquired as of Bank Closing Date	—			185,680		—			185,680
FDIC Indemnification Asset accretion (amortization)	825			291		2,672			291			320		490		826		1,847
Transfers to due from FDIC and other	(26,151		)	—		(41,175		)	—			(5,506)		(14,112)		(28,882)		(15,024)
Balance, end of period	$	149,788		$	185,971	$	149,788		$	185,971	$	102,381	$	175,114	$	102,381	$	175,114

As of June 30, 2015, the Bank had billed and collected $89.3 million from the FDIC, which represented reimbursable covered losses and expenses through March 31, 2015.

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7. Mortgage Servicing Rights

The following tables present the changes in fair value of the Company’s MSR asset, as included in other assets within the consolidated balance sheets, and other information related to ~~our~~the serviced portfolio (dollars in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

Balance, beginning of period

$
35,877

$
7,111

$
20,149

$
2,080

Additions

18,982

4,079

33,790

8,384

Sales

(11,387
)
—

(11,387
)
—

Changes in fair value:

Due to changes in model inputs or assumptions (1)

(1,024
)
2,377

627

3,284

Due to customer payments

(541
)
(166
)
(1,272
)
(347
)
Balance, end of period

$
41,907

$
13,401

$
41,907

$
13,401

September 30,

December 31,

2014

2013

Mortgage loans serviced for others

$
3,657,999

$
1,965,883

MSR as a percentage of serviced mortgage loans

1.15
%
1.02
%


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015		2014
Balance, beginning of period	$	31,648		$	29,939		$	36,155	$	20,149
Additions		9,406			7,376			12,096		14,808
Sales		—			—			—		—
Changes in fair value:
Due to changes in model inputs or assumptions (1)		5,772			(1,113)			728		1,651
Due to customer payments		(1,841)			(325)			(3,994)		(731)
Balance, end of period	$	44,985		$	35,877		$	44,985	$	35,877

	June 30,			December 31,
	2015			2014
Mortgage loans serviced for others	$	4,146,074		$	3,645,220
MSR as a percentage of serviced mortgage loans		1.09	%		0.99	%

(1)

Primarily represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates and the refinement of other MSR model assumptions.

~~(1)Primarily represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates and the refinement of other MSR model assumptions.~~

The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.

September 30,

December 31,

2014

2013

Weighted average constant prepayment rate

9.51
%
9.72
%
Weighted average discount rate

11.03
%
12.37
%
Weighted average life (in years)

7.6

7.6


	June 30,		December 31,
	2015		2014
Weighted average constant prepayment rate	10.41	%	12.17	%
Weighted average discount rate	10.96	%	11.01	%
Weighted average life (in years)	7.0		6.3

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands).


	September 30,			December 31,			June 30,		December 31,
	2014			2013			2015		2014
Constant prepayment rate:
Impact of 10% adverse change	$	(1,556	)	$	(601	)	$	(1,813)	$	(1,648)
Impact of 20% adverse change	(3,009		)	(1,170		)		(5,089)		(3,169)
Discount rate:
Impact of 100 basis point adverse change	(1,835		)	(631		)		(1,885)		(1,431)
Impact of 200 basis point adverse change	(3,519		)	(1,236		)		(3,620)		(2,753)

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the ~~MSR.~~MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

Contractually specified servicing fees, late fees and ancillary fees earned of ~~$3.1~~$4.3 million and ~~$0.9~~$2.8 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$8.1~~$8.5 million and ~~$1.8~~$5.0 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, were included in other noninterest income within the consolidated statements of operations.

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8. Deposits

Deposits are summarized as follows (in thousands).


	September 30,		December 31,		June 30,		December 31,
	2014		2013		2015		2014
Noninterest-bearing demand	$	1,988,066	$	1,773,749	$	2,135,988	$	2,076,385
Interest-bearing:
NOW accounts	1,112,749		1,083,596			1,119,656		1,242,110
Money market	865,144		878,578			1,303,126		861,851
Brokered - money market	96,632		276,760			78,524		79,937
Demand	108,701		47,636			413,277		136,886
Savings	343,667		357,325			287,611		299,051
Time	1,631,765		2,110,947			1,362,407		1,575,910
Brokered - time	89,558		194,327			95,848		97,762
	$	6,236,282	$	6,722,918	$	6,796,437	$	6,369,892

~~Table~~The significant increase in deposits at June 30, 2015 as compared to December 31, 2014 was primarily due to the inclusion of ~~Contents~~those deposits assumed in the SWS Merger.

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

9. Short-term Borrowings

Short-term borrowings are summarized as follows (in thousands).


	September 30,		December 31,		June 30,		December 31,
	2014		2013		2015		2014
Federal funds purchased	$	121,050	$	137,225	$	56,450	$	128,100
Securities sold under agreements to repurchase	134,134		107,462			182,875		136,396
Federal Home Loan Bank notes	525,000		—			675,000		375,000
Short-term bank loans	65,800		97,400			185,700		123,200
	$	845,984	$	342,087	$	1,100,025	$	762,696

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~~the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and broker-dealers. Securities involved in these transactions are held by the Bank, ~~FSC~~the Hilltop Broker-Dealers or the dealer.

Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).

Nine Months Ended September 30,

2014

2013

Average balance during the period

$
326,936

$
284,819

Average interest rate during the period

0.17
%
0.19
%

September 30,

December 31,

2014

2013

Average interest rate at end of period

0.14
%
0.16
%
Securities underlying the agreements at end of period:

Carrying value

$
179,921

$
144,991

Estimated fair value

$
175,835

$
138,719


	Six Months Ended June 30,
	2015			2014
Average balance during the period	$	347,698		$	331,142
Average interest rate during the period		0.27	%		0.17	%


	June 30,			December 31,
	2015			2014
Average interest rate at end of period		0.16	%		0.15	%
Securities underlying the agreements at end of period:
Carrying value	$	234,669		$	166,734
Estimated fair value	$	232,580		$	163,852

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Federal Home Loan Bank (“FHLB”) short-term 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 tables (dollars in thousands).

Nine Months Ended September 30,

2014

2013

Average balance during the period

$
258,849

$
142,274

Average interest rate during the period

0.17
%
0.13
%

September 30,

December 31,

2014

2013

Average interest rate at end of period

0.17
%
—


	Six Months Ended June 30,
	2015			2014
Average balance during the period	$	284,448		$	137,159
Average interest rate during the period		0.22	%		0.14	%

~~FSC uses~~


	June 30,		December 31,
	2015		2014
Average interest rate at end of period	0.19	%	0.16	%

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013~~2014 was ~~1.06%~~1.08% and ~~1.15%~~1.07%, respectively.

3510. Notes Payable

On April 9, 2015, Hilltop completed an offering of $150.0 million aggregate principal amount of its 5% senior notes due 2025 (“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Unregistered Notes were offered within the United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to persons outside of the United States under Regulation S under the Securities Act. The Senior Unregistered Notes were issued pursuant to an indenture, dated as of April 9, 2015, by and between Hilltop and U.S. Bank National Association, as trustee (the “Trustee”). The net proceeds from the offering, after deducting estimated fees and expenses and the initial purchasers’ discounts, were approximately $148 million. Hilltop used the net proceeds of the offering to redeem all of Hilltop’s outstanding Non-Cumulative Perpetual Preferred Stock, Series B at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4 million and Hilltop is utilizing the remainder for general corporate purposes.

In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, the Company entered into a registration rights agreement with the initial purchasers of the Senior Unregistered Notes. Under the terms of the registration rights agreement, the Company agreed to offer to exchange the Senior Unregistered Notes for notes registered under the Securities Act (the “Senior Registered Notes”). The terms of the Senior Registered Notes are substantially identical to the Senior Unregistered Notes for which they were exchanged (including principal amount, interest rate, maturity and redemption rights), except that the Senior Registered Notes generally are not subject to transfer restrictions. On May 22, 2015 and subject to the terms and conditions set forth in the Senior Registered Notes prospectus, the Company commenced an offer to exchange the Senior Unregistered Notes for Senior Registered Notes. Substantially all of the Senior Unregistered Notes were tendered in the exchange offer, and on June 22, 2015, the Company fulfilled its requirements under the registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes in exchange for the tendered Senior Unregistered Notes. The Senior Registered Notes and the Senior Unregistered Notes that remain outstanding are collectively referred to as the “Senior Notes.”

The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless Hilltop redeems the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at its election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

The indenture contains covenants that limit the Company’s ability to, among other things and subject to certain significant exceptions: (i) dispose of or issue voting stock of certain of the Company’s bank subsidiaries or subsidiaries that own voting stock of our bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain of the Company’s bank subsidiaries or subsidiaries that own capital stock of the Company’s bank subsidiaries and (iii) sell all or substantially all of the Company’s assets or merge or consolidate with or into other companies. The indenture also provides for certain events of default, which, if any of them occurs, would permit or require the principal amount, premium, if any, and accrued and unpaid interest on the then outstanding Senior Notes to be declared immediately due and payable.

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~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~10.~~11. Income Taxes

The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company’s effective tax rate was ~~35.8%~~37.3% and ~~33.7% for~~36.2% during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively and ~~36.1%~~19.0% and ~~35.5% for~~36.2% during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, respectively. The decrease in the Company’s effective tax rate during the six months ended June 30, 2015 was primarily due to no income taxes being recorded in connection with the preliminary bargain purchase gain of $80.7 million associated with the SWS Merger because the acquisition was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In addition, the Company recorded an income tax benefit of $2.1 million as a result of the SWS Merger to reverse the deferred tax liability booked during 2014 associated with the difference between book and ~~2013,~~tax basis on Hilltop’s investment in SWS common stock prior to the SWS Merger.

At June 30, 2015 and December 31, 2014, the Company had net operating loss carryforwards for Federal income tax purposes of $93.2 million and $45.5 million, respectively. This increase in net operating loss carryforwards was a result of the SWS Merger. The net operating loss carryforwards are subject to either separate return year limitations or annual limitations on their usage because of the ownership change. These net operating loss carryforwards expire in 2023 and later years. The Company expects to realize its current deferred tax asset for these net operating loss carryforwards through the implementation of certain tax planning strategies, core earnings, and reversal of timing differences. The Company has a valuation allowance recorded of $4.1 million at June 30, 2015 against its gross deferred tax asset for capital loss carryforwards. This increase in the valuation allowance of $2.2 million from December 31, 2014 was a result of the SWS Merger. The amount of the deferred tax asset considered realizable, however, could increase during the carryforward period if unexpected capital gains are recognized. The Company has no valuation allowance on the remainder of its deferred tax assets at June 30, 2015 or December 31, 2014.

GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. ~~There were no uncertain~~At June 30, 2015, the total amount of gross unrecognized tax ~~positions at September 30, 2014 or December 31, 2013.~~benefits was $0.9 million, of which $0.6 million if recognized, would favorably impact the Company’s effective tax rate. The Company does not anticipate a significant change in the unrecognized tax benefits within the next twelve months.

The Company files income tax returns in U.S. federal and ~~several~~numerous state jurisdictions. The Company is subject to tax audits in numerous jurisdictions in the U.S. until the applicable statute of limitations expires. The Company is no longer subject to U.S. federal tax examinations for tax years prior to 2011. The Company is open for various state tax audits for tax years 2010 and later. The Company ~~has been notified of~~is currently under income tax ~~examinations~~examination by ~~several~~a state ~~authorities~~authority for tax years ~~2010,~~ 2011 and 2012. The Company does not expect any significant liability to arise as a result of the ~~examinations.~~examination.

12. Employee Benefits

Deferred Compensation Plan

As a result of the SWS Merger, the Company assumed a deferred compensation plan offered by the former SWS (the “SWS Plan”) that allows former SWS eligible officers and employees to defer a portion of their bonus compensation and commissions. The SWS Plan matched 15% of the deferrals made by participants up to a predetermined limit through matching contributions that vest ratably over four years. Pursuant to the terms of the SWS Plan, the trustee periodically purchased the former SWS common stock in the open market. As a result of the SWS Merger, the former SWS common shares were converted into Hilltop common stock based on the terms of the merger agreement. No further contributions can be made to this plan.

The assets of the SWS Plan are held in a rabbi trust and primarily include investments in company-owned life insurance (“COLI”) and Hilltop common stock. These assets are consolidated with those of the Company. Investments in COLI are carried at the cash surrender value of the insurance policies and recorded in other assets within the consolidated balance sheet at June 30, 2015. Investments in Hilltop common stock, which are carried at cost and accounted for in a manner similar to treasury stock, and the corresponding liability related to the deferred compensation plan are presented as components of stockholders’ equity as employee stock trust and deferred compensation employee stock trust, net, respectively, at June 30, 2015.

~~11.~~39

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13. Commitments and Contingencies

Legal Matters

The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. ~~Some~~A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, ~~however,~~ the Company does not take into account the availability of insurance ~~coverage.~~coverage, other than that provided by reinsurers in the insurance segment. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such possible losses, and when it estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. ~~However, as~~As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves will be adjusted, accordingly.

Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or not or discovery is not complete; meaningful settlement discussions have not commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

Each of Hilltop, ~~Peruna LLC (wholly~~Hilltop Securities (a wholly owned subsidiary of Hilltop), SWS and the individual members of the board of directors of SWS have been named as defendants in two purported stockholder class action lawsuits arising out of the ~~pending merger.~~SWS Merger. Both lawsuits were filed in Delaware Chancery Court (Joseph Arceri v. SWS Group, Inc. et aland Chaile Steinberg v. SWS Group, Inc. et alfiled April 8, 2014 and April 11, 2014, respectively). On May 13, 2014, the Delaware Chancery Court consolidated the two actions (the “Consolidated Action”) for all purposes. On June 10, 2014, plaintiffs filed a consolidated amended complaint. The complaint generally alleges, among other things, that the SWS board of directors breached its fiduciary duties to stockholders by failing to take steps to maximize stockholder value or to engage in a fair sale process before approving the merger, that the SWS board of directors labored under conflicts of interest, that certain provisions of the

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

merger agreement unduly restrict ~~SWS’s~~SWS's ability to negotiate with other potential bidders, and that the other defendants aided and abetted the SWS board of ~~director’s~~director's breaches of fiduciary duty. The complaint further alleges, among other things, that the proxy statement/prospectus filed by Hilltop on May 29, 2014 omits or misstates certain material information. The complaints seek relief that includes, among other things, an injunction prohibiting the consummation of the ~~merger,~~SWS Merger, rescission to the extent the merger terms have already been implemented, damages for the alleged breaches of fiduciary duty, and the payment of ~~plaintiffs’ attorneys’~~plaintiffs' attorneys' fees and costs.

On ~~June 16,~~November 13, 2014, ~~plaintiffs moved for a preliminary injunction prohibiting the consummation of the merger, and for expedited proceedings in connection therewith. Pursuant to negotiations between~~ the parties to the ~~lawsuit,~~Consolidated Action entered into a memorandum of understanding (the “MOU”) reflecting the terms of an agreement, subject to final approval by the Court and certain other conditions, to settle the Consolidated Action. Pursuant to the MOU, defendants, without admitting any wrongdoing, agreed to make certain supplemental disclosures requested by plaintiffs ~~subsequently withdrew~~in the Consolidated Action, as set forth in SWS’s Current Report on Form 8-K dated November 14, 2014. In addition, Hilltop agreed to forbear from asserting certain rights under the Agreement and Plan of Merger, dated as of March 31, 2014, by and among Hilltop, Hilltop Securities and SWS. The MOU further contemplates that, following confirmatory discovery, the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including court approval following notice to the former stockholders of SWS. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the applicable court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those ~~motions. Hilltop~~contemplated by the MOU.

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Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock, representing a total of approximately 8.43 million shares of common stock of SWS, filed petitions in the Court of Chancery of the State of Delaware seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. The actions are captioned as follows: Highland Select Equity Master Fund, L.P. et al. v. SWS Group, Inc. et al., C.A. No. 10554-VCG; Lone Star Value Investors, LP et al. v. SWS Group, Inc. et al., C.A. No. 10572-VCG; and Merlin Partners, LP et al. v. SWS Group, Inc. et al., C.A. No. 10578-VCG. The Company believes ~~that the~~these claims are without merit and intends to vigorously defend ~~against~~ these actions.

On or about November 2, 2012, FSC, along with thirteen other defendants, was named in a lawsuit pending in the state of Rhode Island Superior Court styled Rhode Island Economic Development Corporation v. Wells Fargo Securities, LLC, et al. FSC is included in connection with its role as financial advisor to the State of Rhode Island, specifically in connection with the Rhode Island Economic Development Corporation’s issuance of $75 million in bonds to finance a loan to 38 Studios, LLC. FSC intends to defend itself vigorously in this action.

The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding certain of its ~~business,~~businesses, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries, including the Inquiry described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the ~~Company’s~~Company's consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could result in additional expenses and collateral costs, including reputational damage.

As a part of an industry-wide inquiry, PrimeLending received a subpoena from the Office of Inspector General of the U.S. Department of Housing and Urban Development regarding mortgage-related practices, including those relating to origination practices for loans insured by the Federal Housing Administration (the “FHA”). On August 20, 2014, PrimeLending received a Civil Investigative Demand from the United States Department of Justice (the “DOJ”) related to this Inquiry. According to the Civil Investigative Demand, the DOJ is conducting an investigation to determine whether PrimeLending has violated the False Claims Act in connection with originating and underwriting single-family residential mortgage loans insured by the FHA. No allegations have been asserted against PrimeLending. PrimeLending cannot predict the ultimate outcome of this investigation, and cannot make a reasonable estimate of potential liability, if any, at this time. PrimeLending is cooperating with the investigation and continues to respond to the Civil Investigative Demand.

While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Other Contingencies

The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that each loan sold meets 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 affected loan from the investor or reimburses the investor’s losses. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

Generally, the mortgage origination segment first becomes aware that an investor believes a loss has been incurred on a sold loan when it receives a written request from the investor to repurchase the loan or reimburse the investor’s losses. Upon completing its review of the investor’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the investor is both probable and reasonably estimable.

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An additional reserve has been established for probable investor losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific investor requests, actual investor claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

segment’s history of successfully curing defects identified in investor claim requests. While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of investor claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

At ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the mortgage origination segment’s indemnification liability reserve totaled ~~$19.1~~$17.3 million and ~~$21.1~~$17.6 million, respectively. The provision for indemnification losses was $1.2 million and $0.9 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$2.3~~$2.0 million and ~~$2.8~~$1.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively.

The following tables provide for a roll-forward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).


													Representation and Warranty Specific Claims
	Representation and Warranty Specific Claims Activity - Origination Loan Balance						Representation and Warranty Specific Claims Activity - Origination Loan Balance						Activity - ‑Origination Loan Balance
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013			2014			2013			2015		2014		2015		2014
Balance, beginning of period	$	53,123		$	46,090		$	51,912		$	39,693		$	74,100	$	51,929	$	53,906	$	51,912
Claims made	13,336			6,769			35,179			26,423				14,658		11,799		51,981		21,843
Claims resolved with no payment	(8,329		)	(2,338		)	(17,660		)	(10,751		)		(10,451)		(4,873)		(22,138)		(9,331)
Repurchases	(3,173		)	(1,597		)	(12,411		)	(4,496		)		(3,075)		(4,360)		(8,314)		(9,238)
Indemnification payments	(1,168		)	(542		)	(3,231		)	(2,487		)		(2,668)		(1,372)		(2,871)		(2,063)
Balance, end of period	$	53,789		$	48,382		$	53,789		$	48,382		$	72,564	$	53,123	$	72,564	$	53,123

													Indemnification Liability Reserve Activity
													Three Months Ended June 30,				Six Months Ended June 30,
													2015		2014		2015		2014
Balance, beginning of period													$	17,342	$	20,975	$	17,619	$	21,121
Additions for new sales														1,150		852		1,994		1,412
Repurchases														(300)		(524)		(798)		(1,028)
Early payment defaults														(29)		(56)		(39)		(77)
Indemnification payments														(879)		(931)		(1,041)		(1,112)
Change in estimate														(5)		(628)		(456)		(628)
Balance, end of period													$	17,279	$	19,688	$	17,279	$	19,688

Indemnification Liability Reserve Activity

Indemnification Liability Reserve Activity

Three Months Ended September 30,

Nine Months Ended September 30,

2014

2013

2014

2013

Balance, beginning of period

$
19,688

$
20,397

$
21,121

$
18,964

Additions for new sales

883

878

2,295

2,834

Repurchases

(388
)
(120
)
(1,416
)
(255
)
Early payment defaults

(24
)
(165
)
(101
)
(397
)
Indemnification payments

(542
)
(177
)
(1,654
)
(701
)
Change in estimate

(508
)
214

(1,136
)
582

Balance, end of period

$
19,109

$
21,027

$
19,109

$
21,027

Reserve for Indemnification Liability:

Specific claims

$
11,517

Incurred but not reported claims

7,592

Total

$
19,109


	June 30,		December 31,
	2015		2014
Reserve for Indemnification Liability:
Specific claims	$	7,817	$	7,912
Incurred but not reported claims		9,462		9,707
Total	$	17,279	$	17,619

Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses, due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable.

In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The

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Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ~~ten~~10 years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement. As of ~~September~~June 30, ~~2014,~~2015, the Bank estimated that the sum of covered losses and reimbursable expenses subject to the loss-share agreements will exceed $240.4 million, but dowill not exceed $365.7 million. Unless ~~the estimates of~~actual plus projected covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record additional ~~reimbursement receivable from~~amounts to the ~~FDIC.~~FDIC Indemnification Asset. As of ~~September~~June 30, ~~2014,~~2015, the Bank had billed ~~$46.6~~$111.6 million of covered net losses to the FDIC, of which 80%, or ~~$37.7~~$89.3 million, ~~are~~were reimbursable under the loss-share agreements. As of June 30, 2015, the Bank had received aggregate reimbursements of $89.3 million from the FDIC.

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~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~12.~~14. Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk 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 consolidated 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 some 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 letters of credit 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.

In the aggregate, the Bank had outstanding unused commitments to extend credit of ~~$1.4~~$1.7 billion at ~~September~~June 30, ~~2014~~2015 and outstanding financial and performance standby letters of credit of ~~$45.1~~$42.6 million at ~~September~~June 30, ~~2014.~~2015.

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, in these transactions 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,~~the Hilltop Broker-Dealers execute, settle, and ~~finances~~finance various securities transactions that may expose ~~FSC~~the Hilltop Broker-Dealers 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~~accounts of ~~FSC,~~the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients, clearing agreements between ~~FSC~~the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

~~13.~~15. Stock-Based Compensation

Pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”), the Company may grant nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. ~~Upon the approval by stockholders and effectiveness of the 2012 Plan in September 2012, no additional awards were permissible under the 2003 Equity Incentive Plan (the “2003 Plan”).~~ In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At ~~September~~June 30, ~~2014, 3,151,649~~2015, 3,324,751 shares of common stock ~~remain~~remained available for issuance pursuant to the 2012 Plan.

During the ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees an aggregate of ~~370,536~~439,975 restricted stock units (“RSUs”) pursuant to the

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2012 ~~Plan,~~Plan. At June 30, 2015, 344,137 of ~~which 363,881 remain outstanding at September 30, 2014. At September 30, 2014, 293,844 of the outstanding~~these RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and ~~70,037 outstanding~~95,838 of these RSUs vest based upon the achievement of certain performance goals over a three-year period. These RSUs are subject to service conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective vesting periods. The weighted average grant date fair value related to these RSUs was ~~$23.78~~$19.44 per share. At ~~September~~June 30, ~~2014,~~2015, unrecognized compensation expense related to these RSUs was ~~$7.3~~$7.9 million, which will be amortized through ~~June 2017.~~April 2018. The RSUs are not transferable, and the shares of common stock issuable upon conversion of vested RSUs are generally subject to transfer restrictions for a period of one year following conversion, subject to certain exceptions. In addition, the applicable RSU award agreements provide for accelerated vesting under certain conditions.

~~During 2013,~~Prior to the ~~Compensation Committee~~completion of the ~~Board~~SWS Merger and in accordance with the SWS merger agreement, on August 20, 2014, SWS granted restricted shares of ~~Directors~~common stock to certain of its executive officers and key employees. On January 1, 2015, the effective time of the ~~Company awarded certain executives and key~~

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~employees a total of 471,000~~SWS Merger, these restricted shares of common stock converted into the right to receive an aggregate of 62,994 restricted shares of Company common stock (“Restricted Stock Awards”) ~~pursuant to~~based on the ~~2012 Plan,~~value of ~~which 466,000 remain outstanding at September~~the merger consideration, and their vesting schedule did not accelerate. At June 30, ~~2014. These~~2015, 18,179 Restricted Stock Awards remained outstanding, generally ~~cliff~~ vest in three equal annual installments beginning on ~~the third anniversary of the grant date~~August 20, 2015, and are subject to service conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective vesting periods. The ~~weighted average grant date~~ fair value ~~related to~~of these Restricted Stock Awards at the time of conversion was ~~$13.32~~$19.95 per share. At ~~September~~June 30, ~~2014,~~2015, unrecognized compensation expense related to these Restricted Stock Awards was ~~$3.2~~$0.2 million, which will be amortized through ~~September 2016.~~August 2017. The award agreements governing these Restricted Stock Awards provide for accelerated vesting under certain conditions.

During 2014 and 2013, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees an aggregate of 444,175 RSUs and 471,000 Restricted Stock Awards, respectively, pursuant to the 2012 Plan, of which 424,552 and 451,000, respectively, remained outstanding at June 30, 2015. At June 30, 2015, unrecognized compensation expense related to these awards was $7.6 million, which will be amortized through December 2017. The award agreements governing these awards provide for accelerated vesting under certain conditions.

Compensation expense related to the plans was $2.5 million and $1.3 million during the three months ended June 30, 2015 and 2014, respectively, and $4.3 million and $2.0 million during the six months ended June 30, 2015 and 2014, respectively.

During the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, Hilltop granted ~~7,227~~5,707 and ~~6,504~~5,011 shares of common stock to independent members of the Company’s Board of Directors for services rendered to the Company pursuant to the 2012 Plan.

Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000 shares of the Company’s common stock (the “Stock Option Awards”) at an exercise price of $7.70 per share were outstanding at September 30, 2014. These Stock Option Awards vest in five equal installments beginning on the grant date, with the remainder vesting on each grant date anniversary through 2015. At September 30, 2014, unrecognized compensation expense related to these Stock Option Awards was $0.1 million, which will be amortized through October 2015. These Stock Option Awards expire on November 2, 2016.16. Regulatory Matters

Compensation expense related to the plans was $1.3 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and $3.3 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.

~~14. Regulatory Matters~~

Bank

The Bank and Hilltop 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 usthe Bank and Hilltop 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.

On January 1, 2015, the new comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for the Bank and Hilltop for reporting periods beginning after January 1, 2015 (subject to a phase-in period through January 2019). Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of common equity Tier 1 capital and additional Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital.

Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets ~~(as~~

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(as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

In July 2013, federal banking regulators released final rules for the regulation of capital and liquidity for U.S. banking organizations, establishing a new comprehensive capital framework (“Basel III”) for U.S. banking organizations that will become effective for reporting periods beginning after January 1, 2015 (subject to a phase-in period through January 2019).

In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). ~~It is possible that the Company may accelerate redemption of the existing junior subordinated debentures.~~ All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of ~~September~~June 30, ~~2014,~~2015, under guidance issued by the Board of Governors of the Federal Reserve System.

~~Management believes that, as of September 30, 2014, Hilltop and the Bank would meet all applicable capital adequacy~~

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~requirements under the Basel III capital rules for banks with less than $15 billion in assets on a fully phased-in basis as if such requirements were currently in effect.~~

The following table shows the Bank’s and Hilltop’s consolidated actual capital amounts and ratios compared to the regulatory minimum capital requirements and the Bank’s regulatory minimum capital requirements needed to qualify as a “well-capitalized” institution in accordance with Basel III as measured at June 30, 2015 and applicable regulatory guidelines at December 31, 2014 (dollars in thousands)~~, without giving effect to the final Basel III capital rules.~~.

									To Be Well Capitalized
					Minimum Capital				Minimum Capital												To Be Well Capitalized
	Actual				Requirements				Requirements								Minimum Capital				Minimum Capital
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Actual				Requirements				Requirements
September 30, 2014
													Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2015
Tier 1 capital (to average assets):
Bank													$	990,025	12.17	%	$	325,391	4.0	%	$	406,739	5.0	%
Hilltop														1,457,413	11.87	%		490,929	4.0	%		N/A	N/A
Common equity Tier 1 capital (to risk-weighted assets):
Bank														990,025	16.46	%		270,706	4.5	%		391,020	6.5	%
Hilltop														1,401,209	18.02	%		349,998	4.5	%		N/A	N/A
Tier 1 capital (to risk-weighted assets):
Bank														990,025	16.46	%		360,941	6.0	%		481,255	8.0	%
Hilltop														1,457,413	18.74	%		466,665	6.0	%		N/A	N/A
Total capital (to risk-weighted assets):
Bank														1,032,760	17.17	%		481,255	8.0	%		601,569	10.0	%
Hilltop														1,500,493	19.29	%		622,219	8.0	%		N/A	N/A

December 31, 2014
Tier 1 capital (to average assets):
Bank	$	822,306	9.95	%	$	330,701	4	%	$	413,376	5	%	$	845,656	10.31	%	$	328,025	4.0	%	$	410,031	5.0	%
Hilltop	1,196,318		13.63	%	351,148		4	%	N/A		N/A			1,231,724	14.17	%		347,619	4.0	%		N/A	N/A
Tier 1 capital (to risk-weighted assets):
Bank	822,306		13.48	%	243,965		4	%	$	365,947	6	%		845,656	13.74	%		246,099	4.0	%		369,148	6.0	%
Hilltop	1,196,318		18.57	%	257,653		4	%	N/A		N/A			1,231,724	19.02	%		259,078	4.0	%		N/A	N/A
Total capital (to risk-weighted assets):
Bank	866,457		14.21	%	487,929		8	%	$	609,911	10	%		888,744	14.45	%		492,198	8.0	%		615,247	10.0	%
Hilltop	1,242,010		19.28	%	515,307		8	%	N/A		N/A			1,275,023	19.69	%		518,157	8.0	%		N/A	N/A

December 31, 2013
Tier 1 capital (to average assets):
Bank	$	762,364	9.29	%	$	328,275	4	%	$	410,344	5	%
Hilltop	1,112,424		12.81	%	347,480		4	%	N/A		N/A
Tier 1 capital (to risk-weighted assets):
Bank	762,364		13.38	%	227,984		4	%	341,976		6	%
Hilltop	1,112,424		18.53	%	240,159		4	%	N/A		N/A
Total capital (to risk-weighted assets):
Bank	797,771		14.00	%	455,968		8	%	569,960		10	%
Hilltop	1,148,736		19.13	%	480,318		8	%	N/A		N/A

To be considered “adequately capitalized” (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1 capital to total average assets ~~and~~of 4%, common equity Tier 1 capital to risk-weighted assets of 4.5%, Tier 1 capital to risk-weighted assets ratios of 6% (an increase from 4% prior to January 1, 2015), 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 regulatory requirements.

~~Financial Advisory~~Broker-Dealer

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), FSC ~~has~~and Southwest Securities have each elected to determine ~~its~~their respective net capital requirements using the alternative method. Accordingly, FSC isand Southwest Securities are required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 and 1,000,000, respectively, or 2%

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of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. ~~At September 30, 2014, FSC had~~Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of the aggregate debit items. SWS Financial follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the maintenance of the larger of minimum net capital of ~~$78.2 million (the minimum~~$250,000 or 1/15 of aggregate indebtedness.

At June 30, 2015, the net capital ~~requirement was $5.6 million), net capital maintained by FSC was 28%~~position of ~~aggregate debits, and net capital in excess~~each of the ~~minimum requirement~~Hilltop Broker-Dealers was ~~$72.6 million.~~as follows (in thousands).


				Southwest			SWS
	FSC			Securities			Financial
Net capital	$	77,427		$	155,300		$	1,145
Less required net capital		4,670			6,484			250
Excess net capital	$	72,757		$	148,816		$	895

Net capital as a percentage of aggregate debit items		33.2	%		47.9	%
Net capital in excess of 5% aggregate debit items	$	65,752		$	139,090

Under certain conditions, ~~FSC~~the Hilltop Broker-Dealers may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. ~~FSC was~~The Hilltop Broker-Dealers were required to segregate ~~$29.5~~$188.1 million and $76.0 million in cash and securities at ~~September~~June 30, ~~2014, which is included in other assets within the consolidated balance sheet. At~~2015 and December 31, ~~2013, FSC was not required to segregate cash and securities.~~2014, respectively.

~~FSC was~~The Hilltop Broker-Dealers were not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

introducing broker-dealers at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013.~~2014.

Mortgage Origination

As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the ~~United States~~U.S. Department of Housing and Urban Development (“HUD”) and the GNMA. On an annual basis, PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending’s compliance with its minimum net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of ~~September~~June 30, ~~2014,~~2015, PrimeLending’s net worth exceeded the amounts required by both HUD and GNMA.

Insurance

The statutory financial statements of the ~~Company’s~~Company's insurance subsidiaries, which are domiciled in the State of Texas, are presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has adopted the statutory accounting practices of the National Association of Insurance ~~Commissioners’~~Commissioners (“NAIC”) ~~statutory accounting practices~~ as the basis of its statutory accounting practices with certain differences that are not significant to the insurance company subsidiaries’ statutory equity.

A summary of statutory capital and surplus and statutory net income (loss) of each insurance subsidiary is as follows (in thousands).


	September 30,			December 31,							June 30,		December 31,
	2014			2013							2015		2014
Capital and surplus:
National Lloyds Insurance Company	$	106,531		$	98,602						$	109,982	$	113,023
American Summit Insurance Company	27,604			26,452								29,754		28,964

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
Statutory net income (loss):
National Lloyds Insurance Company	$	6,106		$	2,645	$	7,428	$	(7,296	)
American Summit Insurance Company	(418		)	167		958		(962		)


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Statutory net income (loss):
National Lloyds Insurance Company	$	(8,835)	$	(4,664)	$	(4,076)	$	1,322
American Summit Insurance Company		(342)		245		567		1,376

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Regulations of the Texas Department of Insurance require insurance companies to maintain minimum levels of statutory surplus to ensure their ability to meet their obligations to policyholders. At ~~September~~June 30, ~~2014,~~2015, the ~~Company’s~~Company's insurance subsidiaries had statutory surplus in excess of the minimum required.

The NAIC has adopted a risk based capital (“RBC”) formula for insurance companies that establishes minimum capital requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. At ~~December 31, 2013,~~June 30, 2015, the ~~most recent date for which the RBC calculation was performed, the Company’s~~Company's insurance ~~subsidiaries’~~subsidiaries' RBC ratio exceeded the level at which regulatory action would be required. ~~As of September 30, 2014, management was not aware of any changes in financial condition or structure that would cause~~

17. Stockholders’ Equity

Stock Repurchase Program

On May 18, 2015, the Company’s ~~insurance subsidiaries~~Board of Directors approved a stock repurchase program under which it authorized the Company to ~~not be~~repurchase, in ~~compliance~~the aggregate, up to $30.0 million of its outstanding common stock. Under the stock repurchase program authorized, the Company may repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. The extent to which the Company repurchases its shares and the timing of such repurchases depends upon market conditions and other corporate considerations, as determined by Hilltop’s management team. The purchases are funded from available cash balances.

During the three months ended June 30, 2015, the Company paid $17.0 million to repurchase and retire 774,444 shares at an average price of $21.89 per share. These retired shares were returned to the Company’s pool of authorized but unissued shares of common stock. The Company uses the par value method of accounting for its stock repurchases, whereby the par value of the shares is deducted from common stock. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital based on an estimated average sales price per issued share with the ~~required RBC ratio.~~excess amounts charged to retained earnings.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~15.~~18. Derivative Financial Instruments

The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively ~~modifying~~managing the re-pricing characteristics of certain assets and liabilities ~~so that~~to mitigate potential adverse impacts from changes in interest rates ~~do not adversely affect~~on the net interest margin. PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”). Additionally, PrimeLending has interest rate risk relative to its MSR asset. During the three months ended September 30, 2014, PrimeLending began using derivative instruments, including interest rate swaps and swaptions, to hedge this risk. ~~FSC uses~~The Hilltop Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions.

Non-Hedging Derivative Instruments and the Fair Value Option

As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions. The fair values of PrimeLending’s IRLCs, forward commitments, and interest rate swaps and swaptions are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production income. The fair value of PrimeLending’s derivative instruments increased ~~$0.2~~$14.5 million ~~for~~during the three months ended ~~September~~June 30, 2015, compared with a decrease of $3.6 million during the three months ended June 30, 2014, and ~~decreased $48.9~~an increase of $33.3 million during the ~~same period in 2013. The fair value of PrimeLending’s derivative instruments decreased $5.0 million and $14.9 million for the nine~~six months ended ~~September~~June 30, ~~2014 and 2013, respectively.~~2015, compared with a decrease of $5.2 million during the six months ended June 30, 2014. Changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and ~~MSRs,~~MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans

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held for sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 3 to the consolidated financial statements. The fair values of ~~FSC’s~~the Hilltop Broker-Dealers’ derivative instruments are recorded in other assets or other liabilities, as appropriate, and the fair values of ~~FSC’s~~the Hilltop Broker-Dealers’ derivatives increased ~~$5.3~~$9.2 million and $3.2 million ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and increased ~~$11.4~~$17.8 million and ~~$8.8~~$6.1 million ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The changes in fair value were recorded as a component of other noninterest income.

Derivative positions are presented in the following table (in thousands).


	September 30, 2014					December 31, 2013					June 30, 2015				December 31, 2014
	Notional		Estimated			Notional		Estimated			Notional		Estimated		Notional		Estimated
	Amount		Fair Value			Amount		Fair Value			Amount		Fair Value		Amount		Fair Value
Derivative instruments:
IRLCs	$	842,127	$	20,810		$	602,467	$	12,151		$	1,394,780	$	29,265	$	621,216	$	17,057
Commitments to purchase MBSs	489,361		4,040			236,305		(109		)		3,136,840		2,094		510,553		6,040
Commitments to sell MBSs	2,201,379		(3,709		)	1,645,332		11,383				5,361,530		5,868		1,968,768		(12,566)
Fee Award Option	20,420		(6,827		)	20,432		(5,600		)
Interest rate swaps and swaptions	79,000		409			—		—				237,821		359		83,000		425

~~Table of Contents~~PrimeLending advanced cash collateral totaling $6.6 million to offset net liability derivative positions on its commitments to sell MBSs at December 31, 2014. PrimeLending had no cash collateral advances to offset net derivative positions on its commitments to sell MBSs at June 30, 2015. In addition, PrimeLending advanced cash collateral totaling $5.2 million and $3.3 million in initial margin on its interest rate swaps and swaptions at June 30, 2015 and December 31, 2014, respectively. These amounts are included in other assets within the consolidated balance sheets.

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~16.~~19. Balance Sheet Offsetting

Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).

								Gross Amounts Not Offset in
						Net Amounts		the Balance Sheet														Gross Amounts Not Offset in
	Gross Amounts		Gross Amounts			of Assets					Cash									Net Amounts		the Balance Sheet
	of Recognized		Offset in the			Presented in the		Financial			Collateral			Net		Gross Amounts		Gross Amounts		of Assets				Cash
	Assets		Balance Sheet			Balance Sheet		Instruments			Pledged			Amount		of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
September 30, 2014
																Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
June 30, 2015
Securities borrowed:
Institutional counterparties																$	1,985,580	$	—	$	1,985,580	$	(1,985,580)	$	—	$	—

Interest rate swaps and swaptions:
Institutional counterparties																	932		(4)		928		—		—		928

Reverse repurchase agreements:
Institutional counterparties																	79,153		—		79,153		(78,743)		—		410

Forward MBS derivatives:
Institutional counterparties																	14,078		(1,614)		12,464		(2,964)		—		9,500
																$	2,079,743	$	(1,618)	$	2,078,125	$	(2,067,287)	$	—	$	10,838
December 31, 2014
Securities borrowed:
Institutional counterparties	$	210,590	$	—		$	210,590	$	(210,590	)	$	—		$	—	$	152,899	$	—	$	152,899	$	(152,899)	$	—	$	—

Interest rate swaps and swaptions:
Institutional counterparties	409		—			409		—			—			409			425		—		425		—		—		425

Forward MBS derivatives:
Institutional counterparties	9		—			9		—			—			9			41		—		41		—		—		41
	$	211,008	$	—		$	211,008	$	(210,590	)	$	—		$	418	$	153,365	$	—	$	153,365	$	(152,899)	$	—	$	466

December 31, 2013
Securities borrowed:
Institutional counterparties	$	107,365	$	—		$	107,365	$	(107,365	)	$	—		$	—

Forward MBS derivatives:
Institutional counterparties	11,489		(76		)	11,413		—			(286		)	11,127
	$	118,854	$	(76	)	$	118,778	$	(107,365	)	$	(286	)	$	11,127

								Gross Amounts Not Offset in
						Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts			of Liabilities					Cash
	of Recognized		Offset in the			Presented in the		Financial			Collateral			Net
	Liabities		Balance Sheet			Balance Sheet		Instruments			Pledged			Amount
September 30, 2014
Securities loaned:
Institutional counterparties	$	157,212	$	—		$	157,212	$	(157,212	)	$	—		$	—

Repurchase agreements:
Customer counterparties	134,134		—			134,134		(134,134		)	—			—

Forward MBS derivatives:
Institutional counterparties	4,163		(446		)	3,717		—			(1,749		)	1,968
	$	295,509	$	(446	)	$	295,063	$	(291,346	)	$	(1,749	)	$	1,968

December 31, 2013
Securities loaned:
Institutional counterparties	$	74,913	$	—		$	74,913	$	(74,913	)	$	—		$	—

Repurchase agreements:
Customer counterparties	107,462		—			107,462		(107,462		)	—			—

Forward MBS derivatives:
Institutional counterparties	30		—			30		—			(17		)	13
	$	182,405	$	—		$	182,405	$	(182,375	)	$	(17	)	$	13

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							Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Liabilities				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
June 30, 2015
Securities loaned:
Institutional counterparties	$	1,923,756	$	—	$	1,923,756	$	(1,923,756)	$	—	$	—

Interest rate swaps and swaptions:
Institutional counterparties		602		(33)		569		(1,759)		—		(1,190)

Repurchase agreements:
Institutional counterparties		48,322		—		48,322		(48,322)		—		—
Customer counterparties		134,553		—		134,553		(134,553)		—		—

Forward MBS derivatives:
Institutional counterparties		3,820		—		3,820		(3,820)		—		—
	$	2,111,053	$	(33)	$	2,111,020	$	(2,112,210)	$	—	$	(1,190)
December 31, 2014
Securities loaned:
Institutional counterparties	$	117,822	$	—	$	117,822	$	(117,822)	$	—	$	—

Repurchase agreements:
Customer counterparties		136,396		—		136,396		(136,396)		—		—

Forward MBS derivatives:
Institutional counterparties		12,829		(223)		12,606		—		(6,137)		6,469
	$	267,047	$	(223)	$	266,824	$	(254,218)	$	(6,137)	$	6,469

Secured Borrowing Arrangements

Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under repurchase agreements, which are secured borrowings and generally mature within one to thirty days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities, which is monitored on a daily basis.

~~Hilltop Holdings Inc.~~Securities Lending Activities — The Company’s securities lending activities includes lending securities for other broker-dealers, lending institutions and ~~Subsidiaries~~

~~Notes~~its own clearing and retail operations. These activities involve lending securities to ~~Consolidated Financial Statements (continued)~~

~~(Unaudited)~~other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date and as a conduit for financing activities.

When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to perform or if collateral securing its obligations is insufficient. In securities transactions, we are subject to credit risk during the period between the execution of a trade and the settlement by the customer.

~~17.~~49

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The following tables present the remaining contractual maturities of repurchase agreements, repurchase-to-maturity transactions and securities lending transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity transactions outstanding at June 30, 2015 or December 31, 2014.

Remaining Contractual Maturities

Overnight and

Greater Than

June 30, 2015

Continuous

Up to 30 Days

30-90 Days

90 Days

Total

Repurchase agreements and repurchase-to-maturity transactions:

U.S. Treasury and agency securities

$
176,053

$
6,822

$
—

$
—

$
182,875

Securities lending transactions:

U.S. Treasury and agency securities

13,566

—

—

—

13,566

Corporate securities

13,120

—

—

—

13,120

Equity securities

1,897,070

—

—

—

1,897,070

Total

$
2,099,809

$
6,822

$
—

$
—

$
2,106,631

Gross amount of recognized liabilities for repurchase agreements and securities lending in offsetting disclosure above

$
2,106,631

Amount related to agreements not included in offsetting disclosure above

$
—

Remaining Contractual Maturities

Overnight and

Greater Than

December 31, 2014

Continuous

Up to 30 Days

30-90 Days

90 Days

Total

Repurchase agreements and repurchase-to-maturity transactions:

U.S. Treasury and agency securities

$
136,396

$
—

$
—

$
—

$
136,396

Securities lending transactions:

U.S. Treasury and agency securities

9,171

—

—

—

9,171

Corporate securities

200

—

—

—

200

Equity securities

108,451

—

—

—

108,451

Total

$
254,218

$
—

$
—

$
—

$
254,218

Gross amount of recognized liabilities for repurchase agreements and securities lending in offsetting disclosure above

$
254,218

Amount related to agreements not included in offsetting disclosure above

$
—

20. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).


	September 30,		December 31,		June 30,		December 31,
	2014		2013		2015		2014
Receivables:
Securities borrowed	$	210,590	$	107,365	$	1,985,580	$	152,899
Securities failed to deliver	12,053		7,160			36,318		3,497
Clearing organizations	1,019		4,698			15,451		11,471
Due from dealers	17		94
	$	223,679	$	119,317
Trades in process of settlement, net						27,005		—
Other						6,416		17
					$	2,070,770	$	167,884
Payables:
Securities loaned	$	157,212	$	74,913	$	1,923,756	$	117,822
Correspondents	51,797		44,852			72,163		51,930
Securities failed to receive	8,937		5,523			49,202		5,960
Clearing organizations	25,889		4,390			3,055		3,330
	$	243,835	$	129,678	$	2,048,176	$	179,042

~~18. Reserves~~50

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21. Reserve for ~~Unpaid~~ Losses and Loss Adjustment Expenses

~~Information regarding the~~A rollforward of NLC’s reserve for unpaid ~~losses and~~ losses and loss adjustment expenses (“LAE”) ~~are~~, as included in other liabilities within the consolidated balance sheets, is as follows (in thousands).


							Six Months Ended June 30,
	Nine Months Ended September 30,						2015		2014
	2014			2013
Balance, beginning of period	$	27,468		$	34,012		$	29,716	$	27,468
Less reinsurance recoverables	(4,508		)	(10,385		)		(4,315)		(4,508)
Net balance, beginning of period	22,960			23,627				25,401		22,960

Incurred related to:
Current period	70,349			93,124
Prior periods	5,892			852
Current year								53,368		48,750
Prior years								6,733		4,862
Total incurred	76,241			93,976				60,101		53,612

Payments related to:
Current period	(55,701		)	(78,742		)
Prior periods	(14,338		)	(13,623		)
Current year								(34,696)		(33,171)
Prior years								(11,544)		(11,980)
Total payments	(70,039		)	(92,365		)		(46,240)		(45,151)

Net balance, end of period	29,162			25,238				39,262		31,421
Plus reinsurance recoverables	3,298			6,029				19,458		3,725
Balance, end of period	$	32,460		$	31,267		$	58,720	$	35,146

The increase in the NLC’s reserves at ~~September~~June 30, ~~2014~~2015 as compared with ~~September~~June 30, ~~2013~~2014 of ~~$1.2~~$23.6 million is primarily due to increased reserves attributable to an increase in frequency and severity of severe weather events in our geographic coverage area as well as the prior period adverse ~~development. This~~development and additional reinsurance recoverables associated with the increase in reserves. The prior period adverse development ~~totaled $5.9~~of $6.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014 and~~2015 was primarily related to litigation emerging from a series of hail storms within the 2012 through 2014 accident ~~year.~~years.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~19.~~22. Reinsurance Activity

NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At ~~September~~June 30, ~~2014,~~2015, reinsurance receivables ~~have~~had a carrying value of ~~$3.5~~$21.0 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at ~~September~~June 30, ~~2014,~~2015, based on NLC’s quality requirements.

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The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).


	Three Months Ended September 30,												Nine Months Ended September 30,												Three Months Ended June 30,								Six Months Ended June 30,
	2014						2013						2014						2013						2015				2014				2015				2014
	Written			Earned			Written			Earned			Written			Earned			Written			Earned			Written		Earned		Written		Earned		Written		Earned		Written		Earned
Premiums from direct business	$	42,586		$	43,890		$	44,484		$	43,031		$	134,355		$	130,183		$	134,292		$	125,520		$	46,564	$	42,520	$	47,999	$	43,534	$	89,313	$	84,610	$	91,770	$	86,293
Reinsurance assumed	2,531			2,338			2,058			1,860			7,441			6,536			5,931			5,238				2,942		2,547		2,677		2,178		5,458		4,990		4,910		4,198
Reinsurance ceded	(4,604		)	(4,407		)	(5,100		)	(4,909		)	(14,085		)	(13,802		)	(14,879		)	(14,713		)		(4,737)		(4,749)		(5,295)		(4,935)		(9,442)		(9,715)		(9,481)		(9,395)
Net premiums	$	40,513		$	41,821		$	41,442		$	39,982		$	127,711		$	122,917		$	125,344		$	116,045		$	44,769	$	40,318	$	45,381	$	40,777	$	85,329	$	79,885	$	87,199	$	81,096

The effects of reinsurance on incurred losses are as follows (in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013			2014			2013			2015		2014		2015		2014
Loss and LAE incurred	$	22,834		$	27,558		$	77,041		$	98,507		$	54,266	$	36,455	$	77,597	$	54,207
Reinsurance recoverables	(205		)	(2,927		)	(800		)	(4,531		)		(13,025)		(1,180)		(17,496)		(595)
Net loss and LAE incurred	$	22,629		$	24,631		$	76,241		$	93,976		$	41,241	$	35,275	$	60,101	$	53,612

Multi-line excess of loss coverage

In addition to the catastrophe reinsurance noted below, both NLIC and ASIC participate in an excess of loss program placed with various reinsurers. This program is limited to each risk with respect to property and liability in the amount of $500,000 for each of NLIC and ASIC. Each of NLIC and ASIC retain $500,000 in this program.

Catastrophic coverage

At ~~September~~June 30, ~~2014,~~2015, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8$8.0 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.5 million in excess of its $1.5 million retention to bridge to the primary program. The reinsurance for NLIC and ASIC in excess of $8$8.0 million is comprised of four layers of protection: ~~$17~~$17.0 million in excess of $8$8.0 million ~~retention; $25~~retention and/or loss; $25.0 million in excess of ~~$25~~$25.0 million loss; ~~$50~~$50.0 million in excess of ~~$50~~$50.0 million loss and ~~$40~~$40.0 million in excess of ~~$100~~$100.0 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8$8.0 million and $1.5 million, respectively. At ~~September~~June 30, ~~2014,~~2015, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8$8.0 million in the aggregate.

~~Additionally,~~Effective January 1, 2015, NLC ~~purchased an~~renewed its underlying excess of loss contract that provides ~~$10~~$10.0 million aggregate coverage for sub-catastrophic events. NLC retains a ~~34%~~9% participation in this coverage.

46Effective July 1, 2015, NLC renewed its catastrophic excess of loss reinsurance coverage for a two-year period. The retentions for each of its subsidiary companies continue at $8.0 million for NLIC and $1.5 million for ASIC. ASIC renewed the underlying layer of coverage providing $6.5 million in excess of its $1.5 million retention. The reinsurance for NLIC and ASIC in excess of $8.0 million continues in four layers, but the coverage provided has been realigned and the total coverage provided reduced to $125.0 million. The revised program is comprised of the following four layers of protection: $17.0 million in excess of $8.0 million retention and/or loss; $25.0 million in excess of $25.0 million loss; $25.0 million in excess of $50.0 million loss and $50.0 million in excess of $75.0 million loss.

Table of Contents

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~20.~~23. Segment and Related Information

The Company currently has four reportable business segments that are organized primarily by the core products offered to the segments’ respective customers. These segments reflect the manner in which operations are managed and the criteria used by the Company’s chief operating decision maker function to evaluate segment performance, develop strategy and allocate resources. The chief operating decision maker function consists of the President and Chief Executive Officer of the Company and the Chief Executive Officer of PlainsCapital. During the fourth quarter of 2013, we began presenting certain amounts previously allocated to the four reportable business segments under the heading Corporate to better reflect our internal organizational structure. This change had no impact on the Company’s consolidated results of operations. The Company’s historical segment disclosures have been revised to conform to the current presentation.

The banking segment includes the operations of the Bank ~~which,~~and, since ~~September 14, 2013,~~January 1, 2015, the operations of the former SWS FSB acquired in the SWS Merger. The broker-dealer segment includes the operations of First Southwest and, since January 1, 2015, the operations of Southwest Securities and SWS Financial acquired in the ~~FNB Transaction.~~SWS Merger. The mortgage origination segment is composed of ~~PrimeLending. The~~PrimeLending, while the insurance segment is composed of NLC. ~~The financial advisory segment is composed of First Southwest.~~

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance and acquisition costs not allocated to business segments.

Balance sheet amounts ~~for remaining subsidiaries~~ not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about reportable business segment revenues, operating results, goodwill and assets (in thousands).

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated						Mortgage						All Other and		Hilltop
Three Months Ended September 30, 2014
Three Months Ended June 30, 2015																				Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	78,285	$	(3,197	)	$	808		$	3,269		$	1,712		$	4,883		$	85,760	$	90,881	$	8,022	$	(2,277)	$	699	$	(1,599)	$	4,941	$	100,667
Provision for loan losses	4,049		—			—			(16		)	—			—			4,033			304		(146)		—		—		—		—		158
Noninterest income	17,638		128,989			44,014			29,726			—			(8,232		)	212,135			15,047		80,247		168,227		42,835		—		(4,956)		301,400
Noninterest expense	67,236		114,690			36,636			31,782			5,015			(615		)	254,744			60,524		90,347		144,952		56,060		1,892		(458)		353,317
Income (loss) before income taxes	$	24,638	$	11,102		$	8,186		$	1,229		$	(3,303	)	$	(2,734	)	$	39,118	$	45,100	$	(1,932)	$	20,998	$	(12,526)	$	(3,491)	$	443	$	48,592

			Mortgage						Financial						All Other and			Hilltop						Mortgage						All Other and		Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Nine Months Ended September 30, 2014
Six Months Ended June 30, 2015																				Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	248,686	$	(9,726	)	$	2,625		$	9,077		$	5,100		$	13,865		$	269,627	$	174,322	$	16,018	$	(5,291)	$	1,456	$	(1,490)	$	9,044	$	194,059
Provision for loan losses	12,793		—			—			15			—			—			12,808			2,789		56		—		—		—		—		2,845
Noninterest income	50,258		343,572			129,910			80,161			—			(18,385		)	585,516			68,398		206,391		303,519		84,681		—		(9,376)		653,613
Noninterest expense	188,153		316,546			118,398			87,507			9,767			(1,786		)	718,585			119,061		181,142		267,253		89,527		11,518		(708)		667,793
Income (loss) before income taxes	$	97,998	$	17,300		$	14,137		$	1,716		$	(4,667	)	$	(2,734	)	$	123,750	$	120,870	$	41,211	$	30,975	$	(3,390)	$	(13,008)	$	376	$	177,034

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Three Months Ended September 30, 2013
Net interest income (expense)	$	70,594	$	(8,880	)	$	911		$	2,690		$	(68	)	$	6,669		$	71,916
Provision for loan losses	10,661		—			—			(3		)	—			—			10,658
Noninterest income	26,614		127,460			42,163			25,710			—			(6,852		)	215,095
Noninterest expense	34,136		114,815			38,689			28,227			908			(183		)	216,592
Income (loss) before income taxes	$	52,411	$	3,765		$	4,385		$	176		$	(976	)	$	—		$	59,761

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Nine Months Ended September 30, 2013
Net interest income (expense)	$	206,863	$	(32,731	)	$	2,796		$	9,445		$	(304	)	$	21,533		$	207,602
Provision for loan losses	34,927		—			—			25			—			—			34,952
Noninterest income	50,747		439,246			122,365			77,350			—			(22,102		)	667,606
Noninterest expense	96,732		371,577			135,098			84,327			4,818			(569		)	691,983
Income (loss) before income taxes	$	125,951	$	34,938		$	(9,937	)	$	2,443		$	(5,122	)	$	—		$	148,273

September 30, 2014
Goodwill	$	207,741	$	13,071		$	23,988		$	7,008		$	—		$	—		$	251,808

Total assets	$	8,000,666	$	1,452,449		$	328,168		$	744,769		$	1,449,438		$	(2,795,088	)	$	9,180,402

December 31, 2013
Goodwill	$	207,741	$	13,071		$	23,988		$	7,008		$	—		$	—		$	251,808

Total assets	$	7,981,517	$	1,249,091		$	308,160		$	520,412		$	1,316,398		$	(2,471,456	)	$	8,904,122


					Mortgage						All Other and		Hilltop
Three Months Ended June 30, 2014	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	90,828	$	3,178	$	(2,389)	$	838	$	1,695	$	4,296	$	98,446
Provision for loan losses		5,516		17		—		—		—		—		5,533
Noninterest income		16,392		25,838		122,820		43,123		—		(4,892)		203,281
Noninterest expense		60,240		28,359		111,224		49,420		2,565		(596)		251,212
Income (loss) before income taxes	$	41,464	$	640	$	9,207	$	(5,459)	$	(870)	$	—	$	44,982


					Mortgage						All Other and		Hilltop
Six Months Ended June 30, 2014	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	170,401	$	5,808	$	(6,528)	$	1,817	$	3,387	$	8,982	$	183,867
Provision for loan losses		8,744		31		—		—		—		—		8,775
Noninterest income		32,621		50,435		214,583		85,896		—		(10,154)		373,381
Noninterest expense		120,917		55,724		201,857		81,762		4,753		(1,172)		463,841
Income (loss) before income taxes	$	73,361	$	488	$	6,198	$	5,951	$	(1,366)	$	—	$	84,632

June 30, 2015
Goodwill	$	207,741	$	7,008	$	13,071	$	23,988	$	—	$	—	$	251,808
Total assets	$	8,537,026	$	3,455,721	$	1,622,317	$	360,654	$	1,822,215	$	(3,320,735)	$	12,477,198

December 31, 2014
Goodwill	$	207,741	$	7,008	$	13,071	$	23,988	$	—	$	—	$	251,808
Total assets	$	8,036,729	$	758,636	$	1,498,846	$	328,693	$	1,522,655	$	(2,903,143)	$	9,242,416

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~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~21.~~24. Earnings per Common Share

Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. ~~In May 2013, as discussed in Note 13 to the consolidated financial statements, Hilltop issued~~ Restricted Stock Awards are the only instruments issued by Hilltop which qualify as participating securities.

Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. ~~For~~During the three and ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, stock options and RSUs are the only potentially dilutive non-participating instruments issued by ~~Hilltop, while potentially dilutive non-participating instruments for~~Hilltop. Next, the ~~three~~Company determines and ~~nine months ended September 30, 2013 included stock options, RSUs and the~~ ~~7.50% Senior Exchangeable Notes due 2025 (the “Notes”), which were called for redemption during the fourth quarter of 2013. Next, we determine and include~~includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2014			2013			2014			2013			2015		2014		2015		2014
Basic earnings per share:
Income applicable to Hilltop common stockholders	$	23,386		$	38,174		$	74,231		$	91,487		$	29,622	$	27,085	$	140,865	$	50,845
Less: income applicable to participating shares	(121		)	(211		)	(384		)	(507		)		(139)		(141)		(660)		(266)
Net earnings available to Hilltop common stockholders	$	23,265		$	37,963		$	73,847		$	90,980		$	29,483	$	26,944	$	140,205	$	50,579

Weighted average shares outstanding - basic	89,711			83,493			89,709			83,490				99,486		89,709		99,613		89,708

Basic earnings per common share	$	0.26		$	0.45		$	0.82		$	1.09		$	0.30	$	0.30	$	1.41	$	0.56

Diluted earnings per share:
Income applicable to Hilltop common stockholders	$	23,386		$	38,174		$	74,231		$	91,487		$	29,622	$	27,085	$	140,865	$	50,845
Add: interest expense on senior exchangeable notes (net of tax)	—			1,053			—			3,158
Net earnings available to Hilltop common stockholders	$	23,386		$	39,227		$	74,231		$	94,645

Weighted average shares outstanding - basic	89,711			83,493			89,709			83,490				99,486		89,709		99,613		89,708
Effect of potentially dilutive securities	847			6,967			861			6,761				924		860		894		868
Weighted average shares outstanding - diluted	90,558			90,460			90,570			90,251				100,410		90,569		100,507		90,576

Diluted earnings per common share	$	0.26		$	0.43		$	0.82		$	1.05		$	0.30	$	0.30	$	1.40	$	0.56

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~22.~~25. Recently Issued Accounting Standards

In ~~August 2014, the~~June 2015, FASB issued Accounting Standards Update (“ASU”) ~~No. 2014-14~~2015-10 to ~~reduce diversity~~clarify the codification, correct unintended application of guidance, eliminate inconsistencies, and to improve the codification’s presentation of guidance for a wide range of topics in ~~practice~~the codification. Transition guidance varies based on the amendments included. The amendments that require transition guidance are effective for annual periods, and interim periods within those fiscal periods, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance. The Company is currently in the process of evaluating the transition provisions of the amendment and impact on its future consolidated financial statements. However, the

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Company has adopted the amendment related to a clarification of the disclosure requirements for nonrecurring fair value measurements made during the period.

In May 2015, the FASB issued ASU 2015-09 requiring enhanced disclosures for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The amendment is effective for annual periods beginning after December 15, 2015 and interim reporting periods thereafter. Early adoption is permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 to simplify presentation of debt issuance costs to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ~~clarifying how to classify and measure certain government-guaranteed mortgage loans upon foreclosure.~~this amendment. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, ~~2014~~2015 using the retrospective method of adoption. As permitted within the amendment, the Company has elected to early adopt the provisions of this amendment beginning with the three months ended June 30, 2015. Adoption of the amendment resulted in unamortized debt issuance costs of $1.9 million in connection with Hilltop’s issuance of the 5% senior notes due 2025 on April 9, 2015 being presented in the consolidated balance sheet at June 30, 2015 as a reduction from the $150.0 million aggregate principal amount. During the three months ended June 30, 2015, debt issuance costs of $30 thousand were amortized and included in interest expense.

In February 2015, the FASB issued ASU 2015-02 to modify the analysis that companies must perform in order to determine whether a legal entity should be consolidated. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships and (iv) provide a scope exception for certain entities. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01 as part of its initiative to reduce complexity in accounting standards. This amendment eliminates the concept of extraordinary items. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2015 and may be adopted using either a ~~modified~~full retrospective transition method or a prospective transition method. ~~The Company expects to adopt~~Adoption of the amendment ~~as of January 1, 2015 using the prospective transition method and does~~is not ~~expect the amendment~~expected to ~~have~~ a significant effect on ~~its future~~the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 which clarifies the principles for recognizing revenue from contracts with customers. The amendment outlines a single comprehensive model for entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendment was initially scheduled to be effective for the Company no earlier than the first quarter of 2017, however, in July 2015, the FASB voted to defer the effective date by one year. Therefore, the amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, ~~2016~~2017 and may be adopted using either a full retrospective transition method or a modified retrospective transition method. Early adoption is ~~not permitted.~~permitted no earlier than the first quarter of 2017. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08 which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The amendment is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results and will permit companies to have continuing cash flows and significant continuing involvement with the disposed component. The amendment is effective for disposals (or classifications as held for sale) and acquired businesses or nonprofit activities that are classified as held for sale upon acquisition that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. As such, the Company will evaluate the provisions of the amendment as it relates to any potential disposals or acquisitions beginning on or after January 1, 2015.

In January 2014, the FASB issued ASU No. 2014-04 to clarify that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014 and may be adopted using either a modified retrospective transition method or a prospective transition method. The Company expects to adopt the amendment as of January 1, 2015 using the prospective transition method and does not expect the amendment to have a significant effect on its future consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11 to require an entity to present an unrecognized tax benefit, or portion thereof, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendment became effective for the Company on January 1, 2014, and its adoption did not have any effect on the Company’s consolidated financial statements as the amendment is to be applied prospectively to all unrecognized tax benefits that exist at the balance sheet date.

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~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~23. Subsequent Events~~

On October 2, 2014, Hilltop exercised its SWS Warrant in full, acquiring 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share. Pursuant to the terms of the SWS Warrant and a credit agreement with SWS, the exercise price was paid by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Following the exercise of the SWS Warrant, Hilltop (i) owns 10,171,039 shares of SWS common stock, representing approximately 21% of the outstanding shares of SWS common stock as of October 4, 2014, and (ii) is no longer a lender under the credit agreement.

On October 24, 2014, the Bank notified its federal and state banking regulators and affected customers that, effective January 30, 2015, it will be closing certain branch locations acquired in the FNB Transaction. Eleven of the branches to be closed are located in the Texas Rio Grande Valley, and the remaining two branches are located in Houston and Laredo, Texas. The Bank previously notified its federal and state banking regulators and affected customers that it will be closing two other branches acquired in the FNB Transaction in the Houston market effective November 7, 2014.

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

The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the financial information set forth in the tables herein.

Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PlainsCapital” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Southwest Securities” refer to Southwest Securities, Inc. (a wholly owned subsidiary of Hilltop Securities), references to “SWS Financial” refer to SWS Financial Services, Inc. (a wholly owned subsidiary of Hilltop Securities), references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First National Bank, references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of ~~the Bank)~~Hilltop Securities) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, LLC (a wholly owned subsidiary of First Southwest), references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, and references to “NLC” refer to National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.

FORWARD-LOOKING STATEMENTS

This Quarterly Report ~~and the documents incorporated by reference into this report include~~includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “probable,” “projects,” “seeks,” “should,” “view” or “would” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our litigation, our efforts to make strategic acquisitions, our ~~pending~~recent acquisition of SWS Group, Inc. (“SWS”), and integration thereof, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation (“FDIC”), projected losses on mortgage loans originated, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, and the collectability of loans are forward-looking statements.

These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:

risks associated with merger and acquisition integration, including the diversion of management time on acquisition-related issues and our ability to promptly and effectively integrate our businesses with those of SWS and achieve the synergies and value creation contemplated by the acquisition;

·risks related to our pending acquisition of SWS, including our ability to achieve the synergies and value creation contemplated by the pending acquisition and the diversion of management time on acquisition-related issues;

our ability to estimate loan losses;

changes in the default rate of our loans;

risks associated with concentration in real estate related loans;

our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the FDIC;

·~~risks associated with merger and acquisition integration, including our ability to promptly and effectively integrate our businesses with those of FNB and SWS;~~56

·~~our ability to estimate loan losses;~~

·~~changes in the default rate of our loans;~~

·~~risks associated with concentration in real estate related loans;~~

·~~our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the Federal Deposit Insurance Corporation (the “FDIC”);~~

·~~changes in general economic, market and business conditions in areas or markets where we compete;~~

·~~severe catastrophic events in our geographic area;~~

·~~changes in the interest rate environment;~~

·~~cost and availability of capital;~~

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

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

severe catastrophic events in Texas and other areas of the southern United States;

·~~our ability to use net operating loss carry forwards to reduce future tax payments;~~

changes in the interest rate environment;

·~~approval of new, or changes in, accounting policies and practices;~~

cost and availability of capital;

·~~changes in key management;~~

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

·competition in our banking, mortgage origination, financial advisory and insurance segments from other banks and financial institutions as well as insurance companies, mortgage bankers, investment banking and financial advisory firms, asset-based non-bank lenders and government agencies;

our ability to use net operating loss carryforwards to reduce future tax payments;

·~~failure of our insurance segment reinsurers to pay obligations under reinsurance contracts;~~

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

·~~our ability to use excess cash in an effective manner, including the execution of successful acquisitions; and~~

changes in key management;

competition in our banking, broker-dealer, mortgage origination and insurance segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders, government agencies and insurance companies;

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

failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; and

our ability to use excess cash in an effective manner, including the execution of successful acquisitions.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, ~~please refer to~~see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on ~~March 3, 2014,~~February 26, 2015, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A, “Risk Factors” herein and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.

OVERVIEW

We are a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. Our primary line of business is to provide business and consumer banking services from offices located throughout ~~Texas.~~Texas through the Bank. We also provide an array of financial products and services ~~such as~~through our broker-dealer, mortgage origination and insurance ~~and financial advisory services.~~segments.

~~On September 13, 2013 (the “Bank Closing Date”)~~Effective January 1, 2015, in connection with our acquisition of SWS, we modified our organizational structure into three primary operating business units, PlainsCapital (banking and mortgage origination), ~~the Bank assumed substantially all of the liabilities, including all of the deposits,~~Hilltop Securities (broker-dealer) and acquired substantially all of the assets of Edinburg, Texas-based FNB from the FDIC, as receiver, and reopened former branches of FNB acquired from the FDIC under the “PlainsCapital Bank” name (the “FNB Transaction”)NLC (insurance). ~~Pursuant~~The PlainsCapital unit continues to ~~the Purchase and Assumption Agreement by and among the FDIC as receiver for FNB, the FDIC and the Bank (the “P&A Agreement”),~~include the Bank and PrimeLending, while the ~~FDIC entered into loss-share agreements whereby~~new Hilltop Securities unit includes First Southwest (transferred from the ~~FDIC agreed~~PlainsCapital unit effective January 1, 2015), and two entities acquired on January 1, 2015, Southwest Securities and SWS Financial. The following includes additional details regarding the financial products and services provided by each of our primary operating business units.

PlainsCapital. PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, traditional banking services, wealth and investment management and treasury management primarily in Texas and residential mortgage lending throughout the United States.

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Hilltop Securities. Hilltop Securities is a holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

NLC. NLC is a property and casualty insurance holding company, headquartered in Waco, Texas, that provides, through its subsidiaries, fire and homeowners insurance to ~~share~~low value dwellings and manufactured homes primarily in ~~the losses of certain covered loans~~Texas and ~~covered~~ other ~~real estate owned (“OREO”) that the Bank acquired in the FNB Transaction. The fair value~~areas of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits.southern United States.

~~On March 31, 2014, we entered into~~During the three and six months ended June 30, 2015, our net income to common stockholders was $29.6 million, or $0.30 per diluted share, and $140.9 million, or $1.40 per diluted share, respectively. The consolidated operating results during the six months ended June 30, 2015 include the recognition of a ~~definitive merger agreement with~~preliminary bargain purchase gain of $80.7 million related to our acquisition of SWS ~~providing for the merger of~~in a stock and cash transaction, whereby SWS merged with and into ~~a subsidiary of~~ Hilltop formed for the purpose of facilitating this transaction. Under the terms of the merger agreement, SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $6.94 per share based on Hilltop’s closing price on September 30, 2014. The value of the merger consideration will fluctuate with the market price of Hilltop common stock. We intend to fund the cash portion of the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.Securities (the “SWS Merger”).

52We reported $48.6 million and $177.0 million of consolidated income before income taxes during the three and six months ended June 30, 2015, respectively, including the following contributions from our four reportable operating segments.

The banking segment contributed $45.1 million and $120.9 million of income before income taxes during the three and six months ended June 30, 2015, respectively, including $34.1 million of preliminary bargain purchase gain during the six months ended June 30, 2015;

The broker-dealer segment incurred losses before income taxes of $1.9 million during the three months ended June 30, 2015, and contributed $41.2 million of income before income taxes, including $46.6 million of preliminary bargain purchase gain, during the six months ended June 30, 2015;

The mortgage origination segment contributed $21.0 million and $31.0 million of income before income taxes during the three and six months ended June 30, 2015, respectively; and

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The insurance segment incurred losses before income taxes of $12.5 million and $3.4 million during the three and six months ended June 30, 2015, respectively.

At ~~September~~June 30, ~~2014,~~2015, on a consolidated basis, we had total assets of ~~$9.2~~$12.5 billion, total deposits of ~~$6.2~~$6.8 billion, total loans, including loans held for sale, of ~~$5.8~~$6.8 billion and stockholders’ equity of ~~$1.4~~$1.7 billion. ~~Our banking operations include the operations acquired in the FNB Transaction since September 14, 2013.~~

~~Management made significant estimates~~On January 1, 2015, we completed the SWS Merger. SWS’s broker-dealer subsidiaries, Southwest Securities and ~~exercised significant judgment~~SWS Financial, became subsidiaries of Hilltop Securities. Immediately following the SWS Merger, SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS Merger, each outstanding share of SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in ~~estimating fair values~~cash, equating to $6.92 per share based on Hilltop’s closing price on December 31, 2014 and ~~accounting~~resulting in an aggregate purchase price of $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3 million associated with ~~the FNB Transaction during the third quarter of 2013~~our existing investment in SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the ~~short time period between~~SWS Merger, the ~~Bank Closing Date~~merger consideration is subject to change, and ~~September 30, 2013. The Bank Closing Date valuations related to loans, FDIC Indemnification Asset, covered OREO, other intangible assets, assumed liabilities and taxes were considered~~therefore, preliminary at ~~September 30, 2013.~~ this time. Based on preliminary purchase date valuations, the fair value of the assets acquired was $3.3 billion, including $707.5 million in securities, $863.8 million in non-covered loans and $1.2 billion in broker-dealer and clearing organization receivables. The fair value of liabilities assumed was $2.9 billion, consisting primarily of deposits of $1.3 billion and $1.1 billion in broker-dealer and clearing organization payables.

The operations of ~~FNB~~SWS were included in our operating results beginning ~~September 14, 2013~~January 1, 2015 and such operations included a preliminary bargain purchase gain of ~~$3.3 million, before income taxes of $1.2~~$82.8 million as disclosed in our Quarterly Report on Form 10-Q filed with the SEC on ~~November 12, 2013.~~

May 6, 2015. During the quarter ended ~~December 31, 2013,~~June 30, 2015, the estimated fair ~~values~~value of ~~certain identifiable assets~~the customer relationship intangible asset acquired ~~and liabilities assumed~~ as of ~~the Bank Closing Date were~~January 1, 2015 was adjusted ~~in accordance with the Business Combinations Topic of the Accounting Standards Codification (“ASC”)~~ as a result of ~~additional information obtained about the facts~~management’s review and ~~circumstances~~approval of certain key assumptions that existed as of ~~the Bank Closing Date primarily related to the fair values of loans, covered OREO, FDIC Indemnification Asset, premises and equipment and other intangible assets. These adjustments~~January 1, 2015. This adjustment resulted in ~~an increase~~a decrease in the preliminary bargain purchase gain associated with the ~~FNB Transaction~~SWS Merger to ~~$12.6 million, before income taxes of $4.5~~$80.7 million. This change is reflected in the ~~revised~~ consolidated statements of operations within noninterest income during the ~~three and nine~~six months ended ~~September~~June 30, ~~2013. In the aggregate, the adjustments~~2015. The adjustment to the preliminary

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bargain purchase gain ~~and related revisions to the accretion of discount on loans and other items increased~~decreased net income for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2015 by ~~$6.3~~$2.1 million as compared with amounts previously reported in our Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2013.~~March 31, 2015. Additionally, certain amounts previously reported in our Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2013~~March 31, 2015 within the consolidated balance sheet as of ~~September 30, 2013,~~March 31, 2015, the related ~~statements~~statement of comprehensive income, ~~(loss),~~ stockholders’ equity and cash flows for the three ~~and nine~~ months ended ~~September 30, 2013,~~March 31, 2015, as well as the notes to the consolidated financial statements, ~~have been~~will be revised ~~accordingly.~~in future filings.

~~Segment Information~~In connection with the SWS Merger, we modified our organizational structure whereby FSC and its related entities also became subsidiaries of Hilltop Securities. First Southwest, Southwest Securities and SWS Financial (collectively, the “Hilltop Broker-Dealers”) will continue to operate as separate broker-dealers, under coordinated leadership, until such time as the necessary regulatory approvals are obtained and systems integrations are complete.

On April 9, 2015, we completed our offering of $150.0 million aggregate principal amount of our 5% senior notes due 2025 (“Senior Unregistered Notes”) in a private offering. On April 28, 2015, we used the net proceeds of the offering to redeem all of our outstanding Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4 million, and are utilizing the remainder for general corporate purposes. In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, we entered into a registration rights agreement with the initial purchasers of the Senior Unregistered Notes and agreed to offer to exchange the Senior Unregistered Notes for notes registered under the Securities Act (the “Senior Registered Notes”). The terms of the Senior Registered Notes are substantially identical to the Senior Unregistered Notes for which they were exchanged (including principal amount, interest rate, maturity and redemption rights), except that the Senior Registered Notes generally are not subject to transfer restrictions. On May 22, 2015, and subject to the terms and conditions set forth in the Senior Registered Notes prospectus, we commenced an offer to exchange the outstanding Senior Unregistered Notes for Senior Registered Notes. Substantially all of the Senior Unregistered Notes were tendered for exchange, and on June 22, 2015, we fulfilled all of the requirements of the registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes in exchange for the tendered Senior Unregistered Notes. We refer to the Senior Registered Notes and the Senior Unregistered Notes that remain outstanding collectively as the “Senior Notes.”

Segment Information

Effective January 1, 2015, we have ~~two~~three primary operating business units, PlainsCapital ~~(financial services~~(banking and ~~products)~~mortgage origination), Hilltop Securities (broker-dealer) and NLC (insurance). ~~Within the PlainsCapital unit are three primary wholly owned operating subsidiaries: the Bank, PrimeLending and First Southwest.~~ Under accounting principles generally accepted in the United States (“GAAP”), our business units are comprised of four reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer, mortgage origination ~~insurance~~ and ~~financial advisory. During the fourth quarter of 2013, we began presenting certain amounts previously allocated~~insurance. The SWS Merger did not result in changes to ~~the~~our four reportable business segments under the heading Corporate to better reflect our internal organizational structure. This change had no impact on our consolidated results of operations. Our historical segment disclosures and Management’s Discussion and Analysis of Financial Condition and Results of Operations have been revised to conform to the current presentation.segments. Consistent with the segment operating results during ~~2013,~~2014, we anticipate that future ~~earnings~~revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer, mortgage origination ~~insurance~~ and ~~financial advisory~~insurance segments. Based on historical results, of PlainsCapital Corporation, which we acquired on November 30, 2012, the relative share of total revenue provided by our banking and mortgage origination segments fluctuates depending on market conditions, and operating results for the mortgage origination segment tend to be more volatile than operating results for the banking, ~~segment.~~broker-dealer and insurance segments.

The banking segment ~~includes~~has included the operations of the ~~Bank and,~~former SWS FSB since ~~September 14, 2013, the operations acquired in the FNB Transaction.~~January 1, 2015. The banking segment primarily provides business and consumer banking ~~products and~~ services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income, while also deriving revenue from other sources, including service charges on customer deposit accounts and trust fees.

The broker-dealer segment has included the operations of Southwest Securities and SWS Financial since January 1, 2015. The broker-dealer segment has historically generated a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services at First Southwest. The principal subsidiaries of First Southwest are FSC, a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), and First Southwest Asset Management, LLC, a registered investment advisor under the Investment Advisors Act of 1940. Southwest Securities is a broker-dealer registered with the SEC and FINRA and a member of the NYSE, and SWS Financial is an introducing broker-dealer that is also registered with the SEC and FINRA.

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The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products ~~from offices in 42 states~~ and generates revenue predominantly from fees charged on the origination of loans and from selling these loans in the secondary market.

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The insurance segment includes the operations of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”). Insurance segment income is primarily generated from revenue earned on net insurance premiums less loss and loss adjustment expenses (“LAE”) and policy acquisition and other underwriting expenses in Texas and other areas of the southern United States.

The financial advisory segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services at First Southwest. The principal subsidiaries of First Southwest are FSC, a broker-dealer registered with the SEC and Financial Industry Regulatory Authority and a member of the New York Stock Exchange, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940. FSC holds trading securities to support sales, underwriting and other customer activities. These securities are marked to market through other noninterest income. FSC uses derivatives to support mortgage origination programs of certain non-profit housing organization clients. FSC hedges its related exposure to interest rate risk from these programs with U.S. Agency to-be-announced, or TBA, mortgage-backed securities. These derivatives are marked to market through other noninterest income.

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

Balance sheet amounts ~~for remaining subsidiaries~~ not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.”

Additional information concerning our reportable business segments is presented in Note ~~20,~~23, Segment and Related Information, in the notes to our consolidated financial statements. The following tables present certain information about the operating results of our reportable business segments (in thousands).

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated						Mortgage						All Other and		Hilltop
Three Months Ended September 30, 2014
Three Months Ended June 30, 2015																				Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	78,285	$	(3,197	)	$	808		$	3,269		$	1,712		$	4,883		$	85,760	$	90,881	$	8,022	$	(2,277)	$	699	$	(1,599)	$	4,941	$	100,667
Provision for loan losses	4,049		—			—			(16		)	—			—			4,033			304		(146)		—		—		—		—		158
Noninterest income	17,638		128,989			44,014			29,726			—			(8,232		)	212,135			15,047		80,247		168,227		42,835		—		(4,956)		301,400
Noninterest expense	67,236		114,690			36,636			31,782			5,015			(615		)	254,744			60,524		90,347		144,952		56,060		1,892		(458)		353,317
Income (loss) before income taxes	$	24,638	$	11,102		$	8,186		$	1,229		$	(3,303	)	$	(2,734	)	$	39,118	$	45,100	$	(1,932)	$	20,998	$	(12,526)	$	(3,491)	$	443	$	48,592

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Nine Months Ended September 30, 2014
Net interest income (expense)	$	248,686	$	(9,726	)	$	2,625		$	9,077		$	5,100		$	13,865		$	269,627
Provision for loan losses	12,793		—			—			15			—			—			12,808
Noninterest income	50,258		343,572			129,910			80,161			—			(18,385		)	585,516
Noninterest expense	188,153		316,546			118,398			87,507			9,767			(1,786		)	718,585
Income (loss) before income taxes	$	97,998	$	17,300		$	14,137		$	1,716		$	(4,667	)	$	(2,734	)	$	123,750

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Three Months Ended September 30, 2013
Net interest income (expense)	$	70,594	$	(8,880	)	$	911		$	2,690		$	(68	)	$	6,669		$	71,916
Provision for loan losses	10,661		—			—			(3		)	—			—			10,658
Noninterest income	26,614		127,460			42,163			25,710			—			(6,852		)	215,095
Noninterest expense	34,136		114,815			38,689			28,227			908			(183		)	216,592
Income (loss) before income taxes	$	52,411	$	3,765		$	4,385		$	176		$	(976	)	$	—		$	59,761

			Mortgage						Financial						All Other and			Hilltop
	Banking		Origination			Insurance			Advisory			Corporate			Eliminations			Consolidated
Nine Months Ended September 30, 2013
Net interest income (expense)	$	206,863	$	(32,731	)	$	2,796		$	9,445		$	(304	)	$	21,533		$	207,602
Provision for loan losses	34,927		—			—			25			—			—			34,952
Noninterest income	50,747		439,246			122,365			77,350			—			(22,102		)	667,606
Noninterest expense	96,732		371,577			135,098			84,327			4,818			(569		)	691,983
Income (loss) before income taxes	$	125,951	$	34,938		$	(9,937	)	$	2,443		$	(5,122	)	$	—		$	148,273


					Mortgage						All Other and		Hilltop
Six Months Ended June 30, 2015	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	174,322	$	16,018	$	(5,291)	$	1,456	$	(1,490)	$	9,044	$	194,059
Provision for loan losses		2,789		56		—		—		—		—		2,845
Noninterest income		68,398		206,391		303,519		84,681		—		(9,376)		653,613
Noninterest expense		119,061		181,142		267,253		89,527		11,518		(708)		667,793
Income (loss) before income taxes	$	120,870	$	41,211	$	30,975	$	(3,390)	$	(13,008)	$	376	$	177,034


					Mortgage						All Other and		Hilltop
Three Months Ended June 30, 2014	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	90,828	$	3,178	$	(2,389)	$	838	$	1,695	$	4,296	$	98,446
Provision for loan losses		5,516		17		—		—		—		—		5,533
Noninterest income		16,392		25,838		122,820		43,123		—		(4,892)		203,281
Noninterest expense		60,240		28,359		111,224		49,420		2,565		(596)		251,212
Income (loss) before income taxes	$	41,464	$	640	$	9,207	$	(5,459)	$	(870)	$	—	$	44,982


					Mortgage						All Other and		Hilltop
Six Months Ended June 30, 2014	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	170,401	$	5,808	$	(6,528)	$	1,817	$	3,387	$	8,982	$	183,867
Provision for loan losses		8,744		31		—		—		—		—		8,775
Noninterest income		32,621		50,435		214,583		85,896		—		(10,154)		373,381
Noninterest expense		120,917		55,724		201,857		81,762		4,753		(1,172)		463,841
Income (loss) before income taxes	$	73,361	$	488	$	6,198	$	5,951	$	(1,366)	$	—	$	84,632

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How We Generate Revenue

We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. We generated ~~$269.6~~$194.1 million in net interest income during the ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, compared with net interest income of ~~$207.6~~$183.9 million during the same period in ~~2013.~~2014. The year-over-year increase in net interest income was primarily due to the inclusion of those operations acquired ~~as a part of~~in the ~~FNB Transaction within our banking segment.~~SWS Merger.

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

~~(i)~~~~Income from mortgage operations~~. Through our wholly owned subsidiary, PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the nine months ended September 30, 2014 and 2013, we generated $340.7 million and $439.1 million, respectively, in net gains from the sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination

(i)

Income from broker-dealer operations. Through the Hilltop Broker-Dealers, we provide investment banking and other related financial services. During the six months ended June 30, 2015 and 2014, we generated $138.8 million and $43.6 million, respectively, in securities commissions and fees (net of intercompany eliminations) and investment banking and advisory fees.

~~(ii)~~~~Net insurance premiums earned.~~ Through our wholly owned insurance subsidiary, NLC, we provide fire and limited homeowners insurance for low value dwellings and manufactured homes. We generated $122.9 million in net insurance premiums earned during the nine months ended September 30, 2014, compared with $116.0 million during the same period in the prior year.

(ii)

Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the six months ended June 30, 2015 and 2014, we generated $303.3 million and $214.5 million, respectively, in net gains from the sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees.

~~(iii)~~~~Investment advisory fees~~

(iii)

Income from insurance operations. Through NLC, we provide fire and limited homeowners insurance for low value dwellings and manufactured homes. We generated $79.9 million and $81.1 million in net insurance premiums earned during the six months ended June 30, 2015 and ~~commissions and securities brokerage fees and commissions.~~ Through our wholly owned subsidiary, First Southwest, we provide public finance advisory and various investment banking and brokerage services. We generated $67.7 million and $70.3 million in investment advisory fees and commissions and securities brokerage fees and commissions during the nine months ended September 30, 2014, ~~and 2013,~~ respectively.

In the aggregate, we generated ~~$585.5~~$653.6 million and ~~$667.6~~$373.4 million in noninterest income during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, respectively. Excluding the preliminary bargain purchase gain of $80.7 million related to the SWS Merger, our noninterest income during the six months ended June 30, 2015 was $572.9 million. We are presenting this financial measure because certain investors may use it to evaluate our business and ~~2013, respectively. The significant~~financial results. This year-over-year ~~decrease~~increase in noninterest income ~~was primarily due to the decrease in loan origination volume within our mortgage origination segment and, to a lesser extent, the recognition of a pre-tax~~other than preliminary bargain purchase gain ~~related~~is predominantly attributable to ~~the FNB Transaction of $12.6 million during the quarter ended September 30, 2013 within our banking segment, partially offset by~~ increases in noninterest income in our ~~banking, insurance~~broker-dealer and ~~financial advisory~~mortgage origination segments.

We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.

Consolidated Operating Results

Net income applicable to common stockholders ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 was ~~$23.4~~$29.6 million, or ~~$0.26~~$0.30 per diluted share, compared with net income applicable to common stockholders of ~~$38.2~~$27.1 million, or ~~$0.43~~$0.30 per diluted share, ~~for~~during the three months ended ~~September~~June 30, ~~2013.~~2014. Net income applicable to common stockholders ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 was ~~$74.2~~$140.9 million, or ~~$0.82~~$1.40 per diluted share, compared with net income applicable to common stockholders of ~~$91.5~~$50.8 million, or ~~$1.05~~$0.56 per diluted share, ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2013.~~2014. The consolidated operating results ~~for~~during the ~~three and nine~~six months ended ~~September~~June 30, ~~2013~~2015 include the recognition of a preliminary bargain purchase gain related to the ~~FNB Transaction~~SWS Merger of ~~$12.6~~$80.7 million. Included in the preliminary bargain purchase gain is a reversal of a $35.5 million ~~before income taxes~~valuation allowance against SWS deferred tax assets. This amount is based on our expected ability to realize these acquired deferred tax assets through our consolidated core earnings, the implementation of ~~$4.5~~certain tax planning strategies and reversal of timing differences. SWS’s net operating loss carryforwards are subject to an annual limitation on their usage because of the ownership change. In addition, the preliminary bargain purchase gain reflects our acquisition date fair value allocation to identifiable intangible assets of $7.5 million.

As a result of the SWS Merger, the operations, assets and liabilities acquired in the SWS Merger are included in our balance sheet and operating results beginning January 1, 2015. We expect the operations acquired in the SWS Merger to have a significant effect on our broker-dealer segment in future periods. In addition, transaction costs primarily related to the execution and closing of the transaction, and integration related costs associated with employee expenses (such as,

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severance and retention), professional fees (such as consulting and legal) and contractual costs (such as vendor contract termination and lease), have been incurred as a result of the plan to restructure and integrate the operations and systems of SWS and the former SWS FSB. During the six months ended June 30, 2015, we incurred $3.6 million in pre-tax transaction costs related to the SWS Merger, while pre-tax integration related costs associated with employee, professional fee and contractual expenses during this same period were $6.9 million, $1.6 million, and $2.4 million, respectively. During the ~~quarter~~six months ended ~~September~~June 30, ~~2013.~~2014, we incurred $0.4 million in pre-tax transaction costs related to the SWS Merger.

Certain items included in net income for ~~2013~~2014 and ~~2014~~2015 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012 (the “PlainsCapital Merger”), the FDIC-assisted transaction (the “FNB Transaction”) whereby the Bank acquired certain assets and assumed certain liabilities of FNB, and the ~~FNB Transaction.~~SWS Merger. Income before ~~income~~ taxes ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 includes net accretion of ~~$3.9~~$6.0 million, $11.8 million and ~~$11.9~~$5.0 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively (collectively, the “Bank Transactions”), offset by amortization of identifiable intangibles of $2.3 million, $0.2 million and $0.1 million, respectively. During the three months ended June 30, 2014, income before taxes includes net accretion of $17.0 million and $10.4 million on earning assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of $2.3 million and $0.3 million, respectively. ~~During~~Income before taxes during the ~~three~~six months ended ~~September~~June 30, ~~2013, income before income taxes~~2015 includes net accretion of ~~$15.2~~$10.0 million, $21.6 million and $7.4 million on

~~Table of Contents~~
earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, offset by amortization of identifiable intangibles of ~~$2.5 million. Income before income taxes for~~$4.3 million, $0.5 million and $0.5 million, respectively. During the ~~nine~~six months ended ~~September~~June 30, 2014, income before taxes includes net accretion of ~~$30.8~~$27.0 million and ~~$31.8~~$19.9 million on earning assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of ~~$7.0~~$4.6 million and ~~$0.8~~$0.5 million, respectively. During the nine months ended September 30, 2013, income before income taxes includes net accretion of $47.1 million on earning assets and liabilities acquired in the PlainsCapital Merger, offset by amortization of identifiable intangibles of $7.4 million.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Year Ended

Three Months Ended June 30,

Six Months Ended June 30,

Year Ended

2014

2013

2014

2013

December 31, 2013


2015

2014

2015

2014

December 31, 2014

Performance Ratios:

Return on average stockholders’ equity

6.51
%
12.73
%
7.37
%
10.57
%
10.48
%
Return on average stockholder's equity

7.12
%
7.99
%
16.92
%
7.82
%
8.01
%
Return on average assets

1.03
%
2.08
%
1.14
%
1.75
%
1.66
%

0.97
%
1.24
%
2.31
%
1.19
%
1.26
%
Net interest margin (taxable equivalent) (1)

4.38
%
4.46
%
4.72
%
4.39
%
4.47
%

3.75
%
5.18
%
3.66
%
4.90
%
4.74
%
(1)
~~(1)~~ Taxable equivalent net interest income divided by average interest-earning assets.
(2)
During the three and six months ended June 30, 2015, taxable equivalent net interest margin was 84 basis points and 77 basis points, respectively, lower due to the impact related to the securities financing operations within our Broker-Dealer segment. The effect on taxable equivalent net interest margin was nominal during the three and six months ended June 30, 2014.

During the three months ended ~~September~~June 30, ~~2014,~~2015, the consolidated taxable equivalent net interest margin of ~~4.38%~~3.75% was ~~impacted by PlainsCapital Merger-related~~96 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of ~~$4.6~~$7.1 million, $11.8 million and $4.7 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of ~~$0.9 million and amortization of premium on acquired time deposits of $0.2~~$1.0 million. ~~Additionally, FNB Transaction related accretion of discount on loans of $11.0 million and amortization of premium on acquired time deposits of $0.9 million also impacted the consolidated~~The taxable equivalent net interest margin during the three months ended ~~September~~June 30, ~~2014. These items increased the consolidated taxable equivalent net interest margin by 87~~2014 of 5.18% was 164 basis points ~~for~~greater due to the three months ended September 30, 2014. The consolidated taxable equivalent net interest margin was 4.46% for the three months ended September 30, 2013. The taxable equivalent net interest margin for the third quarterimpact of ~~2013 was impacted by PlainsCapital Merger-related~~purchase accounting and primarily related to accretion of discount on loans of ~~$16.1~~$17.8 million and $8.1 million associated with PlainsCapital Merger and FNB Transaction, respectively, PlainsCapital Merger-related amortization of premium on acquired securities of ~~$1.2~~$1.0 million, and FNB Transaction-related amortization of premium on acquired time deposits of ~~$0.8~~$2.5 million. ~~These items increased the consolidated taxable equivalent interest margin by 96 basis points for the three months ended September 30, 2013.~~

During the ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, the consolidated taxable equivalent net interest margin of ~~4.72%~~3.66% was ~~impacted by PlainsCapital Merger-related~~85 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of ~~$33.2~~$12.1 million, $21.6 million and $6.9 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of ~~$2.8~~$1.9 million. The taxable equivalent net interest margin during the six months ended June 30, 2014 of 4.90% was 146 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $28.6 million and $15.3 million associated with PlainsCapital Merger and FNB Transaction, respectively, PlainsCapital Merger-related amortization of premium on acquired securities of $1.9 million, and FNB Transaction-related amortization of premium on acquired time deposits of ~~$0.5~~$4.6 million. ~~Additionally,~~
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The FNB ~~Transaction related~~Transaction-related accretion of discount on loans of ~~$26.3~~$21.6 million and ~~amortization of premium on acquired time deposits of $5.5~~$15.3 million ~~also impacted the consolidated taxable equivalent net interest margin~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2014. These items increased~~2015 and 2014, respectively, included accretion due to better-than-expected resolution of covered purchased credit impaired (“PCI”) loans. This better-than-expected performance and resulting increases in yields calculated as a part of the ~~consolidated taxable equivalent net interest margin by 108 basis points for~~Bank’s quarterly recast process led to the nine months ended September 30, 2014. The consolidated taxable equivalent net interest margin was 4.39% for the nine months ended September 30, 2013. The taxable equivalent net interest margin for the nine months ended September 30, 2013 was impacted by PlainsCapital Merger-related accretionreclassification of ~~discount on loans of $49.8 million, amortization of premium on acquired securities of $4.6~~$26.0 million and amortization of premium on acquired time deposits of $2.4 million. These items increased the consolidated taxable equivalent interest margin by 95 basis points for the nine months ended September 30, 2013.
56

~~Table of Contents~~$57.6 million, respectively, from nonaccretable difference to accretable yield.

The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).

Three Months Ended September 30,

Three Months Ended June 30,

2014

2013

2015

2014

Average

Interest

Annualized

Average

Interest

Annualized


Average

Interest

Annualized

Average

Interest

Annualized


Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
5,641,750

$
80,719

5.65
%
$
4,451,589

$
68,585

6.07
%

$
6,563,094

$
96,967

5.88
%
$
5,526,869

$
92,204

6.63
%
Investment securities - taxable

1,161,583

7,688

2.63
%
976,775

7,202

2.93
%

1,087,238

6,210

2.29
%

1,144,269

7,618

2.66
%
Investment securities - non-taxable (2)

185,394

1,731

3.74
%
166,789

1,594

3.82
%

235,229

2,296

3.91
%

185,533

1,772

3.82
%
Federal funds sold and securities purchased under agreements to resell

14,459

10

0.29
%
36,762

35

0.38
%

93,871

15

0.06
%

20,308

14

0.28
%
Interest-bearing deposits in other financial institutions

566,195

303

0.21
%
612,955

282

0.26
%

580,610

327

0.23
%

575,653

317

0.22
%
Other

258,325

3,347

5.13
%
166,559

2,546

6.07
%

2,293,444

10,586

1.83
%

218,413

3,068

5.62
%
Interest-earning assets, gross

7,827,706

93,798

4.74
%
6,411,429

80,244

4.94
%

10,853,486

116,401

4.27
%

7,671,045

104,993

5.44
%
Allowance for loan losses

(40,934
)

(29,042
)

(41,789)

(38,909)

Interest-earning assets, net

7,786,772

6,382,387

10,811,697

7,632,136

Noninterest-earning assets

1,290,543

915,985

1,748,109

1,304,522

Total assets

$
9,077,315

$
7,298,372

$
12,559,806

$
8,936,658

Liabilities and Stockholders’ Equity

Liabilities and Stockholders' Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,265,012

$
4,117

0.38
%
$
3,683,586

$
3,685

0.40
%

$
4,749,690

$
3,900

0.33
%
$
4,523,194

$
3,096

0.27
%
Notes payable and other borrowings

1,168,461

3,340

1.12
%
802,391

4,101

2.02
%

3,345,511

11,095

1.32
%

966,143

2,866

1.18
%
Total interest-bearing liabilities

5,433,473

7,457

0.54
%
4,485,977

7,786

0.69
%

8,095,201

14,995

0.74
%

5,489,337

5,962

0.43
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

1,891,576

1,354,460

2,168,728

1,761,194

Other liabilities

338,825

276,210

601,480

307,846

Total liabilities

7,663,874

6,116,647

10,865,409

7,558,377

Stockholders’ equity

1,412,913

1,181,165

1,693,785

1,377,769

Noncontrolling interest

528

560

612

512

Total liabilities and stockholders’ equity

$
9,077,315

$
7,298,372

Total liabilities and stockholders' equity

$
12,559,806

$
8,936,658

Net interest income (2)

$
86,341

$
72,458

$
101,406

$
99,031

Net interest spread (2)

4.20
%

4.25
%

3.53
%

5.01
%
Net interest margin (2)

4.38
%

4.46
%

3.75
%

5.18
%

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Six Months Ended June 30,

2015

2014


Average

Interest

Annualized

Average

Interest

Annualized


Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate
��
Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
6,460,000

$
184,355

5.69
%
$
5,299,145

$
171,948

6.47
%
Investment securities - taxable

1,124,453

13,241

2.36
%

1,133,315

15,206

2.69
%
Investment securities - non-taxable (2)

249,596

4,819

3.87
%

184,345

3,633

3.94
%
Federal funds sold and securities purchased under agreements to resell

81,696

32

0.08
%

23,305

33

0.28
%
Interest-bearing deposits in other financial institutions

725,516

901

0.25
%

770,206

912

0.24
%
Other

2,138,308

21,504

2.00
%

203,428

5,708

5.64
%
Interest-earning assets, gross

10,779,569

224,852

4.16
%

7,613,744

197,440

5.17
%
Allowance for loan losses

(41,607)

(37,891)

Interest-earning assets, net

10,737,962

7,575,853

Noninterest-earning assets

1,770,586

1,336,127

Total assets

$
12,508,548

$
8,911,980

Liabilities and Stockholders' Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,926,974

$
8,215

0.34
%
$
4,735,026

$
6,855

0.29
%
Notes payable and other borrowings

3,062,589

21,057

1.38
%

815,942

5,514

1.35
%
Total interest-bearing liabilities

7,989,563

29,272

0.74
%

5,550,968

12,369

0.45
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

2,161,493

1,741,409

Other liabilities

656,268

264,504

Total liabilities

10,807,324

7,556,881

Stockholders’ equity

1,700,666

1,354,635

Noncontrolling interest

558

464

Total liabilities and stockholders' equity

$
12,508,548

$
8,911,980

Net interest income (2)

$
195,580

$
185,071

Net interest spread (2)

3.42
%

4.72
%
Net interest margin (2)

3.66
%

4.90
%
(1)
Average balance includes non-accrual loans.
(2)
Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.7 million and $0.6 million for the three months ended June 30, 2015 and 2014, respectively, and $1.5 million and $1.2 million for the six months ended June 30, 2015 and 2014, respectively.

Nine Months Ended September 30,

2014

2013

Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate

Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
5,414,602

$
252,667

6.18
%
$
4,338,209

$
198,684

6.06
%
Investment securities - taxable

1,142,843

22,894

2.67
%
958,220

19,594

2.72
%
Investment securities - non-taxable (2)

184,697

5,374

4.53
%
195,316

5,390

4.29
%
Federal funds sold and securities purchased under agreements to resell

20,324

43

0.29
%
27,281

91

0.45
%
Interest-bearing deposits in other financial institutions

701,455

1,215

0.23
%
646,800

857

0.25
%
Other

221,928

9,055

5.44
%
162,001

7,660

6.32
%
Interest-earning assets, gross

7,685,849

291,248

5.04
%
6,327,827

232,276

4.89
%
Allowance for loan losses

(38,916
)

(18,884
)

Interest-earning assets, net

7,646,933

6,308,943

Noninterest-earning assets

1,320,764

869,254

Total assets

$
8,967,697

$
7,178,197

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,576,633

$
10,972

0.32
%
$
3,540,786

$
10,541

0.40
%
Notes payable and other borrowings

934,740

8,854

1.25
%
899,022

12,331

1.82
%
Total interest-bearing liabilities

5,511,373

19,826

0.48
%
4,439,808

22,872

0.69
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

1,792,014

1,242,101

Other liabilities

289,550

321,098

Total liabilities

7,592,937

6,003,007

Stockholders’ equity

1,374,274

1,174,512

Noncontrolling interest

486

678

Total liabilities and stockholders’ equity

$
8,967,697

$
7,178,197

Net interest income (2)

$
271,422

$
209,985

Net interest spread (2)

4.56
%

4.22
%
Net interest margin (2)

4.72
%

4.39
%
~~(1) Average balance~~The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes ~~non-accrual loans.~~
~~(2) Annualized taxable equivalent adjustments~~the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer segment, particularly items related to securities financing operations, as well as the borrowing costs of Hilltop and PlainsCapital, both of which reduce our consolidated net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to subsidiaries by the banking segment, are ~~based on a 35% tax rate. The adjustment to interest income was $0.6 million and $0.5 million for~~eliminated from the ~~three months ended September 30, 2014 and 2013, respectively, and $1.8 million for each of the nine months ended September 30, 2014 and 2013.~~consolidated financial statements.

On a consolidated basis, net interest income increased ~~$13.8~~$2.2 million and ~~$62.0~~$10.2 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same periods in ~~2013.~~2014. These increases were primarily due to the inclusion of those operations acquired ~~as a part of~~in the ~~FNB Transaction within our banking segment.~~SWS Merger.

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The consolidated provision for loan losses, ~~primarily in~~substantially all of which relates to the banking segment, was ~~$4.0~~$0.2 million and ~~$10.7~~$5.5 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. During the three months ended ~~September~~June 30, ~~2014 and 2013,~~2015, the provision for loan losses was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of ~~$2.6~~$0.7 million and ~~$8.4 million, respectively, and purchased credit impaired (“PCI”)~~the recapture of charges on PCI loans of ~~$1.4~~$0.5 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $3.9 million and ~~$2.3~~PCI loans of $1.6 million ~~respectively.~~during the three months ended June 30, 2014. During the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, the consolidated provision for loan losses, ~~primarily in~~substantially all of which relates to the banking segment, was ~~$12.8~~$2.8 million and ~~$35.0~~$8.8 million, respectively. The provision for loan losses during the ~~nine~~six months ended ~~September~~June 30, ~~2014 and 2013~~2015 was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of ~~$7.9~~$4.1 million and ~~$32.0~~the recapture of charges on PCI loans of $1.3 million, ~~respectively,~~compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $5.3 million and PCI loans of ~~$4.9~~$3.5 million ~~and $3.0 million, respectively.~~during the six months ended June 30, 2014.

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Consolidated noninterest income ~~decreased $3.0~~increased $98.1 million and ~~$82.1~~$280.2 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same periods in ~~2013.~~2014. These year-over-year changes included the recognition of a ~~pre-tax~~preliminary bargain purchase gain related to the ~~FNB Transaction~~SWS Merger of ~~$12.6~~$80.7 million during the quarter ended September 30, 2013. The remaining changes between the three months ended September 30, 2014 and 2013 were primarily due to increases in noninterest income in our banking and financial advisory segments of $3.6 million and $4.0 million, respectively, while the remainingMarch 31, 2015. Other changes in noninterest income ~~between~~during the ~~nine~~three and six months ended ~~September~~June 30, 2015, compared with the same periods in 2014, included increases in securities commissions and ~~2013 included the reduction in net gains from sale~~fees (net of ~~loans, other mortgage production income~~intercompany eliminations) and ~~mortgage loan origination~~investment banking and advisory fees within our broker-dealer segment of $48.5 million and $95.2 million, respectively, and increases within our mortgage origination segment of ~~$98.4 million, slightly offset by increases in noninterest income in our banking and insurance segments of $12.1~~$45.4 million and ~~$7.5~~$88.9 million, respectively.

~~Our consolidated~~Consolidated noninterest expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 increased ~~$38.2~~$102.1 million and ~~$26.6~~$204.0 million, respectively, compared with the same periods in ~~2013. The~~2014. These year-over-year ~~increase between~~increases during the three and six months ended ~~September~~June 30, 2015, compared with the same periods in 2014, ~~and 2013~~ included significant increases in noninterest expenses within our ~~banking~~broker-dealer segment of ~~$33.1~~$62.0 million and $125.4 million, respectively, primarily due to the inclusion of those operations acquired as part of the ~~FNB Transaction. The year-over-year changes between~~SWS Merger. In addition, as previously discussed, during the ~~nine~~three and six months ended ~~September~~June 30, ~~2014~~2015 we incurred pre-tax transaction and ~~2013 included significant increases in noninterest expenses within our banking segment of $91.4 million, primarily due~~integration costs related to the ~~inclusion~~SWS Merger of ~~those operations acquired as part of the FNB Transaction, which were offset by significant decreases in noninterest expenses within our mortgage origination segment of $55.0~~$4.5 million ~~primarily due to reductions in variable compensation tied to mortgage loan originations~~ and ~~initiatives to decrease segment operating costs, and within our insurance segment of $16.7~~$14.5 million, ~~due to improved claims loss experience associated with the significant decline in the severity of severe weather-related events during 2014.~~respectively. Changes between the ~~nine~~three and six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013~~the comparable periods in 2014 within the major components of noninterest expense included ~~decreases~~increases of ~~$10.8~~$75.9 million and $152.1 million, respectively, in employees’ compensation and benefits and ~~$17.7~~$15.0 million ~~in loss~~ and ~~loss adjustment expenses, partially offset by increases of $16.9~~$37.4 million, ~~in occupancy and equipment and $37.5 million~~respectively, in other ~~expenses.~~expenses and primarily attributable to increases in our broker-dealer and mortgage origination segments.

Consolidated income tax expense during the three months ended ~~September~~June 30, 2015 and 2014 ~~and 2013~~ was ~~$14.0~~$18.1 million and ~~$20.1~~$16.3 million, respectively, reflecting effective tax rates of ~~35.8%~~37.3% and ~~33.7%~~36.2%, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, consolidated income tax expense was ~~$44.7~~$33.6 million and ~~$52.6~~$30.6 million, respectively, reflecting effective tax rates of ~~36.1%~~19.0% and ~~35.5%~~36.2%, respectively. The decrease in our effective tax rate during the six months ended June 30, 2015 was primarily due to no income taxes being recorded during the quarter ended March 31, 2015 in connection with the preliminary bargain purchase gain of $80.7 million associated with the SWS Merger because the acquisition was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In addition, during the quarter ended March 31, 2015, we recorded an income tax benefit of $2.1 million as a result of the SWS Merger to reverse the deferred tax liability booked during 2014 associated with the difference between book and tax basis on Hilltop’s prior investment in SWS common stock. Therefore, the effective income tax rate during the six months ended June 30, 2015 is not necessarily indicative of anticipated future effective tax rates.

Segment Results

Banking Segment

Income before income taxes in our banking segment ~~for~~during the three months ended ~~September~~June 30, 2015 and 2014 ~~and 2013~~ was ~~$24.6~~$45.1 million and ~~$52.4~~$41.5 million, respectively. This year-over-year decrease of $27.8 million included the recognition of a pre-tax bargain purchase gain related to the FNB Transaction of $12.6 million during the quarter ended September 30, 2013. The remaining changes inrespectively, while income before income taxes between the three months ended September 30, 2014 and 2013 were primarily due to an increase in noninterest expenses, partially offset by increases in net interest income and noninterest income other than bargain purchase gain and a decrease in the provision for loan losses. Income before income taxes in our banking segment ~~for~~during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014 ~~and 2013~~ was ~~$98.0~~$120.9 million and ~~$126.0~~$73.4 million, respectively. ~~In addition to~~These year-over-year changes included the ~~effects~~recognition of ~~the pre-tax~~a preliminary bargain purchase gain ~~discussed above, this year-over-year decrease~~related to the SWS Merger included within the banking segment of $34.1 million during the six months ended June 30, 2015 and pre-tax costs of $1.2 million and $3.0 million directly attributable to the integration of the former SWS FSB during the three and six months ended June 30, 2015, respectively. The remainder of the increases in income before income taxes between the nine months ended September 30, 2014 and 2013 of $28.0 million included increases in net interest income and noninterest income other than bargain purchase gain and a decrease in the provision for loan losses, significantly offset by an increase in noninterest expense. The operations acquired as a part of the FNB Transaction had a significant effect on each of the components of income before income taxes during ~~both~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, compared with the same periods in ~~2013.~~
59

~~Table of Contents~~2014, were primarily due to decreases in the provision for loan losses.

We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.

Three Months Ended September 30,

Nine Months Ended September 30,

Year Ended

Three Months Ended June 30,

Six Months Ended June 30,

Year Ended

2014

2013

2014

2013

December 31, 2013


2015

2014

2015

2014

December 31, 2014

Performance Ratios:

Efficiency ratio (1)

70.09
%
35.12
%
62.94
%
37.55
%
42.58
%

57.14
%
56.18
%
49.05
%
59.56
%
61.17
%
Return on average assets

0.77
%
2.23
%
1.05
%
1.86
%
1.78
%

1.41
%
1.36
%
2.17
%
1.20
%
1.20
%
Net interest margin (taxable equivalent) (2)

4.62
%
5.09
%
4.98
%
5.16
%
5.17
%

5.02
%
5.52
%
4.80
%
5.16
%
5.00
%
(1)
Noninterest expenses divided by the sum of total noninterest income and net interest income for the period.
(2)
Taxable equivalent net interest income divided by average interest-earning assets.
65

~~(1) Noninterest expenses divided by the sum~~Table of ~~total noninterest income and net interest income for the period.~~Contents
~~(2) Taxable equivalent net interest income divided by average interest-earning assets.~~
During the three months ended ~~September~~June 30, ~~2014,~~2015, the banking segment’s taxable equivalent net interest margin of ~~4.62%~~5.02% was ~~impacted by PlainsCapital Merger-related~~145 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of ~~$4.6~~$7.1 million, $11.8 million and $4.7 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of ~~$0.9 million and amortization of premium on acquired time deposits of $0.2~~$1.0 million. ~~Additionally, FNB Transaction related accretion of discount on loans of $11.0 million and amortization of premium on acquired time deposits of $0.9 million also impacted the banking segment’s~~The taxable equivalent net interest margin during the three months ended ~~September~~June 30, ~~2014. These items increased the banking segment’s taxable equivalent net interest margin by 102~~2014 of 5.52% was 190 basis points ~~for~~greater due to the ~~three months ended September 30, 2014. The banking segment’s taxable equivalent net interest margin for the three months ended September 30, 2013~~impact of ~~5.09% was impacted by PlainsCapital Merger-related~~purchase accounting and primarily related to accretion of discount on loans of ~~$16.1~~$17.8 million and $8.1 million associated with PlainsCapital Merger and FNB Transaction, respectively, PlainsCapital Merger-related amortization of premium on acquired securities of ~~$1.2~~$1.0 million, and FNB Transaction-related amortization of premium on acquired time deposits of ~~$0.8~~$2.5 million. ~~These items increased the banking segment’s taxable equivalent interest margin by 113 basis points for three months ended September 30, 2013.~~

During the ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, the banking segment’s taxable equivalent net interest margin of ~~4.98%~~4.80% was ~~impacted by PlainsCapital Merger-related~~127 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of ~~$33.2~~$12.1 million, $21.6 million and $6.9 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of ~~$2.8~~$1.9 million. The taxable equivalent net interest margin during the six months ended June 30, 2014 of 5.16% was 166 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $28.6 million and $15.3 million associated with PlainsCapital Merger and FNB Transaction, respectively, PlainsCapital Merger-related amortization of premium on acquired securities of $1.9 million, and FNB Transaction-related amortization of premium on acquired time deposits of ~~$0.4~~$4.6 million. ~~Additionally,~~The FNB ~~Transaction related~~Transaction-related accretion of discount on loans of ~~$26.3~~$21.6 million and ~~amortization of premium on acquired time deposits of $5.5~~$15.3 million ~~also impacted the banking segment’s taxable equivalent net interest margin~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2014. These items increased~~2015 and 2014, respectively, included accretion due to better-than-expected resolution of covered PCI loans. This better-than-expected performance and resulting increases in yields calculated as a part of the ~~banking segment’s taxable equivalent net interest margin by 124 basis points for~~Bank’s quarterly recast process led to the ~~nine months ended September 30, 2014. The banking segment’s taxable equivalent net interest margin for the nine months ended September 30, 2013~~reclassification of ~~5.16% was impacted by PlainsCapital Merger-related accretion of discount on loans of $49.8 million, amortization of premium on acquired securities of $4.6~~$26.0 million and amortization of premium on acquired time deposits of $2.4 million. These items increased the banking segment’s taxable equivalent interest margin by 114 basis points for nine months ended September 30, 2013.$57.6 million, respectively, from nonaccretable difference to accretable yield.

60

~~Table of Contents~~

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

Three Months Ended September 30,

Three Months Ended June 30,

2014

2013

2015

2014

Average

Interest

Annualized

Average

Interest

Annualized


Average

Interest

Annualized

Average

Interest

Annualized


Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
4,152,093

$
66,998

6.36
%
$
3,135,680

$
56,383

7.06
%

$
4,756,730

$
80,687

6.74
%
$
4,216,648

$
80,173

7.55
%
Subsidiary warehouse lines of credit

1,090,561

10,089

3.62
%
970,323

12,907

5.20
%

1,112,636

9,888

3.52
%

901,125

8,229

3.61
%
Investment securities - taxable

930,658

4,552

1.96
%
789,451

4,088

2.07
%

763,905

3,998

2.09
%

913,494

4,561

2.00
%
Investment securities - non-taxable (2)

149,586

1,453

3.89
%
154,518

1,429

3.70
%

138,267

1,318

3.81
%

152,042

1,476

3.88
%
Federal funds sold and securities purchased under agreements to resell

14,459

11

0.29
%
35,127

25

0.29
%

20,801

15

0.29
%

20,308

14

0.28
%
Interest-bearing deposits in other financial institutions

395,292

250

0.25
%
392,570

282

0.29
%

479,752

302

0.25
%

406,773

256

0.25
%
Other

58,742

486

3.31
%
41,798

385

3.68
%

48,554

429

3.53
%

42,871

411

3.84
%
Interest-earning assets, gross

6,791,391

83,839

4.87
%
5,519,467

75,499

5.38
%

7,320,645

96,637

5.25
%

6,653,261

95,120

5.68
%
Allowance for loan losses

(40,757
)

(28,885
)

(41,466)

(38,745)

Interest-earning assets, net

6,750,634

5,490,582

7,279,179

6,614,516

Noninterest-earning assets

1,236,336

893,160

1,126,700

1,260,740

Total assets

$
7,986,970

$
6,383,742

$
8,405,879

$
7,875,256

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,220,977

$
4,136

0.39
%
$
3,679,753

$
3,711

0.40
%

$
4,363,195

$
4,556

0.42
%
$
4,500,603

$
3,112

0.28
%
Notes payable and other borrowings

823,947

621

0.30
%
384,843

325

0.33
%

651,281

379

0.23
%

597,977

392

0.26
%
Total interest-bearing liabilities (3)

5,044,924

4,757

0.37
%
4,064,596

4,036

0.39
%

5,014,476

4,935

0.39
%

5,098,580

3,504

0.28
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

1,823,016

1,409,690

2,140,807

1,706,187

Other liabilities

45,484

22,858

48,358

31,748

Total liabilities

6,913,424

5,497,144

7,203,641

6,836,515

Stockholders’ equity

1,073,546

886,598

1,202,238

1,038,741

Total liabilities and stockholders’ equity

$
7,986,970

$
6,383,742

$
8,405,879

$
7,875,256

Net interest income (2)

$
79,082

$
71,463

$
91,702

$
91,616

Net interest spread (2)

4.50
%

4.99
%

4.85
%

5.40
%
Net interest margin (2)

4.62
%

5.09
%

5.02
%

5.52
%

61

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Table of Contents

Nine Months Ended September 30,

2014

2013

Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate

Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
4,204,613

$
217,892

6.86
%
$
2,995,848

$
163,626

7.22
%
Subsidiary warehouse lines of credit

877,791

25,250

3.79
%
984,857

41,122

5.51
%
Investment securities - taxable

913,732

13,508

1.97
%
758,330

10,267

1.81
%
Investment securities - non-taxable (2)

151,880

4,434

4.58
%
159,671

4,242

4.15
%
Federal funds sold and securities purchased under agreements to resell

20,324

43

0.29
%
25,111

53

0.28
%
Interest-bearing deposits in other financial institutions

531,650

1,019

0.26
%
399,980

806

0.27
%
Other

43,675

1,298

3.96
%
34,818

935

3.58
%
Interest-earning assets, gross

6,743,665

263,444

5.19
%
5,358,615

221,051

5.47
%
Allowance for loan losses

(38,752
)

(18,730
)

Interest-earning assets, net

6,704,913

5,339,885

Noninterest-earning assets

1,255,878

830,395

Total assets

$
7,960,791

$
6,170,280

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,554,514

$
11,034

0.32
%
$
3,511,243

$
10,528

0.40
%
Notes payable and other borrowings

592,459

1,340

0.30
%
429,728

1,053

0.33
%
Total interest-bearing liabilities (3)

5,146,973

12,374

0.32
%
3,940,971

11,581

0.39
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

1,743,458

1,313,114

Other liabilities

32,016

46,581

Total liabilities

6,922,447

5,300,666

Stockholders’ equity

1,038,344

869,614

Total liabilities and stockholders’ equity

$
7,960,791

$
6,170,280

Net interest income (2)

$
251,070

$
209,470

Net interest spread (2)

4.87
%

5.08
%
Net interest margin (2)

4.98
%

5.16
%

Six Months Ended June 30,

2015

2014


Average

Interest

Annualized

Average

Interest

Annualized


Outstanding

Earned or

Yield or

Outstanding

Earned or

Yield or

Balance

Paid

Rate

Balance

Paid

Rate

Assets

Interest-earning assets

Loans, gross (1)

$
4,742,687

$
154,628

6.50
%
$
4,231,309

$
150,894

7.11
%
Subsidiary warehouse lines of credit

1,010,350

17,951

3.53
%

769,643

15,161

3.92
%
Investment securities - taxable

802,914

8,781

2.19
%

905,127

8,956

1.98
%
Investment securities - non-taxable (2)

142,141

2,704

3.80
%

153,048

2,971

3.88
%
Federal funds sold and securities purchased under agreements to resell

23,069

32

0.28
%

23,305

33

0.28
%
Interest-bearing deposits in other financial institutions

617,865

844

0.28
%

600,960

769

0.26
%
Other

46,647

850

3.64
%

36,016

812

4.51
%
Interest-earning assets, gross

7,385,673

185,790

5.01
%

6,719,408

179,596

5.33
%
Allowance for loan losses

(41,282)

(37,733)

Interest-earning assets, net

7,344,391

6,681,675

Noninterest-earning assets

1,155,379

1,265,809

Total assets

$
8,499,770

$
7,947,484

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
4,520,424

$
8,879

0.40
%
$
4,724,047

$
6,897

0.29
%
Notes payable and other borrowings

620,499

935

0.30
%

474,797

717

0.30
%
Total interest-bearing liabilities (3)

5,140,923

9,814

0.38
%

5,198,844

7,614

0.30
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

2,112,617

1,703,019

Other liabilities

62,009

25,169

Total liabilities

7,315,549

6,927,032

Stockholders’ equity

1,184,221

1,020,452

��
Total liabilities and stockholders’ equity

$
8,499,770

$
7,947,484

Net interest income (2)

$
175,976

$
171,982

Net interest spread (2)

4.63
%

5.03
%
Net interest margin (2)

4.80
%

5.16
%
(1)
Average balance includes non-accrual loans.
~~(1) Average balance includes non-accrual loans.~~
(2) Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.5 million for each of the three months ended September 30, 2014 and 2013, respectively, and $1.5 million for each of the nine months ended September 30, 2014 and 2013, respectively.
(3) Excludes the allocation of interest expense on PlainsCapital debt of $0.3 million for each of the three months ended September 30, 2014 and 2013 and $0.8 million and $0.8 million for the nine months ended September 30, 2014 and 2013.
(2)
Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.5 million for each of the three months ended June 30, 2015 and 2014, and $1.0 million for each of the six months ended June 30, 2015 and 2014.
(3)
Excludes the allocation of interest expense on PlainsCapital debt of $0.4 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, and $0.7 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively.

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

62

67
Table of Contents
The following ~~tables summarize~~table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,

2014 v. 2013

2014 v. 2013

2015 vs. 2014

2015 vs. 2014

Change Due To (1)

Change Due To (1)

Change Due To (1)

Change Due To (1)

Volume

Yield/Rate

Change

Volume

Yield/Rate

Change


Volume

Yield/Rate

Change

Volume

Yield/Rate

Change

Interest income

Loans, gross

$
17,943

$
(7,328
)
$
10,615

$
65,419

$
(11,153
)
$
54,266

$
10,193

$
(9,679)

$
514

$
18,169

$
(14,435)

$
3,734

Subsidiary warehouse lines of credit

1,565

(4,383
)
(2,818
)
(4,421
)
(11,451
)
(15,872
)

1,910

(251)

1,659

4,715

(1,925)

2,790

Investment securities - taxable

731

(267
)
464

2,104

1,137

3,241

(747)

184

(563)

(1,011)

836

(175)

Investment securities - non-taxable (2)

(46
)
70

24

(243
)
435

192

(134)

(24)

(158)

(212)

(55)

(267)

Federal funds sold and securities purchased under agreements to resell

(15
)
1

(14
)
(10
)
—

(10
)

—

1

1

—

(1)

(1)

Interest-bearing deposits in other financial institutions

2

(34
)
(32
)
266

(53
)
213

46

—

46

22

53

75

Other

156

(55
)
101

238

125

363

55

(37)

18

240

(202)

38

Total interest income (2)

20,336

(11,996
)
8,340

63,353

(20,960
)
42,393

11,323

(9,806)

1,517

21,923

(15,729)

6,194

Interest expense

Deposits

$
542

$
(117
)
$
425

$
3,137

$
(2,631
)
$
506

$
(95)

$
1,539

$
1,444

$
(300)

$
2,282

$
1,982

Notes payable and other borrowings

365

(69
)
296

397

(110
)
287

35

(48)

(13)

221

(3)

218

Total interest expense

907

(186
)
721

3,534

(2,741
)
793

(60)

1,491

1,431

(79)

2,279

2,200

Net interest income (2)

$
19,429

$
(11,810
)
$
7,619

$
59,819

$
(18,219
)
$
41,600

$
11,383

$
(11,297)

$
86

$
22,002

$
(18,008)

$
3,994

(1)
Changes attributable to both volume and yield/rate are included in yield/rate column.
(2)
~~(1) Changes attributable to both volume and yield/rate are included in yield/rate column.~~
~~(2)~~ Annualized taxable equivalent.

Taxable equivalent net interest income increased ~~$7.6~~$0.1 million and ~~$41.6~~$4.0 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same periods in ~~2013.~~2014. Increases in the volume of interest-earning assets, primarily loans acquired in the ~~FNB Transaction,~~SWS Merger and additional amounts drawn on the subsidiary warehouse lines of credit, increased taxable equivalent net interest income by ~~$20.3~~$11.3 million and ~~$63.4~~$21.9 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same periods in 2013, while increases in the volume of interest-bearing liabilities, primarily deposits assumed in the FNB Transaction, reduced taxable equivalent interest income by $0.9 million and $3.5 million during these same respective periods. Decreases in yields on loans, a lower yield on subsidiary warehouse lines of credit as well as decreased yields on the investment portfolio decreased taxable equivalent net interest income by $12.0 million during the three months ended September 30, 2014, compared with the same period in 2013.2014. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by ~~$21.0~~$9.8 million and $15.7 million during the ~~nine~~three and six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same ~~period~~periods in ~~2013,~~2014, primarily due to the net effects of lower yields on the loan portfolio and subsidiary warehouse lines of credit, partially offset by increased yields on the investment portfolio. Changes in rates paid on interest-bearing liabilities ~~increased~~decreased taxable equivalent net interest income by ~~$0.2~~$1.5 million and ~~$2.7~~$2.3 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, compared with the same periods in ~~2013,~~2014, primarily due to ~~the~~lower amortization of premiums on time deposits acquired in the FNB ~~Transaction.~~Transaction and SWS Merger.

The banking segment’s noninterest income was ~~$17.6~~$15.0 million and ~~$26.6~~$16.4 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$50.3~~$68.4 million and ~~$50.7~~$32.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The year-over-year ~~changes~~change during the ~~three and nine~~six months ended ~~September~~June 30, ~~2014 and 2013 of $9.0 million and $0.4 million, respectively, included the effects of~~2015 was primarily due to the recognition of a ~~pre-tax~~preliminary bargain purchase gain related to the ~~FNB Transaction~~SWS Merger of ~~$12.6~~$34.1 million and $4.4 million of realized gains on securities acquired in the SWS Merger and subsequently sold during the ~~quarter~~three months ended September 30, 2013. The remaining year-over-year changes in noninterest income were primarily due to increases in service charges and fees on deposits assumed in the FNB Transaction, as well as accretion on the amounts receivable under the loss-share agreements with the FDIC (“FDIC Indemnification Asset”) associated with the FNB Transaction. Noninterest income was also negatively affected by decreases in intercompany financing charges associated with the lending commitment on the PrimeLending warehouse line of credit.March 31, 2015.

The banking segment’s noninterest expenses were ~~$67.2~~$60.5 million and ~~$34.1~~$60.2 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$188.2~~$119.1 million and ~~$96.7~~$120.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. Noninterest expenses were primarily comprised of employees’ compensation and benefits, and occupancy expenses. Noninterest expenses during the three and six months ended June 30, 2015 included the operations acquired in the SWS Merger and pre-tax integration related costs directly attributable to the integration of the former SWS FSB of $1.2 million and $3.0 million, respectively, related to employee, professional fees and contractual expenses.
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Table of Contents
Broker-Dealer Segment
Loss before income taxes in our broker-dealer segment during the three months ended June 30, 2015 was $1.9 million compared with income before income taxes of $0.6 million during the same period in 2014, while income before income taxes in our broker-dealer segment during the six months ended June 30, 2015 and 2014 were $41.2 million and $0.5 million, respectively. The year-over-year change during the six months ended June 30, 2015 included the recognition of a preliminary bargain purchase gain of $46.6 million related to the SWS Merger included within the broker-dealer segment, as well as pre-tax transaction and integration related costs of $8.2 million directly attributable to the acquisition of SWS during the six months ended June 30, 2015. The broker-dealer segment incurred pre-tax integration related costs of $5.0 million directly attributable to the acquisition of SWS during the three months ended June 30, 2015. As noted in the table below, the operations acquired in the SWS Merger had a significant impact on each of the components of income (loss) before income taxes during the three and six months ended June 30, 2015, compared with the same periods in 2014. The following table provides additional details regarding our broker-dealer operating results (in thousands).

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance


2015

2014

2015 vs 2014

2015

2014

2015 vs 2014
Net interest income:

   Securities lending

$
2,786

$
951

$
1,835

$
5,298

$
1,577

$
3,721
   Other

5,236

2,227

3,009

10,720

4,231

6,489
       Total net interest income

8,022

3,178

4,844

16,018

5,808

10,210
Noninterest income:

   Securities commissions and fees by business line (1):

       Capital markets

13,779

3,760

10,019

29,902

7,740

22,162
       Retail

20,549

217

20,332

40,423

390

40,033
       Clearing

6,082

2,877

3,205

11,921

5,658

6,263
       Other

1,330

140

1,190

2,538

200

2,338

41,740

6,994

34,746

84,784

13,988

70,796
   Investment banking and advisory fees by business line:

       Public finance

23,587

14,671

8,916

42,289

26,955

15,334
       Capital markets

70

(45)

115

828

61

767
       Retail

4,006

—

4,006

7,970

—

7,970
       Structured finance

1,622

287

1,335

2,801

802

1,999
       Clearing

12

11

1

24

23

1
       Other

368

346

22

675

1,766

(1,091)

29,665

15,270

14,395

54,587

29,607

24,980
   Bargain purchase gain

—

—

—

46,615

—

46,615
   Other

8,842

3,574

5,268

20,405

6,840

13,565
       Total noninterest income

80,247

25,838

54,409

206,391

50,435

155,956
Noninterest expense:

   Compensation and benefits expenses

64,395

17,009

47,386

128,821

33,629

95,192
   Other

25,806

11,367

14,439

52,377

22,126

30,251
       Total noninterest expense

90,201

28,376

61,825

181,198

55,755

125,443

Income (loss) before income taxes

$
(1,932)

$
640

$
(2,572)

$
41,211

$
488

$
40,723
(1)
Securities commissions and fees includes income of $0.6 million during both the three and six months ended June 30, 2015 and 2014 that is eliminated in consolidation.
The broker-dealer segment had net interest income of $8.0 million and $3.2 million during the three months ended June 30, 2015 and 2014, respectively, and net interest income of $16.0 million and $5.8 million during the six months ended June 30, 2015 and 2014, respectively. In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The year-over-year ~~increase~~increases between the three and six months ended June 30, 2015 and the comparable periods in ~~noninterest expenses was~~2014 were primarily due to the inclusion of those operations acquired in the SWS Merger.

63Noninterest income was $80.2 million and $25.8 million during the three months ended June 30, 2015 and 2014, respectively, and $206.4 million and $50.4 million during the six months ended June 30, 2015 and 2014, respectively. As noted above, the year-over-year change during the six months ended June 30, 2015 included the recognition of a preliminary bargain purchase gain of $46.6 million related to the SWS Merger. The remaining changes in noninterest income during the three and six months ended June 30, 2015, compared with the same periods in 2014, were primarily due to increases of $54.4 million and $109.3 million, respectively, resulting from the inclusion of SWS’s operations, increased fees earned by FSC from increased volumes in its non-profit housing program which is included within other noninterest income, and increased advisory fees by FSC on its public finance clients.

69
Table of Contents
The broker-dealer segment participates in programs in which it issues forward purchase commitments of mortgage-backed securities to certain non-profit housing clients and sells U.S. Agency to-be-announced (“TBA”) securities. Additionally, TBA purchase and sales agreements are entered into to assist small to mid-size mortgage loan originators in hedging the interest rate risk associated with their client-owned mortgages. The fair values of these derivative instruments increased $9.2 million and $3.2 million during the three months ended June 30, 2015 and 2014, respectively, and $17.8 million and $6.1 million during the six months ended June 30, 2015 and 2014, respectively. The Hilltop Broker-Dealers also hold trading securities to support sales, underwriting and other customer activities. The fair values of securities within this trading portfolio decreased $0.4 million during the three months ended June 30, 2015 and increased $2.6 million during the six months ended June 30, 2015, and increased $0.3 million and $0.7 million during the three and six months ended June 30, 2014, respectively. These changes in the fair value of derivative instruments and trading portfolio are included within other noninterest income.

Noninterest expenses, including provision for loan losses, were $90.2 million and $28.4 million during the three months ended June 30, 2015 and 2014, respectively, and $181.2 million and $55.8 million during the six months ended June 30, 2015 and 2014, respectively. The increases in noninterest expenses, including provision for loan losses, of $61.8 million and $125.4 million during the three and six months ended June 30, 2015, compared to the same periods in 2014, were primarily due to increases of $47.4 million and $95.2 million, respectively, in employees’ compensation and benefits costs, of which $39.4 million and $82.0 million, respectively, was associated with the operations acquired in the ~~FNB Transaction and write downs of $14.4~~SWS Merger. Compensation that varies with noninterest income accounted for $7.5 million and ~~$17.4~~$11.8 million, ~~associated with covered OREO assets~~respectively, of the noted increases in First Southwest’s compensation costs, and employees’ compensation and benefits and occupancy and equipment expenses accounted for the majority of the noninterest expenses incurred during each respective period. In addition, during the ~~three and nine~~six months ended ~~September~~June 30, ~~2014, respectively. The write downs to fair value~~2015, the broker-dealer segment incurred pre-tax transaction costs of ~~the covered OREO reflect new appraisals on certain OREO acquired in the FNB Transaction~~$0.8 million, while pre-tax integration related costs resulted from employee expenses, professional fees and OREO acquired from the foreclosure on certain FNB loans acquired in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired assets upon acquisition, in some cases additional downward valuations were required.
~~These additional downward valuation adjustments reflect changes~~contractual expenses directly attributable to the ~~assumptions regarding the fair value~~integration of ~~the OREO, including in some cases the intended use of the OREO due to the availability of more information as well as the passage of time. The process of determining fair value is subjective in nature~~SWS were $2.9 million, $0.6 million and requires the use of significant estimates and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent information, that its estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments requires that the decreases to fair value be recorded at the time such new information is received, while increases to fair value are recorded when the asset is subsequently sold. All of the impairments recorded$1.5 million, respectively, during the three months ended ~~September 30, 2014 related to covered assets subject to the loss-share agreements with the FDIC.~~
~~On October 24, 2014, the Bank notified its federal and state banking regulators and affected customers that, effective January~~June 30, 2015, ~~it will be closing certain branch locations acquired in~~and $5.1 million, $0.8 million and $1.5 million, respectively, during the ~~FNB Transaction. Eleven of~~six months ended June 30, 2015. Integration related costs are expected to continue into 2016 as the branches to be closed are located in the Texas Rio Grande Valley, and the remaining two branches are located in Houston and Laredo, Texas. The Bank previously notified its federal and state banking regulators and affected customers that it will be closing two other branches acquired in the FNB Transaction in the Houston market effective November 7, 2014. It is anticipated that closing these branches will improve the operational efficiencies of the Bank. In an effort to mitigate potential deposit runoff associated with these branch closures, the BankHilltop Broker-Dealers will continue to ~~offer banking services to its customers through other branches operating in these markets.~~operate as separate broker-dealers, under coordinated leadership, until such time as the necessary regulatory approvals are obtained and systems integrations are complete.

Selected information concerning the broker-dealer segment follows (dollars in thousands).

Three Months Ended June 30,

Six Months Ended June 30,

2015


2014

2015


2014

Compensation as a % of net revenue, excluding bargain purchase gain

73.0%

58.6%

73.3%

59.8%

FDIC insured program balances at PlainsCapital Bank (end of period)

$
674,579

$
281,616

Other FDIC insured program balances (end of period)

$
1,079,549

$
175,856

Customer margin balances (end of period)

$
413,860

$
224,151

Customer funds on deposit, including short credits (end of period)

$
497,345

$
184,114

Public finance:

Number of issues

889

433

1,372

722

Aggregate amount of offerings
$
38,792,286

$
20,913,900

$
75,981,106

$
41,271,697

Capital markets:

Total volumes
$
18,777,064

$
7,794,962

$
36,283,310

$
14,320,282

Net inventory (end of period)

$
108,374

$
40,497

Retail:

Retail employee representatives (end of period)

132

4

Independent registered representatives (end of period)

250

—

Structured finance:

Lock production/TBA volume
$
3,223,490

$
502,149

$
6,249,120

$
830,185

Clearing:

Total tickets
$
544,857

$
373,015

$
1,063,972

$
779,933

Correspondents (end of period)

209

76

Securities lending:

Interest-earning assets - stock borrowed (end of period)

$
2,027,934

$
163,682

Interest-bearing liabilities - stock loaned (end of period)

$
1,966,110

$
133,162

70
Table of Contents
Mortgage Origination Segment

Income before income taxes in our mortgage origination segment ~~for~~during the three months ended ~~September~~June 30, 2015 and 2014 ~~and 2013~~ was ~~$11.1~~$21.0 million and ~~$3.8~~$9.2 million, respectively, ~~while income before income taxes in our mortgage origination segment for~~and $31.0 million and $6.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013 was $17.3 million and $34.9 million,~~2014, respectively. The ~~increase~~increases in income before income taxes ~~for~~during the three and six months ended ~~September~~June 30, ~~2014~~2015 compared ~~with~~to the same ~~period~~periods in ~~2013 was~~2014 were primarily due to a reduction in net interest expense and a slight increase in noninterest income. The decrease in income before income taxes for the nine months ended September 30, 2014 compared with the same period in 2013 was primarily due to a decreaseincreases in noninterest income partially offset by ~~decreases~~increases in compensation that varies with the volume of mortgage loan originations (“variable compensation”), and to a lesser extent, increases in other noninterest ~~expense and net interest expense.~~expenses. Net interest expense of ~~$3.2~~$2.3 million and ~~$8.9~~$2.4 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and net interest expense of ~~$9.7~~$5.3 million and ~~$32.7~~$6.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, resulted from interest incurred on a warehouse line of credit held atwith the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for sale.
64

~~Table of Contents~~

The mortgage origination segment originates all of its mortgage loans through a retail channel. The following table provides certain details regarding our mortgage loan originations and selected information for the periods indicated below (dollars in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,

% of

% of

% of

% of





% of




% of





% of




% of

2014

Total

2013

Total

2014

Total

2013

Total

2015

Total

2014

Total

2015

Total

2014

Total

Mortgage Loan Originations - units

13,766

13,727

36,291

44,681

17,010

13,373

29,373

22,525

Mortgage Loan Originations - volume

$
2,946,198

$
2,851,627

$
7,651,082

$
9,447,550

$
3,833,765

$
2,838,731

$
6,647,285

$
4,704,884

Mortgage Loan Originations:

Conventional

$
1,829,908

62.11
%
$
1,841,025

64.56
%
$
4,801,634

62.76
%
$
6,017,174

63.69
%

$
2,422,374

63.19
%
$
1,777,589

62.62
%

$
4,269,787

64.23
%
$
2,971,726

63.16
%
Government

788,897

26.78
%
856,127

30.02
%
2,159,383

28.22
%
2,801,915

29.66
%

997,726

26.02
%

818,158

28.82
%

1,667,262

25.08
%

1,370,486

29.13
%
Jumbo

245,749

8.34
%
144,027

5.05
%
601,474

7.86
%
596,478

6.31
%

261,033

6.81
%

238,991

8.42
%

472,866

7.12
%

355,725

7.56
%
Other

81,644

2.77
%
10,448

0.37
%
88,591

1.16
%
31,993

0.34
%

152,632

3.98
%

3,993

0.14
%

237,370

3.57
%

6,947

0.15
%

$
2,946,198

100.00
%
$
2,851,627

100.00
%
$
7,651,082

100.00
%
$
9,447,560

100.00
%

$
3,833,765

100.00
%
$
2,838,731

100.00
%

$
6,647,285

100.00
%
$
4,704,884

100.00
%

Home purchases

$
2,408,752

81.76
%
$
2,342,508

82.15
%
$
6,273,557

82.00
%
$
6,330,240

67.00
%

$
2,913,479

76.00
%
$
2,396,094

84.41
%

$
4,601,838

69.23
%
$
3,864,805

82.14
%
Refinancings

537,446

18.24
%
509,119

17.85
%
1,377,525

18.00
%
3,117,320

33.00
%

920,286

24.00
%

442,637

15.59
%

2,045,447

30.77
%

840,079

17.86
%

$
2,946,198

100.00
%
$
2,851,627

100.00
%
$
7,651,082

100.00
%
$
9,447,560

100.00
%

$
3,833,765

100.00
%
$
2,838,731

100.00
%

$
6,647,285

100.00
%
$
4,704,884

100.00
%

Texas

$
703,793

23.89
%
$
665,504

23.34
%
$
1,826,826

23.88
%
$
2,111,761

22.35
%

$
827,197

21.58
%
$
692,878

24.41
%

$
1,416,627

21.31
%
$
1,123,033

23.87
%
California

433,465

14.71
%
457,812

16.05
%
1,112,481

14.54
%
1,683,019

17.81
%

565,335

14.75
%

387,445

13.65
%

1,052,413

15.83
%

679,017

14.43
%
Florida

144,106

4.89
%
117,891

4.13
%
373,181

4.88
%
344,483

3.65
%

174,574

4.55
%

135,701

4.78
%

304,070

4.57
%

229,075

4.87
%
Ohio

119,117

4.04
%
93,966

3.30
%
303,224

3.96
%
300,960

3.18
%

159,831

4.17
%

117,026

4.12
%

267,275

4.02
%

184,106

3.91
%
North Carolina

100,447

3.41
%
138,446

4.85
%
316,109

4.13
%
494,652

5.24
%

137,985

3.60
%

123,930

4.37
%

245,831

3.70
%

215,662

4.59
%
Arizona

90,847

3.08
%
87,739

3.08
%
255,601

3.34
%
318,473

3.37
%
South Carolina

89,901

3.05
%
81,779

2.87
%
220,008

2.88
%
253,883

2.69
%
Virginia

89,212

3.03
%
107,860

3.78
%
233,629

3.05
%
389,374

4.12
%

134,096

3.50
%

93,538

3.29
%

227,865

3.43
%

144,417

3.07
%
Maryland

89,091

3.03
%
86,326

3.03
%
215,219

2.81
%
320,142

3.39
%

124,114

3.24
%

75,503

2.66
%

224,111

3.37
%

126,128

2.68
%
Washington

125,563

3.28
%

70,248

2.48
%

217,446

3.27
%

128,507

2.73
%
Arizona

124,020

3.23
%

85,268

3.00
%

214,512

3.23
%

164,753

3.50
%
Missouri

124,418

3.24
%

84,962

2.99
%

199,321

3.00
%

137,209

2.92
%
All other states

1,086,219

36.87
%
1,014,304

35.57
%
2,794,804

36.53
%
3,230,813

34.20
%

1,336,632

34.86
%

972,232

34.25
%

2,277,814

34.27
%

1,572,977

33.43
%

$
2,946,198

100.00
%
$
2,851,627

100.00
%
$
7,651,082

100.00
%
$
9,447,560

100.00
%

$
3,833,765

100.00
%
$
2,838,731

100.00
%

$
6,647,285

100.00
%
$
4,704,884

100.00
%

Mortgage Loan Sales - volume

$
3,635,853

$
2,343,440

$
6,541,119

$
4,418,991

The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate fluctuations. Historically, the mortgage origination segment has typically experienced increased loan origination volume from purchases of homes during the spring and summer, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased refinancings. Changes in interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.

~~Beginning~~As a result of a decline in ~~May 2013 and continuing through the fourth quarter of 2013,~~ mortgage interest rates ~~increased at a pace~~ that ~~along with other factors, resulted in a decrease of 19.0%~~began in the second quarter of 2014 and continued into the first quarter of 2015, refinancing volume increased to $920.3 million and $2.0 billion during the three and six months ended June 30, 2015, respectively (representing 24.0% and 30.8%, respectively, of total loan origination volume), from $442.6
71
Table of Contents
million and $840.1 million during the three and six months ended June 30, 2014, respectively (representing 15.6% and 17.9%, respectively, of total loan origination volume). Home purchases volume increased 21.6% to $2.9 billion from $2.4 billion during the three months ended June 30, 2015 compared to the same period in 2014, while home purchases volume increased by 19.1% to $4.6 billion from $3.9 billion during the six months ended June 30, 2015 compared to the same period in 2014.
The mortgage origination segment’s total loan origination volume during the ~~nine~~three and six months ended ~~September~~June 30, ~~2014, when compared with~~2015 increased 35.1% and 41.3%, respectively, from the same ~~period~~periods in ~~2013. Although home purchases volume of $6.3 billion~~2014. Income before income taxes during the ~~nine~~three and six months ended ~~September~~June 30, ~~2014 was virtually unchanged from the nine months ended September 30, 2013, refinancing volume decreased $1.7 billion, or 56%, during~~2015, compared to the same ~~period. Total~~periods in 2014, increased at a greater rate than loan origination volume ~~as well as home purchases volume, was relatively flat between each~~primarily due to noninterest income increasing by 37.0% and 41.4%, respectively, compared with increases in noninterest expense of ~~the three months ended September 30, 2014, June 30, 2014~~30.3% and September 30, 2013. Refinancing volume during each of these three quarters ranged between 16% and 18% of total loan origination volume. For each quarter subsequent to the second quarter of 2013, the mortgage origination segment’s refinancing volume as a percentage of total loan origination volume has ranged between 16% and 21%. Due to recent declines in mortgage interest rates, we anticipate refinancing as a percentage of total loan origination volume to increase through the first quarter of 2015.32.4%, respectively.

~~Although the mortgage origination segment’s total loan origination volume~~Noninterest income was ~~relatively flat~~$168.2 million and $122.8 million during the three months ended ~~September~~June 30, 2015 and 2014, ~~compared with~~respectively, and $303.5 million and $214.6 million during the ~~same period in 2013, income before income taxes~~six months ended June 30, 2015 and 2014, respectively, and was comprised of the following (in thousands).

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance

2015

2014

2015 vs 2014

2015

2014

2015 vs 2014

Net gains from sale of loans
$
134,082

$
78,772

$
55,310

$
242,712

$
150,289

$
92,423

Mortgage loan origination fees

20,958

16,983

3,975

35,547

29,327

6,220

Other mortgage production income:

Change in net fair value and related derivative activity:

Interest rate lock commitments and loans held for sale

6,499

25,667

(19,168)

19,672

29,020

(9,348)

Mortgage servicing rights asset

2,414

(1,441)

3,855

(2,874)

917

(3,791)

Servicing fees

4,274

2,839

1,435

8,462

5,030

3,432

$
168,227

$
122,820

$
45,407

$
303,519

$
214,583

$
88,936

Net gains on sale of loans increased 194.9% between the same periods ($11.1 million income compared with $3.8 million income) primarily due to a reduction in net interest expense. To address negative trends in loan origination volume resulting from changes in interest rates that began in May 2013, the70.2% and 61.5%, and mortgage origination ~~segment reduced its non-origination employee headcount approximately 22%~~fees increased 23.4% and 21.2% during ~~the third and fourth quarters of 2013. Salaries and benefits expenses for~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2014 decreased approximately 19% and 16%~~2015, respectively, as compared with the same periods in ~~2013, as the benefits~~2014. The increases in net gains on sale of the headcount reductions in the third and fourth quarters of 2013 were realized. The mortgage origination segment also engaged in other initiatives to reduce segment operating costs during the third and fourth quarters of 2013 thatloans were primarily ~~responsible for the decrease~~a result of ~~approximately 6%~~55.2% and ~~9%, respectively,~~48.0% increases in ~~non-employee related expenses, including occupancy and~~
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~~administrative costs,~~total loan sales volume, in addition to increases in average loan sales margins during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014, as~~2015, respectively, compared with the same periods in ~~2013.~~2014. The ~~benefits~~increases in mortgage origination fees were primarily a result of ~~the employee reductions~~35.1 % and ~~other cost savings initiatives include a decrease~~41.3% increases in ~~recurring quarterly operating costs of approximately $8 million since the third quarter of 2013. The decrease~~total loan origination volume, partially offset by decreases in ~~salaries, benefits and segment operating costs between~~average loan origination fees during the three ~~months ended September 30, 2014~~ and ~~2013 was significantly offset by the increase in unreimbursed closing costs discussed below.~~
~~The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing released. During the~~ six months ended June 30, 2013, the mortgage origination segment retained servicing on approximately 8% of loans sold. This rate was increased to approximately 22% during the third and fourth quarters of 2013, and approximately 40% during the nine months ended September 30, 2014. The related mortgage servicing rights (“MSR”) asset was valued at $43.1 million on $3.8 billion of serviced loan volume at September 30, 2014,2015, respectively, compared with a value of $20.1 million on $2.0 billion of serviced loan volume at December 31, 2013. The mortgage origination segment has retained servicing on certain loans sold to the banking segment. The MSR value associated with these loans at September 30, 2014 was $1.2 million on $125.5 million of serviced loan volume. Gains and losses associated with this sale and the related MSR are eliminated in consolidation. All income related to retained servicing, including changes in the value of the MSR asset, is included in noninterest income. The mortgage origination segment’s determination on whether to retain or release servicing on mortgage loans it sells is impacted by changes in mortgage interest rates, and refinancing and market activity. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. During the three months ended September 30, 2014, the mortgage origination segment began using derivative financial instruments, including interest rate swaps and swaptions, as a means to mitigate market risk associated with MSR assets. Changes in the net value of the MSR and the related derivatives resulted in a loss of $0.2 million and a gain of $0.7 million during the three and nine months ended September 30, 2014, respectively. No similar gains or losses were recorded during the same periods in ~~2013. In July 2014, the mortgage origination segment sold MSR assets of $11.4 million, which represented approximately $1.0 billion of its serviced loan volume at that time.~~2014.

~~Noninterest~~During the three and six months ended June 30, 2015, noninterest income ~~was $129.0~~included $6.5 million and ~~$127.5~~$19.7 million, ~~for the three months ended September 30, 2014 and 2013,~~ respectively, ~~and $343.6 million and $439.2 million for the nine months ended September 30, 2014 and 2013, respectively. Noninterest income was comprised~~ of net gains on the sale of loans and other mortgage production income, and mortgage origination fees. Noninterest income increased 1.2% during the three months ended September 30, 2014 when compared with the same periodincreases in 2013 due to a reduction in the fair value losses associated with the mortgage origination segment’s derivative financial instruments and loans held for sale as discussed below, offset by a decrease in loan origination margins resulting from increased pricing competition. Noninterest income decreased 21.8% during the nine months ended September 30, 2014 when compared with the same period in 2013 due to a decrease of 19% in loan origination volume and a decrease in loan origination margins resulting from increased pricing competition, partially offset by a reduction in the fair value losses associated with the mortgage origination segment’s derivative financial instruments and loans held for sale as discussed below.
~~Changes in the~~net fair value of the mortgage origination segment’s interest rate lock commitments (“IRLCs”) and loans held for sale and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale, are included in noninterest income. Net fair value decreased $8.6 million and $14.5 million during the three months ended September 30, 2014 and 2013, respectively. Net fair value increased $20.4 million during the nine months ended September 30, 2014, compared withsale. These increases were primarily a decrease in net fair value of $11.0 million during the nine months ended September 30, 2013. During both the three months ended September 30, 2014 and 2013, and the nine months ended September 30, 2013, the decrease in net fair value was primarily the result of ~~a decrease~~increases in the volume of IRLCs and mortgage loans held during these ~~respective periods.~~periods partially offset by decreases in the average value of individual IRLCs and mortgage loans. During the ~~nine~~three and six months ended ~~September~~June 30, 2014, ~~the increase in net fair value was primarily a result~~noninterest income included comparable increases of ~~an increase~~$25.7 million and $29.0 million, respectively. Increases in the volume of IRLCs and mortgage loans held for sale and the average value of individual IRLCs and mortgage loans were primarily responsible for the increase during ~~this period and~~the three months ended June 30, 2014, while an increase in the average value of individual IRLCs and mortgage ~~loans.~~loans was primarily responsible for the increase during the six months ended June 30, 2014.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing released. During the year ended December 31, 2014, the mortgage origination segment retained servicing on approximately 31% of loans sold, but decreased to approximately 21% and 16% during the three and six months ended June 30, 2015. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage interest rates, and refinancing and market activity. The related mortgage servicing rights (“MSR”) asset was valued at $46.3 million on $4.3 billion of serviced loan volume at June 30, 2015, respectively, compared with a value of $37.4 million on $3.8 billion of serviced loan volume at December 31, 2014. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on
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certain loans sold to the banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in consolidation. During the third quarter of 2014, the mortgage origination segment began using derivative financial instruments, including interest rate swaps, swaptions and forward commitments to sell mortgage-backed securities, as a means to mitigate market risk associated with its MSR asset. Changes in the net fair value of the MSR asset and the related derivatives resulted in a net gain of $2.4 million and a net loss of $2.9 million during the three and six months ended June 30, 2015, respectively, while the change in the net value of the MSR asset resulted in a net loss of $1.4 million and a net gain of $0.9 million during the three and six months ended June 30, 2014.

Noninterest expenses were ~~$114.7~~$145.0 million and ~~$114.8~~$111.2 million ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$316.5~~$267.3 million and ~~$371.6~~$201.9 million ~~for~~during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, respectively, and ~~2013, respectively.~~ were comprised of the following (in thousands).

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance

2015

2014

2015 vs 2014

2015

2014

2015 vs 2014

Variable compensation
$
67,032

$
45,086

$
21,946

$
115,162

$
75,072

$
40,090

Segment operating costs

66,797

57,120

9,677

130,651

112,323

18,328

Unreimbursed closing costs

11,123

9,018

2,105

21,440

14,462

6,978

$
144,952

$
111,224

$
33,728

$
267,253

$
201,857

$
65,396

Employees’ compensation and benefits accounted for the majority of the noninterest expenses ~~incurred. Compensation that varies with the volume of mortgage loan originations and overall segment profitability~~incurred during all periods presented. Variable compensation increased ~~$2.4~~$21.9 million and ~~decreased $28.0~~$40.1 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, compared with the same periods in ~~2013,~~2014, and comprised ~~approximately 62%~~66.5% and ~~58%~~60.0% of the total employees’ compensation and benefits expenses during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~58%~~63.8% and ~~61%~~56.0% during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, respectively. Variable compensation tends to fluctuate at greater rates than loan origination volumes, since mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved.

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~~Table of Contents~~
~~2013, respectively. In addition, employee salaries~~While total loan origination volumes increased 35.1% and ~~benefits decreased $6.6 million and $16.1 million during~~41.3% between the three and ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, respectively, ~~as compared with~~and the same periods in ~~2013, primarily~~2014, the mortgage origination segment’s operating costs increased 16.9% and 16.3%, respectively. Segment operating costs tend to fluctuate with, but at a lesser magnitude than, loan origination volume, as ~~a result~~these costs are comprised of ~~headcount reductions~~salaries, benefits, occupancy and administrative costs, which are not highly sensitive to changes in ~~the third and fourth quarters of 2013.~~ loan origination volume.
The mortgage origination segment records unreimbursed closing costs as noninterest expense when it pays a customer’s closing costs. Unreimbursed closing costs are generally paid in return for the customer choosing to accept a higher interest rate on the customer’s mortgage ~~loan. Unreimbursed~~loan, and as a result, unreimbursed closing costs during the three months ended September 30, 2014 and 2013 were $9.6 million and $4.4 million, respectively, and $23.5 million and $24.7 million for the nine months ended September 30, 2014 and 2013, respectively.typically increases at a greater rate than loan origination volumes when mortgage interest rates decline.

Between January 1, ~~2005,~~2006, and ~~September~~June 30, ~~2014,~~2015, the mortgage origination segment sold mortgage loans totaling ~~$62.9~~$69.6 billion. These loans were sold under sales contracts that generally include provisions ~~which~~that hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to ~~2005,~~2006, it ~~has~~does not ~~experienced, nor does it~~ anticipate experiencing significant losses in the future on loans originated prior to ~~2005~~2006 as a result of investor claims under these provisions of its sales contracts.

When an investor claim for indemnification of a loan sold is made, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim cannot be satisfied in that ~~matter,~~manner, the mortgage origination segment negotiates with the investor to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the investor for losses incurred
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Table of Contents
on the loan. Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, ~~2005~~2006 and ~~September~~June 30, ~~2014~~2015 (dollars in thousands).

Original Loan Balance

Loss Recognized

Original Loan Balance

Loss Recognized

% of

% of

% of

% of

Loans

Loans

Loans

Loans

Amount

Sold

Amount

Sold


Amount

Sold

Amount

Sold

Claims resolved with no payment

$
155,375

0.25
%
$
—

0.00
%

$
189,123

0.27%

$
—

0.00%

Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred (1)

190,428

0.30
%
25,048

0.04
%

227,112

0.33%

25,738

0.04%

$
345,803

0.55
%
$
25,048

0.04
%

$
416,235

0.60%

$
25,738

0.04%

(1)
~~(1)~~ Losses incurred include refunded purchased servicing rights.

At ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the mortgage origination segment’s indemnification liability reserve totaled ~~$19.1~~$17.3 million and ~~$21.1~~$17.6 million, respectively. The related provision for indemnification losses was $1.2 million and $0.9 million ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$2.3~~$2.0 million and ~~$2.8~~$1.4 million ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively.

Insurance Segment

~~Income~~Losses before income taxes in our insurance segment were $12.5 million and $5.5 million during the three months ended June 30, 2015 and 2014, respectively. Loss before income taxes in our insurance segment was ~~$8.2 million and $4.4~~$3.4 million during the ~~three~~six months ended ~~September~~June 30, ~~2014 and 2013, respectively. Income~~2015, compared with income before ~~income~~ taxes ~~in our insurance segment was $14.1~~of $6.0 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014, compared with a loss before income taxes of $9.9 million during the same period in 2013.~~2014. The insurance segment is subject to claims arising out of severe weather, the incidence and severity of which are inherently unpredictable. Generally, the insurance segment’s insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of the year.

The ~~significant improvement in operating results in our~~ insurance segment during the nine months ended September 30, 2014 compared with the same period in 2013 was primarily a result of growth in earned premium and improved claims loss experience associated with the significant decline in the general severity of severe weather-related events during 2014. Based on our estimates of the ultimate losses, claims associated with these storms totaled $18.2 million through
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~~Table of Contents~~
September 30, 2014. The significant loss during the nine months ended September 30, 2013 was primarily driven by the severity of three tornado, wind and hail storms during the second quarter of 2013. Based on estimates of the ultimate cost, two of these storms are considered catastrophic losses as they exceeded our $8 million reinsurance retention during the third quarter of 2013. The estimate of ultimate losses from these storms totaled $26.5 million through September 30, 2013 with a net loss, after reinsurance, of $21.7 million.
~~During 2013, the insurance segment initiated a review of~~periodically reviews the pricing of its primary products in each state of operation utilizing a consulting actuarial firm to supplement normal review ~~processes. Based on this review,~~processes resulting in filings to increase rates as deemed necessary. The benefit of these rate actions will not be fully realized until all customers renew their policies under the ~~insurance segment increased~~new rates, ~~on certain products in several states in 2014. A state-by-state review~~typically one year from the date of ~~the insurance segment’s products and pricing continues and has resulted in additional~~ rate ~~filings.~~change implementation. Concurrently, business concentrations ~~were~~are reviewed and actions initiated, including cancellation of agents, non-renewal of policies and cessation of new business writing on certain products in problematic geographic areas. These actions have ~~both~~ reduced the rate of premium growth for ~~the first nine months of 2014~~targeted areas when compared with the patterns exhibited in prior quarters and years and reduced the insurance segment’s exposure to volatile weather ~~through a lower number of insureds~~ in these areas, but competition and customer response to ~~improve its loss experience during 2014.~~rate increases has negatively impacted customer retention and new business. The insurance segment aims to manage and diversify its business concentrations and products to minimize the effects of future weather-related events.

The insurance segment’s operations resulted in combined ratios of ~~84.8%~~135.8% and ~~94.0%~~118.2% during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~93.4%~~109.0% and ~~113.7%~~97.9% during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The year-over-year ~~improvement~~increase in the combined ~~ratios~~ratio was primarily driven by the effects of net insurance premiums earned being relatively flat, an increase in ~~net earned premiums~~frequency and ~~improvement~~severity of severe weather events in our geographic coverage area, an increase in claims loss ~~experience.~~reserves associated with prior period adverse development related to litigation emerging from a series of hail storms within the 2012 through 2014 accident years, and additional costs associated with sales, marketing and corporate organizational initiatives. The combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of ~~the~~ loss and LAE ~~ratio~~ and ~~the~~ underwriting ~~expense ratio, which are discussed in more detail below.~~expenses divided by net insurance premiums earned.

Noninterest income of ~~$44.0~~$42.8 million and $43.1 million during the three months ended ~~September~~June 30, 2015 and 2014, respectively, included net insurance premiums earned of ~~$41.8~~$40.3 million ~~compared with $40.0~~and $40.8 million, ~~for the same period in 2013,~~respectively, while noninterest income of ~~$129.9~~$84.7 million and $85.9 million during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, respectively, included
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Table of Contents
net insurance premiums earned of ~~$122.9~~$79.9 million ~~compared with $116.0~~and $81.1 million, ~~for the same period~~respectively. The decrease in ~~2013. The increase in net~~ earned premiums ~~during both periods~~ was primarily attributable to ~~rate~~efforts to reduce concentrations both geographically and ~~volume~~within specific product lines and moderate success in customer retention and expansion efforts, offset by rate increases in homeowners and mobile home products.

Direct insurance premiums written by major product line are presented in the table below (in thousands).

Three Months Ended September 30,

Variance

Nine Months Ended September 30,

Variance

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance

2014

2013

2014 vs 2013

2014

2013

2014 vs 2013


2015

2014

2015 vs 2014

2015

2014

2015 vs 2014

Direct Insurance Premiums Written:

Homeowners

$
19,644

$
21,110

$
(1,466
)
$
59,659

$
61,634

$
(1,975
)

$
20,519

$
21,431

$
(912)

$
38,614

$
40,016

$
(1,402)

Fire

13,329

14,086

(757
)
42,289

42,097

192

14,465

15,125

(660)

27,911

28,960

(1,049)

Mobile Home

8,556

8,098

458

29,055

26,827

2,228

10,549

10,280

269

20,776

20,499

277

Commercial

965

1,094

(129
)
3,126

3,492

(366
)

946

1,075

(129)

1,899

2,161

(262)

Other

92

96

(4
)
226

242

(16
)

85

88

(3)

113

134

(21)

$
42,586

$
44,484

$
(1,898
)
$
134,355

$
134,292

$
63

$
46,564

$
47,999

$
(1,435)

$
89,313

$
91,770

$
(2,457)

~~Total~~
The total direct insurance premiums written for our three largest insurance product lines decreased by ~~$1.8~~$1.3 million and $2.2 million during the three and six months ended ~~September~~June 30, ~~2014~~2015, respectively, compared with the same ~~period~~periods in ~~2013~~2014, due to efforts to reduce concentrations both geographically and within specific product ~~lines. Total direct insurance premiums written for our three largest insurance product~~ lines, ~~increased by $0.5 million during the nine months ended September 30, 2014 compared with the same period in 2013 due to growth in our mobile home line, offset by reductions in homeowners products.~~
68

~~Table~~customer acceptance of ~~Contents~~rate increases and competitive pressure.

Net insurance premiums earned by major product line are presented in the table below (in thousands).

Three Months Ended September 30,

Variance

Nine Months Ended September 30,

Variance

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance

2014

2013

2014 vs 2013

2014

2013

2014 vs 2013


2015

2014

2015 vs 2014

2015

2014

2015 vs 2014

Net Insurance Premiums Earned:

Homeowners

$
19,219

$
18,937

$
282

$
54,580

$
53,259

$
1,321

$
17,789

$
18,243

$
(454)

$
34,537

$
35,361

$
(824)

Fire

13,097

12,653

444

38,689

36,377

2,312

12,520

12,847

(327)

24,965

25,592

(627)

Mobile Home

8,467

7,320

1,147

26,581

23,182

3,399

9,118

8,701

417

18,583

18,114

469

Commercial

950

987

(37
)
2,860

3,018

(158
)

817

909

(92)

1,699

1,910

(211)

Other

88

85

3

207

209

(2
)

74

77

(3)

101

119

(18)

$
41,821

$
39,982

$
1,839

$
122,917

$
116,045

$
6,872

$
40,318

$
40,777

$
(459)

$
79,885

$
81,096

$
(1,211)

Net insurance premiums earned ~~for~~during the three and ~~nine~~six months ended ~~September~~June 30, ~~2014 increased~~2015 decreased compared ~~with~~to the same periods in ~~2013,~~2014, primarily due to ~~increases~~the decreases in net insurance premiums written during ~~2013.~~2015. This reduction in net insurance premiums earned when compared with the patterns exhibited in prior quarters and years was consistent with the insurance segment’s previously discussed efforts to manage and diversify its business concentrations and products to minimize the effects of future weather-related events.

Noninterest expenses of ~~$36.6~~$56.1 million and ~~$38.7~~$49.4 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$118.4~~$89.5 million and ~~$135.1~~$81.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, include both loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE during the three months ended ~~September~~June 30, ~~2014~~2015 was ~~$22.6~~$41.2 million, compared with ~~$24.6~~$35.3 million during the same period in ~~2013,~~2014, resulting in loss and LAE ratios of ~~54.1%~~102.3% and ~~61.6%~~86.5% during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. Loss and LAE during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 was ~~$76.4~~$60.1 million, compared with ~~$94.0~~$53.6 million during the same period in ~~2013. As a result,~~2014, resulting in loss and LAE ratios of 75.2% and 66.1% during the six months ended June 30, 2015 and 2014, respectively. The year-over-year increases in the loss and LAE ~~ratios during the nine months ended September 30, 2014 and 2013 were 62.0% and 81.0%, respectively. These year-over-year~~ ratio ~~improvements~~ were primarily ~~a result~~due to the effects of ~~growth~~net insurance premiums earned being relatively flat, the increase in ~~earned premium~~frequency and ~~improved claims loss experience associated with the significant decline in the~~ severity of severe ~~weather-related~~weather events ~~during 2014.~~in our geographic coverage area and the increase in claims loss reserves associated with prior period adverse development related to litigation emerging from a series of hail storms within the 2012 through 2014 accident years.

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Table of Contents
Policy acquisition and other underwriting expenses encompass all expenses incurred relative to NLC operations, and include elements of multiple categories of expense otherwise reported as noninterest expense in the consolidated statements of operations.

~~Policy acquisition and other~~The following table details the calculation of the underwriting ~~expenses were as follows~~expense ratio for the periods presented (dollars in thousands).

Three Months Ended September 30,

Variance

Nine Months Ended September 30,

Variance

Three Months Ended June 30,

Variance

Six Months Ended June 30,

Variance

2014

2013

2014 vs 2013

2014

2013

2014 vs 2013


2015

2014

2015 vs 2014

2015

2014

2015 vs 2014

Amortization of deferred policy acquisition costs

$
10,630

$
10,418

$
212

$
31,229

$
30,305

$
924

$
10,059

$
10,402

$
(343)

$
20,100

$
20,599

$
(499)

Other underwriting expenses

2,960

3,207

(247
)
9,665

9,511

154

4,308

3,325

983

8,474

6,705

1,769

Total

13,590

13,625

(35
)
40,894

39,816

1,078

14,367

13,727

640

28,574

27,304

1,270

Agency expenses

(753
)
(652
)
(101
)
(2,257
)
(1,883
)
(374
)

(855)

(813)

(42)

(1,560)

(1,503)

(57)

Total less agency expenses

$
12,837

$
12,973

$
(136
)
$
38,637

$
37,933

$
704

$
13,512

$
12,914

$
598

$
27,014

$
25,801

$
1,213

Net insurance premiums earned

$
41,821

$
39,982

$
1,839

$
122,917

$
116,045

$
6,872

$
40,318

$
40,777

$
(459)

$
79,885

$
81,096

$
(1,211)

Expense ratio

30.7
%
32.4
%
-1.7
%
31.4
%
32.7
%
-1.3
%

33.5
%

31.7
%

1.8
%

33.8
%

31.8
%

2.0
%

~~Financial Advisory Segment~~

Income before income taxes in our financial advisory segment during the three months ended September 30, 2014 and 2013 was $1.2 million and $0.2 million, respectively, while income before income taxes in our financial advisory segment during the nine months ended September 30, 2014 and 2013 was $1.7 million and $2.4 million, respectively. Continuing uncertainty in fixed income markets as a result of increased regulations, uncertainty in the direction of future interest rates and a lack of liquidity in the market have resulted in reduced sales of fixed income securities to institutional customers.Corporate

The financial advisory segment had net interest income of $3.3 million and $2.7 million during the three months ended September 30, 2014 and 2013, respectively, and $9.1 million and $9.4 million during the nine months ended September 30, 2014 and 2013, respectively, consisting of securities lending activity, customer margin loan balances and investment securities used to support sales, underwriting and other customer activities.
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~~Table of Contents~~
Noninterest income was $29.7 million and $25.7 million during the three months ended September 30, 2014 and 2013, respectively, and $80.2 million and $77.4 million during the nine months ended September 30, 2014 and 2013, respectively. The majority of the financial advisory segment’s noninterest income was generated from fees and commissions earned from investment advisory and securities brokerage activities of $24.1 million and $22.3 million during the three months ended September 30, 2014 and 2013, respectively, and $67.7 million and $70.3 million during the nine months ended September 30, 2014 and 2013, respectively. The financial advisory segment participates in programs in which it issues forward purchase commitments of mortgage-backed securities to certain clients and sells TBAs. The fair values of these derivative instruments increased $5.3 million and $3.2 million during the three months ended September 30, 2014 and 2013, respectively, and $11.4 million and $8.8 million during the nine months ended September 30, 2014 and 2013, respectively. The fair value of the financial advisory segment’s trading portfolio, which is used to support sales, underwriting and other customer activities, increased $0.3 million and $0.2 million during the three months ended September 30, 2014 and 2013, respectively, and increased $1.1 million during the nine months ended September 30, 2014 and decreased $1.7 million during the nine months ended September 30, 2013.
Noninterest expenses were $31.8 million and $28.2 million during the three months ended September 30, 2014 and 2013, respectively, and $87.5 million and $84.3 million during the nine months ended September 30, 2014 and 2013, respectively. The increases in noninterest expenses during both periods were primarily due to increases in professional fees as a result of increased regulatory requirements and litigation expenses, as well as employees’ compensation and benefits due to increases in compensation costs that vary with noninterest income.
~~Corporate~~
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

As a holding company, Hilltop’s primary investment objectives are to preserve capital and have available cash resources to utilize in making acquisitions. Investment and interest income earned ~~primarily from available cash~~was $0.1 million and ~~available-for-sale securities, including our note receivable from SWS, was~~ $1.7 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$5.1~~$0.2 million and ~~$4.9~~$3.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively. On October 2, 2014, Hilltop exercised aits warrant to purchase 8,695,652 shares of SWS common stock ~~(the “SWS Warrant”)~~ at an exercise price of $5.75 per ~~share.~~share (the “SWS Warrant”). The aggregate exercise price was paid by the automatic elimination of the $50.0 million aggregate principal amount note receivable from SWS. Consequently, recurring quarterly investment and interest income of ~~approximately~~ $1.6 million ~~will~~were no longer be recognized beginning in the fourth calendar quarter of 2014. ~~This transaction is discussed in more detail within~~Investment and interest income during the ~~section entitled “Liquidity~~three and ~~Capital Resources — SWS Warrant and Note Receivable” below.~~six months ended June 30, 2015 primarily consisted of intercompany interest earned on a note receivable held with First Southwest.

On April 9, 2015, as previously discussed, Hilltop completed its offering of $150.0 million aggregate principal amount of Senior Notes and used the net proceeds of the offering to redeem all of its outstanding Series B Preferred Stock at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4 million. Consequently, recurring quarterly interest expense of $1.9 million will be incurred beginning in the third calendar quarter of 2015. Interest expense ~~of $1.8 million and $5.2~~related to the Senior Notes was $1.7 million during the three and ~~nine~~six months ended ~~September~~June 30, 2013, respectively, was due to interest costs associated with the 7.50% Senior Exchangeable Notes due 2025 of HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop, which were called for redemption during the fourth quarter of 2013.2015.

Noninterest expenses ~~were $5.0~~of $1.9 million and ~~$0.9~~$2.6 million during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013~~,2014, respectively, and ~~$9.8~~$11.5 million and $4.8 million during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, ~~and 2013, respectively. Noninterest expenses~~respectively, were primarily comprised of employees’ compensation and benefits and professional ~~fees. The increases in noninterest expenses were primarily due to year-over-year increases in professional~~ fees, including corporate governance, legal and transaction costs. During the three and six months ended June 30, 2015, compared with the same periods in 2014, noninterest expenses included year-over-year increases in employees’ compensation and benefits costs of $0.4 million and $1.7 million, respectively, associated with increases in headcount and incentive compensation costs as well as transaction and integration related ~~costs.~~costs directly attributable to the SWS Merger. During the six months ended June 30, 2015, Hilltop incurred pre-tax transaction costs of $2.9 million and pre-tax integration related costs associated with professional fees of $0.4 million.

70

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Table of Contents
Financial Condition

The following discussion contains a more detailed analysis of our financial condition at ~~September~~June 30, ~~2014~~2015 as compared with December 31, ~~2013.~~2014.

Securities Portfolio

At ~~September~~June 30, ~~2014,~~2015, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, mortgage-backed, corporate debt, and equity ~~securities, a note receivable and a warrant.~~securities. We have the ability to categorize investments as trading, available for sale and held to maturity.

Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and ~~First Southwest.~~the Hilltop Broker-Dealers. Securities that may be sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.

The table below summarizes our securities portfolio (in thousands).

September 30,

December 31,

June 30,

December 31,

2014

2013


2015

2014

Trading securities, at fair value

$
66,102

$
58,846

U.S. Treasury securities

$
6,021

$
—

U.S. government agencies:

Bonds

32,464

—

Residential mortgage-backed securities

22,858

25,058

Collateralized mortgage obligations

1,260

—

Commercial mortgage-backed securities

15

—

Corporate debt securities

67,217

4

States and political subdivisions

68,516

40,616

Unit investment trusts

33,085

—

Private-label securitized product

32,281

—

Other

1,712

39

265,429

65,717

Securities available for sale, at fair value

U.S. Treasury securities

44,794

43,528

19,607

19,613

U.S. government agencies:

Bonds

620,757

662,732

383,848

516,241

Residential mortgage-backed securities

55,005

60,087

49,661

52,898

Collateralized mortgage obligations

96,982

120,461

64,451

87,124

Corporate debt securities

99,918

76,608

104,768

98,472

States and political subdivisions

142,723

156,835

126,553

136,785

Commercial mortgage-backed securities

656

760

627

640

Equity securities

23,983

22,079

13,948

13,762

Note receivable

49,849

47,909

Warrant

11,434

12,144

1,146,101

1,203,143

763,463

925,535

Securities held to maturity, at amortized cost

U.S. Treasury securities

25,010

—

50,295

25,008

U.S. government agencies:

Bonds

32,372

—

Residential mortgage-backed securities

30,183

—

29,268

29,782

Collateralized mortgage obligations

58,825

—

189,791

57,328

States and political subdivisions

6,121

—

11,234

6,091

120,139

—

312,960

118,209

Total securities portfolio

$
1,332,342

$
1,261,989

$
1,341,852

$
1,109,461

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Table of Contents
We had net unrealized losses of ~~$6.0~~$1.9 million at June 30, 2015 and ~~$53.7~~net unrealized gains of $0.8 million at December 31, 2014 related to the available for sale investment portfolio, ~~at September 30, 2014 and December 31, 2013, respectively. The significant decrease in the~~while net unrealized ~~loss position of our available for sale investment portfolio during 2014 was due to~~gains associated with the ~~effects of a decrease in market interest rates since December 31, 2013 that resulted in an increase in the fair value of our debt securities.~~
~~The market value of~~ securities held to maturity portfolio were $0.6 million and $0.1 million at ~~September~~June 30, 2015 and December 31, 2014, ~~approximated book value.~~respectively.

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~~Table of Contents~~
Banking Segment

The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale securities portfolio serves as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At ~~September~~June 30, ~~2014,~~2015, the banking segment’s securities portfolio of ~~$1.1 billion~~$943.2 million was comprised of trading securities of ~~$20.7~~$20.5 million, available for sale securities of ~~$924.1~~$609.8 million and held to maturity securities of ~~$120.1~~$312.9 million.

Broker-Dealer Segment
Our broker-dealer segment holds securities to support sales, underwriting and other customer activities. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, the Hilltop Broker-Dealers classify their securities portfolio of $245.1 million at June 30, 2015 as trading. In addition, the broker-dealer segment may purchase securities at a future date at the then-current market price to facilitate customer transactions. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheet, had a value of $135.6 million at June 30, 2015.
Insurance Segment

Our insurance segment’s primary investment ~~objectives are~~objective is to preserve capital and manage for a total rate of return. NLC’s strategy is to purchase securities in sectors that represent the most attractive relative value. Our insurance segment invests the premiums it receives from policyholders until they are needed to pay policyholder claims or other expenses. At ~~September~~June 30, ~~2014,~~2015, the insurance segment’s securities portfolio was comprised of ~~$150.5~~$153.6 million in available for sale securities and ~~$6.1~~$7.6 million of other investments included in other assets within the consolidated balance sheet.

~~Financial Advisory Segment~~
Our financial advisory segment holds securities to support sales, underwriting and other customer activities. Because FSC is a broker-dealer, it is required to carry its securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, FSC classifies its securities portfolio of $45.4 million at September 30, 2014 as trading.
~~Corporate~~
Available for sale securities of Hilltop at September 30, 2014 included the note receivable from SWS of $49.8 million, the SWS Warrant of $11.4 million, and equity securities of $10.2 million representing those shares of SWS common stock held by Hilltop. On October 2, 2014, Hilltop exercised its SWS Warrant in full, acquiring 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share. Pursuant to the terms of the SWS Warrant and a credit agreement with SWS, the aggregate exercise price was paid by the automatic elimination of the $50.0 million aggregate principal amount note receivable from SWS. This transaction is discussed in more detail within the section entitled “Liquidity and Capital Resources — SWS Warrant and Note Receivable” below.
Non-Covered Loan Portfolio

Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and segregated between those considered to be PCI loans and all other originated or acquired loans (in thousands). PCI loans showed evidence of credit deterioration on the date of acquisition that ~~makes~~made it probable that all contractually required principal and interest payments ~~will~~would not be collected.

Loans, excluding

PCI

Total

September 30, 2014

PCI Loans

Loans

Loans


Loans, excluding

PCI

Total

June 30, 2015

PCI Loans

Loans

Loans

Commercial and industrial

$
1,660,872

$
16,517

$
1,677,389

$
2,185,311

$
15,756

$
2,201,067

Real estate

1,582,205

24,513

1,606,718

2,098,792

76,110

2,174,902

Construction and land development

419,518

9,698

429,216

525,344

5,735

531,079

Consumer

52,865

2,655

55,520

48,756

1,165

49,921

Non-covered loans, gross

3,715,460

53,383

3,768,843

4,858,203

98,766

4,956,969

Allowance for loan losses

(33,739
)
(5,288
)
(39,027
)

(35,432)

(5,052)

(40,484)

Non-covered loans, net of allowance

$
3,681,721

$
48,095

$
3,729,816

$
4,822,771

$
93,714

$
4,916,485

72

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Table of Contents

Loans, excluding

PCI

Total

December 31, 2013

PCI Loans

Loans

Loans

Commercial and industrial

$
1,600,450

$
36,816

$
1,637,266

Real estate

1,418,003

39,250

1,457,253

Construction and land development

344,734

19,817

364,551

Consumer

51,067

4,509

55,576

Non-covered loans, gross

3,414,254

100,392

3,514,646

Allowance for loan losses

(30,104
)
(3,137
)
(33,241
)
Non-covered loans, net of allowance

$
3,384,150

$
97,255

$
3,481,405


Loans, excluding

PCI

Total

December 31, 2014

PCI Loans

Loans

Loans

Commercial and industrial

$
1,745,409

$
13,442

$
1,758,851

Real estate

1,670,684

24,151

1,694,835

Construction and land development

404,465

9,178

413,643

Consumer

51,009

2,138

53,147

Non-covered loans, gross

3,871,567

48,909

3,920,476

Allowance for loan losses

(31,722)

(5,319)

(37,041)

Non-covered loans, net of allowance

$
3,839,845

$
43,590

$
3,883,435

Banking Segment

The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. The banking segment’s loan portfolio is presented below in two sections, “— Non-Covered Loan Portfolio” and “— Covered Loan Portfolio.” The “Covered Loan Portfolio” consists of loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC and is discussed below. The “Non-Covered Loan Portfolio” includes all other loans held by the Bank, which we refer to as “non-covered loans,” and is discussed herein.

The banking segment’s total non-covered loans, net of the allowance for non-covered loan losses, were ~~$4.6~~$5.6 billion and ~~$4.2~~$4.7 billion at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively. The banking segment’s non-covered loan portfolio includes a $1.5 billion warehouse line of credit extended to PrimeLending, of which ~~$1.2~~$1.3 billion and ~~$1.0~~$1.2 billion was drawn at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013, respectively, as well as term loans~~2014, respectively. During July 2015, this warehouse line of credit was temporarily increased to ~~First Southwest that had an outstanding balance~~a commitment of ~~$19.0 million at September 30, 2014~~$1.8 billion and ~~December 31, 2013.~~is scheduled to revert to a commitment of $1.5 billion on October 1, 2015. Amounts advanced against the warehouse line of credit ~~and the First Southwest term loans~~ are eliminated from net loans on our consolidated balance sheets.
The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. The areas of concentration within our covered real estate portfolio were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans.
At ~~September~~June 30, ~~2014,~~2015, the banking ~~segment’s~~segment had non-covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of ~~its~~ total non-covered loans ~~included~~in its real estate portfolio. The areas of concentration within our non-covered real estate portfolio were non-construction commercial real estate loans, ~~within the non-covered real estate portfolio. At September 30, 2014,~~ non-construction ~~commercial~~residential real estate loans, ~~were 23.90%~~and construction and land development loans, which represented 29.7%, 14.2% and 10.7%, respectively, of the banking segment’s total non-covered ~~loans.~~loans at June 30, 2015. The banking segment’s non-covered loan concentrations were within regulatory guidelines at ~~September~~June 30, ~~2014.~~2015.

~~Mortgage Origination~~Broker-Dealer Segment

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale were $1.3 billion and $1.1 billion at September 30, 2014 and December 31, 2013, respectively. The components of the mortgage origination segment’s loans held for sale and pipeline loans are as follows (in thousands).

September 30,

December 31,

2014

2013

Loans held for sale:

Unpaid principal balance

$
1,225,747

$
1,066,850

Fair value adjustment

46,473

21,555

$
1,272,220

$
1,088,405

Pipeline loans:

Unpaid principal balance

$
842,127

$
602,467

Fair value adjustment

20,810

12,151

$
862,937

$
614,618

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~~Table of Contents~~
~~Financial Advisory Segment~~
~~The loan portfolio of the financial advisory~~broker-dealer segment consists primarily of margin loans to customers and ~~correspondents.~~correspondents that are included within the commercial and industrial portfolio segment in the table above. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as ~~FSC’s~~the Hilltop Broker-Dealers’ internal policies. The ~~financial advisory~~broker-dealer segment’s total non-covered loans, net of the allowance for non-covered loan losses, were ~~$341.7~~$626.5 million and ~~$281.6~~$378.3 million at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively. This increase was primarily attributable to ~~increased~~the inclusion of those operations acquired in the SWS Merger, partially offset by a decrease of $22.2 million in borrowings in margin accounts held by FSC customers and correspondents.

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Table of Contents
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and IRLCs with a customer pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in thousands).

June 30,

December 31,


2015

2014

Loans held for sale:

Unpaid principal balance

$
1,323,289

$
1,218,792

Fair value adjustment

37,602

53,360

$
1,360,891

$
1,272,152

IRLCs:

Unpaid principal balance

$
1,394,780

$
621,216

Fair value adjustment

29,265

17,057

$
1,424,045

$
638,273

The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at June 30, 2015 and December 31, 2014 were $2.3 billion and $1.5 billion, respectively, while the related estimated fair values were $10.0 million and ($11.1) million, respectively.
Covered Loan Portfolio

Banking Segment

Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as “covered loans” and reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets (including covered loans): (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from ~~the Bank~~September 13, 2013 (the “Bank Closing ~~Date.~~Date”). In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ~~ten~~10 years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the PPurchase and Assumption Agreement by and among the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A ~~Agreement.~~Agreement”). As of ~~September~~June 30, ~~2014,~~2015, the Bank estimated that the sum of covered losses and reimbursable expenses subject to the loss-share agreements will exceed $240.4 million, but dowill not exceed $365.7 million. Unless ~~the estimates of~~actual plus projected covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record additional ~~reimbursement~~amounts to the receivable ~~from~~under the ~~FDIC.~~loss-share agreements with the FDIC (“FDIC Indemnification Asset”). As of ~~September~~June 30, ~~2014,~~2015, the Bank had billed ~~$46.6~~$111.6 million of covered net losses to the FDIC, of which 80%, or ~~$37.7~~$89.3 million, ~~are~~were reimbursable under the loss-share agreements. As of June 30, 2015, the Bank had received aggregate reimbursements of $89.3 million from the FDIC.

In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. ~~The~~Based on purchase date valuations, the banking segment’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Unless the banking segment acquires additional loans subject to loss-share agreements with the FDIC, the covered portfolio will continue to decrease as covered loans are liquidated.

80
Table of Contents
Covered loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).

Loans, excluding

PCI

Total

September 30, 2014

PCI Loans

Loans

Loans

Commercial and industrial

$
9,968

$
23,542

$
33,510

Real estate

198,608

438,689

637,297

Construction and land development

14,951

65,517

80,468

Consumer

—

—

—

Covered loans, gross

223,527

527,748

751,275

Allowance for loan losses

(89
)
(3,672
)
(3,761
)
Covered loans, net of allowance

$
223,438

$
524,076

$
747,514

Loans, excluding

PCI

Total

December 31, 2013

PCI Loans

Loans

Loans


Loans, excluding

PCI

Total

June 30, 2015

PCI Loans

Loans

Loans

Commercial and industrial

$
28,533

$
38,410

$
66,943

$
8,110

$
12,530

$
20,640

Real estate

223,304

564,678

787,982

163,872

263,646

427,518

Construction and land development

25,376

126,068

151,444

11,125

34,950

46,075

Consumer

—

—

—

—

—

—

Covered loans, gross

277,213

729,156

1,006,369

183,107

311,126

494,233

Allowance for loan losses

(179
)
(882
)
(1,061
)

(49)

(885)

(934)

Covered loans, net of allowance

$
277,034

$
728,274

$
1,005,308

$
183,058

$
310,241

$
493,299

74


Loans, excluding

PCI

Total

December 31, 2014

PCI Loans

Loans

Loans

Commercial and industrial

$
10,345

$
20,435

$
30,780

Real estate

183,886

368,964

552,850

Construction and land development

13,021

45,989

59,010

Consumer

—

—

—

Covered loans, gross

207,252

435,388

642,640

Allowance for loan losses

(77)

(4,534)

(4,611)

Covered loans, net of allowance

$
207,175

$
430,854

$
638,029

~~Table of Contents~~

At ~~September~~June 30, ~~2014,~~2015, the banking segment had covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total covered loans in its real estate portfolio. The areas of concentration within our covered real estate portfolio were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans. At September 30, 2014, construction and land development loans, non-construction residential real estate loans and non-construction commercial real estate loans, ~~were 10.28%, 34.72%~~which represented 49.1% and ~~47.22%~~37.4%, respectively, of the banking segment’s total covered ~~loans.~~loans at June 30, 2015. The banking segment’s covered loan concentrations were within regulatory guidelines at ~~September~~June 30, ~~2014.~~2015.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in our existing non-covered and covered loan portfolios. 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 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 Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the Financial Accounting Standards Board (“FASB”) ASC.portfolio. 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, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs of loans acquired in the Bank Transactions that occurred prior to ~~the PlainsCapital Merger~~their acquisition represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on acquired loans charged-off subsequent to ~~the PlainsCapital Merger~~their acquisition are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount.

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. Impaired loans that are equal to or greater than $0.5 million are 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, adjusted for qualitative or environmental factors. The Bank uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.
~~While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon which we 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 the volume and severity of past due, nonaccrual and classified loans;~~
·~~changes in the nature, volume and terms of loans in the portfolio;~~
·~~changes in lending policies and procedures;~~
·~~changes in economic and business conditions and developments that affect the collectability of the portfolio;~~
·~~changes in lending management and staff;~~
·~~changes in the loan review system and the degree of oversight by the Bank’s board of directors; and~~
·~~any concentrations of credit and changes in the level of such concentrations.~~
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~~Table of Contents~~
~~Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes~~ in the nature, volume and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.
We design our loan review program to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes are made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. We review on an individual basis all loan relationships over $0.5 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.
Homogeneous loans, such as 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 homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At September 30, 2014, we had no material delinquencies in these types of loans.
~~The allowance~~ is subject to regulatory examination and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing non-covered and covered portfolios at ~~September~~June 30, ~~2014,~~2015, additional provisions for losses on existing loans may be necessary in the future. Within our non-covered portfolio, we recorded net recoveries of $0.5 million and $0.1 million during the three and six months ended June 30, 2015 respectively, and net charge-offs of ~~$1.6~~$2.3 million ~~and $3.7 million for~~during each of the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013, respectively, and $3.9 million and $5.2 million for the nine months ended September 30,~~ 2014, ~~and 2013,~~ respectively. Our allowance for non-covered loan losses totaled ~~$39.0~~$40.5 million and ~~$33.2~~$37.0 million at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively. The ratio of the allowance for non-covered loan losses to total non-covered loans held for investment at ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013~~2014 was ~~1.04%~~0.82% and ~~0.95%~~0.94%, respectively. Within our covered portfolio, we recorded net charge-offs of $3.1 million and $0.3 million during the six months ended June 30, 2015 and 2014, respectively. Our allowance for covered loan losses totaled $0.9 million and $4.6 million at June 30, 2015 and December 31, 2014, respectively. The ratio of the allowance for covered loan losses to total covered loans held for investment at June 30, 2015 and December 31, 2014 was 0.19% and 0.72%, respectively.
81
Table of Contents

In connection with the ~~PlainsCapital Merger and the FNB Transaction,~~Bank Transactions, we acquired loans both with and without evidence of credit quality deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in each of the FNB Transaction and the SWS Merger are accounted for in pools as well as on an individual loan basis. We have established under our PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB and SWS PCI loans are risk grade and loan collateral type. The loans acquired ~~loans~~in the Bank Transactions were initially recorded at fair value with no carryover of any allowance for loan losses. Within our covered portfolio, we recorded net charge-offs of $0.2 million and $0.5 million for the three and nine months ended September 30, 2014, respectively. Our allowance for covered loan losses totaled $3.8 million and $1.1 million at September 30, 2014 and December 31, 2013, respectively. The ratio of the allowance for covered loan losses to total covered loans held for investment at September 30, 2014 and December 31, 2013 was 0.50% and 0.11%, respectively.

Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking segment, ~~within our non-covered and covered portfolios~~ was ~~$4.0~~$0.2 million and ~~$10.7~~$5.5 million ~~for~~during the three months ended ~~September~~June 30, ~~2014~~2015 and ~~2013,~~2014, respectively, and ~~$12.8~~$2.8 million and ~~$35.0~~$8.8 million ~~for~~during the ~~nine~~six months ended ~~September~~June 30, 2015 and 2014, ~~and 2013,~~ respectively.
76

~~Table of Contents~~

The following tables present the activity in our allowance for loan losses within our non-covered and covered loan portfolios for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended June 30,

Six Months Ended June 30,

Non-Covered Portfolio

2014

2013

2014

2013


2015

2014

2015

2014

Balance, beginning of period

$
36,431

$
26,237

$
33,241

$
3,409

$
39,365

$
34,645

$
37,041

$
33,241

Provisions charged to operating expenses

4,186

10,658

9,657

34,952

Provisions charged to operations

587

4,083

3,381

5,471

Recoveries of non-covered loans previously charged off:

Commercial and industrial

457

42

1,811

2,457

1,330

629

2,044

1,354

Real estate

31

26

145

227

90

82

134

114

Construction and land development

18

2

181

153

—

41

—

163

Consumer

24

15

74

43

28

32

53

50

Total recoveries

530

85

2,211

2,880

1,448

784

2,231

1,681

Non-covered loans charged off:

Commercial and industrial

1,976

3,220

5,707

7,314

678

2,924

1,620

3,731

Real estate

28

53

100

149

92

72

369

72

Construction and land development

—

524

—

524

—

—

—

—

Consumer

116

3

275

74

146

85

180

159

Total charge-offs

2,120

3,800

6,082

8,061

916

3,081

2,169

3,962

Net charge-offs

(1,590
)
(3,715
)
(3,871
)
(5,181
)
Net recoveries (charge-offs)

532

(2,297)

62

(2,281)

Balance, end of period

$
39,027

$
33,180

$
39,027

$
33,180

$
40,484

$
36,431

$
40,484

$
36,431

Three Months Ended

Nine Months Ended

Covered Portfolio

September 30, 2014

September 30, 2014

Balance, beginning of period

$
4,115

$
1,061

Provisions charged to (recapture of) operating expenses

(153
)
3,151

Recoveries of covered loans previously charged off:

Commercial and industrial

—

—

Real estate

—

—

Construction and land development

—

—

Consumer

—

—

Total recoveries

—

—

Covered loans charged off:

Commercial and industrial

—

91

Real estate

169

213

Construction and land development

32

147

Consumer

—

—

Total charge-offs

201

451

Net charge-offs

(201
)
(451
)

Balance, end of period

$
3,761

$
3,761

82
Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,
Covered Portfolio

2015

2014

2015

2014
Balance, beginning of period

$
1,388

$
2,665

$
4,611

$
1,061
Provisions charged to (recapture from) operations

(429)

1,450

(536)

3,304
Recoveries of covered loans previously charged off:

Commercial and industrial

21

—

21

—
Real estate

99

—

99

—
Construction and land development

—

—

—

—
Consumer

—

—

—

—
Total recoveries

120

—

120

—
Covered loans charged off:

Commercial and industrial

53

—

953

91
Real estate

83

—

2,299

44
Construction and land development

9

—

9

115
Consumer

—

—

—

—
Total charge-offs

145

—

3,261

250
Net charge-offs

(25)

—

(3,141)

(250)
Balance, end of period

$
934

$
4,115

$
934

$
4,115

The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our non-covered and covered loan portfolios are presented in the ~~tables~~table below (dollars in thousands).

September 30, 2014

December 31, 2013

June 30, 2015

December 31, 2014

% of

% of





% of




% of


Gross

Gross

Gross

Gross

Non-Covered

Non-Covered

Non‑Covered

Non‑Covered

Non-Covered Portfolio

Reserve

Loans

Reserve

Loans

Reserve

Loans

Reserve

Loans

Commercial and industrial

$
18,845

44.51
%
$
16,865

46.58
%

$
18,853

44.40
%
$
18,999

44.86
%
Real estate (including construction and land development)

19,564

54.02
%
16,288

51.84
%

21,410

54.59
%

17,581

53.78
%
Consumer

618

1.47
%
88

1.58
%

221

1.01
%

461

1.36
%
Total

$
39,027

100.00
%
$
33,241

100.00
%

$
40,484

100.00
%
$
37,041

100.00
%

77

June 30, 2015

December 31, 2014





% of




% of

Gross

Gross

Covered

Covered

Covered Portfolio

Reserve

loans

Reserve

Loans

Commercial and industrial

$
130

4.18
%
$
1,193

4.79
%
Real estate (including construction and land development)

804

95.82
%

3,418

95.21
%
Consumer

—

—
%

—

—
%
Total

$
934

100.00
%
$
4,611

100.00
%

~~Table of Contents~~

September 30, 2014

December 31, 2013

% of

% of

Gross

Gross

Covered

Covered

Covered Portfolio

Reserve

Loans

Reserve

Loans

Commercial and industrial

$
935

4.46
%
$
1,053

6.65
%
Real estate (including construction and land development)

2,826

95.54
%
8

93.35
%
Consumer

—

0.00
%
—

0.00
%
Total

$
3,761

100.00
%
$
1,061

100.00
%

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. ~~Within our non-covered loan portfolio at September 30, 2014, we had three credit relationships totaling $3.7 million of potential~~Potential problem loans ~~which~~ are assigned a grade of special mention within our risk grading matrix. ~~At December 31, 2013,~~Potential problem loans do not include PCI loans since these loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected. Within our non-covered loan portfolio at June 30, 2015, we had ~~ten~~seven credit relationships totaling ~~$24.7~~$7.3 million of potential problem loans, compared with three credit relationships totaling $1.8 million of non-covered potential problem ~~loans.~~loans at December 31, 2014. Within our covered loan portfolio at ~~September~~June 30, 2015 and December 31, 2014, we had no credit relationships with potential problem ~~loans assigned a grade~~loans.
83
Table of ~~special mention within our risk grading matrix, compared with two credit relationships totaling $3.3 million at December 31, 2013.~~Contents

Non-Performing Assets

The following table presents ~~our~~ components of our non-covered non-performing assets (dollars in thousands).

September 30,

December 31,

June 30,

December 31,

2014

2013


2015

2014


Non-covered loans accounted for on a non-accrual basis:





Commercial and industrial

$
17,336

$
16,730

$
23,353

$
16,648

Real estate

6,104

6,511

6,612

4,707

Construction and land development

783

112

253

703

Consumer

—

—

21

—

$
24,223

$
23,353

$
30,239

$
22,058

Non-covered non-performing loans as a percentage of total non-covered loans

0.48
%
0.51
%

0.48
%

0.42
%

Non-covered other real estate owned

$
2,268

$
4,805

$
920

$
808

Other repossessed assets

$
532

$
13

$
—

$
361

Non-covered non-performing assets

$
27,023

$
28,171

$
31,159

$
23,227

Non-covered non-performing assets as a percentage of total assets

0.29
%
0.32
%

0.25
%

0.25
%

Non-covered loans past due 90 days or more and still accruing

$
—

$
534

$
31,073

$
19,237

Troubled debt restructurings included in accruing non-covered loans

$
420

$
1,055

$
2,830

$
2,901

At ~~September~~June 30, ~~2014,~~2015, total non-covered non-performing assets ~~decreased $1.2~~increased $8.0 million to ~~$27.0~~$31.2 million, compared with ~~$28.2~~$23.2 million at December 31, ~~2013.~~2014. Non-covered non-performing loans totaled ~~$24.2~~$30.2 million at ~~September~~June 30, ~~2014~~2015 and ~~$23.4~~$22.1 million at December 31, ~~2013.~~2014. At ~~September~~June 30, ~~2014,~~2015, non-covered non-accrual loans included ~~eleven~~twelve commercial and industrial relationships with loans of ~~$16.5~~$21.0 million secured by accounts receivable, inventory, ~~oil and gas properties, aircraft and~~equipment, life insurance, and a total of ~~$0.8~~$2.4 million in lease financing receivables. Non-covered non-accrual loans at ~~September~~June 30, ~~2014~~2015 also included ~~$6.1~~$6.6 million characterized as real estate loans, including ~~eleven~~three commercial real estate
78

~~Table of Contents~~
loan relationships of ~~$0.5~~$4.0 million and loans secured by residential real estate of ~~$5.6~~$2.6 million, ~~$4.4~~$1.7 million of which were classified as loans held for sale, as well as construction and land development loans of ~~$0.8~~$0.3 million. At December 31, ~~2013,~~2014, non-covered non-accrual loans included ~~five~~twelve commercial and industrial relationships with loans of ~~$14.0~~$15.0 million secured by accounts receivable, inventory, ~~aircraft and~~equipment, life insurance, and a total of ~~$1.0~~$1.6 million in lease financing receivables. Non-covered non-accrual loans at December 31, ~~2013~~2014 also included ~~$6.5~~$4.7 million characterized as real estate loans, including ~~three~~two commercial real estate loan relationships of ~~$2.5~~$0.4 million and loans secured by residential real estate of ~~$3.5~~$1.3 million, ~~substantially all~~$3.0 million of which were classified as loans held for sale, as well as construction and land development loans of ~~$0.1~~$0.7 million.

Non-covered OREO ~~decreased $2.5~~increased $0.1 million to ~~$2.3~~$0.9 million at ~~September~~June 30, ~~2014,~~2015, compared with ~~$4.8~~$0.8 million at December 31, ~~2013.~~2014. Changes in non-covered OREO included the disposal of ~~ten~~six properties totaling ~~$4.4~~$5.3 million, ~~and~~five of which were acquired in the ~~addition~~SWS Merger. At June 30, 2015, non-covered OREO included commercial properties of ~~seven properties totaling $2.6~~$0.9 million. At ~~September 30,~~December 31, 2014, non-covered OREO included commercial properties of $0.4 million and commercial real estate property consisting of parcels of unimproved land of $0.5 million and residential lots under development of $1.4 million. At December 31, 2013, non-covered OREO included commercial properties of $4.2 million, commercial real estate property consisting of parcels of unimproved land of $0.5 million and residential lots under development of $0.1$0.4 million.

At September 30, 2014, troubled debt restructurings (“TDRs”) granted on non-covered loans totaled $2.1 million, of which $0.4 million relate to non-covered PCI loans that are considered to be performing due to the application of the accretion method and non-covered non-performing loans of $1.7 million for which discount accretion has been suspended. At December 31, 2013, TDRs granted on non-covered loans totaled $11.4 million. These TDRs were comprised of $1.1 million of non-covered PCI loans that are considered to be performing due to the application of the accretion method and non-covered non-performing loans of $10.3 million for which discount accretion has been suspended.
Non-covered non-PCI loans past due 90 days or more and still accruing were ~~$0.5~~$31.1 million and $19.2 million at June 30, 2015 and December 31, ~~2013~~2014, respectively, all of which were loans held for sale and ~~included secured commercial~~guaranteed by U.S. Government agencies, including loans that are subject to repurchase, or have been repurchased, by PrimeLending.
At June 30, 2015, troubled debt restructurings (“TDRs”) on non-covered loans totaled $9.2 million. These TDRs were comprised of $2.8 million of non-covered loans that are considered to be performing and ~~industrial~~non-covered non-performing loans of $6.4 million reported in non-accrual loans. At December 31, 2014, TDRs on non-covered loans totaled $10.3 million, of which $2.9 million relate to non-covered loans that are considered to be performing and ~~a real estate loan.~~non-covered non-performing loans of $7.4 million reported in non-accrual loans.
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Table of Contents

The following table presents components of our covered non-performing assets (dollars in thousands).

September 30,

December 31,

2014

2013

Covered loans accounted for on a non-accrual basis:

Commercial and industrial

$
1,886

$
973

Real estate

37,288

249

Construction and land development

1,116

575

Consumer

—

—

$
40,290

$
1,797

Covered non-performing loans as a percentage of total covered loans

5.36
%
0.18
%

Covered other real estate owned:

Real estate - residential

$
14,252

$
11,634

Real estate - commercial

39,986

51,897

Construction and land development - residential

22,664

36,866

Construction and land development - commercial

49,896

42,436

$
126,798

$
142,833

Other repossessed assets

$
—

$
—

Covered non-performing assets

$
167,088

$
144,630

Covered non-performing assets as a percentage of total assets

1.82
%
1.62
%

Covered loans past due 90 days or more and still accruing

$
542

$
—

Troubled debt restructurings included in accruing covered loans

$
—

$
—

79

June 30,

December 31,


2015

2014


Covered loans accounted for on a non-accrual basis:

Commercial and industrial

$
596

$
1,325

Real estate

13,674

31,869

Construction and land development

826

1,029

Consumer

—

—

$
15,096

$
34,223

Covered non-performing loans as a percentage of total covered loans

3.05
%

5.33
%

Covered other real estate owned:

Real estate - residential

$
17,085

$
15,711

Real estate - commercial

47,073

40,889

Construction and land development - residential

13,964

21,719

Construction and land development - commercial

47,388

58,626

$
125,510

$
136,945

Other repossessed assets

$
—

$
—

Covered non-performing assets

$
140,606

$
171,168

Covered non-performing assets as a percentage of total assets

1.13
%

1.85
%

Covered loans past due 90 days or more and still accruing

$
258

$
67

Troubled debt restructurings included in accruing covered loans

$
466

$
326

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At ~~September~~June 30, ~~2014,~~2015, covered non-performing assets ~~increased~~decreased by ~~$22.5~~$30.6 million to ~~$167.1~~$140.6 million, compared with ~~$144.6~~$171.2 million at December 31, ~~2013, primarily~~2014, due to ~~an increase~~decreases in covered non-accrual loans of ~~$38.5~~$19.1 million and covered other real estate owned of $11.4 million. Covered non-performing loans totaled ~~$40.3~~$15.1 million at ~~September~~June 30, ~~2014~~2015 and ~~$1.8~~$34.2 million at December 31, ~~2013.~~2014. At ~~September~~June 30, ~~2014,~~2015, covered non-performing loans included ~~five~~six commercial and industrial relationships with loans of ~~$1.9~~$0.6 million secured by accounts receivable and inventory, ~~three~~four commercial real estate loan relationships of ~~$36.3~~$11.5 million, ~~seven~~19 residential real estate loan relationships of ~~$1.0~~$2.2 million, as well as construction and land development loans of ~~$1.1~~$0.8 million. At December 31, ~~2013,~~2014, covered non-performing loans ~~of $1.8 million~~ included ~~one~~two commercial and industrial ~~relationship~~relationships with loans of ~~$1.0~~$2.1 million secured by accounts receivable and inventory, ~~and equipment. Covered non-accrual loans at December 31, 2013 also included one~~four commercial real estate loan ~~relationship~~relationships of ~~$0.2~~$30.8 million, nine residential real estate loan relationships of $1.1 million, as well as construction and land development loans of ~~$0.6~~$1.0 million.

OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as “covered OREO” and reported separately in our consolidated balance sheets. Covered OREO decreased ~~$16.0~~$11.4 million to ~~$126.8~~$125.5 million at ~~September~~June 30, ~~2014,~~2015, compared with ~~$142.8~~$136.9 million at December 31, ~~2013.~~2014. The decrease was primarily due to the disposal of ~~183~~138 properties totaling ~~$40.8~~$43.4 million and fair value valuation decreases of ~~$17.4~~$4.1 million, partially offset by the addition of ~~138~~77 properties totaling ~~$42.2~~$36.1 million.

Covered non-PCI loans past due 90 days or more and still accruing totaled ~~$0.5~~$0.3 million at ~~September~~June 30, 2015 and included two residential real estate loans. Covered non-PCI loans past due 90 days or more and still accruing totaled $0.1 million at December 31, 2014 and included a secured commercial and industrial ~~loans,~~loan, a construction and land development loan, and a residential real estate loan.
At June 30, 2015, TDRs on covered loans totaled $1.8 million, of which $0.5 million relate to covered loans that are considered to be performing and covered non-performing loans of $1.3 million included in non-accrual loans. At December 31, 2014, TDRs on covered loans totaled $0.7 million, of which $0.3 million relate to covered loans that are considered to be performing and covered non-performing loans of $0.4 million included in non-accrual loans.

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Insurance Losses and Loss Adjustment Expenses

At ~~September~~June 30, ~~2014~~2015 and December 31, ~~2013,~~2014, our reserves for unpaid losses and LAE were ~~$32.5~~$58.7 million and ~~$27.5~~$29.7 million, respectively, including estimated recoveries from reinsurance of $19.5 million and $4.3 million, respectively. The increase in the gross reserve for unpaid losses and LAE was primarily due to increased reserves attributable to prior period adverse development associated with litigation emerging from a series of hail storms within the 2012 through 2014 accident years and significant losses experienced from severe weather events. The liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been ~~reported.~~reported, less a reduction for reinsurance recoverables related to those liabilities. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact of reinsurance. The amount of liabilities for reported claims is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered relevant to estimating exposure presented by the claim.

~~Insured~~NLC’s liabilities for unpaid losses ~~for~~represent the best estimate at a given ~~accident year change~~point in ~~value over~~ time asof what it expects to pay claimants, based on facts, circumstances and historical trends then known. During the loss settlement period, additional ~~information on~~facts regarding individual claims ~~is received, as claim conditions change~~may become known and, ~~as new claims are reported.~~consequently, it often becomes necessary to refine and adjust the estimates of liability. This process is commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the companies’ historical loss triangles (which utilize historical trends, adjusted for changes in loss costs, underwriting standards, policy provisions, product mix and other factors) and applicable insurance industry loss development factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims.

The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

Deposits

The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investment in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail within the section entitled “Liquidity and Capital Resources — Banking Segment” below, is constantly changing due to the banking segment’s needs and market conditions. Overall, average deposits totaled ~~$6.4~~$7.1 billion ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2014,~~2015, an increase from average deposits of ~~$1.6~~$6.5 billion ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2013.~~2014 and $6.4 billion during the year ended December 31, 2014. The ~~significant year-over-year~~ increase in average deposits during the six months ended June 30, 2015, compared with the same period in 2014 and the year ended December 31, 2014, was primarily due to changes within our demand deposit and time deposit accounts. The increase in demand deposits between the noted periods primarily related to the inclusion of those deposits assumed ~~as a part~~in the SWS Merger, while the decrease in time deposits between the noted periods was due to our strategic decision during the second quarter of 2014 to offer lower renewal rates on certain time deposits acquired in the FNB Transaction. For the periods presented below, the average rates paid associated with ~~certificates of~~time deposits include the effects of amortization of the ~~core~~ deposit ~~intangible assets~~premiums booked as a part of the PlainsCapital Merger and the FNB Transaction.

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The table below presents the average balance of, ~~deposits~~ and ~~the average~~ rate paid on, ~~our~~consolidated deposits (dollars in thousands).

Nine Months Ended September 30,

Year Ended

Six Months Ended June 30,

Year Ended

2014

2013

December 31, 2013

2015

2014

December 31, 2014

Average

Average

Average

Average

Average

Average


Average

Average

Average

Average

Average

Average

Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Noninterest-bearing demand deposits

$
1,792,014

0.00
%
$
1,242,101

0.00
%
$
1,370,029

0.00
%

$
2,161,493

0.00
%
$
1,741,409

0.00
%
$
1,862,277

0.00
%
Interest-bearing demand deposits

2,266,350

0.22
%
1,834,406

0.24
%
1,930,622

0.24
%

3,020,489

0.14
%

2,310,167

0.22
%

2,249,527

0.22
%
Savings deposits

295,338

0.19
%
194,804

0.35
%
247,789

0.32
%

322,107

0.16
%

286,734

0.21
%

304,774

0.19
%
Certificates of deposit

2,014,945

0.46
%
1,511,576

0.60
%
1,745,483

0.54
%
Time deposits

1,584,378

0.74
%

2,138,125

0.38
%

1,936,447

0.53
%

$
6,368,647

0.23
%
$
4,782,887

0.29
%
$
5,293,923

0.28
%

$
7,088,467

0.23
%
$
6,476,435

0.21
%
$
6,353,025

0.25
%

Borrowings

Our borrowings are shown in the table below (dollars in thousands).

September 30, 2014

December 31, 2013

June 30, 2015

December 31, 2014

Average

Average





Average




Average



Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Balance

Rate Paid

Short-term borrowings

$
845,984

0.31
%
$
342,087

0.36
%

$
1,100,025

0.51
%
$
762,696

0.32
%

Notes payable

55,684

4.58
%
56,327

6.33
%

245,420

3.50
%

56,684

4.27
%

Junior subordinated debentures

67,012

3.52
%
67,012

3.59
%

67,012

3.55
%

67,012

3.52
%

$
968,680

0.87
%
$
465,426

2.10
%

$
1,412,457

1.17
%
$
886,392

0.88
%

Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the Federal Home Loan Bank (“FHLB”) and short-term bank loans. The ~~$503.9~~$337.3 million increase in short-term borrowings at ~~September~~June 30, ~~2014~~2015 compared with December 31, ~~2013~~2014 was primarily due to an increase of ~~$525.0~~$300.0 million in borrowings at the ~~FHLB. This~~FHLB that had an original maturity of one year or less. The increase in borrowings at the FHLB was the result of higher funding requirements associated with the increase in our mortgage origination segment’s balance on its warehouse line of credit with the ~~Bank and a decrease in deposits.~~Bank. Notes payable at ~~September~~June 30, ~~2014~~2015 of ~~$55.7~~$245.4 million was comprised of $148.1 million related to Senior Notes, net of loan origination fees, associated with our debt offering in April 2015, insurance segment term notes of $54.5 million and ~~nonrecourse~~FHLB borrowings with an original maturity greater than one year held by the former SWS FSB within the banking segment of $42.8 million. For the 2015 period above, the average rate paid associated with notes ~~owed by First Southwest.~~payable includes the effect of amortization of the premiums on FHLB borrowings booked as a part of the SWS Merger.

Liquidity and Capital Resources

Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s primary investment objectives, as a holding company, are to preserve capital and have available cash resources to utilize in making acquisitions. At ~~September~~June 30, ~~2014,~~2015, Hilltop had ~~approximately $153~~$78.8 million in freely available cash and cash ~~equivalents.~~equivalents, a decrease of $67.2 million from $146.0 million at December 31, 2014. This decrease in available cash was primarily due to the use of $78.2 million to settle the cash portion of the merger consideration associated with the SWS Merger, partially offset by net proceeds from our debt offering in April 2015. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. Subject to regulatory restrictions, Hilltop may also receive dividends from its subsidiaries. The current short-term liquidity needs of Hilltop include operating expenses ~~dividends~~and interest on ~~preferred stock and the cash consideration associated with the SWS merger.~~debt obligations.

~~Pending Merger~~Senior Notes due 2025

On ~~March 31, 2014,~~April 9, 2015, we completed our offering of $150.0 million aggregate principal amount of our Senior Unregistered Notes in a private offering that was exempt from the registration requirements of the Securities Act. The Senior Unregistered Notes were offered within the United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to persons outside of the United States under Regulation S under the Securities Act. The Senior Unregistered Notes were issued pursuant to an indenture, dated as of April 9, 2015 (the “indenture”), by and between Hilltop and U.S. Bank National Association, as trustee (the “Trustee”). The net proceeds from the offering, after deducting estimated fees and expenses and the initial purchasers’ discounts, were approximately $148 million. We used the net proceeds of the offering to redeem all of our outstanding Series B Preferred Stock at an aggregate liquidation
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value of $114.1 million, plus accrued but unpaid dividends of $0.4 million and Hilltop is utilizing the remainder for general corporate purposes.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, we entered into a ~~definitive merger~~registration rights agreement with ~~SWS providing for~~ the ~~merger~~initial purchasers of ~~SWS with and into a subsidiary of Hilltop formed for~~ the ~~purpose of facilitating this transaction (the “merger”).~~Senior Unregistered Notes. Under the terms of the ~~merger~~registration rights agreement, we agreed to offer to exchange the Senior Unregistered Notes for the Senior Registered Notes, which were registered under the Securities Act. The terms of the Senior Registered Notes are substantially identical to the Senior Unregistered Notes for which they were exchanged (including principal amount, interest rate, maturity and redemption rights), except that the Senior Registered Notes generally are not subject to transfer restrictions. On May 22, 2015, and subject to the terms and conditions set forth in the Senior Registered Notes prospectus, we commenced an offer to exchange the outstanding Senior Unregistered Notes for Senior Registered Notes. Substantially all of the Senior Unregistered Notes were tendered for exchange, and on June 22, 2015, we fulfilled all of the requirements of the registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes in exchange for the tendered Senior Unregistered Notes. We refer to the Senior Registered Notes and the Senior Unregistered Notes that remain outstanding collectively as the “Senior Notes.”
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture contains covenants that limit our ability to, among other things and subject to certain significant exceptions: (i) dispose of or issue voting stock of certain of our bank subsidiaries or subsidiaries that own voting stock of our bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain of our bank subsidiaries or subsidiaries that own capital stock of our bank subsidiaries and (iii) sell all or substantially all of our assets or merge or consolidate with or into other companies.  The indenture also provides for certain events of default, which, if any of them occurs, would permit or require the principal amount, premium, if any, and accrued and unpaid interest on the then outstanding Senior Notes to be declared immediately due and payable.
Stock Repurchase Program
On May 18, 2015, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase, in the aggregate, up to $30.0 million of our outstanding common stock. Under the stock repurchase program authorized, we may repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. The extent to which we repurchase our shares and the timing of such repurchases will depend upon market conditions and other corporate considerations, as determined by Hilltop’s management team. The purchases will be funded from available cash balances. During the three months ended June 30, 2015, we paid $17.0 million to repurchase and retire 774,444 shares at an average price of $21.89 per share. These retired shares were returned to our pool of authorized but unissued shares of common stock.
SWS
On January 1, 2015, we completed our acquisition of SWS ~~stockholders will~~in a stock and cash transaction, whereby SWS merged with and into Hilltop Securities. SWS’s broker-dealer subsidiaries, Southwest Securities and SWS Financial, became subsidiaries of Hilltop Securities. Immediately following the SWS Merger, SWS’s banking subsidiary, SWS FSB, was merged into the Bank. As a result of the SWS Merger, each outstanding share of SWS common stock was converted into the right to receive ~~per share consideration of~~ 0.2496 shares of Hilltop common stock and $1.94 ofin cash, equating to ~~$6.94~~$6.92 per share based on Hilltop’s closing price on ~~September 30, 2014. The value~~December 31, 2014 and resulting in an aggregate purchase price of $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3 million associated with our existing investment in SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the SWS Merger, the merger consideration will fluctuate with the market price of Hilltop common stock. We intend to fund the cash portion of the consideration, currently estimated at approximately $78 million in the aggregate, through available cash. The merger is subject to ~~customary closing conditions, including regulatory approvals~~change, and ~~approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.~~therefore, preliminary at this time.

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~~SWS Warrant and Note Receivable~~
On October 2, 2014, Hilltop exercised its SWS Warrant in full, acquiring 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share. Pursuant to the terms of the warrant and a credit agreement with SWS, the aggregate exercise price was paid by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Following the exercise of the SWS Warrant, Hilltop (i) owns 10,171,039 shares of SWS common stock, representing approximately 21% of the outstanding shares of SWS common stock as of October 4, 2014 and (ii) is no longer a lender under the credit agreement. The SWS Warrant and note receivable are reflected as available for sale securities within the consolidated balance sheet at September 30, 2014. Beginning in the fourth calendar quarter of 2014, Hilltop will no longer receive cash interest payments of approximately $1.0 million related to the eliminated note receivable.
~~Series B Preferred Stock~~
As a result of the PlainsCapital Merger, the outstanding shares of PlainsCapital Corporation’s Non-Cumulative Perpetual Preferred Stock, Series C, all of which were held by the U.S. Treasury, were converted on a one-for-one basis into shares of Hilltop Series B Preferred Stock. The terms of our Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of “qualified small business lending” (“QSBL”) by the Bank. The shares of Hilltop Series B Preferred Stock are senior to shares of our common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At both September 30, 2014 and December 31, 2013, $114.1 million of our Series B Preferred Stock was outstanding. During the three months ended September 30, 2014, we accrued dividends of $1.4 million on the Hilltop Series B Preferred Stock.
The dividend rate on the Hilltop Series B Preferred Stock is fixed at 5.0% from January 1, 2014 until March 26, 2016, based upon our level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.
Loss-Share Agreements

In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction, which we refer to as “covered assets”. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ~~ten~~10 years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.

Regulatory Capital

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In ~~July 2013, federal banking regulators released final rules for~~January 2015, the ~~regulation of~~new comprehensive capital ~~and liquidity~~framework (“Basel III”) for U.S. banking organizations ~~(“Basel III”), a new comprehensive capital framework~~became effective for ~~U.S. banking organizations that will become effective~~the Bank and Hilltop for reporting periods beginning after January 1, 2015 (subject to a phase-in period through January 2019).
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~~Table~~ Under Basel III, total capital consists of ~~Contents~~two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of common equity Tier 1 capital and additional Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital.

In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). ~~It is possible that we may accelerate redemption of the existing junior subordinated debentures.~~ All of the debentures issued to the PCC Statutory Trusts I, II, III and IV (the “Trusts”), less the common stock of the Trusts, qualified as Tier 1 capital as of ~~September~~June 30, ~~2014,~~2015, under guidance issued by the Board of Governors of the Federal Reserve System.

The final rules also provide for a number of adjustments to and deductions from the new common equity Tier 1 capital ratio, as well as changes to the calculation of risk weighted assets which is expected to increase the absolute level. Under current capital standards, the effects of accumulated other comprehensive items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including Hilltop and the Bank, ~~may make~~made a one-time permanent election to continue to exclude these items. Hilltop and the Bank ~~expect to make~~made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from the common equity Tier 1 capital ratio to the extent that any one such category exceeds 10% of the common equity Tier 1 capital ratio or all such categories in the aggregate exceed 15% of the common equity Tier 1 capital ratio. Further, deferred tax assets which are related to operating losses and tax credit ~~carry forward~~carryforward are excluded from the common equity Tier 1 capital ratio.

The final rules did not address the proposed liquidity coverage ratio test and the net stable funding ratio test called for by the Basel III liquidity framework. Management will continue to monitor the developments related to these proposals and their potential impact on our liquidity requirements.
At ~~September~~June 30, ~~2014,~~2015, Hilltop exceeded all regulatory capital requirements in accordance with Basel III with a total capital to risk weighted assets ratio of ~~19.28%~~19.29%, Tier 1 capital to risk weighted assets ratio of ~~18.57%~~18.74%, common equity Tier 1 capital to risk weighted assets ratio of 18.02%, and a Tier 1 capital to average assets, or leverage, ratio of ~~13.63%~~11.87%. The Bank’s consolidated actual capital amounts and ratios at ~~September~~June 30, ~~2014~~2015 resulted in it being considered “well-capitalized” under regulatory requirements ~~without giving effect to~~in accordance with Basel III, and included a total capital to risk weighted assets ratio of ~~14.21%~~17.17%,
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Tier 1 capital to risk weighted assets ratio of ~~13.48%~~16.46%, common equity Tier 1 capital to risk weighted assets ratio of 16.46%, and a Tier 1 capital to average assets, or leverage, ratio of ~~9.95%~~12.17%. Management believes that, as of September 30, 2014, Hilltop and the Bank would meet all applicable capital adequacy requirements under the Basel III capital rules for banks with less than $15 billion in assets on a fully phased-in basis as if such requirements were currently in effect. We discuss regulatory capital requirements in more detail in Note 1416 to our consolidated financial statements, as well as under the caption “Government Supervision and Regulation — ~~PlainsCapital Bank~~Banking — BASEL III” set forth in Part I, Item I. of our ~~Annual Report on~~2014 Form 10-K.

Cash Flow Activities

Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled ~~$647.6~~$605.9 million at ~~September~~June 30, ~~2014,~~2015, a decrease of ~~$98.4~~$207.2 million from ~~$746.0~~$813.1 million at December 31, ~~2013.~~2014. Deposit flows, calls of investment securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Cash ~~used in~~provided by operations during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 was ~~$50.0~~$26.5 million, ~~a decrease~~an increase in cash flow of ~~$512.3~~$318.3 million compared with the same period in ~~2013.~~2014. Cash ~~used in~~provided by operations increased primarily due to ~~reductions~~increases in cash provided by our mortgage loan origination ~~activities.~~activities and the inclusion of those operating activities acquired in the SWS Merger during the six months ended June 30, 2015.

Cash provided by our investing activities during the ~~nine~~six months ended ~~September~~June 30, 2015 was $737.3 million, including net proceeds from securities in our investment portfolio of $408.6 million, the net change in loans of $176.1 million, and net cash from the SWS Merger of $41.1 million. Cash provided by our investment activities during six months ended June 30, 2014 was ~~$84.1~~$40.6 million, including ~~$106.3~~$68.6 million from net changes in loans, ~~and $55.1~~$38.3 million from sales of premises and equipment and other real estate owned, partially offset by net cash paid for FHLB and FRB stock of ~~$28.4~~$31.4 million, net purchases of premises and equipment and other assets of ~~$32.6~~$19.8 million and net purchases of securities in our investment portfolio of ~~$16.4~~$15.0 million. ~~Cash provided by our investment activities during the nine months ended September 30, 2013 of $257.9 million primarily~~
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included $362.7 million in net cash from the FNB Transaction, partially offset by $48.9 million for the origination of loans held for investment and net purchases of securities for investment of $43.4 million. The decrease in cash provided by investing activities during the nine months ended September 30, 2014, compared with the same period in 2013 was primarily due to net cash provided from the FNB Transaction, partially offset by the increase in loans.

Cash used in financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2014~~2015 was ~~$132.5 million, a decrease in cash used of $297.8~~$971.0 million, compared with cash provided by financing activities of $193.9 million during the same period in ~~2013. The~~2014. This year-over year decrease in cash ~~used~~flow of $1.2 billion was primarily due to reductions in ~~financing activities was due primarily to an increase~~cash associated with the net change in short-term borrowings ~~during~~of $672.0 million, the ~~nine months ended September 30, 2014,~~net change in deposits of $476.2 million and the redemption of Series B Preferred Stock of $114.1 million, partially offset by ~~a greater decrease in deposits, primarily due to~~the net cash proceeds from our ~~strategic decision to offer lower renewal rates on certain time deposits acquired in the FNB Transaction, during the nine months ended September 30, 2014, compared with the same period in 2013.~~Senior Notes offering of $148.1 million.

Banking Segment

Within our banking segment, liquidity refers to the measure of our ability to meet our customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on our net interest income.

Our asset and liability group is responsible for continuously monitoring our liquidity position to ensure that assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities, and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions.  For intermediate liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered ~~certificates of deposit,~~time deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.

We had deposits of ~~$6.2~~$6.8 billion at ~~September~~June 30, ~~2014, a decrease~~2015, an increase of ~~$486.6~~$426.5 million from ~~$6.7~~$6.4 billion at December 31, ~~2013.~~2014. This ~~decrease~~increase is primarily due to ~~seasonal factors related to our customers’ requirements to satisfy prior year-end tax obligations and our strategic decision to offer lower renewal rates on certain time~~the inclusion of $938.3 million of deposits ~~acquired~~assumed in the ~~FNB Transaction that conform to the legacy PlainsCapital Bank interest rate structure.~~SWS Merger. Deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. At ~~September~~June 30, ~~2014,~~2015, money market deposits, including brokered deposits, were ~~$961.8 million;~~$1.4 billion; time deposits, including brokered deposits, were ~~$1.7~~$1.5 billion; and noninterest bearing demand deposits were ~~$2.0~~ $2.1
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billion. Money market deposits, including brokered deposits, ~~decreased~~increased by ~~$193.6~~$439.9 million from ~~$1.2 billion~~$0.9 million and time deposits, including brokered deposits, decreased ~~$584.0~~$215.4 million from ~~$2.3~~$1.7 billion at December 31, ~~2013.~~2014.

The Bank’s 15 largest depositors, excluding Hilltop, Southwest Securities and First Southwest, accounted for ~~12.81%~~12.37% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Southwest Securities and First Southwest, accounted for ~~7.43%~~7.04% of the Bank’s total deposits at ~~September~~June 30, ~~2014.~~2015. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. We have not experienced any liquidity issues to date with respect to brokered deposits or our other large balance deposits, and we believe alternative sources of funding are available to more than compensate for the loss of one or more of these customers.

Broker-Dealer Segment
The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and operations. FSC has credit arrangements with four unaffiliated banks of up to $305.0 million and Southwest Securities has credit arrangements with three unaffiliated banks of up to $375.0 million. These credit arrangements are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. At June 30, 2015, FSC and Southwest Securities had borrowed $117.7 million and $68.0 million, respectively, under these credit arrangements. In addition, Southwest Securities has a committed revolving credit facility with an unaffiliated bank of up to $45.0 million. At June 30, 2015, Southwest Securities had no borrowings under this credit facility.
Mortgage Origination Segment

PrimeLending funds the mortgage loans it originates through a warehouse line of credit of up to $1.5 billion maintained with the Bank. At ~~September~~June 30, ~~2014,~~2015, PrimeLending had outstanding borrowings of ~~$1.2~~$1.3 billion against the warehouse line of credit. During July 2015, this warehouse line of credit was temporarily increased to a commitment of $1.8 billion and is scheduled to revert to a commitment of $1.5 billion on October 1, 2015. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with
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JPMorgan Chase Bank, NA (“JPMorgan Chase”) of up to $1.0 million. At ~~September~~June 30, ~~2014,~~2015, PrimeLending had no borrowings under the JPMorgan Chase line of credit.

Insurance Segment

Our insurance operating subsidiary’s primary investment objectives are to preserve capital and manage for a total rate of return. NLC’s strategy is to purchase securities in sectors that represent the most attractive relative value. Bonds, cash and short-term investments of ~~$214.4~~$216.8 million, or ~~91.5%~~91.0%, equity investments of $13.8 million and other investments of ~~$6.1~~$7.6 million comprised NLC’s ~~$234.3~~$238.2 million in total cash and investments at ~~September~~June 30, ~~2014.~~2015. NLC does not currently have any significant concentration in both direct and indirect guarantor exposure or any investments in subprime mortgages. NLC has custodial agreements with Wells Fargo Bank, N.A. and an investment management agreement with DTF Holdings, LLC.

~~Financial Advisory Segment~~
FSC relies on its equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and operations. FSC has credit arrangements with four unaffiliated banks of up to $305.0 million, which are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. At September 30, 2014, FSC had borrowed $65.8 million under these credit arrangements.
Impact of Inflation and Changing Prices

Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.
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Off-Balance Sheet Arrangements; Commitments; Guarantees

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

In the aggregate, the Bank had outstanding unused commitments to extend credit of ~~$1.4~~$1.7 billion at ~~September~~June 30, ~~2014~~2015 and outstanding financial and performance standby letters of credit of ~~$45.1~~$42.6 million at ~~September~~June 30, ~~2014.~~
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In the normal course of business, ~~FSC executes, settles~~the Hilltop Broker-Dealers execute, settle and ~~finances~~finance various securities transactions that may expose ~~FSC~~the Hilltop Broker-Dealers 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,~~the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients, clearing agreements between ~~FSC~~the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

Critical Accounting Policies and Estimates

Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to ~~Allowance~~allowance for ~~Loan Losses,~~loan losses, FDIC Indemnification Asset, ~~Reserve~~reserve for ~~Losses~~losses and ~~Loss Adjustment Expenses, Goodwill~~loss adjustment expenses, goodwill and ~~Identifiable Intangible Assets, Loan Indemnification Liability, Mortgage Servicing Rights~~identifiable intangible assets, loan indemnification liability, mortgage servicing rights and ~~Acquisition Accounting.~~acquisition accounting. Since December 31, ~~2013,~~2014, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and Note 1 to the Consolidated Financial Statements in our ~~Annual Report on~~2014 Form ~~10-K for the year ended December 31, 2013.~~10-K.

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk.

Our assessment of market risk as of ~~September~~June 30, ~~2014~~2015 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our ~~Annual Report on~~2014 Form 10-K, ~~for the year ended December 31, 2013,~~ except as discussed below.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

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Banking Segment

The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities.  Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.

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An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a significant impact on earnings.

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As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).

September 30, 2014

June 30, 2015

3 Months or

> 3 Months to

> 1 Year to

> 3 Years to


3 Months or

> 3 Months to

> 1 Year to

> 3 Years to




Less

1 Year

3 Years

5 Years

> 5 Years

Total

Less

1 Year

3 Years

5 Years

> 5 Years

Total

Interest sensitive assets:

Loans

$
3,078,794

$
622,234

$
683,188

$
312,488

$
663,020

$
5,359,724

$
3,371,278

$
611,870

$
914,010

$
288,120

$
887,976

$
6,073,254

Securities

97,054

51,282

192,975

142,450

581,217

1,064,978

76,908

101,574

250,533

143,522

431,251

1,003,788

Federal funds sold and securities purchased under agreements to resell

11,655

—

—

—

—

11,655

22,814

—

—

—

—

22,814

Other interest sensitive assets

327,148

—

—

—

—

327,148

324,982

—

—

—

—

324,982

Total interest sensitive assets

3,514,651

673,516

876,163

454,938

1,244,237

6,763,505

3,795,982

713,444

1,164,543

431,642

1,319,227

7,424,838

Interest sensitive liabilities:

Interest bearing checking

$
2,184,596

$
—

$
—

$
—

$
—

$
2,184,596

$
2,556,415

$
—

$
—

$
—

$
—

$
2,556,415

Savings

343,667

—

—

—

—

343,667

287,611

—

—

—

—

287,611

Time deposits

621,594

652,624

366,115

71,491

9,500

1,721,324

442,841

542,634

415,629

20,670

36,481

1,458,255

Notes payable & other borrowings

555,341

225,482

1,372

736

5,228

788,159

Notes payable and other borrowings

792,688

76,059

28,247

3,073

16,426

916,493

Total interest sensitive liabilities

3,705,198

878,106

367,487

72,227

14,728

5,037,746

4,079,555

618,693

443,876

23,743

52,907

5,218,774

Interest sensitivity gap

$
(190,547
)
$
(204,590
)
$
508,676

$
382,711

$
1,229,509

$
1,725,759

$
(283,573)

$
94,751

$
720,667

$
407,899

$
1,266,320

$
2,206,064

Cumulative interest sensitivity gap

$
(190,547
)
$
(395,137
)
$
113,539

$
496,250

$
1,725,759

$
(283,573)

$
(188,822)

$
531,845

$
939,744

$
2,206,064

Percentage of cumulative gap to total interest sensitive assets

-2.82
%
-5.84
%
1.68
%
7.34
%
25.52
%

(3.82)
%

(2.54)
%

7.16
%

12.66
%

29.71
%

The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 1%, 2% and 3% to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on economic value of equity by discounting projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance-sheet derivatives.

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The table below shows the estimated impact of increases of 1%, 2% and 3% and a decrease of 0.5% in interest rates on net interest income and on economic value of equity for the banking segment at ~~September~~June 30, ~~2014~~2015 (dollars in thousands).

Change in

Changes in

Changes in

Changes in

Changes in

Interest Rates

Net Interest Income

Economic Value of Equity

Net Interest Income

Economic Value of Equity

(basis points)

Amount

Percent

Amount

Percent


Amount

Percent

Amount

Percent

+300

$
3,396

1.34
%
$
(14,926
)
-1.12
%

$
710

0.26
%
$
10,008

0.71
%
+200

$
(7,128
)
-2.82
%
$
(17,275
)
-1.29
%

$
(8,477)

(3.12)
%
$
6,858

0.49
%
+100

$
(11,421
)
-4.52
%
$
(11,734
)
-0.88
%

$
(10,366)

(3.82)
%
$
8,484

0.60
%
-50

$
531

0.21
%
$
(3,317
)
-0.25
%

$
2,284

0.84
%
$
(35,618)

(2.54)
%

The projected changes in net interest income and economic value of equity to changes in interest rates at ~~September~~June 30, ~~2014~~2015 were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities.

The historically low level of interest rates, combined with the existence of rate floors that are in effect for a significant portion of the loan portfolio, are projected to cause yields on our earning assets to rise more slowly than increases in market interest rates. As a result, in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is sufficient to allow our loan portfolio to reprice above applicable rate floors.

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Item 4. Controls and ~~Procedures~~Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)~~ during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, other than as it relates to the incorporation of the acquired systems and processes of SWS into our internal control environment.
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PART II. OTHER ~~INFORMATION~~INFORMATION

Item 1. Legal ~~Proceedings.~~Proceedings.

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 1113 to our Consolidated Financial Statements, which is incorporated by reference herein.

Item 1A. Risk ~~Factors.~~Factors.

Except as follows, there have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our ~~Annual Report on~~2014 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our ~~Annual Report on~~2014 Form 10-K.

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~~Risks Related to the Merger~~
WeOur indebtedness may ~~fail to realize all of the anticipated benefits of the pending merger.~~
~~The success of the merger will depend on, among other things, the~~affect our ability to achieve certain operating results at SWS. If the financial condition or result of operations of SWS is materially different than those that we forecasted, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected.
~~Hilltop~~operate our business, and ~~SWS have operated and, until the completion of the merger, will continue to operate, independently. The companies~~ may have difficulty addressing possible differences in corporate cultures and management philosophies. It is also possible that clients, customers, depositors and counterparties of SWS could choose to discontinue their relationships with the company post-merger, which would adversely affect our future performance.
Our results of operations and the market price of our common stock after the merger may be affected by factors different from those currently affecting our results of operations and the market price of our common stock.
Our business differs in important respects from the business of SWS and, accordingly, the results of operations of the combined company and the market price of the combined company’s common stock may be affected by factors different from those currently affecting the independent results of operations of Hilltop and SWS. As a ~~holder of our common stock following the merger, you would be subject to the risks and liabilities affecting SWS as well as those of Hilltop.~~
The merger is subject to the receipt of consents and approvals from government entities that may take longer than expected or may impose conditions that are not presently anticipated or that could have anmaterial adverse effect on ~~the combined company following the merger.~~
The merger is conditioned on the receipt of all requisite governmental and regulatory authorizations, consents, orders and approvals from the Federal Reserve Board and the Texas Department of Banking. These government entities may impose conditions on the completion of the merger and the merger of SWS’s wholly owned bank subsidiary, Southwest Securities, FSB, with and into the Bank (the “bank merger”) or require changes to the terms of the merger or bank merger. Although we do not currently expect that any such material conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger and the bank merger.
~~We are subject to contractual restrictions while the merger is pending.~~
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on SWS and consequently on us. These uncertainties may impair SWS’s ability to attract, retain and motivate key personnel while the merger is pending, and could cause customers and others that deal with SWS to seek to change existing business relationships with SWS. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to such uncertainty or a desire not to remain with the business, our ~~business following the merger could be negatively impacted.~~
In addition, the merger agreement restricts SWS and, to a lesser extent, us from taking certain specified actions until the merger occurs without the consent of the other party. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger. In addition, our business may be indirectly adversely affected by the failure to pursue other beneficial opportunities due to the focus of management on the merger.
~~The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the price of our common stock to decline.~~
The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approval of the SWS stockholders. If any condition to the merger is not satisfied or waived, the merger will not be completed. In addition, we and SWS may terminate the merger agreement under certain circumstances even if the merger is approved by SWS stockholders, including if the merger has not been consummated by March 31, 2015. If we do not
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complete the merger, the trading price of our common stock may decline to the extent that the current prices reflect a market assumption that the merger will be completed. In addition, we would not realize any of the expected benefits of having completed the merger. If the merger is not completed, additional risks could materialize, which could materially and adversely affect our business, financial condition and results of operations. ~~For example, our business~~We may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. A termination of the merger agreement may also damage our reputation and franchise value.incur additional indebtedness, including secured indebtedness.

At June 30, 2015, on a consolidated basis, we had total deposits of $6.8 billion and other indebtedness of $1.3 billion. In addition, on April 9, 2015, we issued $150.0 million aggregate principal amount of Senior Notes. Our ~~current stockholders will~~significant amount of indebtedness could have ~~a reduced ownership and voting interest after the merger and will exercise less influence over management.~~important consequences, such as:

Our current stockholders have the right to vote in the election of our board of directors and on other matters affecting Hilltop. Immediately after the merger is completed, it is expected that, on a fully diluted basis, our current stockholders will own approximately 90%, and current SWS stockholders will own approximately 10%, of the outstanding shares of our common stock. As a result of the merger, our current stockholders will have less influence on our management and policies post-merger than they currently have, and current SWS stockholders will have less influence on our management and policies post-merger than they currently have with respect to SWS.
·
limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;

~~The completion of the merger may trigger change in control provisions in certain agreements to which SWS is a party.~~
·
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt;

The completion of the merger may trigger change in control provisions in certain agreements to which SWS is a party. If we and/or SWS are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements (including terminating the agreements or seeking monetary penalties). Even if we and/or SWS are able to obtain waivers, the counterparties may demand a fee for such waivers or seek to renegotiate the agreements on materially less favorable terms than those currently in place.
·
limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;

~~The combined company expects to incur substantial expenses related to the merger.~~
·
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;

The combined company expects to incur substantial expenses in connection with completing the merger and combining the business, operations, networks, systems, technologies, policies and procedures of the two companies. Although we have assumed that a certain level of transaction and combination expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of our and SWS’s combination expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and combination expenses associated with the merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the combination of the businesses following the completion of the merger. As a result of these expenses, we and SWS expect to take charges against earnings before and after the completion of the merger. The charges taken in connection with the merger are expected to be significant, although the aggregate amount and timing of such charges are uncertain at present. Further, if the merger is not completed, we would have to recognize these expenses without realizing the expected benefits of the merger.
·
restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our and certain of our subsidiaries’ existing and future indebtedness, including, in the case of certain indebtedness of subsidiaries, certain covenants that restrict the ability of subsidiaries to pay dividends or make other distributions to us;

~~If completed, the merger may not produce its anticipated results, and we may be unable to combine our operations with SWS’s operations in the manner expected.~~
·
exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and operating results;

We entered into the merger agreement with the expectation that the merger will result in various benefits. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the Hilltop and SWS organizations can be combined in an efficient, effective and timely manner.
·
increasing our vulnerability to a downturn in general economic conditions or in pricing of our products; and

It is possible that the transition process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, controls, procedures, policies and compensation arrangements, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger. The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions that occur prior to the closing of the merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies. The transition process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in
90
·
limiting our ability to react to changing market conditions in our industry and in our customers’ industries.

~~Table of Contents~~
~~increased costs or decreases in the amount of expected revenues and could adversely affect the combined company’s future business, financial condition, operating results and prospects.~~
~~The merger may not be accretive to earnings and may cause dilution to our earnings per share, which may negatively affect the market price of our common stock.~~
The merger may not be accretive to earnings as we could encounter additional transaction and integration-related costs, may fail to realize all of the benefits anticipated in the merger or be subject to other factors that affect preliminary estimates. Any of these factors could cause a decrease in our adjusted earnings per share or decrease or delay the expected accretive effect of the merger and contribute to a decrease in the price of our common stock.
~~Pending litigation could result in an injunction preventing the completion of the merger or a judgment resulting in the payment of damages.~~
In connection with the merger, purported SWS stockholders have filed putative shareholder class action lawsuits against SWS, the members of the SWS board of directors and Hilltop. Among other remedies, the plaintiffs seek to enjoin the merger. If the cases are not resolved, these lawsuits could prevent or delay completion of the merger and result in substantial costs to us and to SWS, including any costs associated with the indemnification of directors and officers. Plaintiffs may file additional lawsuits against SWS, Hilltop and/or the directors and officers of either company in connection with the merger. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect our business, financial condition, results of operations and cash flows.
~~Risks Related to Our Business~~
~~The impact of the changing regulatory capital requirements and new capital rules are uncertain.~~
In July 2013, the Federal Reserve Board approved a final rule that will substantially amend the risk-based capital rules applicable to Hilltop and the Bank. The final rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for Hilltop and the Bank on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions. The application of more stringent capital requirements for Hilltop and the Bank could, among other things, adversely affect our results of operations and growth, require the raising of additional capital, restrict our ability to pay dividends or repurchase shares and result in regulatory actions if we were to be unable to comply with such requirements.

In addition ~~the Federal Reserve Board adopted~~to our debt service obligations, our operations require substantial investments on a ~~final rule in February 2014 that clarifies how companies should incorporate the Basel III regulatory capital reforms into their~~continuing basis. Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, ~~projections during~~depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.
Subject to the ~~2014~~restrictions in the indenture governing the Senior Notes, we may incur significant additional indebtedness, including secured indebtedness. If new debt is added to our current debt levels, the risks described above could increase.
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We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior Notes, and ~~subsequent cycles~~may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to satisfy our debt obligations will depend upon, among other things:
·
our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and
·
our future ability to refinance the Senior Notes, which depends on, among other things, our complying with the covenants in the indenture governing the Senior Notes.
We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to obtain financing in an amount sufficient to fund our liquidity needs.
If our cash flows and capital ~~plan submissions~~resources are insufficient to service our indebtedness, including the Senior Notes, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the Senior Notes. These alternative measures may not be successful and ~~stress tests required~~may not permit us to meet our scheduled debt service obligations, including our obligations under the ~~Dodd-Frank Act. For companies and their subsidiary banks with between $10.0 billion and $50.0 billion in total consolidated assets,~~Senior Notes. Our ability to restructure or refinance our debt will depend on the initial stress testing cycle began on October 1, 2013 and the initial nine-quarter planning horizon for stress capital projections continues through the fourth quarter of 2015, which overlaps with the implementationcondition of the ~~Basel III~~ capital ~~reforms beginning~~markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations, sell equity and/or negotiate with our lenders and other creditors to restructure the applicable debt, in order to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. The indenture governing the Senior Notes may restrict, or market or business conditions may limit, our ability to avail ourselves of some or all of these options. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.
The indenture governing the Senior Notes contains, and any instruments governing future indebtedness of ours would likely contain, restrictions that will limit our flexibility in operating our business.
The indenture governing the Senior Notes contains, and any instruments governing future indebtedness of ours would likely contain, a number of covenants that will impose significant operating and financial restrictions on ~~January 1, 2015. At September 30, 2014, Hilltop~~us, including restrictions on our ability to, among other things:
·
dispose of or issue voting stock of certain subsidiaries; or
·
incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain subsidiaries.
Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate activities. Any failure to comply with these covenants could result in a default under the ~~Bank had approximately $9.2 billion and $8.0 billion, respectively, in total consolidated assets and their average of total consolidated assets for~~indenture governing the four most recent consecutive quarters was $9.1 billion and $8.1 billion, respectively. Accordingly, Hilltop and the Bank are not currently subject to capital planning and stress testing requirements. However, asSenior Notes offered hereby. Upon a ~~result~~default, holders of the ~~merger, Hilltop~~Senior Notes offered hereby would have ~~more than $10.0 billion in assets and would become~~the ability ultimately to force us into bankruptcy or liquidation, subject to the ~~stress testing requirements, which would likely increase~~indenture governing the Senior Notes. In addition, a default under the indenture governing the Senior Notes could trigger a cross default under the agreements governing our ~~cost of regulatory compliance. Management continues~~existing and future indebtedness. Our operating results may not be sufficient to ~~study the implementation of Basel III regulatory capital reforms~~service our indebtedness or to fund our other expenditures and ~~stress testing~~we may not be able to obtain financing to meet these requirements.

91

~~Table of Contents~~
Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds

On ~~July 14, 2014,~~April 21, 2015, we issued an aggregate of ~~2,216~~3,162 shares of common stock under the Hilltop Holdings 2012 Equity Incentive Plan to certain non-employee directors as compensation for their service on our Board of Directors during the second quarter of ~~2014.~~2015. The shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.

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The following table details our repurchases of shares of common stock during the three months ended June 30, 2015.

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 – April 30, 2015

—

$
—

—

$
—
May 1 – May 31, 2015

493,401

21.75

493,401

19,267,075
June 1 – June 30, 2015

281,043

22.13

281,043

13,046,284
_________
(1)
On May 18, 2015, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase, in the aggregate, up to $30.0 million of our outstanding common stock. Under the stock repurchase program authorized, the Company may repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act.
Item 6. Exhibit ~~Exhibits~~s

A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein.
92

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SIGNATURES

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

~~HILLTOP HOLDINGS INC.~~
HILLTOP HOLDINGS INC.
Date: ~~November 6, 2014~~July 29, 2015
By:
/s/ Darren Parmenter

Darren Parmenter

Executive Vice President — Principal Financial Officer
(Principal Financial and Accounting Officer and duly authorized officer)

93

99
Table of Contents
EXHIBIT INDEX

~~EXHIBIT INDEX~~
~~Exhibit~~
~~Number~~
Exhibit
Number
Description of Exhibit

2.1

Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated as of March 31, 2014 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2014 (File No. 001-31987) and incorporated herein by reference).

2.2

Purchase and Assumption Agreement—Whole Bank, All Deposits, dated as of September 13, 2013, by and among the Federal Deposit Insurance Corporation, receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and the Federal Deposit Insurance Corporation (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 19, 2013 (File No. 001-31987) and incorporated herein by reference).
4.1
Indenture, dated as of April 9, 2015, by and between Hilltop Holdings Inc. and U.S. Bank National Association, as Trustee, including forms of notes (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2015 (File No. 001-31987) and incorporated herein by reference).
10.1
Registration Rights Agreement, dated as of April 9, 2015, by and among Hilltop Holdings Inc. and Barclays Capital Inc. and Sandler O’Neill & Partners, L.P. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2015 (File No. 001-31987) and incorporated herein by reference).

31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

XBRL Taxonomy Extension Definition Linkbase

101.LAB*

XBRL Taxonomy Extension Label Linkbase

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase

*Filed herewith.

94100

											Accumulated						Total
								Additional			Other						Hilltop						Total
	Preferred Stock			Common Stock				Paid-in			Comprehensive			Accumulated			Stockholders’			Noncontrolling			Stockholders’
	Shares	Amount		Shares		Amount		Capital			Income (Loss)			Deficit			Equity			Interest			Equity
Balance, December 31, 2012	114	$	114,068	83,487		$	835	$	1,304,448		$	8,094		$	(282,949	)	$	1,144,496		$	2,054		$	1,146,550
Net income	—	—		—		—		—			—			94,472			94,472			1,207			95,679
Other comprehensive loss	—	—		—		—		—			(25,332		)	—			(25,332		)	—			(25,332		)
Stock-based compensation expense	—	—		—		—		1,071			—			—			1,071			—			1,071
Common stock issued to board members	—	—		7		—		96			—			—			96			—			96
Issuance of restricted common stock	—	—		465		5		(5		)	—			—			—			—			—
Dividends on preferred stock	—	—		—		—		(2,985		)	—			—			(2,985		)	—			(2,985		)
Cash distributions to noncontrolling interest	—	—		—		—		—			—			—			—			(2,383		)	(2,383		)
Balance, September 30, 2013	114	$	114,068	83,959		$	840	$	1,302,625		$	(17,238	)	$	(188,477	)	$	1,211,818		$	878		$	1,212,696

Balance, December 31, 2013	114	$	114,068	90,176		$	902	$	1,388,641		$	(34,863	)	$	(157,607	)	$	1,311,141		$	781		$	1,311,922
Net income	—	—		—		—		—			—			78,509			78,509			583			79,092
Other comprehensive income	—	—		—		—		—			31,136			—			31,136			—			31,136
Stock-based compensation expense	—	—		—		—		3,316			—			—			3,316			—			3,316
Common stock issued to board members	—	—		7		—		162			—			—			162			—			162
Forfeiture of restricted common stock awards	—	—		(3	)	—		(12		)	—			—			(12		)	—			(12		)
Dividends on preferred stock	—	—		—		—		(4,278		)	—			—			(4,278		)	—			(4,278		)
Issuance of common stock	—	—		—		—		3,001			—			—			3,001			—			3,001
Cash distributions to noncontrolling interest	—	—		—		—		—			—			—			—			(595		)	(595		)
Balance, September 30, 2014	114	$	114,068	90,180		$	902	$	1,390,830		$	(3,727	)	$	(79,098	)	$	1,422,975		$	769		$	1,423,744


									Accumulated		Retained		Deferred					Total
							Additional		Other		Earnings		Compensation		Employee			Hilltop				Total
	Preferred Stock			Common Stock			Paid-in		Comprehensive		(Accumulated		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit)		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2013	114	$	114,068	90,176	$	902	$	1,388,641	$	(34,863)	$	(157,607)	$	—	—	$	—	$	1,311,141	$	781	$	1,311,922
Net income	—		—	—		—		—		—		53,697		—	—		—		53,697		287		53,984
Other comprehensive income	—		—	—		—		—		32,362		—		—	—		—		32,362		—		32,362
Stock-based compensation expense	—		—	—		—		1,979		—		—		—	—		—		1,979		—		1,979
Common stock issued to board members	—		—	5		—		115		—		—		—	—		—		115		—		115
Dividends on preferred stock	—		—	—		—		(2,852)		—		—		—	—		—		(2,852)		—		(2,852)
Cash distributions to noncontrolling interest	—		—	—		—		—		—		—		—	—		—		—		(348)		(348)
Balance, June 30, 2014	114	$	114,068	90,181	$	902	$	1,387,883	$	(2,501)	$	(103,910)	$	—	—	$	—	$	1,396,442	$	720	$	1,397,162

Balance, December 31, 2014	114	$	114,068	90,182	$	902	$	1,390,788	$	651	$	(45,957)	$	—	—	$	—	$	1,460,452	$	787	$	1,461,239
Net income	—		—	—		—		—		—		142,719		—	—		—		142,719		758		143,477
Other comprehensive loss	—		—	—		—		—		(1,756)		—		—	—		—		(1,756)		—		(1,756)
Issuance of common stock	—		—	10,101		101		199,932		—		—		—	—		—		200,033		—		200,033
Stock-based compensation expense	—		—	—		—		4,253		—		—		—	—		—		4,253		—		4,253
Common stock issued to board members	—		—	6		—		113		—		—		—	—		—		113		—		113
Dividends on preferred stock	—		—	—		—		—		—		(1,854)		—	—		—		(1,854)		—		(1,854)
Redemption of preferred stock	(114)		(114,068)	—		—		—		—		—		—	—		—		(114,068)		—		(114,068)
Repurchase of common stock	—		—	(774)		(8)		(12,431)		—		(4,532)		—	—		—		(16,971)		—		(16,971)
Deferred compensation plan	—		—	—		—		—		—		—		1,182	30		(590)		592		—		592
Cash distributions to noncontrolling interest	—		—	—		—		—		—		—		—	—		—		—		(426)		(426)
Balance, June 30, 2015	—	$	—	99,515	$	995	$	1,582,655	$	(1,105)	$	90,376	$	1,182	30	$	(590)	$	1,673,513	$	1,119	$	1,674,632


	Loans, excluding		PCI		Total
	PCI Loans		Loans		Loans
Commercial and industrial (1)	$	447,959	$	9,850	$	457,809
Real estate		324,477		62,218		386,695
Construction and land development		14,708		1,391		16,099
Consumer		3,216		—		3,216
Total	$	790,360	$	73,459	$	863,819

										Total Gains or Losses
										(Realized or Unrealized)
	Balance at												Included in Other
	Beginning of			Purchases/			Sales/			Included in			Comprehensive			Balance at
	Period			Additions			Reductions			Net Income			Income (Loss)			End of Period
Three months ended September 30, 2014
Available for sale securities	$	63,819		$	—		$	—		$	639		$	(3,175	)	$	61,283
Loans held for sale	10,409			6,110			(1,600		)	(1,156		)	—			13,763
Mortgage servicing rights asset	35,877			18,982			(11,387		)	(1,565		)	—			41,907
Derivative liabilities	(6,300		)	(177		)	—			(350		)	—			(6,827		)
Total	$	103,805		$	24,915		$	(12,987	)	$	(2,432	)	$	(3,175	)	$	110,126

Nine months ended September 30, 2014
Available for sale securities	$	60,053		$	—		$	—		$	1,848		$	(618	)	$	61,283
Loans held for sale	27,729			16,531			(31,203		)	706			—			13,763
Mortgage servicing rights asset	20,149			33,790			(11,387		)	(645		)	—			41,907
Derivative liabilities	(5,600		)	(177		)	—			(1,050		)	—			(6,827		)
Total	$	102,331		$	50,144		$	(42,590	)	$	859		$	(618	)	$	110,126

Three months ended September 30, 2013
Available for sale securities	$	55,510		$	—		$	—		$	551		$	3,541		$	59,602
Mortgage servicing rights asset	7,111			4,079			—			2,211			—			13,401
Derivative liabilities	(4,939		)	—			—			(225		)	—			(5,164		)
Total	$	57,682		$	4,079		$	—		$	2,537		$	3,541		$	67,839

Nine months ended September 30, 2013
Available for sale securities	$	56,277		$	—		$	—		$	1,594		$	1,731		$	59,602
Mortgage servicing rights asset	2,080			8,384			—			2,937			—			13,401
Derivative liabilities	(4,490		)	—			—			(674		)	—			(5,164		)
Total	$	53,867		$	8,384		$	—		$	3,857		$	1,731		$	67,839

	Recorded Investment in Loans Modified by
			Interest Rate		Payment Term		Total
Nine months ended September 30, 2014	A/B Note		Adjustment		Extension		Modification
Commercial and industrial:
Secured	$	—	$	—	$	—	$	—
Unsecured	—		—		—		—
Real estate:
Secured by commercial properties	—		—		326		326
Secured by residential properties	—		—		253		253
Construction and land development:
Residential construction loans	—		—		—		—
Commercial construction loans and land development	—		—		133		133
Consumer	—		—		—		—
	$	—	$	—	$	712	$	712


		Remaining Contractual Maturities
		Overnight and						Greater Than
June 30, 2015		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and agency securities		$	176,053	$	6,822	$	—	$	—	$	182,875

Securities lending transactions:
U.S. Treasury and agency securities			13,566		—		—		—		13,566
Corporate securities			13,120		—		—		—		13,120
Equity securities			1,897,070		—		—		—		1,897,070
Total		$	2,099,809	$	6,822	$	—	$	—	$	2,106,631

Gross amount of recognized liabilities for repurchase agreements and securities lending in offsetting disclosure above										$	2,106,631
Amount related to agreements not included in offsetting disclosure above										$	—

	Remaining Contractual Maturities
		Overnight and						Greater Than
December 31, 2014		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and agency securities		$	136,396	$	—	$	—	$	—	$	136,396

Securities lending transactions:
U.S. Treasury and agency securities			9,171		—		—		—		9,171
Corporate securities			200		—		—		—		200
Equity securities			108,451		—		—		—		108,451
Total		$	254,218	$	—	$	—	$	—	$	254,218

Gross amount of recognized liabilities for repurchase agreements and securities lending in offsetting disclosure above										$	254,218
Amount related to agreements not included in offsetting disclosure above										$	—


	Three Months Ended September 30,				Nine Months Ended September 30,				Year Ended		Three Months Ended June 30,				Six Months Ended June 30,				Year Ended
	2014		2013		2014		2013		December 31, 2013		2015		2014		2015		2014		December 31, 2014
Performance Ratios:
Return on average stockholders’ equity	6.51	%	12.73	%	7.37	%	10.57	%	10.48	%
Return on average stockholder's equity											7.12	%	7.99	%	16.92	%	7.82	%	8.01	%
Return on average assets	1.03	%	2.08	%	1.14	%	1.75	%	1.66	%	0.97	%	1.24	%	2.31	%	1.19	%	1.26	%
Net interest margin (taxable equivalent) (1)	4.38	%	4.46	%	4.72	%	4.39	%	4.47	%	3.75	%	5.18	%	3.66	%	4.90	%	4.74	%


	Three Months Ended June 30,				Variance		Six Months Ended June 30,				Variance
	2015		2014		2015 vs 2014		2015		2014		2015 vs 2014
Net interest income:
Securities lending	$	2,786	$	951	$	1,835	$	5,298	$	1,577	$	3,721
Other		5,236		2,227		3,009		10,720		4,231		6,489
Total net interest income		8,022		3,178		4,844		16,018		5,808		10,210
Noninterest income:
Securities commissions and fees by business line (1):
Capital markets		13,779		3,760		10,019		29,902		7,740		22,162
Retail		20,549		217		20,332		40,423		390		40,033
Clearing		6,082		2,877		3,205		11,921		5,658		6,263
Other		1,330		140		1,190		2,538		200		2,338
		41,740		6,994		34,746		84,784		13,988		70,796
Investment banking and advisory fees by business line:
Public finance		23,587		14,671		8,916		42,289		26,955		15,334
Capital markets		70		(45)		115		828		61		767
Retail		4,006		—		4,006		7,970		—		7,970
Structured finance		1,622		287		1,335		2,801		802		1,999
Clearing		12		11		1		24		23		1
Other		368		346		22		675		1,766		(1,091)
		29,665		15,270		14,395		54,587		29,607		24,980
Bargain purchase gain		—		—		—		46,615		—		46,615
Other		8,842		3,574		5,268		20,405		6,840		13,565
Total noninterest income		80,247		25,838		54,409		206,391		50,435		155,956
Noninterest expense:
Compensation and benefits expenses		64,395		17,009		47,386		128,821		33,629		95,192
Other		25,806		11,367		14,439		52,377		22,126		30,251
Total noninterest expense		90,201		28,376		61,825		181,198		55,755		125,443

Income (loss) before income taxes	$	(1,932)	$	640	$	(2,572)	$	41,211	$	488	$	40,723


	Original Loan Balance				Loss Recognized				Original Loan Balance			Loss Recognized
			% of				% of				% of			% of
			Loans				Loans				Loans			Loans
	Amount		Sold		Amount		Sold		Amount		Sold	Amount		Sold
Claims resolved with no payment	$	155,375	0.25	%	$	—	0.00	%	$	189,123	0.27%	$	—	0.00%

Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred (1)	190,428		0.30	%	25,048		0.04	%		227,112	0.33%		25,738	0.04%
	$	345,803	0.55	%	$	25,048	0.04	%	$	416,235	0.60%	$	25,738	0.04%


	Three Months Ended September 30,				Variance			Nine Months Ended September 30,				Variance			Three Months Ended June 30,				Variance		Six Months Ended June 30,				Variance
	2014		2013		2014 vs 2013			2014		2013		2014 vs 2013			2015		2014		2015 vs 2014		2015		2014		2015 vs 2014
Direct Insurance Premiums Written:
Homeowners	$	19,644	$	21,110	$	(1,466	)	$	59,659	$	61,634	$	(1,975	)	$	20,519	$	21,431	$	(912)	$	38,614	$	40,016	$	(1,402)
Fire	13,329		14,086		(757		)	42,289		42,097		192				14,465		15,125		(660)		27,911		28,960		(1,049)
Mobile Home	8,556		8,098		458			29,055		26,827		2,228				10,549		10,280		269		20,776		20,499		277
Commercial	965		1,094		(129		)	3,126		3,492		(366		)		946		1,075		(129)		1,899		2,161		(262)
Other	92		96		(4		)	226		242		(16		)		85		88		(3)		113		134		(21)
	$	42,586	$	44,484	$	(1,898	)	$	134,355	$	134,292	$	63		$	46,564	$	47,999	$	(1,435)	$	89,313	$	91,770	$	(2,457)

	Loans, excluding			PCI			Total
September 30, 2014	PCI Loans			Loans			Loans
										Loans, excluding		PCI		Total
June 30, 2015										PCI Loans		Loans		Loans
Commercial and industrial	$	1,660,872		$	16,517		$	1,677,389		$	2,185,311	$	15,756	$	2,201,067
Real estate	1,582,205			24,513			1,606,718				2,098,792		76,110		2,174,902
Construction and land development	419,518			9,698			429,216				525,344		5,735		531,079
Consumer	52,865			2,655			55,520				48,756		1,165		49,921
Non-covered loans, gross	3,715,460			53,383			3,768,843				4,858,203		98,766		4,956,969
Allowance for loan losses	(33,739		)	(5,288		)	(39,027		)		(35,432)		(5,052)		(40,484)
Non-covered loans, net of allowance	$	3,681,721		$	48,095		$	3,729,816		$	4,822,771	$	93,714	$	4,916,485

	Three Months Ended			Nine Months Ended
Covered Portfolio	September 30, 2014			September 30, 2014
Balance, beginning of period	$	4,115		$	1,061
Provisions charged to (recapture of) operating expenses	(153		)	3,151
Recoveries of covered loans previously charged off:
Commercial and industrial	—			—
Real estate	—			—
Construction and land development	—			—
Consumer	—			—
Total recoveries	—			—
Covered loans charged off:
Commercial and industrial	—			91
Real estate	169			213
Construction and land development	32			147
Consumer	—			—
Total charge-offs	201			451
Net charge-offs	(201		)	(451		)
Balance, end of period	$	3,761		$	3,761


	Three Months Ended June 30,				Six Months Ended June 30,
Covered Portfolio	2015		2014		2015		2014
Balance, beginning of period	$	1,388	$	2,665	$	4,611	$	1,061
Provisions charged to (recapture from) operations		(429)		1,450		(536)		3,304
Recoveries of covered loans previously charged off:
Commercial and industrial		21		—		21		—
Real estate		99		—		99		—
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Total recoveries		120		—		120		—
Covered loans charged off:
Commercial and industrial		53		—		953		91
Real estate		83		—		2,299		44
Construction and land development		9		—		9		115
Consumer		—		—		—		—
Total charge-offs		145		—		3,261		250
Net charge-offs		(25)		—		(3,141)		(250)
Balance, end of period	$	934	$	4,115	$	934	$	4,115


	September 30, 2014																	June 30, 2015
	3 Months or			> 3 Months to			> 1 Year to			> 3 Years to								3 Months or			> 3 Months to			> 1 Year to			> 3 Years to
	Less			1 Year			3 Years			5 Years			> 5 Years			Total		Less			1 Year			3 Years			5 Years			> 5 Years			Total
Interest sensitive assets:
Loans	$	3,078,794		$	622,234		$	683,188		$	312,488		$	663,020		$	5,359,724	$	3,371,278		$	611,870		$	914,010		$	288,120		$	887,976		$	6,073,254
Securities	97,054			51,282			192,975			142,450			581,217			1,064,978			76,908			101,574			250,533			143,522			431,251			1,003,788
Federal funds sold and securities purchased under agreements to resell	11,655			—			—			—			—			11,655			22,814			—			—			—			—			22,814
Other interest sensitive assets	327,148			—			—			—			—			327,148			324,982			—			—			—			—			324,982
Total interest sensitive assets	3,514,651			673,516			876,163			454,938			1,244,237			6,763,505			3,795,982			713,444			1,164,543			431,642			1,319,227			7,424,838

Interest sensitive liabilities:
Interest bearing checking	$	2,184,596		$	—		$	—		$	—		$	—		$	2,184,596	$	2,556,415		$	—		$	—		$	—		$	—		$	2,556,415
Savings	343,667			—			—			—			—			343,667			287,611			—			—			—			—			287,611
Time deposits	621,594			652,624			366,115			71,491			9,500			1,721,324			442,841			542,634			415,629			20,670			36,481			1,458,255
Notes payable & other borrowings	555,341			225,482			1,372			736			5,228			788,159
Notes payable and other borrowings																			792,688			76,059			28,247			3,073			16,426			916,493
Total interest sensitive liabilities	3,705,198			878,106			367,487			72,227			14,728			5,037,746			4,079,555			618,693			443,876			23,743			52,907			5,218,774

Interest sensitivity gap	$	(190,547	)	$	(204,590	)	$	508,676		$	382,711		$	1,229,509		$	1,725,759	$	(283,573)		$	94,751		$	720,667		$	407,899		$	1,266,320		$	2,206,064

Cumulative interest sensitivity gap	$	(190,547	)	$	(395,137	)	$	113,539		$	496,250		$	1,725,759				$	(283,573)		$	(188,822)		$	531,845		$	939,744		$	2,206,064

Percentage of cumulative gap to total interest sensitive assets	-2.82		%	-5.84		%	1.68		%	7.34		%	25.52		%				(3.82)	%		(2.54)	%		7.16	%		12.66	%		29.71	%


Change in	Changes in					Changes in					Changes in				Changes in
Interest Rates	Net Interest Income					Economic Value of Equity					Net Interest Income				Economic Value of Equity
(basis points)	Amount			Percent		Amount			Percent		Amount		Percent		Amount		Percent
+300	$	3,396		1.34	%	$	(14,926	)	-1.12	%	$	710	0.26	%	$	10,008	0.71	%
+200	$	(7,128	)	-2.82	%	$	(17,275	)	-1.29	%	$	(8,477)	(3.12)	%	$	6,858	0.49	%
+100	$	(11,421	)	-4.52	%	$	(11,734	)	-0.88	%	$	(10,366)	(3.82)	%	$	8,484	0.60	%
-50	$	531		0.21	%	$	(3,317	)	-0.25	%	$	2,284	0.84	%	$	(35,618)	(2.54)	%


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 – April 30, 2015	—	$	—	—	$	—
May 1 – May 31, 2015	493,401		21.75	493,401		19,267,075
June 1 – June 30, 2015	281,043		22.13	281,043		13,046,284

	~~HILLTOP HOLDINGS INC.~~
	HILLTOP HOLDINGS INC.

Date: ~~November 6, 2014~~July 29, 2015	By:	/s/ Darren Parmenter
		Darren Parmenter
		Executive Vice President — Principal Financial Officer (Principal Financial and Accounting Officer and duly authorized officer)

~~Exhibit~~ ~~Number~~
Exhibit Number		Description of Exhibit

2.1		Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated as of March 31, 2014 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2014 (File No. 001-31987) and incorporated herein by reference).

2.2		Purchase and Assumption Agreement—Whole Bank, All Deposits, dated as of September 13, 2013, by and among the Federal Deposit Insurance Corporation, receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and the Federal Deposit Insurance Corporation (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 19, 2013 (File No. 001-31987) and incorporated herein by reference).

4.1		Indenture, dated as of April 9, 2015, by and between Hilltop Holdings Inc. and U.S. Bank National Association, as Trustee, including forms of notes (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2015 (File No. 001-31987) and incorporated herein by reference).

10.1		Registration Rights Agreement, dated as of April 9, 2015, by and among Hilltop Holdings Inc. and Barclays Capital Inc. and Sandler O’Neill & Partners, L.P. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2015 (File No. 001-31987) and incorporated herein by reference).

31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

Estimated Useful

Gross Intangible

Life (Years)

Customer relationships

Core deposits