Hilltop (HTH) 10-K/A 2018 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended: December 31, 2018

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

For the transition period from                          to                         

Commission file number: 1-31987

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)

Maryland	84-1477939
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2323 Victory Avenue, Suite 1400 Dallas, TX	75219
(Address of principal executive offices)	(Zip Code)

(214) 855-2177

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HTH	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☑ Yes  ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes  ☑ No

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  ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   ☑ Yes  ☐ No

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

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common stock was last sold on the New York Stock Exchange on June 30, 2018, was approximately $1.58 billion. For the purposes of this computation, all officers, directors and 10% stockholders are considered affiliates. The number of shares of the registrant’s common stock outstanding at February 14, 2019 was 93,611,624.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (this “Amended Filing”) amends our original Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 15, 2019 (the “Original Filing”). 

The purpose of this Amended Filing is to (i) revise the disclosure in Part II, Item 9A in the Original Filing to reflect management’s conclusion that our disclosure controls and procedures were not effective at December 31, 2018 due to material weaknesses in our internal control over financial reporting identified subsequent to the issuance of the Original Filing and (ii) reissue the related “Report of Independent Registered Public Accounting Firm” of PricewaterhouseCoopers LLP regarding the effectiveness of our internal control over financial reporting included in the Original Filing.

These material weaknesses did not result in any change to our consolidated financial statements as set forth in the Original Filing. Part IV, Item 15, “Exhibits, Financial Statement Schedules,” of the Original Filing also has been amended to include currently dated certifications from the Company’s Principal Executive Officer and Principal Financial Officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002. The certifications are attached to this Amended Filing as Exhibits 31.1, 31.2 and 32.1.

Other than the inclusion within this Amended Filing of new certifications by management and a new consent of our independent registered certified public accounting firm (and related amendment to the exhibit index that is incorporated by reference into Item 15 of the Original Filing to reflect the addition of such certifications and consent and related changes to the footnotes to that exhibit index), this Amended Filing speaks only as of the date of the Original Filing and does not modify, supplement or update any other information or disclosures contained in our Original Filing. Specifically, there are no changes to our consolidated financial statements set forth in the Original Filing, including but not limited to any subsequent events. This Amended Filing should be read in conjunction with the Original Filing and reports filed with the SEC subsequent to the Original Filing.

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TABLE OF CONTENTS

Item 8.	Financial Statements and Supplementary Data	4
Item 9A.	Controls and Procedures	4
PART IV
Item 15.	Exhibits, Financial Statement Schedules	6

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PART II

Item 8. Financial Statements and Supplementary Data.

Our financial statements required by this item are submitted as a separate section of this Annual Report. See “Financial Statements,” commencing on page F-1 and the financial statement schedule on page F-77 hereof.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness 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 Annual Report.

At the time we filed the Original Filing, our Co-Principal Executive Officers and Principal Financial Officer had concluded that as of December 31, 2018 our disclosure controls and procedures were effective. Subsequent to that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2018because of the material weaknesses in our internal control over financial reporting, as described below.

Notwithstanding these material weaknesses, the Company has concluded that no material misstatements exist in the consolidated financial statements as filed in the Original Filing, and as included in this Amended Filing, and such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Restated Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive officer or officers and principal financial officer and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting at December 31, 2018. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Management identified material weaknesses as of December 31, 2018 and determined that (1) the Company did not design and maintain effective controls over certain aspects relating to the determination of the qualitative factors

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considered by management in the allowance for loan losses estimation process, specifically control activities to adequately support the analysis and the impact of such support on the loss measurement and (2) certain control enhancements implemented as a part of the Company’s process for the approval of customer wires were not operating as designed. These control deficiencies did not result in a misstatement of the Company’s consolidated financial statements. However, these control deficiencies could result in misstatements of the interim or annual consolidated financial statements and disclosures that would result in a material misstatement that would not be prevented or detected. Therefore, management has concluded that these control deficiencies constitute material weaknesses.

In Management’s Report on Internal Control Over Financial Reporting included in the Original Filing, our management previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. Subsequent to the filing date of the Original Filing, management has concluded that the material weaknesses described above existed as of December 31, 2018. As a result, we have concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018, based on the criteria in Internal Control—Integrated Framework (2013). Accordingly, management has restated its report on internal control over financial reporting.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Amended Filing.

Plan for Remediation of Material Weaknesses

The Company and its Board of Directors are committed to maintaining a strong internal control environment. Management has evaluated the material weaknesses described above and has made significant progress updating its design and implementation of internal controls to remediate the aforementioned deficiencies and enhance the Company’s internal control environment. The respective remediation plans are being implemented and include (1) enhanced the analysis to support the qualitative factors considered in the estimation of the allowance for loan losses and (2) enhanced processes with respect to approval of customer wires. Management is committed to successfully implementing the respective remediation plans and currently plans to commence the evaluation of its updated internal controls design and determine whether the controls have operated effectively during the fourth quarter of 2019.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)The following documents are filed herewith as part of this Form 10-K/A.

		Page
1.	Financial Statements.
	Hilltop Holdings Inc.
	Report of Independent Registered Public Accounting Firm	F-2
	Consolidated Balance Sheets	F-4
	Consolidated Statements of Operations	F-5
	Consolidated Statements of Comprehensive Income	F-6
	Consolidated Statements of Stockholders’ Equity	F-7
	Consolidated Statements of Cash Flows	F-8
	Notes to Consolidated Financial Statements	F-9
2.	Financial Statement Schedules.
	Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance	F-77
	All other financial statement schedules have been omitted because they are not required, not applicable or the information has been included in our consolidated financial statements.
3.	Exhibits. See the Exhibit Index preceding the signature page hereto.

Exhibit Number	Description of Exhibit
2.1.1	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).
2.1.2	Termination Agreement among Federal Deposit Insurance Corporation, as Receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and Federal Deposit Insurance Corporation, acting in its corporate capacity, dated as of October 17, 2018 (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on October 22, 2018 (File No. 001-31987) and incorporated herein by reference.
2.2	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).
3.1	Articles of Amendment and Restatement of Affordable Residential Communities Inc., dated February 16, 2004, as amended or supplemented by: Articles Supplementary, dated February 16, 2004; Corporate Charter Certificate of Notice, dated June 6, 2005; Articles of Amendment, dated January 23, 2007; Articles of Amendment, dated July 31, 2007; Corporate Charter Certificate of Notice, dated September 23, 2008; Articles Supplementary, dated December 15, 2010; Articles Supplementary, dated as of November 29, 2012 relating to Subtitle 8 election; Articles Supplementary, dated November 29, 2012 relating to Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc.; and Articles of Amendment and Restatement, dated March 31, 2014 (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-31987) and incorporated herein by reference).
3.2	Third Amended and Restated Bylaws of Hilltop Holdings Inc. (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018 (File No. 001-31987) and incorporated herein by reference).
4.1	Form of Certificate of Common Stock of Hilltop Holdings Inc. (filed as Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-31987) and incorporated herein by reference).
4.2	Corporate Charter Certificate of Notice, dated June 6, 2005 (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-3 (File No. 333-125854) and incorporated herein by reference).
4.3.1	Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time (filed as Exhibit 4.2 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.3.2	First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and between PlainsCapital Corporation and U.S. Bank National Association, as Institutional Trustee (filed as Exhibit 4.3 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.3.3	Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).

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4.3.4	First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation and U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.3.5	Second Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.5.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
4.3.6	Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of August 7, 2006, by PlainsCapital Corporation  in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust I (filed as Exhibit 4.6 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.3.7	Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.3.8	First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital Corporation and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.8 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.4.1	Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time (filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.4.2	Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S. Bank National Association, as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.4.3	First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.6.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
4.4.4	Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of March 26, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust II (filed as Exhibit 4.11 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.4.5	Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation  and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.12 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.5.1	Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time (filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).

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4.5.2		Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank National Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.5.3		First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation. (filed as Exhibit 4.7.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
4.5.4		Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of September 17, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust III (filed as Exhibit 4.15 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.5.5		Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.16 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.6.1		Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital Corporation, Wells Fargo Bank, N.A., as Property Trustee, Wells Fargo Delaware Trust Company, as Delaware Trustee, and the Administrators party thereto from time to time (filed as Exhibit 4.17 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.6.2		Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.18 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.6.3		First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital Corporation (f/k/a Meadow Corporation) and Wells Fargo Bank, National Association, as Trustee. (filed as Exhibit 4.8.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
4.6.4		Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008, by PlainsCapital Corporation in favor of Wells Fargo Bank, N.A., as Property Trustee of PCC Statutory Trust IV (filed as Exhibit 4.19 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.6.5		Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation  and Wells Fargo Bank, N.A., as Guarantee Trustee (filed as Exhibit 4.20 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
4.7	Indenture, dated as of April 9, 2015, by and between Hilltop Holdings, Inc. and U.S. Bank National Association, as Trustee, including form 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).
10.1.1†		Hilltop Holdings Inc. 2012 Equity Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
10.1.2†		Form of Restricted Stock Unit Award Agreement (Time-Based Vesting) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
10.1.3†		Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
10.1.4†		Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in 2016 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2016 (File No. 001-31987) and incorporated herein by reference).
10.1.5†		Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning in 2016 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2016 (File No. 001-31987) and incorporated herein by reference).
10.1.6†		Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for awards beginning in 2016 (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2016 (File No. 001-31987) and incorporated herein by reference).
10.1.7†		Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in 2018 (filed as Exhibit 10.1.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
10.1.8†		Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning in 2018 (filed as Exhibit 10.1.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
10.1.9†		Form of Restricted Stock Unit Award Agreement  (Time-Based Vesting for Non-Section 16 Officers) for awards beginning in 2018 (filed as Exhibit 10.1.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
10.2†		Hilltop Holdings Inc. Annual Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
10.3.1†		Retention Agreement, dated May 8, 2012, but effective as of November 30, 2012, by and among Alan B. White, Hilltop Holdings Inc. and PlainsCapital Corporation (f/k/a Meadow Corporation) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
10.3.2†		First Amendment to Retention Agreement and Assignment and Assumption Agreement by and among Hilltop Holdings Inc., PlainsCapital Corporation and Alan B. White, dated as of September 12, 2016 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (File No. 001-31987) and incorporated herein by reference).
10.4.1†		Employment Agreement, dated as of December 4, 2014, by and between James R. Huffines and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 9, 2014 (File No. 001-31987) and incorporated herein by reference).
10.4.2†		First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and James R. Huffines, dated as of September 12, 2016 (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (File No. 001-31987) and incorporated herein by reference).
10.5†		Employment Agreement, dated as of December 4, 2014, by and between Todd Salmans and Hilltop Holdings Inc. (filed as Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 001-31987) and incorporated herein by reference).

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10.5.1†	First Amendment to Employment Agreement, dated as of November 8, 2017, by and between Todd Salmans and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 13, 2017 (File No. 001-31987) and incorporated herein by reference).
10.6†	Compensation arrangement of Jeremy B. Ford (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 2, 2015 (File No. 001-31987) and incorporated herein by reference).
10.7†	Employment Agreement, dated as of September 1, 2016, by and between William Furr and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A (Amendment No. 1) filed on September 7, 2016 (File No. 001-31987) and incorporated herein by reference).
10.8†	Employment Agreement, dated as of November, 20, 2018, by and between Hilltop Holdings Inc. and Martin B. Winges (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 12, 2018 (File No. 001-31987) and incorporated herein by reference).
10.9.1†	Sublease, dated December 1, 2012, by and between Hunter’s Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.19 to the Registrant’s Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
10.9.2†	First Amendment to Sublease, dated February 28, 2014, by and between Hunter’s Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.20 to the Registrant’s Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
10.10†	Limited Liability Company Agreement of HTH Diamond Hillcrest Land LLC, dated as of July 31, 2018 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
10.11†	Ground Lease Agreement by and among HTH Diamond Hillcrest Land LLC, as Ground Lessor, and SPC Park Plaza Partners LLC, HTH Hillcrest Project LLC and Diamond Hillcrest LLC, as Ground Lessees, dated as of July 31, 2018 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
10.12†	Hilltop Plaza Co-Owners Agreement, by and among Diamond Hillcrest, LLC, HTH Hillcrest Project LLC and SPC Park Plaza Partners LLC, dated as of July 31, 2018 (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
10.13†	Office Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project LLC, as Co-Owners, and Hilltop Holdings Inc., as Tenant, dated July 31, 2018 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
10.14†	Retail Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project LLC, as Co-Owners, and PlainsCapital Bank, as Tenant, dated July 31, 2018 (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
21.1**	List of subsidiaries of the Registrant.
23.1*	Consent of PricewaterhouseCoopers LLP.
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.

9

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.

†Exhibit is a management contract or compensatory plan or arrangement.

**Previously filed with our Annual Report on Form 10-K originally filed on February 15, 2019.

10

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 20, 2019	By:	/s/ William B. Furr
		William B. Furr
		Chief Financial Officer
		(Principal Financial Officer and duly authorized officer)

11

Index to Consolidated Financial Statements and Financial Statement Schedule

Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm	F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Comprehensive Income	F-6
Consolidated Statements of Stockholders’ Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-9
Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance	F-77

F-1

Report of Independent Registered Public Accounting Firm

��

To the Board of Directors and Stockholders of Hilltop Holdings Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Hilltop Holdings Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) as of and for the year ended December 31, 2018 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) the Company did not design and maintain effective controls over certain aspects relating to the determination of the qualitative factors considered by management in the allowance for loan losses estimation process, specifically control activities to adequately support the analysis and the impact of such support on the loss measurement and (ii) certain control enhancements implemented as a part of the Company’s wire process with respect to approval of customer wires were not operating as designed.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. 

Restatement of Management’s Conclusion Regarding Internal Control over Financial Reporting

Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. However, management has subsequently determined that material weaknesses in internal control over financial reporting related to (i) the Company did not design and maintain effective controls over certain aspects relating to the determination of the qualitative factors considered by management in the allowance for loan losses estimation process, specifically control activities to adequately support the analysis and the impact of such support on the loss measurement and (ii) certain control enhancements implemented as a part of the Company’s wire process with respect to approval of customer wires were not operating as designed. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

F-2

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

February 15, 2019, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matter described in the penultimate paragraph of Management’s Report on Internal Control Over Financial Reporting, as to which the date is November 20, 2019

We have served as the Company’s auditor since 1998.

F-3

HILLTOP HOLDINGS INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 

(in thousands, except share and per share data)

	December 31,
	2018		2017
Assets
Cash and due from banks	$	644,073	$	486,977
Federal funds sold		400		405
Assets segregated for regulatory purposes		133,993		186,578
Securities purchased under agreements to resell		61,611		186,537
Securities:
Trading, at fair value		745,466		730,685
Available for sale, at fair value (amortized cost of $886,799 and $748,255, respectively)		875,658		744,319
Held to maturity, at amortized cost (fair value of $341,124 and $349,939, respectively)		351,012		355,849
Equity, at fair value		19,679		21,241
		1,991,815		1,852,094
Loans held for sale		1,393,246		1,715,357
Loans held for investment, net of unearned income		6,930,458		6,455,798
Allowance for loan losses		(59,486)		(63,686)
Loans held for investment, net		6,870,972		6,392,112
Broker-dealer and clearing organization receivables		1,440,287		1,464,378
Premises and equipment, net		237,373		177,577
Other assets		580,362		615,531
Goodwill		291,435		251,808
Other intangible assets, net		38,005		36,432
Total assets	$	13,683,572	$	13,365,786
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	2,560,750	$	2,411,849
Interest-bearing		5,975,406		5,566,270
Total deposits		8,536,156		7,978,119
Broker-dealer and clearing organization payables		1,294,925		1,287,563
Short-term borrowings		1,065,807		1,206,424
Securities sold, not yet purchased, at fair value		81,667		232,821
Notes payable		228,872		208,809
Junior subordinated debentures		67,012		67,012
Other liabilities		435,240		470,231
Total liabilities		11,709,679		11,450,979
Commitments and contingencies (see Notes 18 and 19)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 93,610,217 and 95,982,184 shares issued and outstanding at December 31, 2018 and 2017, respectively		936		960
Additional paid-in capital		1,489,816		1,526,369
Accumulated other comprehensive loss		(8,627)		(394)
Retained earnings		466,737		384,545
Deferred compensation employee stock trust, net		825		848
Employee stock trust (10,894 and 11,672 shares, at cost, at December 31, 2018 and 2017, respectively)		(217)		(247)
Total Hilltop stockholders' equity		1,949,470		1,912,081
Noncontrolling interests		24,423		2,726
Total stockholders' equity		1,973,893		1,914,807
Total liabilities and stockholders' equity	$	13,683,572	$	13,365,786

See accompanying notes.

F-4

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS 

(in thousands, except per share data)

	Year Ended December 31,
	2018		2017		2016
Interest income:
Loans, including fees	$	436,725	$	411,988	$	389,637
Securities borrowed		66,914		41,048		29,518
Securities:
Taxable		50,975		36,472		26,233
Tax-exempt		6,834		5,807		6,222
Other		17,980		11,841		4,344
Total interest income		579,428		507,156		455,954
Interest expense:
Deposits		46,002		24,695		15,843
Securities loaned		56,733		32,337		22,510
Short-term borrowings		25,816		13,751		5,803
Notes payable		10,263		10,931		10,849
Junior subordinated debentures		3,663		3,016		2,676
Other		627		678		742
Total interest expense		143,104		85,408		58,423
Net interest income		436,324		421,748		397,531
Provision for loan losses		5,088		14,271		40,620
Net interest income after provision for loan losses		431,236		407,477		356,911
Noninterest income:
Net gains from sale of loans and other mortgage production income		445,116		538,468		606,991
Mortgage loan origination fees		103,563		93,944		96,267
Securities commissions and fees		150,989		156,464		157,906
Investment and securities advisory fees and commissions		90,066		109,920		115,992
Net insurance premiums earned		136,751		142,298		155,545
Other		96,305		163,970		154,264
Total noninterest income		1,022,790		1,205,064		1,286,965
Noninterest expense:
Employees' compensation and benefits		768,688		816,994		834,113
Occupancy and equipment, net		115,207		113,943		109,418
Professional services		105,752		101,521		128,176
Loss and loss adjustment expenses		79,347		94,701		89,243
Other		224,255		242,096		251,521
Total noninterest expense		1,293,249		1,369,255		1,412,471
Income before income taxes		160,777		243,286		231,405
Income tax expense		35,050		110,142		83,461
Net income		125,727		133,144		147,944
Less: Net income attributable to noncontrolling interest		4,286		600		2,050
Income attributable to Hilltop	$	121,441	$	132,544	$	145,894
Earnings per common share:
Basic	$	1.28	$	1.36	$	1.48
Diluted	$	1.28	$	1.36	$	1.48
Weighted average share information:
Basic		94,969		97,137		98,404
Diluted		95,067		97,353		98,629

See accompanying notes.

F-5

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(in thousands)

	Year Ended December 31,
	2018		2017		2016
Net income	$	125,727	$	133,144	$	147,944
Other comprehensive income:
Net unrealized gains (losses) on securities available for sale, net of tax of $(1,558),  $(565) and $1,264, respectively		(5,632)		(869)		(2,144)
Reclassification adjustment for gains (losses) included in net income, net of tax of $0,  $(6) and $0, respectively		—		(10)		—
Comprehensive income		120,095		132,265		145,800
Less: comprehensive income attributable to noncontrolling interest		4,286		600		2,050
Comprehensive income applicable to Hilltop	$	115,809	$	131,665	$	143,750

See accompanying notes.

F-6

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

						Accumulated		Retained		Deferred					Total
				Additional		Other		Earnings		Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		(Accumulated		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit)		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2015	98,896	$	989	$	1,577,270	$	2,629	$	155,475	$	1,034	22	$	(443)	$	1,736,954	$	1,171	$	1,738,125
Net income	—		—		—		—		145,894		—	—		—		145,894		2,050		147,944
Other comprehensive loss	—		—		—		(2,144)		—		—	—		—		(2,144)		—		(2,144)
Issuance of common stock	538		5		4,134		—		—		—	—		—		4,139		—		4,139
Stock-based compensation expense	—		—		10,058		—		—		—	—		—		10,058		—		10,058
Common stock issued to board members	22		—		429		—		—		—	—		—		429		—		429
Issuance of common stock related to share-based awards, net	(96)		(1)		(2,746)		—		—		—	—		—		(2,747)		—		(2,747)
Repurchases of common stock	(816)		(8)		(16,268)		—		—		—	—		—		(16,276)		—		(16,276)
Dividends on common stock ($0.06 per share)	—		—		—		—		(5,801)		—	—		—		(5,801)		—		(5,801)
Deferred compensation plan	—		—		—		—		—		(131)	(7)		134		3		—		3
Net cash contributed from noncontrolling interest	—		—		—		—		—		—	—		—		—		790		790
Balance, December 31, 2016	98,544	$	985	$	1,572,877	$	485	$	295,568	$	903	15	$	(309)	$	1,870,509	$	4,011	$	1,874,520
Net income	—		—		—		—		132,544		—	—		—		132,544		600		133,144
Other comprehensive loss	—		—		—		(879)		—		—	—		—		(879)		—		(879)
Stock-based compensation expense	—		—		10,307		—		—		—	—		—		10,307		—		10,307
Common stock issued to board members	17		—		451		—		—		—	—		—		451		—		451
Issuance of common stock related to share-based awards, net	337		4		(3,268)		—		—		—	—		—		(3,264)		—		(3,264)
Repurchases of common stock	(2,916)		(29)		(53,998)		—		(20,427)		—	—		—		(74,454)		—		(74,454)
Dividends on common stock ($0.24 per share)	—		—		—		—		(23,140)		—	—		—		(23,140)		—		(23,140)
Deferred compensation plan	—		—		—		—		—		(55)	(3)		62		7		—		7
Net cash contributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(1,885)		(1,885)
Balance, December 31, 2017	95,982	$	960	$	1,526,369	$	(394)	$	384,545	$	848	12	$	(247)	$	1,912,081	$	2,726	$	1,914,807
Net income	—		—		—		—		121,441		—	—		—		121,441		4,286		125,727
Other comprehensive loss	—		—		—		(5,632)		—		—	—		—		(5,632)		—		(5,632)
Stock-based compensation expense	—		—		8,454		—		—		—	—		—		8,454		—		8,454
Common stock issued to board members	30		—		654		—		—		—	—		—		654		—		654
Issuance of common stock related to share-based awards, net	327		3		(1,850)		—		—		—	—		—		(1,847)		—		(1,847)
Repurchases of common stock	(2,729)		(27)		(43,811)		—		(15,152)		—	—		—		(58,990)		—		(58,990)
Dividends on common stock ($0.28 per share)	—		—		—		—		(26,698)		—	—		—		(26,698)		—		(26,698)
Deferred compensation plan	—		—		—		—		—		(23)	(1)		30		7		—		7
Adoption of accounting standards (Note 33)	—		—		—		(2,601)		2,601		—	—		—		—		—		—
Net cash distributed from noncontrolling interest	—		—		—		—		—		—	—		—		—		17,411		17,411
Balance, December 31, 2018	93,610	$	936	$	1,489,816	$	(8,627)	$	466,737	$	825	11	$	(217)	$	1,949,470	$	24,423	$	1,973,893

See accompanying notes.

F-7

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2018		2017		2016
Operating Activities
Net income	$	125,727	$	133,144	$	147,944
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		5,088		14,271		40,620
Depreciation, amortization and accretion, net		(2,345)		(13,869)		(49,765)
Net realized gains on securities		—		(16)		—
Net change in fair value of equity securities		2,486		—		—
Deferred income taxes		13,197		40,933		(9,690)
Other, net		8,838		12,085		16,564
Net change in securities purchased under agreements to resell		124,926		(97,107)		16,230
Net change in trading securities		(14,781)		(465,151)		(51,388)
Net change in broker-dealer and clearing organization receivables		23,618		(42,449)		(46,775)
Net change in FDIC indemnification asset		22,831		24,890		20,577
Net change in other assets		13,741		(47,352)		41,315
Net change in broker-dealer and clearing organization payables		(7,054)		(2,412)		(33,180)
Net change in other liabilities		(93,890)		(55,557)		11,752
Net change in securities sold, not yet purchased		(151,154)		78,932		23,845
Proceeds from sale of mortgage servicing rights asset		9,303		17,499		7,586
Net gains from sales of loans		(445,116)		(538,468)		(606,991)
Loans originated for sale		(14,287,551)		(15,014,118)		(16,026,911)
Proceeds from loans sold		15,041,676		15,634,027		16,337,299
Net cash provided by (used in) operating activities		389,540		(320,718)		(160,968)
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		43,699		56,359		166,522
Proceeds from sales, maturities and principal reductions of securities available for sale		243,708		298,737		396,572
Proceeds from sales, maturities and principal reductions of equity securities		3		—		—
Purchases of securities held to maturity		(39,259)		(60,939)		(186,875)
Purchases of securities available for sale		(323,991)		(471,047)		(326,810)
Purchases of equity securities		(933)		—		—
Net change in loans held for investment		(110,615)		(216,562)		(555,040)
Purchases of premises and equipment and other assets		(68,079)		(31,152)		(41,941)
Proceeds from sales of premises and equipment and other real estate owned		25,847		32,297		73,032
Net cash received from (paid for) Federal Home Loan Bank and Federal Reserve Bank stock		3,198		34,346		(19,021)
Net cash paid for acquisition		(63,245)		—		—
Net cash used in investing activities		(289,667)		(357,961)		(493,561)
Financing Activities
Net change in deposits		196,060		857,155		153,131
Net change in short-term borrowings		(140,617)		(210,865)		469,916
Proceeds from notes payable		664,045		403,136		296,993
Payments on notes payable		(643,921)		(512,193)		(217,630)
Proceeds from issuance of common stock		—		—		4,139
Payments to repurchase common stock		(58,990)		(27,388)		—
Dividends paid on common stock		(26,698)		(23,140)		(5,801)
Net cash contributed from (distributed to) noncontrolling interest		17,411		(1,885)		790
Taxes paid on employee stock awards netting activity		(1,844)		(3,264)		(2,442)
Other, net		(813)		(674)		(868)
Net cash provided by financing activities		4,633		480,882		698,228
Net change in cash and cash equivalents		104,506		(197,797)		43,699
Cash, cash equivalents and restricted cash, beginning of period		673,960		871,757		828,058
Cash, cash equivalents and restricted cash, end of period	$	778,466	$	673,960	$	871,757
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks	$	644,073	$	486,977	$	669,357
Federal funds sold		400		405		21,407
Assets segregated for regulatory purposes		133,993		186,578		180,993
Total cash, cash equivalents and restricted cash	$	778,466	$	673,960	$	871,757
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	143,201	$	84,309	$	58,429
Cash paid for income taxes, net of refunds	$	8,378	$	85,840	$	88,899
Supplemental Schedule of Non-Cash Activities
Construction in progress related to build-to-suit lease obligations	$	27,802	$	—	$	—
Conversion of loans to other real estate owned	$	6,899	$	8,853	$	20,184
Additions to mortgage servicing rights	$	25,028	$	16,401	$	23,381

See accompanying notes.

F-8

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting and Reporting 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. The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer, mortgage origination and insurance subsidiaries.

The Company, headquartered in Dallas, Texas, provides its products and services through three primary business units, PlainsCapital Corporation (“PCC”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds Corporation (“NLC”). PCC is a financial holding company, that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. Securities Holdings is a holding company, 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 is a property and casualty insurance holding company, 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.

Basis of Presentation

Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the membership interest in Hilltop Opportunity Partners LLC, formerly known as PlainsCapital Equity, LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds an ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).

PCC 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 (“VIE”) Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), because the primary beneficiaries of the Trusts are not within the consolidated group.

Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Hilltop Securities Independent Network (“HTS Independent Network”) and Hilltop Securities Asset Management, LLC, formerly known as First Southwest Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and FINRA and a member of the New York Stock Exchange (“NYSE”), HTS Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA, and Hilltop Securities Asset Management, LLC, a wholly-owned subsidiary of First Southwest Holdings, LLC (“First Southwest”), is a registered investment adviser under the Investment Advisers Act of 1940. From January 1, 2016 to January 22, 2016, Securities Holdings’ subsidiaries also included First Southwest Company, LLC (“FSC”), First Southwest’s principal subsidiary and formerly a broker-dealer registered with the SEC and FINRA and a member of the NYSE.

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

In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza

F-9

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

investment discussed in detail in Note 17 to the consolidated financial statements and are collectively referred to as the “Hilltop Plaza Entities”.

The consolidated financial statements include the accounts of the above-named entities. 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 ASC.

Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation. In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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 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 financial instruments, reserves for losses and loss adjustment expenses (“LAE”), 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.

Acquisition Accounting

Acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net assets purchased exceeds the consideration given, a bargain purchase gain is recognized. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as collateralized financings and are carried at the amounts at which the securities will subsequently be resold as specified in the agreements. The Company is in possession of collateral with a fair value equal to or in excess of the contract amounts.

Securities

Management classifies securities at the time of purchase and reassesses such designation at each balance sheet date. Securities held for resale to facilitate principal transactions with customers are classified as trading and are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. Hilltop reports interest income on trading securities as interest income on securities and other changes in fair value as other noninterest income.

Debt securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale. Securities included in this category are those that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk or other factors related to interest rate and prepayment risk. Debt securities available for sale are carried at fair value. Unrealized holding gains and losses on debt securities available for sale, net of taxes, are reported in other comprehensive income (loss) until realized. Premiums and discounts are recognized in interest income using the effective interest method and reflect any optionality that may be embedded in the security.

Equity securities are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. Equity securities that do not have readily determinable fair values are initially recorded at cost and subsequently remeasured when there is (i) an observable transaction involving the same investment, (ii) an observable transaction

F-10

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

involving a similar investment from the same issuer or (iii) an impairment. These remeasurements are reflected in the consolidated statements of operations.

Purchases and sales (and related gain or loss) of securities are recorded on the trade date, based on specific identification. Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the other-than-temporary impairment (“OTTI”) is related to credit losses. The amount of the OTTI related to other factors is recognized in other comprehensive income (loss). In estimating cash flows related to these securities, management primarily considers, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the historic and implied volatility of the security, (iv) failure of the issuer to make scheduled interest payments and (v) changes to the rating of the security by a rating agency.

Loans Held for Sale

Loans held for sale consist primarily of single-family residential mortgages funded through PrimeLending. These loans are generally on the consolidated balance sheet between 30 and 45 days. Substantially all mortgage loans originated by PrimeLending are sold to various investors in the secondary market, the majority with servicing released. Mortgage loans held for sale are carried at fair value in accordance with the provisions of the Fair Value Option Subsections of the ASC (the “Fair Value Option”). Changes in the fair value of the loans held for sale are recognized in earnings and fees and costs associated with origination are recognized as incurred. The specific identification method is used to determine realized gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to certain indemnification provisions with investors, including the repurchase of loans sold and repayment of certain sales proceeds to investors under certain conditions. In addition, certain mortgage loans guaranteed by U.S. Government agencies and sold into Government National Mortgage Association (“GNMA”) pools may, under certain conditions specified in the government programs, become subject to repurchase by PrimeLending. When such loans subject to repurchase no longer qualify for sale accounting, they are reported as loans held for sale in the consolidated balance sheets.

Loans Held for Investment

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for loan losses. Unearned income on installment loans and interest on other loans is recognized using the effective interest method. Net fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income over the life of the related loan, beginning with the initial borrowing. Net fees on commitments and letters of credit that are not expected to be funded are amortized to noninterest income over the commitment period. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment.

Impaired loans include non-accrual loans, troubled debt restructurings, purchased credit impaired (“PCI”) loans and partially charged-off loans. The accrual of interest on impaired loans is discontinued when, in management’s opinion, there is 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. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income. If the ultimate collectability of principal, wholly or partially, is in doubt, any payment received on a loan on which the accrual of interest has been suspended is applied to reduce principal to the extent necessary to eliminate such doubt. Once the collection of the remaining recorded loan balance is fully expected, interest income is recognized on a cash basis.

Management has defined the loans acquired in a business combination as acquired loans. Acquired loans are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. At acquisition, acquired loans are segregated between those considered to be credit impaired and those without credit impairment at acquisition. To make this determination, management considered such factors as past due status, non-accrual status and credit risk ratings. The fair value of acquired performing loans was determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan.

F-11

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Loans acquired in the Federal Deposit Insurance Corporation (“FDIC”) -assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of Edinburg, Texas-based First National Bank (“FNB”) on September 13, 2013 (the “FNB Transaction”) were previously subject to loss-share agreements with the FDIC. At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired, except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered into a Termination Agreement pursuant to which all rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements were resolved and terminated. Accordingly, loans which were previously referred to as either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively referred to as “loans held for investment.”

PCI loans acquired by the Company are accounted for either on an individual loan basis or in pools. The Company has established under its PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of similar 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 similar risk characteristics used for the pooling of PCI loans are risk grade and loan collateral type.

PCI loans show evidence of credit deterioration that make it probable that not all contractually required principal and interest payments will be collected. Their fair value was initially based on an estimate of cash flows, both principal and interest, expected to be collected, discounted at prevailing market rates of interest. Management estimates cash flows using key assumptions such as default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values. The excess of cash flows expected to be collected from a loan or pool over its estimated fair value at acquisition is referred to as accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan or pool. The excess of total contractual cash flows over the cash flows expected to be received at acquisition is referred to as the nonaccretable difference. Subsequent to acquisition, management must update these estimates of cash flows expected to be collected at each reporting date. These updates require the continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value.

The Bank accretes the discount for PCI loans for which it can predict the timing and amount of cash flows. PCI loans for which a discount is accreted are reported as performing loans.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to or recovered from expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans at the balance sheet date. The allowance for loan losses includes allowance allocations calculated in accordance with the regulatory Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC.The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond its control, including the performance of the loan portfolio, the economy and changes in interest rates.

The Bank’s allowance for loan losses consists of three elements: (i) specific valuation allowances established for probable losses on individually impaired loans; (ii) general historical valuation allowances calculated based on historical loan loss experience for homogenous loans with similar collateral; and (iii) valuation allowances to adjust general reserves based on current economic conditions and other qualitative risk factors both internal and external to the Bank. The Bank’s methodology regarding the calculation of the allowance for loan losses is discussed in more detail within Note 5 to the consolidated financial statements.

Broker-Dealer and Clearing Organization Transactions

Amounts recorded in broker-dealer and clearing organization receivables and payables include securities lending activities, as well as amounts related to securities transactions for either customers of the Hilltop Broker-Dealers or for the

F-12

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

accounts of the Hilltop Broker-Dealers. Securities borrowed and securities loaned transactions are generally reported as collateralized financings. Securities borrowed transactions require the Hilltop Broker-Dealers to deposit cash, letters of credit, or other collateral with the lender. With respect to securities loaned, the Hilltop Broker-Dealers receive collateral in the form of cash or other assets in an amount generally in excess of the market value of securities loaned. The Hilltop Broker-Dealers monitor the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Interest income and interest expense associated with collateralized financings is included in the accompanying consolidated statements of operations.

Insurance Premiums Receivable

Insurance premiums receivable include premiums written and not yet collected. NLC routinely evaluates the receivable balance to determine if an allowance for uncollectible amounts is necessary. At December 31, 2018 and 2017, NLC determined that no valuation allowance was necessary.

Deferred Policy Acquisition Costs

Costs of acquiring insurance vary with, and are primarily related to, the successful acquisition of new and renewal business. These costs primarily consist of commissions, premium taxes and underwriting expenses, and are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Proceeds from reinsurance transactions that represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expense in proportion to net revenue recognized. Future investment income is considered in determining the recoverability of deferred policy acquisition costs. NLC regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected loss and LAE, unamortized policy acquisition costs, and maintenance costs exceed related unearned insurance premiums and anticipated investment income. At December 31, 2018 and 2017, there was no premium deficiency.

Reinsurance

In the normal course of business, NLC seeks to reduce the loss that may arise from catastrophes or other events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. NLC routinely evaluates the receivable balance to determine if any uncollectible balances exist.

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 included in other assets within the consolidated balance sheets. Reinsurance assumed from other companies, including assumed premiums written and earned, and losses and LAE, is accounted for in the same manner as direct insurance written.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the straight-line method over the estimated useful lives of the assets, which range between 3 and 40 years. Gains or losses on disposals of premises and equipment are included in results of operations.

Other Real Estate Owned

Real estate acquired through foreclosure (“OREO”) is included in other assets within the consolidated balance sheets and is carried at management’s estimate of 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. Valuation adjustments, revenue and expenses from operations of the properties and resulting gains or losses on sale are included within the consolidated statements of operations in other noninterest income or expense, as appropriate.

F-13

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Prior to the termination of the FDIC loss-share agreements, acquired OREO previously subject to FDIC loss-share agreements was referred to as “covered OREO” and reported separately in the consolidated balance sheets. Covered OREO was reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral was transferred into covered OREO at the collateral’s fair value, less selling costs. Covered OREO was initially recorded at its estimated fair value based on similar market comparable valuations, less estimated selling costs. Subsequently, loan collateral transferred to OREO was recorded at its net realizable value. Any subsequent valuation adjustments due to declines in fair value of the covered OREO were charged to noninterest expense, while any recoveries of previous valuation decreases were credited to noninterest expense. Subsequent to the termination of the loss-share agreements, OREO which was previously referred to as “covered OREO” if covered by the loss-share agreements or otherwise “non-covered OREO” is now collectively referred to as OREO.

FDIC Indemnification Asset

As previously discussed, the loss-share agreements with the FDIC entered into in connection with the FNB Transaction were terminated in the fourth quarter of 2018. Subsequent to the termination of the loss-share agreements and the receipt of payment from the FDIC, the remaining balance of the amounts receivable from the FDIC under the loss-share agreements (the “FDIC Indemnification Asset”) was removed from the consolidated balance sheets. The balance of the FDIC Indemnification Asset as of December 31, 2017, is included in other assets within the consolidated balance sheets. Prior to the termination of the loss-share agreements, the Company accounted for the FDIC Indemnification Asset in accordance with the Business Combination Topic of the ASC. The FDIC Indemnification Asset was initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the present value and the undiscounted cash flows the Bank expected to collect from the FDIC was accreted into noninterest income or amortized into noninterest expense within the consolidated statements of operations over the life of the FDIC Indemnification Asset. The FDIC Indemnification Asset was reviewed quarterly and the accretion rate was adjusted for changes in the timing of cash flows expected to be collected from the FDIC. Cumulative net losses over the life of the loss-share agreements of less than $240.4 million reduced the value of the FDIC Indemnification Asset. Any amortization of changes in value of the FDIC Indemnification Asset was limited to the contractual term of the loss-share agreements. Changes to the FDIC Indemnification Asset were recorded as adjustments to other noninterest income or expense, as appropriate, within the consolidated statements of operations over the life of the loss-share agreements.

Debt Issuance Costs

The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized using the effective interest method over the repayment term of the debt. Unamortized debt issuance costs are presented in the consolidated balance sheets as a direct reduction from the associated debt liability. Debt issuance costs of $0.2 million during 2018 and $0.1 million during each of 2017 and 2016 were amortized and included in interest expense within the consolidated statements of operations. In April 2015, debt issuance costs of $1.9 million were capitalized in connection with Hilltop’s issuance of the 5% senior notes due 2025. 

Goodwill

Goodwill, which represents the excess of cost over the fair value of the net assets acquired, is allocated to reporting units and tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount should be assessed. The Company performs required annual impairment tests of its goodwill as of October 1st for each of its reporting units, which is one level below an operating segment. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The goodwill impairment test requires the Company to make judgments in determining what assumptions to use in the calculation. The process consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples of peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, the Company is required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, any loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additional information

F-14

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

concerning the results of the Company’s impairment test of goodwill is included in Note 9 to the consolidated financial statements.

Intangibles and Other Long-Lived Assets

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company’s intangible assets primarily consist of core deposits, trade names and customer relationships. Intangible assets with definite useful lives are generally amortized on the straight-line method over their estimated lives, although certain intangibles, including core deposits, and customer and agent relationships, are amortized on an accelerated basis. Amortization of intangible assets is recorded in other noninterest expense within the consolidated statements of operations. Intangible assets with indefinite useful lives are tested for impairment on an annual basis as of October 1st, or more often if events or circumstances indicate there may be impairment, and not amortized until their lives are determined to be definite. Intangible assets with definite useful lives, premises and equipment, and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. Impaired assets are recorded at fair value.

Mortgage Servicing Rights

The Company determines its classes of residential mortgage servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures its servicing assets at fair value and reports changes in fair value through earnings.

The retained mortgage servicing rights (“MSR”) asset is measured at fair value as of the date of sale of the related mortgage loan. Subsequent fair value measurements of the MSR asset are determined by valuing the projected net servicing cash flows, which are then discounted to estimate fair value using a discounted cash flow model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

The model assumptions and the MSR asset fair value estimates are compared to observable trades of similar portfolios as well as to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would adversely impact the recorded value of the MSR asset. The value of the MSR asset is also dependent upon the discount rate used in the model, which is based on current market rates that are reviewed by management on an ongoing basis. Any increase in the discount rate would reduce the value of the MSR asset.

Derivative Financial Instruments

The Company enters into various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. The Company’s derivative financial instruments also include interest rate lock commitments (“IRLCs”) executed with its customers that allow those customers to obtain a mortgage loan on a future date at an agreed-upon interest rate. The IRLCs, forward commitments, interest rate swaps, U.S. Treasury bond futures and options and Eurodollar futures meet the definition of a derivative under the provisions of the Derivatives and Hedging Topic of the ASC.

Derivatives are recorded at fair value in the consolidated balance sheets. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as hedges of fair values, the change in the fair value of both the derivative instrument and the hedged item are included in current earnings. Changes in the fair value of derivatives designated as hedges of cash flows are recorded in other comprehensive income (loss). Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the line item where the hedged item’s effect on earnings is recorded.

F-15

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Revenue from Contracts with Customers

Certain activities primarily within the Company’s broker-dealer and banking segments are subject to the provisions of ASC 606, Revenue from Contracts with Customers. The Company’s broker-dealer segment has six primary lines of business: (i) public banking, (ii) capital markets, (iii) retail, (iv) structured finance, (v) clearing services and (vi) securities lending. Revenue from contracts with customers subject to the guidance in ASC 606 from the broker-dealer segment is included within the securities commissions and fees and investment and securities advisory fees and commissions line items within the consolidated statements of operations. Commissions and fees revenue is generally recognized at a point in time upon the delivery of contracted services based on a predefined contractual amount or on the trade date for trade execution services based on prevailing market prices and internal and regulatory guidelines.

The Company’s banking segment has three primary lines of business: (i) business banking, (ii) personal banking and (iii) wealth and investment management. Revenue from contracts with customers subject to the guidance in ASC 606 from the banking segment (certain retail and trust fees) is included within the other noninterest income line item within the consolidated statements of operations. Retail and trust fees are generally recognized at the time the related transaction occurs or when services are completed. Fees are based on the dollar amount of the transaction or are otherwise predefined in contracts associated with each customer account depending on the type of account and services provided.

Reserve for Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses (“LAE”) includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported (“IBNR”). Such liabilities are based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The liability for losses and LAE has not been reduced for reinsurance recoverable.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Stock-Based Compensation

Stock-based compensation expense for all share-based awards granted is based on the grant date fair value estimated in accordance with the provisions of the Stock Compensation Topic of the ASC. The Company recognizes these compensation costs for only those awards expected to vest over the service period of the award.

Advertising

Advertising costs are expensed as incurred. Advertising expense totaled $4.6 million, $4.7 million and $5.3 million during 2018,  2017 and 2016, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the estimated future tax effects of the temporary difference between the tax basis and book basis of assets and liabilities reported in the accompanying consolidated balance sheets. The provision for income tax expense or benefit differs from the amounts of income taxes currently payable because certain items of income and expense included in the consolidated financial statements are recognized in different time periods by taxing authorities. Interest and penalties incurred related to tax matters are charged to other interest expense or other noninterest expense, respectively. The revaluation of deferred tax assets as a result of enacted tax rate changes, such as those found in the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”), is recognized within income tax expense in continuing operations in the period of enactment.

Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full

F-16

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the reporting period in which that threshold is no longer met. If the Company were to prevail on all uncertain tax positions, the effect would be a benefit to the Company’s effective tax rate. Due to uncertainties in any tax audit outcome, estimates of the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimate.

Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be realized. Periodic reviews of the carrying amount of deferred tax assets are made when it is more likely than not that all or a portion of a deferred tax asset will not be realized. 

Cash, Cash Equivalents and Restricted Cash

For the purpose of presentation in the consolidated statements of cash flows, cash, cash equivalents and restricted cash are defined as the amounts included in the consolidated balance sheet captions “Cash and due from banks”, “Federal funds sold” and “Assets segregated for regulatory purposes.” Cash equivalents have original maturities of three months or less.

Repurchases of Common Stock

In accordance with Maryland law, 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 excess amounts charged to retained earnings.

Basic and Diluted Net Income Per 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. Throughout 2018, Hilltop had no instruments outstanding which qualified 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. During 2018 and 2017, restricted stock units (“RSUs”) were the only potentially dilutive non-participating instruments issued by Hilltop, while during 2016, stock options and RSUs were the only potentially dilutive non-participating instruments. Next, the Company determines and 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.

F-17

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

2. Acquisition

BORO Acquisition

On August 1, 2018, in an effort to expand its Houston-area banking operations, the Company acquired privately-held The Bank of River Oaks (“BORO”) in an all-cash transaction (the “BORO Acquisition”).  Pursuant to the terms of the definitive agreement, the Company paid cash in the aggregate amount of $85 million to the shareholders and option holders of BORO.  The operations of BORO are included in the Bank’s operating results beginning August 1, 2018. BORO’s results of operations prior to the acquisition date are not included in the Company’s consolidated operating results.

The BORO Acquisition was accounted for using the 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 resulting fair values of the identifiable assets acquired and liabilities assumed from BORO at August 1, 2018 are summarized in the following table (in thousands).

Cash and due from banks	$	21,756
Securities		60,477
Loans held for investment		326,618
Other assets		25,912
Total identifiable assets acquired		434,763
Deposits		376,393
Short-term borrowings		10,000
Other liabilities		2,996
Total liabilities assumed		389,389
Net identifiable assets acquired		45,374
Goodwill resulting from the acquisition		39,627
Net assets acquired	$	85,001

The goodwill of $39.6 million resulting from the BORO Acquisition represents the inherent long-term value expected from the business opportunities created from combining BORO with the Company. The Company used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The amount of goodwill recorded in connection with the Company’s acquisition of BORO is not deductible for tax purposes.

Included within the fair value of other assets in the table above are identifiable core deposits intangible assets recorded in connection with the BORO Acquisition of $10.0 million which is being amortized on an accelerated basis over an estimated useful life of six years. The fair value of the core deposit intangible assets was estimated using the net cost savings method, a variation of the income approach. This involved the use of the following significant assumptions: cost of deposits, customer attrition rate, and discount rate.

During 2018, pre-tax transaction- and integration-related expenses of $8.2 million associated with the BORO Acquisition are included in noninterest expense within the consolidated statement of operations. Such expenses were for professional services and other incremental employee costs associated with the integration of BORO’s operations.

In connection with the BORO Acquisition, the Company 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 PCI loans and those without credit impairment at acquisition.

F-18

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

The following table presents details on acquired loans at the acquisition date (in thousands).

	Loans, excluding		PCI		Total Loans Held
	PCI Loans		Loans		for Investment
Commercial real estate	$	119,188	$	5,350	$	124,538
1 - 4 family residential		55,487		39		55,526
Construction and land development		37,134		—		37,134
Commercial and industrial		98,259		2,127		100,386
Consumer		9,021		13		9,034
Total	$	319,089	$	7,529	$	326,618

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

Contractually required principal and interest payments	$	10,730
Nonaccretable difference		2,859
Cash flows expected to be collected		7,871
Accretable difference		342
Fair value of loans acquired with a deterioration of credit quality	$	7,529

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

Contractually required principal and interest payments	$	381,551
Contractual cash flows not expected to be collected		15,286
Fair value at acquisition		319,089

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 includes 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.

F-19

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Fair Value Option

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained 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. At December 31, 2018 and 2017, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.26 billion and $1.58 billion, respectively, and the unpaid principal balance of those loans was $1.21 billion and $1.53 billion, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

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, as further described below. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit price method.

Trading Securities — Trading securities are reported at fair value primarily using either Level 1 or Level 2 inputs in the same manner as discussed below for available for sale securities.

Available For Sale Securities — Most securities available for sale are reported at fair value using Level 2 inputs. The Company obtains fair value measurements from independent pricing services. As the Company is responsible for the determination of fair value, control processes are designed to ensure that the fair values received from independent pricing services are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the financial instruments’ terms and conditions, among other things.

Equity Securities - For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs based on observable market transactions.

Loans Held for Sale — Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs that consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively short periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a significant component of the change in fair value. The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3, or 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.

Derivatives — Derivatives, which are included in other assets and liabilities within the Company’s consolidated balance sheets, are reported at fair value using either Level 2 or Level 3 inputs. The Bank uses dealer quotes to value interest rate swaps, forward purchase commitments and forward sale commitments executed for both hedging and non-hedging purposes. PrimeLending and the Hilltop Broker-Dealers use dealer quotes to value forward purchase commitments and forward sale commitments, respectively, executed for both hedging and non-hedging purposes. PrimeLending also issues IRLCs to its customers and the Hilltop Broker-Dealers issue forward purchase commitments to its clients that are valued based on the change in the fair value of the underlying mortgage loan from inception of the IRLC or purchase commitment to the balance sheet date, adjusted for projected loan closing rates. PrimeLending determines the value of the underlying mortgage loan as discussed in “Loans Held for Sale”, above. The Hilltop Broker-Dealers determine the value of the underlying mortgage loan from prices of comparable securities used to value forward sale commitments. Additionally, PrimeLending also uses dealer quotes to value Eurodollar futures and U.S Treasury bond futures and options used to hedge interest rate risk, and the Hilltop Broker-Dealers use dealer quotes to value Eurodollar futures and U.S. Treasury bond futures and options used to hedge changes in the fair value of securities. 

MSR Asset — The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is reported at fair value using Level 3 inputs. The MSR asset 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.

F-20

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 10 to the consolidated financial statements.

Securities Sold, Not Yet Purchased — Securities sold, not yet purchased are reported at fair value primarily using either Level 1 or Level 2 inputs in the same manner as discussed above for trading and available for sale securities.

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
December 31, 2018	Inputs		Inputs		Inputs		Fair Value
Trading securities	$	7,947	$	737,519	$	—	$	745,466
Available for sale securities		—		875,658		—		875,658
Equity securities		19,679		—		—		19,679
Loans held for sale		—		1,207,311		50,464		1,257,775
Derivative assets		—		35,010		—		35,010
MSR asset		—		—		66,102		66,102
Securities sold, not yet purchased		33,000		48,667		—		81,667
Derivative liabilities		—		26,355		—		26,355

	Level 1		Level 2		Level 3			Total
December 31, 2017	Inputs		Inputs		Inputs			Fair Value
Trading securities	$	3,329	$	727,356	$	—	$	730,685
Available for sale securities		—		744,319		—		744,319
Equity securities		21,241		—		—		21,241
Loans held for sale		—		1,544,631		36,972		1,581,603
Derivative assets		—		34,150		—		34,150
MSR asset		—		—		54,714		54,714
Securities sold, not yet purchased		156,586		76,235		—		232,821
Derivative liabilities		—		13,197		—		13,197

The following table includes a 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
	Year		Additions		Reductions		Net Income		Income (Loss)		End of Year
Year ended December 31, 2018
Loans held for sale	$	36,972	$	61,573	$	(41,801)	$	(6,280)	$	—	$	50,464
MSR asset		54,714		25,028		(9,303)		(4,337)		—		66,102
Total	$	91,686	$	86,601	$	(51,104)	$	(10,617)	$	—	$	116,566
Year ended December 31, 2017
Loans held for sale	$	35,801	$	36,891	$	(26,773)	$	(8,947)	$	—	$	36,972
MSR asset		61,968		16,401		(17,499)		(6,156)		—		54,714
Total	$	97,769	$	53,292	$	(44,272)	$	(15,103)	$	—	$	91,686
Year ended December 31, 2016
Trading securities	$	1	$	—	$	—	$	(1)	$	—	$	—
Loans held for sale		25,880		60,999		(39,637)		(11,441)		—		35,801
MSR asset		52,285		23,381		(7,586)		(6,112)		—		61,968
Total	$	78,166	$	84,380	$	(47,223)	$	(17,554)	$	—	$	97,769

All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. Excluding the trading securities activity noted above, the unrealized gains (losses) relate to financial instruments still held at December 31, 2018.  

F-21

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

For Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2018 and 2017, the significant unobservable inputs used in the fair value measurements were as follows.

			Range (Weighted-Average)
			December 31,
Financialinstrument	ValuationTechnique	UnobservableInputs	2018							2017
Loansheld for sale	Discountedcash flows / Market comparable	Projected price	95	-	96	%	(	95	%)	90	-	95	%	(	95	%)
MSR asset	Discounted cash flows	Constant prepayment rate			10.51		%					10.93		%
		Discount rate			11.11		%					11.03		%

The Company had no transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes in the observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting period in which they occur.

The following table presents those changes in fair value of instruments recognized in the consolidated statements of operations that are accounted for under the Fair Value Option (in thousands).

	Year Ended December 31, 2018						Year Ended December 31, 2017						Year Ended December 31, 2016
			Other		Total				Other		Total				Other		Total
	Net		Noninterest		Changes in		Net		Noninterest		Changes in		Net		Noninterest		Changes in
	Gains (Losses)		Income		Fair Value		Gains (Losses)		Income		Fair Value		Gains (Losses)		Income		Fair Value
Loans held for sale	$	(8,063)	$	—	$	(8,063)	$	10,655	$	—	$	10,655	$	(8,275)	$	—	$	(8,275)
MSR asset		(4,337)		—		(4,337)		(6,156)		—		(6,156)		(6,112)		—		(6,112)

The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all assets acquired and liabilities assumed in an acquisition of a business are determined at their respective acquisition date fair values. 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 individually impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. PCI loans with a fair value of $172.9 million, $822.8 million, $73.5 million and $7.5 million were acquired by the Company upon completion of the merger with PCC (the “PlainsCapital Merger”), the FNB Transaction, the acquisition of SWS Group, Inc. (the “SWS Merger”) and the BORO Acquisition, respectively (collectively, the “Bank Transactions”). 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.

Estimates for these significant unobservable inputs and the resulting weighted average expected loss on PCI loans were as follows.

	PCI Loans
	PlainsCapital		FNB		SWS		BORO
December 31, 2018	Merger		Transaction		Merger		Acquisition
Weighted average default rate	81	%	34	%	71	%	63	%
Weighted average loss severity rate	59	%	12	%	28	%	42	%
Weighted average prepayment speed	0	%	6	%	0	%	0	%
Resulting weighted average expected loss on PCI loans	48	%	4	%	20	%	26	%
	PCI Loans
	PlainsCapital		FNB		SWS
December 31, 2017	Merger		Transaction		Merger
Weighted average default rate	64	%	41	%	60	%
Weighted average loss severity rate	66	%	18	%	28	%
Weighted average prepayment speed	0	%	7	%	0	%
Resulting weighted average expected loss on PCI loans	42	%	7	%	17	%

F-22

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 orders an updated appraisal of the fair value of the collateral. 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 determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 inputs. At December 31, 2018 and 2017, the estimated fair value of OREO was $27.6 million and $40.6 million, respectively. As previously discussed, subsequent to the termination of the loss-share agreements, OREO which was previously referred to as “covered OREO” if covered by the loss-share agreements or otherwise “non-covered OREO” is now collectively referred to as OREO. The amounts are included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements for 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
	Level 1		Level 2		Level 3		Total		Year Ended December 31,
December 31, 2018	Inputs		Inputs		Inputs		Fair Value		2018		2017		2016
Impaired loans held for investment	$	—	$	—	$	76,711	$	76,711	$	2,481	$	(2,402)	$	3,643
Other real estate owned		—		19,976		—		19,976		(2,757)		(4,436)		(19,036)

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 measured at fair value on a recurring or non-recurring basis are discussed above. For other financial assets and liabilities, the Company utilizes quoted market prices, if available, to estimate the fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows, and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current transaction. Further, as it is management’s intent to hold a significant portion of its financial instruments to maturity, it is not probable that the fair values shown below will be realized in a current transaction.

Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of the Company’s fair value information to that of other financial institutions. The aggregate estimated fair value amount should in no way be construed as representative of the underlying value of Hilltop and its subsidiaries. The following methods and assumptions are typically used in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Assets Segregated for Regulatory Purposes — Assets segregated for regulatory purposes may consist of cash and securities with carrying amounts that approximate fair value.

Securities Purchased Under Agreements to Resell —Securities purchased under agreements to resell are carried at the amounts at which the securities will subsequently be resold as specified in the agreements. The carrying amounts approximate fair value due to their short-term nature.

Held to Maturity Securities — For securities held to maturity, estimated fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

F-23

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Loans Held for Sale — Loans held for sale consist primarily of certain mortgage loans held for sale that are subject to purchase by related parties. Such loans are reported at fair value, as discussed above, using Level 2 inputs that consist of commitments on hand from investors or prevailing market prices.

Loans Held for Investment — In accordance with ASU 2016-01, effective January 1, 2018, the fair values of loans held for investment are measured using an exit price method.

Broker-Dealer and Clearing Organization Receivables and Payables — The carrying amount approximates their fair value.

FDIC Indemnification Asset — Prior to termination of the loss-share agreements, the fair value of the FDIC Indemnification Asset was based on Level 3 inputs, including the discounted value of expected future cash flows under the loss-share agreements. The discount rate contemplated the credit worthiness of the FDIC as counterparty to this asset, and considered an incremental discount rate risk premium reflective of the inherent uncertainty associated with the timing of the cash flows.

Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit approximates their fair values.

Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, Federal Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.

Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.

Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance policies and accrued interest receivable and payable with carrying amounts that approximate their fair values using Level 2 inputs. The fair value of certain other receivables and investments is based on Level 3 inputs.

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
December 31, 2018	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	644,473	$	644,473	$	—	$	—	$	644,473
Assets segregated for regulatory purposes		133,993		133,993		—		—		133,993
Securities purchased under agreements to resell		61,611		—		61,611		—		61,611
Held to maturity securities		351,012		—		341,124		—		341,124
Loans held for sale		135,471		—		135,471		—		135,471
Loans held for investment, net		6,870,972		—		578,363		6,445,810		7,024,173
Broker-dealer and clearing organization receivables		1,440,287		—		1,440,287		—		1,440,287
Other assets		69,720		—		68,573		1,147		69,720
Financial liabilities:
Deposits		8,536,156		—		8,528,947		—		8,528,947
Broker-dealer and clearing organization payables		1,294,925		—		1,294,925		—		1,294,925
Short-term borrowings		1,065,807		—		1,065,807		—		1,065,807
Debt		295,884		—		293,685		—		293,685
Other liabilities		3,482		—		3,482		—		3,482

F-24

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2017	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	487,382	$	487,382	$	—	$	—	$	487,382
Assets segregated for regulatory purposes		186,578		186,578		—		—		186,578
Securities purchased under agreements to resell		186,537		—		186,537		—		186,537
Held to maturity securities		355,849		—		349,939		—		349,939
Loans held for sale		133,753		—		133,754		—		133,754
Loans held for investment, net		6,392,112		—		577,889		6,098,254		6,676,143
Broker-dealer and clearing organization receivables		1,464,378		—		1,464,378		—		1,464,378
FDIC indemnification asset		29,340		—		—		20,122		20,122
Other assets		64,862		—		59,053		5,809		64,862
Financial liabilities:
Deposits		7,978,119		—		7,973,101		—		7,973,101
Broker-dealer and clearing organization payables		1,287,563		—		1,287,563		—		1,287,563
Short-term borrowings		1,206,424		—		1,206,424		—		1,206,424
Debt		275,821		—		289,719		—		289,719
Other liabilities		4,795		—		4,795		—		4,795

The Company held equity investments other than securities of $35.8 million and  $38.7 million at December 31, 2018 and 2017, respectively, which are included within other assets in the consolidated balance sheets. Of the $35.8 million of such equity investments held at December 31, 2018,  $20.4 million do not have readily determinable fair values as defined in ASU 2016-01 (see Note 33) and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table presents the adjustments to the carrying value of these investments (in thousands).

	Year ended
	December 31, 2018
Balance, beginning of year	$	22,946
Additional investments		8,643
Upward adjustments		3,663
Impairments and downward adjustments		(4,083)
Dispositions		(10,793)
Balance, end of year	$	20,376

F-25

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

4. Securities

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

	December 31,
	2018		2017
U.S. Treasury securities	$	7,945	$	—
U.S. government agencies:
Bonds		1,494		52,078
Residential mortgage-backed securities		309,455		372,817
Commercial mortgage-backed securities		4,239		6,125
Collateralized mortgage obligations		206,813		5,122
Corporate debt securities		59,293		96,182
States and political subdivisions		126,748		170,413
Unit investment trusts		19,913		22,612
Private-label securitized product		5,680		1,631
Other		3,886		3,705
Totals	$	745,466	$	730,685

The Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligation may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $81.7 million and $232.8 million at December 31, 2018 and 2017, respectively.

The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).

	Availablefor Sale
	Amortized		Unrealized		Unrealized
December 31, 2018	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	11,552	$	30	$	(44)	$	11,538
U.S. government agencies:
Bonds		85,492		552		(433)		85,611
Residential mortgage-backed securities		391,428		608		(6,962)		385,074
Commercial mortgage-backed securities		11,703		189		(120)		11,772
Collateralized mortgage obligations		281,450		385		(5,436)		276,399
Corporate debt securities		53,614		268		(580)		53,302
States and political subdivisions		51,560		608		(206)		51,962
Totals	$	886,799	$	2,640	$	(13,781)	$	875,658

	Availablefor Sale
	Amortized		Unrealized		Unrealized
December 31, 2017	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	24,665	$	107	$	(103)	$	24,669
U.S. government agencies:
Bonds		96,177		829		(366)		96,640
Residential mortgage-backed securities		246,707		538		(3,740)		243,505
Commercial mortgage-backed securities		11,966		105		(48)		12,023
Collateralized mortgage obligations		237,848		106		(4,142)		233,812
Corporate debt securities		66,868		1,819		(25)		68,662
States and political subdivisions		64,024		1,099		(115)		65,008
Totals	$	748,255	$	4,603	$	(8,539)	$	744,319

F-26

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

	Held toMaturity
	Amortized		Unrealized		Unrealized
December 31, 2018	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	9,903	$	3	$	—	$	9,906
U.S. government agencies:
Bonds	$	39,018	$	—	$	(1,479)	$	37,539
Residential mortgage-backed securities		21,903		—		(263)		21,640
Commercial mortgage-backed securities		87,065		271		(1,462)		85,874
Collateralized mortgage obligations		142,474		—		(5,000)		137,474
States and political subdivisions		50,649		91		(2,049)		48,691
Totals	$	351,012	$	365	$	(10,253)	$	341,124

	Held toMaturity
	Amortized		Unrealized		Unrealized
December 31, 2017	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Bonds	$	39,015	$	—	$	(1,188)	$	37,827
Residential mortgage-backed securities		16,130		44		—		16,174
Commercial mortgage-backed securities		71,373		241		(735)		70,879
Collateralized mortgage obligations		173,928		19		(3,969)		169,978
States and political subdivisions		55,403		437		(759)		55,081
Totals	$	355,849	$	741	$	(6,651)	$	349,939

Additionally, the Company had unrealized net losses of $0.9 million and unrealized net gains of $1.6 million from equity securities with fair values of $19.7 million and $21.2 million held at December 31, 2018 and December 31, 2017, respectively. The Company recognized net losses of $3.3 million during 2018, due to changes in the fair value of equity securities still held at the balance sheet date. During 2018, net gains recognized from equity securities sold were nominal.

F-27

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Information regarding available for sale, held to maturity and equity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).

	December 31, 2018					December 31, 2017
	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	1	$	981	$	6	6	$	15,449	$	69
Unrealized loss for twelve months or longer	3		3,556		39	1		4,150		34
	4		4,537		45	7		19,599		103
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months	3		24,772		5	10		83,476		366
Unrealized loss for twelve months or longer	3		30,472		428	—		—		—
	6		55,244		433	10		83,476		366
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	8		66,791		432	15		121,968		820
Unrealized loss for twelve months or longer	27		194,228		6,530	11		93,358		2,920
	35		261,019		6,962	26		215,326		3,740
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	—		—		—	1		5,048		48
Unrealized loss for twelve months or longer	1		4,953		120	—		—		—
	1		4,953		120	1		5,048		48
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	11		44,394		498	16		90,886		819
Unrealized loss for twelve months or longer	28		140,483		4,938	17		80,492		3,323
	39		184,877		5,436	33		171,378		4,142
Corporate debt securities:
Unrealized loss for less than twelve months	8		16,256		282	1		5,073		25
Unrealized loss for twelve months or longer	8		15,665		297	—		—		—
	16		31,921		579	1		5,073		25
States and political subdivisions:
Unrealized loss for less than twelve months	29		8,590		27	9		6,981		97
Unrealized loss for twelve months or longer	18		9,029		179	9		2,876		18
	47		17,619		206	18		9,857		115
Total available for sale:
Unrealized loss for less than twelve months	60		161,784		1,250	58		328,881		2,244
Unrealized loss for twelve months or longer	88		398,385		12,531	38		180,876		6,295
	148	$	560,169	$	13,781	96	$	509,757	$	8,539

F-28

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

	December 31, 2018					December 31, 2017
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Held to Maturity
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months	—	$	—	$	—	1	$	5,950	$	50
Unrealized loss for twelve months or longer	4		37,539		1,479	3		31,877		1,138
	4		37,539		1,479	4		37,827		1,188
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	1		8,411		89	—		—		—
Unrealized loss for twelve months or longer	3		13,229		174	—		—		—
	4		21,640		263	—		—		—
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	1		4,973		27	7		39,396		271
Unrealized loss for twelve months or longer	13		59,670		1,435	2		12,659		464
	14		64,643		1,462	9		52,055		735
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	1		2,051		26	10		37,064		264
Unrealized loss for twelve months or longer	24		135,423		4,974	12		128,270		3,705
	25		137,474		5,000	22		165,334		3,969
States and political subdivisions:
Unrealized loss for less than twelve months	9		6,431		56	22		11,079		71
Unrealized loss for twelve months or longer	86		32,909		1,993	46		18,598		688
	95		39,340		2,049	68		29,677		759
Total held to maturity:
Unrealized loss for less than twelve months	12		21,866		198	40		93,489		656
Unrealized loss for twelve months or longer	130		278,770		10,055	63		191,404		5,995
	142	$	300,636	$	10,253	103	$	284,893	$	6,651
Equity
Common and preferred stock:
Unrealized loss for less than twelve months	—		—		—	1		944		13
Unrealized loss for twelve months or longer	—		—		—	1		6,800		103
	—	$	—	$	—	2	$	7,744	$	116

During 2018,  2017 and 2016, the Company did not record any OTTI. 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 OTTI of the securities. 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. The Company does not intend, nor is it likely that the Company will be required to sell, these securities before the recovery of the cost basis.

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, at December 31, 2018 are shown by contractual maturity below (in thousands).

	Available for Sale				Heldto Maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	50,468	$	50,354	$	11,301	$	11,305
Due after one year through five years		96,689		96,799		25,732		24,842
Due after five years through ten years		32,435		32,239		4,908		4,786
Due after ten years		22,626		23,021		57,629		55,203
		202,218		202,413		99,570		96,136
Residential mortgage-backed securities		391,428		385,074		21,903		21,640
Collateralized mortgage obligations		281,450		276,399		142,474		137,474
Commercial mortgage-backed securities		11,703		11,772		87,065		85,874
	$	886,799	$	875,658	$	351,012	$	341,124

During 2018,  2017 and 2016, the Company recognized net gains from its trading portfolio of $6.2 million, $20.2 million and $15.9 million, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product

F-29

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

trading activities of $41.9 million, $62.8 million and $109.8 million during 2018,  2017 and 2016, respectively. Other net realized gains on securities during 2018, 2017 and 2016 were nominal. All such net gains (losses) are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $612.3 million and $738.5 million (with a fair value of $600.0 million and $730.1 million, respectively) at December 31, 2018 and 2017, respectively, were pledged by the Bank 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. Substantially all of these pledged securities were included in the Company’s available for sale and held to maturity securities portfolios at December 31, 2018 and 2017.

Mortgage-backed securities and collateralized mortgage obligations consist principally of 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 December 31, 2018 and 2017, NLC had investments on deposit in custody for various state insurance departments with carrying values of $9.5 million and $9.3 million, respectively.

5. Loans Held for Investment and Allowance for Loan Losses

The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are not included in the consolidated financial statements.

As previously discussed, the loans acquired in the FNB Transaction were subject to loss-share agreements with the FDIC. At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired, except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered into a Termination Agreement pursuant to which all rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements were resolved and terminated. Accordingly, loans which were previously referred to as either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively referred to as “loans held for investment.” Loans that were previously covered by the FDIC loss-share agreements are included in the “covered” portfolio segment as of December 31, 2017 and prior. The majority of the loans previously covered by the FDIC loss-share agreements are comprised primarily of commercial real estate and 1-4 family residential loans. Loans held for investment summarized by portfolio segment are as follows (in thousands).

	December 31,
	2018		2017
Commercial real estate	$	2,940,120	$	2,582,167
Commercial and industrial		1,508,451		1,351,418
Construction and land development		932,909		962,605
1-4 family residential		679,263		429,357
Mortgage warehouse		243,806		329,787
Consumer		47,546		40,446
Broker-dealer (1)		578,363		577,889
Covered		—		182,129
		6,930,458		6,455,798
Allowance for loan losses		(59,486)		(63,686)
Total loans held for investment, net of allowance	$	6,870,972	$	6,392,112

(1) Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.

F-30

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 and 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 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 evaluation based on the significance with which the guarantors are expected to serve as secondary repayment sources.

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.

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

	December 31,
	2018		2017
Carrying amount	$	93,072	$	124,317
Outstanding balance		172,808		230,083

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

	Year Ended December 31,
	2018		2017		2016
Balance, beginning of year	$	98,846	$	156,847	$	194,463
Additions		340		—		—
Reclassifications from nonaccretable difference, net (1)		26,166		12,946		47,407
Disposals of loans		(1,226)		(1,663)		—
Accretion		(43,433)		(69,284)		(84,536)
Transfer of loans to OREO (2)		—		—		(487)
Balance, end of year	$	80,693	$	98,846	$	156,847

(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 non-accrual and expected cash flows are no longer predictable and the accretable yield is eliminated.

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

The remaining nonaccretable difference for PCI loans was $64.2 million and $91.9 million at December 31, 2018 and 2017, respectively. During 2018, 2017 and 2016, 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 PCI loan portfolio acquired in the FNB Transaction as a result of the Bank’s strategic decision to dedicate resources to the liquidation of those loans acquired in the FNB Transaction during the noted periods.

F-31

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), 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 Pooled Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level. Impaired loans, segregated between those considered to be PCI loans and those without credit impairment at acquisition, are summarized by class in the following tables (in thousands).

	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related
December 31, 2018	Principal Balance		No Allowance		Allowance		Investment		Allowance
PCI
Commercial real estate:
Non-owner occupied	$	42,668	$	5,549	$	7,540	$	13,089	$	1,125
Owner occupied		36,246		11,657		2,967		14,624		304
Commercial and industrial		27,403		5,491		1,068		6,559		72
Construction and land development		10,992		74		390		464		92
1-4 family residential		106,503		646		57,681		58,327		1,299
Mortgage warehouse		—		—		—		—		—
Consumer		2,185		9		—		9		—
Broker-dealer		—		—		—		—		—
		225,997		23,426		69,646		93,072		2,892
Non-PCI
Commercial real estate:
Non-owner occupied		—		—		—		—		—
Owner occupied		5,231		4,098		—		4,098		—
Commercial and industrial		22,277		9,891		1,740		11,631		721
Construction and land development		3,430		2,711		535		3,246		31
1-4 family residential		8,695		6,922		—		6,922		—
Mortgage warehouse		—		—		—		—		—
Consumer		149		42		—		42		—
Broker-dealer		—		—		—		—		—
		39,782		23,664		2,275		25,939		752
	$	265,779	$	47,090	$	71,921	$	119,011	$	3,644

	Unpaid		Recorded		Recorded		Total
	Contractual		Investment with		Investment with		Recorded		Related
December 31, 2017	Principal Balance		No Allowance		Allowance		Investment		Allowance
PCI
Commercial real estate:
Non-owner occupied	$	20,155	$	7,770	$	8,207	$	15,977	$	722
Owner occupied		20,042		3,067		6,115		9,182		670
Commercial and industrial		19,752		3,610		2,489		6099		89
Construction and land development		2,001		428		1,010		1,438		215
1-4 family residential		7,001		2,053		2,328		4,381		324
Mortgage warehouse		—		—		—		—		—
Consumer		2,377		12		115		127		18
Broker-dealer		—		—		—		—		—
Covered		226,889		2,641		84,472		87,113		2,697
		298,217		19,581		104,736		124,317		4,735
Non-PCI
Commercial real estate:
Non-owner occupied		—		—		—		—		—
Owner occupied		15,504		10,934		3,686		14,620		932
Commercial and industrial		24,427		15,924		2,072		17,996		365
Construction and land development		668		—		611		611		93
1-4 family residential		1,596		1,177		—		1,177		—
Mortgage warehouse		—		—		—		—		—
Consumer		162		56		—		56		—
Broker-dealer		—		—		—		—		—
Covered		6,341		5,382		—		5,382		—
		48,698		33,473		6,369		39,842		1,390
	$	346,915	$	53,054	$	111,105	$	164,159	$	6,125

F-32

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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

	YearEndedDecember31,
	2018		2017		2016
Commercial real estate:
Non-owner occupied	$	14,533	$	16,623	$	19,871
Owner occupied		21,262		25,307		25,754
Commercial and industrial		21,143		19,189		20,216
Construction and land development		2,880		3,136		4,744
1-4 family residential		35,404		5,797		6,474
Mortgage warehouse		—		—		—
Consumer		117		361		659
Broker-dealer		—		—		—
Covered		46,248		115,085		181,921
	$	141,587	$	185,498	$	259,639

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

	December 31,		December 31,
	2018		2017
Commercial real estate:
Non-owner occupied	$	1,226	$	—
Owner occupied		4,098		14,620
Commercial and industrial		14,870		20,878
Construction and land development		3,278		611
1-4 family residential		7,026		1,614
Mortgage warehouse		—		—
Consumer		41		56
Broker-dealer		—		—
Covered		—		5,104
	$	30,539	$	42,883

At December 31, 2018 and 2017, non-accrual loans included PCI loans of $4.9 million and $3.3 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans can no longer be reasonably estimated. In addition to the non-accrual loans in the table above, $3.4 million and $2.7 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at December 31, 2018 and 2017, respectively.

Interest income, including recoveries and cash payments, recorded on impaired loans was $1.4 million, $1.7 million and $1.3 million during 2018,  2017 and 2016, respectively. Except as noted above, PCI loans are considered to be performing due to the application of the accretion method.

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 may also reconfigure a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

F-33

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

There were no TDRs granted during 2018. Information regarding TDRs granted during 2017 and 2016 is shown in the following table (in thousands). At December 31, 2018 and 2017, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.

	Year Ended December 31, 2017					Year Ended December 31, 2016
	Number of	Balance at		Balance at		Number of	Balance at		Balance at
	Loans	Extension		End of Period		Loans	Extension		End of Period
Commercial real estate:
Non-owner occupied	—	$	—	$	—	—	$	—	$	—
Owner occupied	2		4,775		4,629	—		—		—
Commercial and industrial	1		1,357		1,186	1		1,196		944
Construction and land development	1		655		611	—		—		—
1-4 family residential	—		—		—	—		—		—
Mortgage warehouse	—		—		—	—		—		—
Consumer	—		—		—	—		—		—
Broker-dealer	—		—		—	—		—		—
Covered	—		—		—	—		—		—
	4	$	6,787	$	6,426	1	$	1,196	$	944

All of the loan modifications included in the table above involved payment term extensions. The Bank did not grant principal reductions on any restructured loans during 2018,  2017 or 2016. 

There were no TDRs granted during the twelve months preceding December 31, 2018, for which a payment was at least 30 days past due. The following table presents information regarding TDRs granted during the twelve months preceding December 31, 2017, for which a payment was at least 30 days past due (dollars in thousands).

	Twelve Months Preceding December 31, 2017
	Number of	Balance at		Balance at
	Loans	Extension		End of Period
Commercial real estate:
Non-owner occupied	—	$	—	$	—
Owner occupied	1		1,481		1,352
Commercial and industrial	—		—		—
Construction and land development	1		655		611
1-4 family residential	—		—		—
Mortgage warehouse	—		—		—
Consumer	—		—		—
Broker-dealer	—		—		—
Covered	—		—		—
	2	$	2,136	$	1,963

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

															Accruing Loans (Non-PCI)
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due
December 31, 2018	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	1,174	$	199	$	—	$	1,373	$	1,708,160	$	13,089	$	1,722,622	$	—
Owner occupied		1,364		—		4,173		5,537		1,197,337		14,624		1,217,498		75
Commercial and industrial		1,792		1,049		11,051		13,892		1,488,000		6,559		1,508,451		3
Construction and land development		3,549		—		—		3,549		928,896		464		932,909		—
1-4 family residential		5,987		2,484		1,950		10,421		610,515		58,327		679,263		—
Mortgage warehouse		—		—		—		—		243,806		—		243,806		—
Consumer		254		147		—		401		47,136		9		47,546		—
Broker-dealer		—		—		—		—		578,363		—		578,363		—
	$	14,120	$	3,879	$	17,174	$	35,173	$	6,802,213	$	93,072	$	6,930,458	$	78

F-34

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

															Accruing Loans (Non-PCI)
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		PCI		Total		Past Due
December 31, 2017	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	—	$	—	$	—	$	—	$	1,473,942	$	15,977	$	1,489,919	$	—
Owner occupied		442		—		2,195		2,637		1,080,429		9,182		1,092,248		—
Commercial and industrial		2,702		312		5,714		8728		1,336,591		6,099		1,351,418		640
Construction and land development		1,685		101		—		1,786		959,381		1,438		962,605		—
1-4 family residential		1,490		1,290		418		3,198		421,778		4,381		429,357		—
Mortgage warehouse		—		—		—		0		329,787		—		329,787		—
Consumer		194		20		—		214		40,105		127		40,446		—
Broker-dealer		—		—		—		—		577,889		—		577,889		—
Covered		5,871		1,324		3,226		10,421		84,595		87,113		182,129		283
	$	12,384	$	3,047	$	11,553	$	26,984	$	6,304,497	$	124,317	$	6,455,798	$	923

In addition to the loans shown in the table above, PrimeLending had $83.1 million and $84.5 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $84.0 million and $85.2 million, respectively) that were 90 days past due and accruing interest at December 31, 2018 and 2017, 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 state and local markets.

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

Pass — “Pass” loans present a range of acceptable risks to the Company. 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 Company 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 Company 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 Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company 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 Company 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.

F-35

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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

December 31, 2018	Pass		Special Mention		Substandard		PCI		Total
Commercial real estate:
Non-owner occupied	$	1,673,424	$	—	$	36,109	$	13,089	$	1,722,622
Owner occupied		1,175,225		2,083		25,566		14,624		1,217,498
Commercial and industrial		1,433,227		15,320		53,345		6,559		1,508,451
Construction and land development		929,130		—		3,315		464		932,909
1-4 family residential		601,264		393		19,279		58,327		679,263
Mortgage warehouse		243,806		—		—		—		243,806
Consumer		47,416		—		121		9		47,546
Broker-dealer		578,363		—		—		—		578,363
	$	6,681,855	$	17,796	$	137,735	$	93,072	$	6,930,458

December 31, 2017	Pass		Special Mention		Substandard		PCI		Total
Commercial real estate:
Non-owner occupied	$	1,460,758	$	6,408	$	6,776	$	15,977	$	1,489,919
Owner occupied		1,030,611		1,239		51,216		9,182		1,092,248
Commercial and industrial		1,275,489		17,354		52,476		6,099		1,351,418
Construction and land development		958,157		2,259		751		1,438		962,605
1-4 family residential		419,317		—		5,659		4,381		429,357
Mortgage warehouse		329,787		—		—		—		329,787
Consumer		40,211		—		108		127		40,446
Broker-dealer		577,889		—		—		—		577,889
Covered		81,583		356		13,077		87,113		182,129
	$	6,173,802	$	27,616	$	130,063	$	124,317	$	6,455,798

Allowance for Loan Losses

It is management’s responsibility to, at the end of each quarter, or more frequently as deemed necessary, analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio. 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 either the pool discount or the post-acquisition allowance. Recoveries on charge-offs of loans acquired in the Bank Transactions that occurred prior to 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 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 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 using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future cash flows discounted at the loan’s effective rate, (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 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 loan category, and further disaggregates commercial and industrial loans by collateral type. The analysis uses net charge-off experience by considering charge-offs and recoveries in determining the loss rate. 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.

F-36

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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, non-accrual 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, non-accrual 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. Classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. The magnitude of the impact of these factors on the 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.

In connection with the Bank Transactions, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. PCI loans are accounted for in pools as well as on an individual loan basis. 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 to those used for the initial fair value 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 previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield. This increase in accretable yield is taken into income over the remaining life of the loan.

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.

The allowance for loan losses is subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While the Company believes it has an appropriate allowance for the existing loan portfolio at December 31, 2018, additional provisions for losses on existing loans may be necessary in the future.

During 2016, the Bank discovered irregularities in connection with a single loan that was in default. As a result, the Bank increased its provision for loan losses and recorded a $24.5 million charge-off during the second quarter of 2016,

F-37

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

representing the entire outstanding principal balance of the loan. During the second quarter of 2017, the Bank recorded other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery of a document delivered in connection with this loan.

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

	Balance,		Provision (recovery)		Loans		Recoveries on		Balance,
Year Ended December 31, 2018	beginning of year		for loan losses		charged off		charged of loans		end of year
Commercial real estate	$	27,232	$	668	$	(800)	$	—	$	27,100
Commercial and industrial		23,698		6,750		(12,741)		4,273		21,980
Construction and land development		7,847		(1,792)		—		6		6,061
1-4 family residential		4,245		(292)		(143)		146		3,956
Mortgage warehouse		—		—		—		—		—
Consumer		311		(15)		(93)		64		267
Broker-dealer		353		(231)		—		—		122
Total	$	63,686	$	5,088	$	(13,777)	$	4,489	$	59,486

	Balance,		Provision (recovery)		Loans		Recoveries on		Balance,
Year Ended December 31, 2017	beginning of year		for loan losses		charged off		charged of loans		end of year
Commercial real estate	$	22,262	$	4,320	$	(193)	$	24	$	26,413
Commercial and industrial		21,369		6,725		(6,253)		1,833		23,674
Construction and land development		7,002		848		(13)		7		7,844
1-4 family residential		2,974		(701)		(112)		201		2,362
Mortgage warehouse		—		—		—		—		—
Consumer		424		16		(208)		79		311
Broker-dealer		155		198		—		—		353
Covered		413		2,865		(571)		22		2,729
Total	$	54,599	$	14,271	$	(7,350)	$	2,166	$	63,686

	Balance,		Provision (recovery)		Loans		Recoveries on		Balance,
Year Ended December 31, 2016	beginning of year		for loan losses		charged off		charged of loans		end of year
Commercial real estate	$	15,669	$	7,785	$	(1,243)	$	51	$	22,262
Commercial and industrial		19,845		33,369		(33,776)		1,931		21,369
Construction and land development		6,064		938		—		—		7,002
1-4 family residential		3,314		(488)		(196)		344		2,974
Mortgage warehouse		—		—		—		—		—
Consumer		314		190		(203)		123		424
Broker-dealer		209		(53)		(1)		—		155
Covered		1,532		(1,121)		(119)		121		413
Total	$	46,947	$	40,620	$	(35,538)	$	2,570	$	54,599

F-38

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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

	Loans individually		Loans collectively
	evaluated for		evaluated for		PCI
December 31, 2018	impairment		impairment		loans			Total
Commercial real estate	$	3,909	$	2,908,498	$	27,713	$	2,940,120
Commercial and industrial		10,741		1,491,151		6,559		1,508,451
Construction and land development		3,241		929,204		464		932,909
1-4 family residential		—		620,936		58,327		679,263
Mortgage warehouse		—		243,806		—		243,806
Consumer		—		47,537		9		47,546
Broker-dealer		—		578,363		—		578,363
Total	$	17,891	$	6,819,495	$	93,072	$	6,930,458

	Loans individually		Loans collectively
	evaluated for		evaluated for		PCI
December 31, 2017	impairment		impairment		loans			Total
Commercial real estate	$	13,782	$	2,543,226	$	25,159	$	2,582,167
Commercial and industrial		16,819		1,328,500		6,099		1,351,418
Construction and land development		611		960,556		1,438		962,605
1-4 family residential		—		424,976		4,381		429,357
Mortgage warehouse		—		329,787		—		329,787
Consumer		—		40,319		127		40,446
Broker-dealer		—		577,889		—		577,889
Covered		—		95,016		87,113		182,129
Total	$	31,212	$	6,300,269	$	124,317	$	6,455,798

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

	Loans individually		Loans collectively
	evaluated for		evaluated for		PCI
December 31, 2018	impairment		impairment		loans			Total
Commercial real estate	$	—	$	25,671	$	1,429	$	27,100
Commercial and industrial		721		21,187		72		21,980
Construction and land development		31		5,938		92		6,061
1-4 family residential		—		2,657		1,299		3,956
Mortgage warehouse		—		—		—		—
Consumer		—		267		—		267
Broker-dealer		—		122		—		122
Total	$	752	$	55,842	$	2,892	$	59,486

	Loans individually		Loans collectively
	evaluated for		evaluated for		PCI
December 31, 2017	impairment		impairment		loans			Total
Commercial real estate	$	932	$	24,089	$	1,392	$	26,413
Commercial and industrial		365		23,220		89		23,674
Construction and land development		93		7,536		215		7,844
1-4 family residential		—		2,038		324		2,362
Mortgage warehouse		—		—		—		—
Consumer		—		293		18		311
Broker-dealer		—		353		—		353
Covered		—		32		2,697		2,729
Total	$	1,390	$	57,561	$	4,735	$	63,686

6. Covered Assets and Indemnification Asset

The Bank acquired certain assets and assumed certain liabilities of FNB in connection with an FDIC-assisted transaction on September 13, 2013 (the “Bank Closing Date”). As part of the Purchase and Assumption Agreement (the “P&A Agreement”) by and among the FDIC (as receiver of FNB), the Bank and the FDIC, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company referred to acquired commercial and single family residential loan portfolios and OREO that were subject to the loss-share agreements as “covered loans” and “covered OREO”, respectively, and these assets were presented as separate line items in the Company’s consolidated balance sheets. Collectively, covered loans and covered OREO were referred to as “covered assets”. Pursuant to the loss-share agreements, the FDIC agreed to reimburse the Bank the following amounts

F-39

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses incurred. Net losses were defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that were reimbursable to the FDIC for a particular asset was limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There was no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and single family residential assets were in effect for five years and ten years, respectively, from the Bank Closing Date, and the loss recovery provisions to the FDIC were in effect for eight years and ten years, respectively, from the Bank Closing Date. The asset arising from the loss-share agreements, referred to as the “FDIC Indemnification Asset,” was measured separately from the covered loan portfolio because the agreements were not contractually embedded in the covered loans and were not transferable if the Bank chose to dispose of the covered loans. In accordance with the loss-share agreements, the Bank may have been required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if its actual net realized losses over the life of the loss-share agreements were less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment was calculated using a defined formula set forth in the P&A Agreement.

At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired, except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered into a Termination Agreement pursuant to which the loss-share agreements for single family residential assets and commercial assets were terminated in exchange for the payment by the FDIC to the Bank of $6.26 million. Accordingly, loans which were previously referred to as either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively referred to as “loans held for investment.”

Covered Other Real Estate Owned

A summary of the activity in OREO previously covered by the FDIC loss-share agreements is as follows (in thousands)(1).

	Year Ended December 31,
	2018		2017		2016
Balance, beginning of year	$	36,744	$	51,642	$	99,090
Additions to covered OREO		5,284		6,700		13,876
Dispositions of covered OREO		(10,145)		(17,866)		(42,843)
Valuation adjustments in the period		(2,027)		(3,732)		(18,481)
Transfer to other assets as a result of loss-share termination		(29,856)		—		—
Balance, end of year	$	—	$	36,744	$	51,642

(1) The additions, dispositions and valuation adjustments during 2018 as presented in the table represent activity from January 1, 2018 through September 30, 2018, prior to the expiration and termination of the FDIC loss-share agreements. All previously “covered” OREO is included in other assets as of December 31, 2018.

During 2018,  2017 and 2016, 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. The downward valuations recorded during the periods presented above were related to covered assets subject to the loss-share agreements with the FDIC. 

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 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.  Any increases to fair value up to the amount of cumulative losses previously recognized are recorded as gains when the asset is subsequently sold. 

F-40

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

As previously discussed, upon termination of the loss-share agreements, OREO acquired in the FNB Transaction which was previously identified as “covered” is now included in other assets within the consolidated balance sheets.

FDIC Indemnification Asset

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

	Year Ended December 31,
	2018		2017		2016
Balance, beginning of year	$	29,340	$	71,313	$	91,648
FDIC Indemnification Asset accretion (amortization)		(6,509)		(17,083)		242
Transfers to due from FDIC and other		—		(24,890)		(20,577)
FDIC loss-share termination		(22,831)		—		—
Balance, end of year	$	—	$	29,340	$	71,313

In October 2018, in conjunction with the receipt of the $6.26 million payment associated with the termination of the FDIC loss-share agreements, the then-remaining FDIC Indemnification Asset of $22.8 million and the FDIC true-up accrual of $16.6 million were removed with no further impact to the Company’s consolidated statements of operations.

7. Cash and Due from Banks

Cash and due from banks consisted of the following (in thousands).

	December 31,
	2018		2017
Cash on hand	$	47,621	$	44,765
Clearings and collection items		83,949		92,271
Deposits at Federal Reserve Bank		425,770		248,442
Deposits at Federal Home Loan Bank		1,595		1,501
Deposits in FDIC-insured institutions		85,138		99,998
	$	644,073	$	486,977

The amounts above include interest-bearing deposits of $469.4 million and $302.2 million at December 31, 2018 and 2017, respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at December 31, 2018.

8. Premises and Equipment

The components of premises and equipment are summarized as follows (in thousands).

	December 31,
	2018		2017
Land and premises	$	147,783	$	111,203
Furniture and equipment		259,082		207,552
		406,865		318,755
Less accumulated depreciation and amortization		(169,492)		(141,178)
	$	237,373	$	177,577

The amounts shown above include gross assets recorded under capital leases of $7.8 million and $8.4 million, with accumulated amortization of $3.6 million and $3.3 million at December 31, 2018 and 2017, respectively.

Occupancy expense was reduced by rental income of $1.4 million, $1.8 million and $2.0 million during 2018,  2017 and 2016, respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of capital leases, amounted to $33.1 million, $34.6 million and $35.4 million during 2018,  2017 and 2016, respectively.

F-41

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

9. Goodwill and Other Intangible Assets

At December 31, 2018, the carrying amount of goodwill of $291.4 million was comprised of $39.6 million recorded during the third quarter of 2018 in connection with the BORO Acquisition, $24.0 million recorded in connection with the acquisition of NLC and $227.8 million recorded in connection with the PlainsCapital Merger.

Other intangible assets of $38.0 million and $36.4 million at December 31, 2018 and 2017, respectively, include an indefinite lived intangible asset with an estimated fair value of $3.0 million related to state licenses acquired as a part of the NLC acquisition in January 2007.

The Company performed required annual impairment tests of its goodwill and other intangible assets having an indefinite useful life as of October 1st for each of its reporting units. At October 1, 2018, the Company determined that the estimated fair value of each of its reporting units exceeded its carrying value. The Company estimated the fair values of its reporting units based on both a market and income approach using historical, normalized actual and forecasted results. Based on this evaluation, the Company concluded that the goodwill and other identifiable intangible assets were fully realizable.

The Company’s evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that may change over time. If future discounted cash flows become less than those projected by the Company, future impairment charges may become necessary that could have a materially adverse impact on the Company’s results of operations and financial condition. As quoted market prices in active stock markets are relevant evidence of fair value, a significant decline in the Company’s common stock trading price may indicate an impairment of goodwill.

The carrying value of intangible assets subject to amortization was as follows (in thousands).

	Estimated			Gross				Net
	Useful Life			Intangible		Accumulated		Intangible
December 31, 2018	(Years)			Assets		Amortization		Assets
Core deposits	4	-	12	$	48,930	$	(31,062)	$	17,868
Trademarks and trade names	15	-	20		20,000		(8,844)		11,156
Noncompete agreements	4	-	6		11,650		(11,650)		—
Customer contracts and relationships	12	-	14		21,400		(15,465)		5,935
Agent relationships	13				3,600		(3,554)		46
				$	105,580	$	(70,575)	$	35,005

	Estimated			Gross				Net
	Useful Life			Intangible		Accumulated		Intangible
December 31, 2017	(Years)			Assets		Amortization		Assets
Core deposits	4	-	12	$	38,930	$	(26,381)	$	12,549
Trademarks and trade names	15	-	20		20,000		(7,860)		12,140
Noncompete agreements	4	-	6		11,650		(10,529)		1,121
Customer contracts and relationships	12	-	14		21,400		(13,906)		7,494
Agent relationships	13				3,600		(3,472)		128
				$	95,580	$	(62,148)	$	33,432

Amortization expense related to intangible assets during 2018,  2017 and 2016 was $8.4 million, $8.3 million and $10.2 million, respectively.

The estimated aggregate future amortization expense for intangible assets at December 31, 2018 is as follows (in thousands).

2019	$	7,851
2020		6,539
2021		5,313
2022		3,987
2023		2,860
Thereafter		8,455
	$	35,005

F-42

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

10. 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 the serviced portfolio (dollars in thousands).

	Year Ended December 31,
	2018			2017			2016
Balance, beginning of year	$	54,714		$	61,968		$	52,285
Additions		25,028			16,401			23,381
Sales		(9,303)			(17,499)			(7,586)
Changes in fair value:
Due to changes in model inputs or assumptions(1)		159			(1,722)			(153)
Due to customer payoffs		(4,496)			(4,434)			(5,959)
Balance, end of year	$	66,102		$	54,714		$	61,968
	December31,
	2018			2017
Mortgage loans serviced for others	$	5,086,461		$	4,762,042
MSR asset as a percentage of serviced mortgage loans		1.30	%		1.15	%

(1) Primarily represents normal customer payments, 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.

	December 31,
	2018		2017
Weighted average constant prepayment rate	10.51	%	10.93	%
Weighted average discount rate	11.11	%	11.03	%
Weighted average life (in years)	7.1		6.9

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).

	December 31,
	2018		2017
Constant prepayment rate:
Impact of 10% adverse change	$	(2,512)	$	(1,948)
Impact of 20% adverse change		(4,980)		(3,839)
Discount rate:
Impact of 10% adverse change		(2,677)		(2,135)
Impact of 20% adverse change		(5,139)		(4,103)

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the 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 $23.3 million, $20.7 million and $23.8 million during 2018,  2017 and 2016, respectively, were included in other noninterest income within the consolidated statements of operations.

F-43

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

11. Deposits

Deposits are summarized as follows (in thousands).

	December 31,
	2018		2017
Noninterest-bearing demand	$	2,560,750	$	2,411,849
Interest-bearing:
NOW accounts		1,358,196		1,202,752
Money market		2,725,541		2,222,555
Brokered - money market		5,000		101,624
Demand		393,685		411,771
Savings		184,700		218,812
Time		1,308,284		1,313,482
Brokered - time		—		95,274
	$	8,536,156	$	7,978,119

At December 31, 2018, deposits include $655.6 million of time deposit accounts that meet or exceed the FDIC insurance limit of $250,000. Scheduled maturities of interest-bearing time deposits at December 31, 2018 are as follows (in thousands).

2019	$	991,402
2020		237,452
2021		21,269
2022		13,327
2023 and thereafter		44,834
	$	1,308,284

12. Short-term Borrowings

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

	December 31,
	2018		2017
Federal funds purchased	$	100,100	$	101,775
Securities sold under agreements to repurchase		576,707		539,149
Federal Home Loan Bank		200,000		250,000
Short-term bank loans		189,000		315,500
	$	1,065,807	$	1,206,424

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

F-44

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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

	Year Ended December 31,
	2018			2017			2016
Average balance during the year	$	701,622		$	588,847		$	368,012
Average interest rate during the year		1.96	%		1.06	%		0.58	%
Maximum month-end balance during the year		849,568			904,704			520,715
	December 31,
	2018			2017
Average interest rate at end of year		2.43	%		1.21	%
Securities underlying the agreements at end of year:
Carrying value	$	587,609		$	581,636
Estimated fair value	$	618,231		$	598,300

FHLB short-term borrowings 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.  At December 31, 2018, the Bank had available collateral of $3.4 billion, substantially all of which was blanket collateral. Other information regarding FHLB short-term borrowings is shown in the following tables (dollars in thousands).

	Year Ended December 31,
	2018			2017			2016
Average balance during the period	$	214,110		$	390,616		$	361,475
Average interest rate during the period		2.09	%		1.08	%		0.46	%
Maximum month-end balance during the year	$	675,000		$	850,000		$	1,000,000
		December 31,
		2018			2017
Average interest rate at end of period		2.65	%		1.30	%

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 December 31, 2018 and 2017 was 3.35% and 2.27%, respectively.

13. Notes Payable

Notes payable consisted of the following (in thousands).

	December 31,
	2018		2017
Senior Notes due April 2025, net of discount of $1,393 and $1,545, respectively	$	148,607	$	148,455
FHLB notes, net of premium of $222 and $436, respectively, with maturities ranging from September 2020 to June 2030 and interest payable monthly		4,391		19,402
NLIC note payable due May 2033, three-month LIBOR plus 4.10%  (6.89% at December 31, 2018) with interest payable quarterly		10,000		10,000
NLIC note payable due September 2033, three-month LIBOR plus 4.05%  (6.84% at December 31, 2018) with interest payable quarterly		10,000		10,000
ASIC note payable due April 2034, three-month LIBOR plus 4.05%  (6.84% at December 31, 2018) with interest payable quarterly		7,500		7,500
Insurance company line of credit due December 30, 2019, 3.25% plus a calculated index rate (4.220% at December 31, 2018) with interest payable quarterly		—		1,000
Ventures Management lines of credit due March 2019		48,374		12,452
	$	228,872	$	208,809

F-45

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Senior Notes

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 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 utilized the remainder for general corporate purposes. Unamortized debt issuance costs presented as a reduction from the Senior Notes are discussed further in Note 1 to the consolidated financial statements.

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. 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 the Company’s 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.

Federal Home Loan Bank notes

The FHLB notes, assumed by the Bank in the SWS Merger, have interest rates ranging from 2.88% to 5.70%, with a weighted average interest rate of 3.69% at December 31, 2018. The FHLB notes, as well as other borrowings from the FHLB, are collateralized by FHLB stock, a blanket lien on commercial and real estate loans, as well as by the amount of securities that are in safekeeping at the FHLB, the value of which was $3.4 billion at December 31, 2018.

NLIC and ASIC Notes Payable

The NLIC and ASIC notes payable to unaffiliated companies are each subordinated in right of payment to all policy claims and other indebtedness of NLIC and ASIC, respectively. Further, all payments of principal and interest require the prior approval of the Insurance Commissioner of the State of Texas and are only payable to the extent that the statutory surplus of NLIC exceeds $30 million and ASIC exceeds $15 million.

F-46

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

The NLIC and ASIC loan agreements relating to the notes payable contain various covenants pertaining to limitations on additional debt, dividends, officer and director compensation, and minimum capital requirements. The Company was in compliance with the covenants at December 31, 2018.

NLC has entered into an indenture relating to the NLIC and ASIC notes payable which provides that (i) if a person or group becomes the beneficial owner directly or indirectly of 50% or more of its equity securities and (ii) if NLC’s ratings are downgraded by a nationally recognized statistical rating organization as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), then each holder of the notes governed by such indenture has the right to require that NLC purchase such holder’s notes in whole or in part at a price equal to 100% of the outstanding principal amount.

Insurance Company Line of Credit

The Company’s insurance subsidiary has a line of credit with a financial institution which allows for borrowings by NLC of up to $7.5 million and is collateralized by substantially all of NLC’s assets. The loan agreements relating to the line of credit contain various financial and other covenants which must be maintained until all indebtedness to the financial institution is repaid. The Company was in compliance with the covenants at December 31, 2018.

Ventures Management Lines of Credit

At December 31, 2018, Ventures Management’s ABAs had combined available lines of credit totaling $110.0 million, $50.0 million of which was with a single unaffiliated bank and $60.0 million of which was with the Bank. At December 31, 2018, the outstanding balance of $48.4 million was related to two lines of credit, both with an unaffiliated bank with stated interest rates of the greater of a calculated index rate on mortgage notes or 2.75%. The weighted average interest rate of these two lines of credit at December 31, 2018 was 4.16%. The Ventures Management lines of credit are collateralized by mortgage notes, and the loan agreements relating to the lines of credit contain various financial and other covenants which must be maintained until all indebtedness to the financial institution is repaid. The Company was in compliance with the covenants at December 31, 2018.

Scheduled Maturities

Scheduled maturities for notes payable outstanding at December 31, 2018 are as follows (in thousands).

2019	$	48,374
2020		2,389
2021		462
2022		157
2023		—
Thereafter		178,661
	$	230,043

14. Junior Subordinated Debentures and Trust Preferred Securities

PCC has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which, PCC Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole purpose of issuing and selling preferred securities and common securities, using the resulting proceeds to acquire junior subordinated debentures issued by PCC (the “Debentures”). Accordingly, the Debentures are the sole assets of the Trusts, and payments under the Debentures are the sole revenue of the Trusts. All of the common securities are owned by PCC; however, PCC is not the primary beneficiary of the Trusts. Accordingly, the Trusts are not included in the Company’s consolidated financial statements.

The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have invested the proceeds from the securities in floating rate Debentures of PCC.

F-47

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Information regarding the PCC Debentures is shown in the following table (in thousands).

Investor	Issue Date	Amount
PCC Statutory Trust I	July 31, 2001	$	18,042
PCC Statutory Trust II	March 26, 2003	$	18,042
PCC Statutory Trust III	September 17, 2003	$	15,464
PCC Statutory Trust IV	February 22, 2008	$	15,464

The stated term of the Debentures is 30 years with interest payable quarterly. The rate on the Debentures, which resets quarterly, is 3-month LIBOR plus an average spread of 3.22%. The total average interest rate at December 31, 2018 was 5.95%. The term, rate and other features of the preferred securities are the same as the Debentures. PCC’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee of the Trust’s obligations under the preferred securities.

15. Income Taxes

The significant components of the income tax provision are as follows (in thousands).

	Year Ended December 31,
	2018		2017		2016
Current:
Federal	$	19,504	$	63,769	$	82,970
State		2,349	$	5,440	$	10,181
		21,853		69,209		93,151
Deferred:
Federal		11,352	$	40,176	$	(6,732)
State		1,845	$	757	$	(2,958)
		13,197		40,933		(9,690)
	$	35,050	$	110,142	$	83,461

The income tax provision differs from the amount that would be computed by applying the statutory Federal income tax rate to income before income taxes as a result of the following (in thousands). The applicable corporate federal income tax rates were 21% for 2018 and 35% for 2017 and 2016.

	Year Ended December 31,
	2018		2017		2016
Computed tax at federal statutory rate	$	33,763	$	85,150	$	80,992
Tax effect of:
Tax Legislation		—		28,363		—
Non-taxable acquisition adjustment		263		(6,682)		—
Nondeductible transaction costs		86		774		2,608
Nondeductible expenses		2,864		3,089		3,301
State income taxes		3,313		4,028		4,708
Tax-exempt income, net		(1,432)		(2,758)		(2,850)
Valuation allowance		—		—		(2,094)
Minority interest		(900)		(210)		(718)
Share-based compensation benefit		(273)		(412)		(2,391)
Prior year return to provision adjustment		(1,682)		(943)		251
Other		(952)		(257)		(346)
	$	35,050	$	110,142	$	83,461

F-48

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

The components of the tax effects of temporary differences that give rise to the net deferred tax asset included in other assets within the consolidated balance sheets are as follows (in thousands).

	December 31,
	2018		2017
Deferred tax assets:
Net operating and built-in loss carryforward	$	9,656	$	11,697
Purchase accounting adjustment - loans		19,673		24,883
Allowance for loan losses		14,137		15,105
Compensation and benefits		14,865		15,860
Legal and other reserves		3,483		4,359
Foreclosed property		3,974		5,859
Other		15,142		11,961
		80,930		89,724
Deferred tax liabilities:
Premises and equipment		12,344		10,288
FDIC Indemnification Asset		—		2,960
Intangible assets		9,326		8,994
Derivatives		4,169		4,527
Loan servicing		15,761		13,184
Other		7,074		8,157
		48,674		48,110
Net deferred tax asset	$	32,256	$	41,614

The Tax Legislation enacted on December 22, 2017 significantly revised the U.S. corporate income tax by lowering corporate income tax rates. The Company’s results during the fourth quarter and full year of 2017 include the estimated impact of a non-recurring, non-cash charge of $28.4 million as a result of the enactment of the Tax Legislation. The charge was primarily due to the revaluation of deferred tax assets as a result of the reduction in the corporate tax rate from 35% to 21%, and other anticipated impacts associated with the Tax Legislation. Deferred tax asset amounts recorded in December 2017 following enactment of the Tax Legislation were final as of September 30, 2018.

The Company’s effective tax rate was 21.8%,  45.3% and 36.1% during 2018,  2017 and 2016, respectively. The 2018 effective tax rate approximated statutory rates and included the effect of tax planning strategies in conjunction with the Tax Legislation, offset by non-deductible expenses. In addition, a tax benefit was recognized from the portion of the indemnification reserve that was a deductible settlement amount. The effective tax rate during 2017 was higher than the statutory rate primarily due to the revaluation of deferred tax assets as a result of the Tax Legislation, partially offset by a non-taxable gain recorded in the resolution of the SWS appraisal proceedings as the SWS Merger was a tax-free reorganization. The effective tax rate during 2016 was relatively consistent with the statutory rate, but did include effects related to non-deductible transaction costs associated with the SWS Merger, offset by the reversal of a valuation allowance of $2.2 million previously established on a deferred tax asset associated with the SWS Merger and the recognition of excess tax benefits on share-based payment awards as a result of the Company’s adoption of the provisions of Accounting Standards Update (“ASU”) 2016-09 as of January 1, 2016.

At December 31, 2018 and 2017, the Company had net operating loss carryforwards for Federal income tax purposes of $20.9 million and $29.9 million, respectively (or $4.4 million and $6.3 million, respectively, on a tax effected basis at applicable rates for respective tax years). The net operating loss carryforwards are subject to an annual Section 382 limitation on their usage. These net operating loss carryforwards expire in starting in 2033. 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. At December 31, 2018, the Company also had a recognized built-in loss (“RBIL”) carryover of $20.5 million from the ownership change resulting from the SWS Merger. These RBILs, if recognized during a five year recognition period before January 1, 2020, are subject to the annual Section 382 limitation rules similar to the Company’s net operating loss carryforwards. The RBIL’s are expected to be fully realized prior to any expiration. The Company’s remaining net unrealized built-in loss of $9.4 million, if recognized during a five year recognition period before January 1, 2020, would also be subject to the Section 382 limitation.

F-49

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Based on the Company’s evaluation of its deferred tax assets, management determined that no valuation allowance against its gross deferred tax assets was necessary at December 31, 2018 or 2017.  

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. At December 31, 2018 and 2017, the total amount of gross unrecognized tax benefits was $3.1 million and $1.6 million, respectively, of which $2.5 million and $1.2 million, respectively, if recognized, would favorably impact the Company’s effective tax rate. The aggregate changes in gross unrecognized tax benefits, which excludes interest and penalties, are as follows (in thousands).

	Year Ended December 31,
	2018		2017		2016
Balance, beginning of year	$	1,574	$	1,704	$	644
Increases related to tax positions taken during a prior year		770		476		844
Decreases related to tax positions taken during a prior year		—		(1,273)		—
Increases related to tax positions taken during the current year		712		667		216
Balance, end of year	$	3,056	$	1,574	$	1,704

Specific positions that may be resolved include issues involving apportionment and tax credits. At December 31, 2018, the unrecognized tax benefit is recorded as taxes receivable, which is included in other assets within the consolidated balance sheet.

The Company files income tax returns in U.S. federal and numerous state jurisdictions. The Company is subject to tax audits in numerous jurisdictions in the United States until the applicable statute of limitations expires. The Company is no longer subject to U.S. federal tax examinations for tax years prior to 2015. The Company is open for various state tax audits for tax years 2014 and later.

16. Employee Benefits

Hilltop and its subsidiaries have benefit plans that provide for elective deferrals by employees under Section 401(k) of the Internal Revenue Code. Employee contributions are determined by the level of employee participation and related salary levels per Internal Revenue Service regulations. Hilltop and its subsidiaries match a portion of employee contributions based on the amount of eligible employees’ contributions and salaries. The amount charged to operating expense for these matching contributions totaled $15.0 million, $13.9 million and $15.1 million during 2018,  2017 and 2016, respectively.

Effective upon the completion of the PlainsCapital Merger, the Company recorded a liability of $8.9 million associated with separate retention agreements entered into between Hilltop and two executive officers. At December 31, 2018 and 2017, the recorded liability, including interest, was $9.2 million and $9.1 million, respectively.

The Bank purchased $15.0 million of flexible premium universal life insurance in 2001 to help finance the annual expense incurred in providing various employee benefits. At December 31, 2018 and 2017, the carrying value of the policies included in other assets was $26.5 million and $25.8 million, respectively. During each of 2018,  2017 and 2016, the Bank recorded income of $0.6 million related to the policies that was reported in other noninterest income within the consolidated statement of operations.

Deferred Compensation Plan

As a result of the SWS Merger, the Company assumed a deferred compensation plan (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.

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 December 31, 2018 and 2017, respectively. Investments in Hilltop common stock, which are carried at cost, 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 December 31, 2018 and 2017, respectively.

17. Related Party Transactions

Pursuant to a Sublease Agreement, Diamond A Administration Company LLC (“Diamond A Admin”), an affiliate of Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of  16.8%  of Hilltop common stock at December 31, 2018, provided office space to Hilltop at a cost of $24 thousand per month. This Sublease Agreement expired July 31, 2018 and was not renewed.

Jeremy B. Ford, a director and the President and Co-Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owned 16.8% of the outstanding Hilltop common stock at December 31, 2018. He also is a director and the Secretary of Diamond A Admin, which provided office space to Hilltop as described in the preceding paragraph. Diamond A Admin is owned by Hunter’s Glen/Ford, Ltd., a limited partnership in which a trust for the benefit of Jeremy B. Ford is a 46% limited partner.

Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop’s General Counsel and Secretary, is the son-in-law of Gerald J. Ford. Accordingly, Messrs. Jeremy Ford and Corey Prestidge are brothers-in-law.

In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and their affiliates (collectively referred to as related parties) totaling $1.2 million and $34.6 million at December 31, 2018 and 2017, respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. For such loans during 2018, there were no principal additions and total principal payments were $33.5 million.

At December 31, 2018 and 2017, the Bank held deposits of related parties of $126.3 million and $151.0 million, respectively.

A related party is the lessor in an operating lease with the Bank. The Bank’s minimum payment under the lease is $0.5 million annually through 2028, for an aggregate remaining obligation of $5.0 million at December 31, 2018.

The Bank purchased loans from a company for which a related party serves as a director, president and chief executive officer. At December 31, 2018 and 2017, the outstanding balance of the purchased loans was $1.2 million and $2.1 million, respectively.  The loans were purchased with recourse in the ordinary course of business and the related party had no direct financial interest in the transaction.

Hilltop Plaza Investment

On July 31, 2018, HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) purchased approximately 1.7 acres of land in the City of University Park, Texas for $38.5 million. Hillcrest Land LLC is owned equally between Hilltop Investments I, LLC, a wholly owned entity of Hilltop, and Diamond Ground, LLC, an affiliate of Gerald J. Ford. Each of Hilltop Investments I, LLC and Diamond Ground, LLC contributed $19.3 million to Hillcrest Land LLC to complete the purchase. As the voting rights of Hillcrest Land LLC are shared equally between the Company and Diamond Ground, LLC, there is no primary beneficiary, and Diamond Ground, LLC’s interest in Hillcrest Land LLC has been reflected as a noncontrolling interest in the Company’s consolidated financial statements. Therefore, the Company has consolidated Hillcrest Land LLC under the VIE model according to the “most-closely associated” test. The purchased land is included within premises and equipment, net in the consolidated balance sheets. Any income (loss) associated with Hillcrest Land LLC is included within other noninterest income in the consolidated statements of operations. Trusts for which Jeremy Ford and the wife of Corey Prestidge are a beneficiary own 10.2% and 10.1%, respectively, of Diamond Ground, LLC.

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

In connection with the purchase of the land, Hillcrest Land LLC entered into a 99-year ground lease of the land with three tenants-in-common: SPC Park Plaza Partners LLC (“Park Plaza LLC”), an unaffiliated entity which received an undivided 50% leasehold interest; HTH Hillcrest Project LLC (“HTH Project LLC”), a wholly owned subsidiary of Hilltop, which received an undivided 25% leasehold interest; and Diamond Hillcrest, LLC (“Diamond Hillcrest”), an entity owned by Mr. Gerald J. Ford, which received an undivided 25% leasehold interest (collectively, the “Co-Owners”). The ground lease is triple net. The base rent from the Co-Owners under the ground lease commences 18 months after the ground lease was signed at $1.8 million per year and increases 1.0% per year each January 1 thereafter. The ground lease was classified as an operating lease under ASC 840, and the accounting commencement date was determined to be July 31, 2018, the date the land was available to the Co-Owners. 

Concurrent with the ground lease, the Co-Owners entered into an agreement to purchase the improvements currently being constructed on the land, which is a mixed-use project containing a six-story building (“Hilltop Plaza”). HTH Project LLC and Diamond Hillcrest each own an undivided 25% interest in Hilltop Plaza. Park Plaza LLC owns the remaining undivided 50% interest in Hilltop Plaza. Park Plaza LLC has agreed to serve as the Co-Owner property manager under the Co-Owners Agreement; however, certain actions require unanimous approval of all Co-Owners. Hilltop Plaza will be funded through a $41.0 million construction loan from an unaffiliated third party bank, as well as cash contributions of $5.3 million from each of HTH Project LLC and Diamond Hillcrest. HTH Project LLC’s undivided interest in Hilltop Plaza is accounted for as an equity method investment as the tenants-in-common have joint control over decisions regarding Hilltop Plaza. The investment is included within other assets in the consolidated balance sheets and any income (loss) is included within other noninterest income in the consolidated statements of operations.

Hilltop and the Bank entered into leases for an aggregate of approximately 72,000 of the total 119,000 square feet of rentable space in Hilltop Plaza to serve as the headquarters for both companies. The two separate 129-month office and retail leases have combined total base rent of approximately $35 million with the first nine months of rent abated. Move-in is expected in the fourth quarter of 2019. The office and retail leases were considered under the build-to-suit provisions of ASC 840, and the Company was determined to be the accounting owner of the project as its affiliate, HTH Project LLC, has an equity investment in the project. As such, the assets of Hilltop Plaza are recognized during the construction period as costs are incurred to construct the asset, with a corresponding liability representing the costs paid for by the lessor (the Co-Owners). At December 31, 2018, the $27.8 million of costs incurred to date are included within premises and equipment and other liabilities, respectively, in the consolidated balance sheets.

All intercompany transactions associated with the Hilltop Plaza investment and the related transactions discussed above are eliminated in consolidation.

18. Commitments and Contingencies

During 2017, the Bank acted as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated to $3.0 million at December 31, 2017. There were no such transactions during 2018.

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. 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, the Company does not take into account the availability of insurance 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 probable 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. 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.

F-52

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 is complete; whether meaningful settlement discussions have 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.

Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock (the “Petitioners”) filed petitions in the Court of Chancery of the State of Delaware (the “Court”) seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. These petitions were consolidated as In re SWS Group, Inc., C.A. No. 10554-VCG. On May 30, 2017, the Court issued its Memorandum Opinion in the matter.  The Court found the “fair value” of the shares of SWS common stock as of the date of the transaction was $6.38 per share. Accordingly, Hilltop paid cash of $6.38 per share, plus statutory interest from the effective date of the merger until the date of payment, to the Petitioners and the other stockholders of SWS who properly demanded appraisal rights under Delaware law, collectively representing 7,438,453 shares. Each outstanding share of SWS common stock, other than shares held by Hilltop, in treasury by SWS or by stockholders who properly demanded appraisal rights under Delaware law, was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, the aggregate value of which was $6.92 per share of SWS common stock as of the effective date of the merger. The resolution of this matter resulted in 1,856,638 shares of HTH common stock, which had been held in escrow during the pendency of the proceeding, being returned to the Company’s pool of authorized but unissued shares of common stock and a pre-tax net increase to other noninterest income of $11.6 million during the second quarter of 2017. This change in common stock is reflected in repurchases of common stock within the consolidated statements of stockholders’ equity. Petitioners filed an appeal to the Court’s Memorandum Opinion. On February 23, 2018, the Delaware Supreme Court affirmed the decision of the lower Court.

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 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 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 (“HUD”) 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 DOJ related to this Inquiry. According to the Civil Investigative Demand, the DOJ conducted an investigation to determine whether PrimeLending violated the False Claims Act in connection with originating and underwriting single-family residential mortgage loans insured by the FHA. In order to avoid the delay, uncertainty, inconvenience and expense of protracted ligation, on October 23, 2018, PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the DOJ and HUD, respectively. In these agreements, PrimeLending did not admit to any liability or wrongdoing, and the DOJ and HUD did not make any concessions with respect to their alleged claims. These agreements provide for payments to each of the DOJ and HUD of $6.75 million. In exchange for these payments, each of the DOJ and HUD released any civil claims it may have related to certain loans originated by PrimeLending. The payments were made to the DOJ and HUD during the fourth quarter of 2018 and the indemnification liability related to this matter was released. Accordingly, the Company’s operating results or financial condition will not be impacted by this matter in future periods.

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, except related to specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position,

F-53

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 matter, including 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.

Indemnification Liability Reserve

The mortgage origination segment may be responsible to agencies, investors, or other parties 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 or indemnifies the claimant against loss. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

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

An additional reserve has been established for probable agency, investor or other party 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 claimant requests, actual claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in 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 claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

At December 31, 2018 and 2017, the mortgage origination segment’s indemnification liability reserve totaled $10.7 million and $23.5 million, respectively. The provision for indemnification losses was $3.2 million, $4.0 million and $4.6 million during 2018,  2017 and 2016, respectively.

F-54

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

The following tables provide for a rollforward 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
	Activity - Origination Loan Balance
	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	33,702	$	40,669	$	57,298
Claims made		22,156		42,330		21,410
Claims resolved with no payment		(13,169)		(37,439)		(19,696)
Repurchases		(8,250)		(6,490)		(4,164)
Indemnification payments		(655)		(5,368)		(14,179)
Balance, end of period	$	33,784	$	33,702	$	40,669
	Indemnification Liability Reserve Activity
	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	23,472	$	18,239	$	16,640
Additions for new sales		3,170		3,962		4,638
Repurchases		(612)		(466)		(392)
Early payment defaults		(368)		(228)		(241)
Indemnification payments		(13,687)		(713)		(2,482)
Change in reserves for loans sold in prior years		(1,274)		2,678		76
Balance, end of period	$	10,701	$	23,472	$	18,239
	December 31,
	2018		2017
Reserve for Indemnification Liability (1):
Specific claims	$	676	$	646
Incurred but not reported claims		10,025		22,826
Total	$	10,701	$	23,472

(1) As a result of the DOJ and HUD agreements discussed above, at December 31, 2018, the change in the Reserve for Indemnification Liability reflects the total of $13.5 million of payments made to the DOJ and HUD to resolve the specific claims related to this matter. These claims were included in incurred but not reported claims in prior periods.

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.

Other Contingencies

As discussed in Note 16 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger, Hilltop entered into separate retention agreements with two executive officers, one having an initial term of three years (with automatic one-year renewals at the end of two years and each anniversary thereof) and the other having an initial term of two years (with automatic one-year renewals at the end of the first year and each anniversary thereof). Each of these retention agreements provides for severance pay benefits if the executive officer’s employment is terminated without “cause”.

In addition to these retention agreements, Hilltop and its subsidiaries maintain employment contracts with certain officers that provide for benefits in the event of a “change in control” as defined in these agreements.

Hilltop and its subsidiaries lease space, primarily for corporate offices, branch facilities and automated teller machines, under noncancelable operating leases with remaining terms, including renewal options, of 1 to 10 years and under capital leases with remaining terms of 5 to 9 years. Rental expense under the operating leases was $42.9 million, $43.5 million and $41.9 million in 2018,  2017 and 2016, respectively.

F-55

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Future minimum lease payments under lease agreements that had commenced as of December 31, 2018, excluding intercompany leases and subleases which are eliminated in consolidation, are presented below (in thousands).

	Operating Leases		Capital Leases
2019	$	36,171	$	1,186
2020		29,109		1,197
2021		21,058		1,212
2022		16,386		1,241
2023		12,361		1,280
Thereafter		18,264		3,460
Total minimum lease payments	$	133,349		9,576
Amount representing interest				(1,221)
Present value of minimum lease payments			$	8,355

19. 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 $2.4 billion at December 31, 2018 and outstanding financial and performance standby letters of credit of $85.0 million at December 31, 2018.

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

20. 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, RSUs, performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At December 31, 2018,  1,246,880 shares of common stock remain available for issuance pursuant to the 2012 Plan,  

F-56

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

including shares that may be delivered pursuant to outstanding awards.  Compensation expense related to the 2012 Plan was $9.1 million, $10.8 million and $10.5 million during 2018,  2017 and 2016, respectively.

During 2018,  2017 and 2016, Hilltop granted 30,400,  16,859 and 21,224 shares of common stock, respectively, to certain non-employee members of the Company’s board of directors for services rendered to the Company pursuant to the 2012 Plan.

Restricted Stock Awards and RSUs

The Compensation Committee of the board of directors of the Company issued restricted shares of Hilltop common stock (“Restricted Stock Awards”) and RSUs pursuant to the 2012 Plan.

The Restricted Stock Awards generally cliff vested on the third anniversary of the grant date and were 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 award agreements governing the Restricted Stock Awards provided for accelerated vesting under certain conditions. As of September 30, 2017, all remaining Restricted Stock Awards had vested and none were outstanding.

Certain RSUs are subject to time-based vesting conditions and generally provided for a cliff vest on the third anniversary of the grant date, while other RSUs provided for vesting based upon the achievement of certain performance goals over a three-year period subject to service conditions set forth in the award agreements, with associated costs generally recognized on a straight-line basis over the respective vesting periods. The RSUs are not transferable, and the shares of common stock issuable upon conversion of vested RSUs may be 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.

The following table summarizes information about Restricted Stock Award and RSU activity for the noted periods (shares in thousands).

		Restricted Stock Awards			RSUs
			Weighted			Weighted
			Average			Average
			Grant Date			Grant Date
		Outstanding	Fair Value		Outstanding	Fair Value
Balance, December 31, 2015		453	$	13.50	875	$	21.22
	Granted	-	$	-	598	$	17.78
	Vested/Released	(447)	$	13.41	(7)	$	22.22
	Forfeited	(2)	$	19.72	(10)	$	20.70
Balance, December 31, 2016		4	$	19.95	1,456	$	19.83
	Granted	-	$	-	450	$	26.37
	Vested/Released	(4)	$	19.95	(451)	$	22.48
	Forfeited	-	$	-	(137)	$	22.41
Balance, December 31, 2017		-	$	-	1,318	$	20.89
	Granted	-	$	-	510	$	24.00
	Vested/Released	-	$	-	(406)	$	19.92
	Forfeited	-	$	-	(152)	$	20.97
Balance, December 31, 2018		-	$	-	1,270	$	22.44

Vested/Released Restricted Stock Awards and RSUs include an aggregate of 327,387 shares withheld to satisfy employee statutory tax obligations during 2018,  2017 and 2016. Pursuant to certain RSU award agreements, an aggregate of 17,481 vested RSUs at December 31, 2018 require deferral of the settlement in shares and statutory tax obligations to a future date.

During 2018, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of 486,155 RSUs pursuant to the 2012 Plan. At December 31, 2018,  366,827 of these outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

grant date, and 84,626 of these outstanding RSUs will cliff vest based upon the achievement of certain performance goals over a three-year period.

At December 31, 2018, in the aggregate, 1,010,075 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 258,773 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At December 31, 2018, unrecognized compensation expense related to outstanding RSUs of $12.8 million is expected to be recognized over a weighted average period of 1.25 years.

21. Regulatory Matters

Banking and Hilltop

PlainsCapital, which includes the Bank and PrimeLending, 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 PlainsCapital 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 Company is ultimately dependent upon its subsidiaries to provide funding for operating expenses, debt service and dividends. Various laws limit the payment of dividends and other distributions by subsidiaries to parent companies, and may therefore limit the Company’s ability to pay dividends on its common stock. In addition, the federal bank regulatory agencies have issued policy statements providing that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings. Furthermore, if required payments on the Company’s outstanding junior subordinated debentures held by its unconsolidated subsidiary trusts are not made or are suspended, the Company may be prohibited from paying dividends on its common stock. Regulatory authorities could also impose administratively stricter limitations on the ability of the Company’s subsidiaries to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements.

In January 2015, the comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for PlainsCapital 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. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy and compliance with the Basel III regulatory capital requirements. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-weighted assets. The phase-in of the capital conservation buffer requirements began on January 1, 2016 for PlainsCapital and Hilltop. Based on the actual ratios as shown in the table below, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of December 31, 2018, as well as the fully phased-in requirements through 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. All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of December 31, 2018, under guidance issued by the Board of Governors of the Federal Reserve System.

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

The following tables show PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including conservation buffer in effect at the end of the period and on a fully phased-in basis as if such requirements were currently in effect as measured at December 31, 2018 and 2017, respectively (dollars in thousands).  Based on the actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements.

					Minimum Capital Requirements
					Including Conservation Buffer
					In Effect at		Fully		To Be Well
	Actual				End of Period		Phased In		Capitalized
	Amount		Ratio		Ratio		Ratio		Ratio
December 31, 2018
Tier 1 capital (to average assets):
PlainsCapital	$	1,183,447	12.47	%	4.0	%	4.0	%	5.0	%
Hilltop		1,680,364	12.53	%	4.0	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,183,447	13.90	%	6.375	%	7.0	%	6.5	%
Hilltop		1,634,978	16.58	%	6.375	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,183,447	13.90	%	7.875	%	8.5	%	8.0	%
Hilltop		1,680,364	17.04	%	7.875	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,245,177	14.63	%	9.875	%	10.5	%	10.0	%
Hilltop		1,722,602	17.47	%	9.875	%	10.5	%	N/A
					Minimum Capital Requirements
					Including Conservation Buffer
					In Effect at		Fully		To Be Well
	Actual				End of Period		Phased In		Capitalized
	Amount		Ratio		Ratio		Ratio		Ratio
December 31, 2017
Tier 1 capital (to average assets):
PlainsCapital	$	1,147,527	12.32	%	4.0	%	4.0	%	5.0	%
Hilltop		1,688,358	12.94	%	4.0	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,147,527	14.47	%	5.75	%	7.0	%	6.5	%
Hilltop		1,639,009	17.71	%	5.75	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,147,527	14.47	%	7.25	%	8.5	%	8.0	%
Hilltop		1,688,358	18.24	%	7.25	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,212,793	15.29	%	9.25	%	10.5	%	10.0	%
Hilltop		1,738,325	18.78	%	9.25	%	10.5	%	N/A

F-59

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

A reconciliation of equity capital to common equity Tier 1, Tier 1 and total capital (as defined) is as follows (in thousands).

	December 31, 2018				December 31, 2017
	PlainsCapital		Hilltop		PlainsCapital		Hilltop
Total equity capital	$	1,459,985	$	1,949,470	$	1,379,402	$	1,912,081
Add:
Net unrealized holding losses (gains) on securities available for sale and held in trust		7,988		8,627		3,520		394
Deduct:
Goodwill and other disallowed intangible assets		(282,238)		(319,942)		(235,395)		(273,466)
Other		(2,288)		(3,177)		—		—
Common equity Tier 1 capital (as defined)		1,183,447		1,634,978		1,147,527		1,639,009
Add: Tier 1 capital
Trust preferred securities		—		65,000		—		65,000
Deduct:
Additional Tier 1 capital deductions		—		(19,614)		—		(15,651)
Tier 1 capital (as defined)		1,183,447		1,680,364		1,147,527		1,688,358
Add: Allowable Tier 2 capital
Allowance for loan losses, including unfunded commitments		61,730		61,852		65,266		65,618
Deduct:
Additional Tier 2 capital deductions		—		(19,614)		—		(15,651)
Total capital (as defined)	$	1,245,177	$	1,722,602	$	1,212,793	$	1,738,325

Broker-Dealer

Pursuant to the net capital requirements of the Exchange Act, Hilltop Securities elected to determine its net capital requirement using the alternative method. Accordingly, Hilltop Securities is 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% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. 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. HTS Independent Network 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 $250,000 or 1/15 of aggregate indebtedness.

At December 31, 2018, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).

				HTS
	Hilltop			Independent
	Securities			Network
Net capital	$	193,995		$	3,073
Less: required net capital		10,898			250
Excess net capital	$	183,097		$	2,823
Net capital as a percentage of aggregate debit items		35.6	%
Net capital in excess of 5% aggregate debit items	$	166,750

Under certain conditions, Hilltop Securities 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. At December 31, 2018 and 2017, the Hilltop Broker-Dealers held cash of $134.0 million and $186.6 million, respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash or securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at December 31, 2018 and 2017.  

F-60

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Mortgage Origination

As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity requirements established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial statements to HUD and GNMA, as applicable, documenting their respective compliance with minimum net worth and liquidity requirements. As of December 31, 2018, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.

Insurance

The statutory financial statements of the Company’s insurance subsidiaries, 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 (“NAIC”) 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 of each insurance subsidiary is as follows (in thousands).

	December 31,
	2018		2017
Statutory capital and surplus:
National Lloyds Insurance Company	$	78,637	$	93,812
American Summit Insurance Company		17,908		22,778

	Year Ended December 31,
	2018		2017		2016
Statutory net income (loss):
National Lloyds Insurance Company	$	9,114	$	(1,785)	$	13,043
American Summit Insurance Company		(1,304)		742		2,124

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 December 31, 2018, the 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, 2018, the Company’s insurance subsidiaries’ RBC ratio exceeded the level at which regulatory action would be required.

22. Stockholders’ Equity

The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At December 31, 2018,  $163.5 million of its earnings was available for dividend declaration without prior regulatory approval.

At December 31, 2018, the maximum aggregate dividend that may be paid to NLC from its insurance company subsidiaries without regulatory approval was $11.7 million.

Dividends

During 2018, 2017 and 2016, the Company declared and paid cash dividends of $0.28,  $0.24 and $0.06 per common share, or $26.7 million, $23.1 million and $5.8 million, respectively.

F-61

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

On January 24, 2019, the Company announced that its board of directors declared a quarterly cash dividend of $0.08 per common share, payable on February 28, 2019, to all common stockholders of record as of the close of business on February 15, 2019.

Stock Repurchase Programs

The Company’s board of directors has periodically approved stock repurchase programs under which it authorized the Company to repurchase its outstanding common stock. Under the respective stock repurchase program authorized, the Company could 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 repurchased its shares and the timing of such repurchases depended upon market conditions and other corporate considerations, as determined by Hilltop’s management team. Repurchased shares will be returned to the Company’s pool of authorized but unissued shares of common stock. 

In January 2017, the Hilltop board of directors reauthorized the stock repurchase program originally approved during the second quarter of 2016 through January 2018. During 2017, the Company paid $27.4 million to repurchase an aggregate of 1,057,656 shares of common stock at an average price of $25.87 per share, inclusive of repurchases to offset dilution related to grants of stock-based compensation. This stock repurchase program expired in January 2018. All purchases were funded from available cash balances.

In January 2018, the Hilltop board of directors authorized a stock repurchase program through January 2019 pursuant to which the Company was originally authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding common stock. In July 2018, the Hilltop board of directors authorized an increase to the aggregate amount of common stock the Company may repurchase under this program to $100.0 million, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During 2018, the Company paid $59.0 million to repurchase an aggregate of 2,729,568 shares of common stock at an average price of $21.61 per share. These shares were returned to the Company’s pool of authorized but unissued shares of common stock. The purchases were funded from available cash balances.

In January 2019, our board of directors authorized a new stock repurchase program through January 2020, pursuant to which we are authorized to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. 

F-62

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

23. Other Noninterest Income and Expense

The following table shows the components of other noninterest income and expense (in thousands). 

	Year Ended December 31,
	2018		2017		2016
Other noninterest income:
Net gains from Hilltop Broker-Dealer trading activities	$	41,543	$	70,922	$	86,383
Service charges on depositor accounts		14,484		14,429		14,162
Trust fees		9,807		7,485		6,782
Net gain from trading securities portfolio		6,197		20,210		15,926
Insurance commissions		5,211		4,819		4,206
Insurance direct billing and other policy fees		3,930		4,353		4,818
Revenue from check and stored value cards		2,966		3,169		5,036
Rent and other income from other real estate owned		764		1,280		1,461
SWS merger appraisal proceeding		—		11,757		—
FDIC Indemnification Asset accretion		—		—		242
Other		11,403		25,546		15,248
	$	96,305	$	163,970	$	154,264
Other noninterest expense:
Software and information technology	$	56,986	$	45,891	$	38,421
Brokerage commissions and fees		20,674		22,884		24,654
Mortgage origination and servicing		19,705		22,353		25,736
Unreimbursed loan closing costs		16,798		20,428		31,234
Business development		15,913		18,619		19,738
Travel, meals and entertainment		12,389		12,839		13,683
Amortization of intangible assets		8,426		8,263		10,174
FDIC indemnification asset amortization		6,509		17,083		—
Office supplies		6,123		7,806		8,719
Funding fees		5,414		8,464		7,451
OREO and repossessed assets		3,885		4,004		13,438
FDIC "true-up"		250		2,100		8,750
Other		51,183		51,362		49,523
	$	224,255	$	242,096	$	251,521

24. 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 managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse impacts from changes in interest rates on the Bank’s 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”) and Eurodollar futures. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including U.S. Treasury bond futures and options, to hedge this risk. 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. Additionally, Hilltop Securities uses both U.S. Treasury bond and Eurodollar futures to hedge changes in the fair value of their securities.

F-63

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 and forward commitments 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 values of PrimeLending’s derivative instruments decreased $12.8 million during 2018, compared with a decrease of $13.1 million during 2017 and an increase of $8.0 million during 2016. 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 MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans 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 the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as appropriate. The fair values of the Hilltop Broker-Dealers’ derivatives decreased $0.4 million during 2018, compared with an increase of and $8.1 million during 2017 and a decrease of $23.4 million during 2016. The fair values of the Bank’s derivatives increased nominally during 2018, and increased $0.3 million and $0.4 million during 2017 and 2016, 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).

	December 31, 2018				December 31, 2017
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Derivative instruments:
IRLCs	$	677,267	$	17,421	$	850,850	$	18,851
Customer-based written options		31,200		(49)		21,637		38
Customer-based purchased options		31,200		49		21,637		(38)
Commitments to purchase MBSs		2,359,630		10,467		2,831,635		(921)
Commitments to sell MBSs		3,711,477		(19,315)		4,963,498		2,972
Interest rate swaps		15,104		82		25,971		51
U.S. Treasury bond futures and options (1)		367,200		—		214,500		—
Eurodollar futures (1)		104,000		—		—		—

(1)Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the Hilltop Broker-Dealers.

PrimeLending has cash collateral advances totaling $11.9 million and $0.8 million to offset net liability derivative positions on its commitments to sell MBSs at December 31, 2018 and 2017, respectively. In addition, PrimeLending and the Hilltop Broker-Dealers advanced cash collateral totaling $3.4 million and $3.2 million on its U.S. Treasury bond futures and options and Eurodollar futures at December 31, 2018 and 2017, respectively. These amounts are included in other assets within the consolidated balance sheets.

F-64

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

25. 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		Gross Amounts		of Assets				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
December 31, 2018
Securities borrowed:
Institutional counterparties	$	1,365,547	$	—	$	1,365,547	$	(1,307,121)	$	—	$	58,426
Interest rate options:
Customer counterparties		49		—		49		—		—		49
Interest rate swaps:
Institutional counterparties		88		—		88		—		—		88
Reverse repurchase agreements:
Institutional counterparties		61,611		—		61,611		(61,390)		—		221
Forward MBS derivatives:
Institutional counterparties		10,469		—		10,469		(10,469)		—		—
	$	1,437,764	$	—	$	1,437,764	$	(1,378,980)	$	—	$	58,784
December 31, 2017
Securities borrowed:
Institutional counterparties	$	1,386,821	$	—	$	1,386,821	$	(1,327,536)	$	—	$	59,285
Interest rate options:
Customer counterparties		38		—		38		—		—		38
Reverse repurchase agreements:
Institutional counterparties		186,537		—		186,537		(186,026)		—		511
Forward MBS derivatives:
Institutional counterparties		3,576		—		3,576		(3,576)		—		—
	$	1,576,972	$	—	$	1,576,972	$	(1,517,138)	$	—	$	59,834

							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
December 31, 2018
Securities loaned:
Institutional counterparties	$	1,186,073	$	—	$	1,186,073	$	(1,136,033)	$	—	$	50,040
Interest rate options:
Institutional counterparties		49		—		49		—		—		49
Interest rate swaps:
Institutional counterparties		6		—		6		—		—		6
Repurchase agreements:
Institutional counterparties		533,441		—		533,441		(533,441)		—		—
Customer counterparties		43,266		—		43,266		(43,266)		—		—
Forward MBS derivatives:
Institutional counterparties		19,331		(15)		19,316		(7,728)		—		11,588
	$	1,782,166	$	(15)	$	1,782,151	$	(1,720,468)	$	—	$	61,683
December 31, 2017
Securities loaned:
Institutional counterparties	$	1,215,093	$	—	$	1,215,093	$	(1,157,198)	$	—	$	57,895
Interest rate options:
Institutional counterparties		38		—		38		—		—		38
Interest rate swaps:
Institutional counterparties		35		(86)		(51)		(1,059)		—		(1,110)
Repurchase agreements:
Institutional counterparties		409,058		—		409,058		(409,058)		—		—
Customer counterparties		130,091		—		130,091		(130,091)		—		—
Forward MBS derivatives:
Institutional counterparties		2,696		(1,171)		1,525		(1,295)		—		230
	$	1,757,011	$	(1,257)	$	1,755,754	$	(1,698,701)	$	—	$	57,053

F-65

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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 one to thirty days from the transaction date or involve arrangements with no definite termination 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.

Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to 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, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the customer.

The following tables present the remaining contractual maturities of repurchase agreement and securities lending transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity transactions outstanding at both December 31, 2018 and 2017.

	Remaining Contractual Maturities
	Overnight and						Greater Than
December 31, 2018	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. Treasury and agency securities	$	131,848	$	—	$	—	$	—	$	131,848
Asset-backed securities		444,859		—		—		—		444,859
Securities lending transactions:
Corporate securities		113		—		—		—		113
Equity securities		1,185,960		—		—		—		1,185,960
Total	$	1,762,780	$	—	$	—	$	—	$	1,762,780
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,762,780
Amount related to agreements not included in offsetting disclosure above									$	—
	Remaining Contractual Maturities
	Overnight and						Greater Than
December 31, 2017	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. Treasury and agency securities	$	181,915	$	—	$	—	$	—	$	181,915
Asset-backed securities		357,234		—		—		—		357,234
Securities lending transactions:
Corporate securities		11,499		—		—		—		11,499
Equity securities		1,203,594		—		—		—		1,203,594
Total	$	1,754,242	$	—	$	—	$	—	$	1,754,242
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,754,242
Amount related to agreements not included in offsetting disclosure above									$	—

F-66

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

26. Broker-Dealer and Clearing Organization Receivables and Payables

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

	December 31,
	2018		2017
Receivables:
Securities borrowed	$	1,365,547	$	1,386,821
Securities failed to deliver		16,300		25,491
Trades in process of settlement		32,993		29,412
Other		25,447		22,654
	$	1,440,287	$	1,464,378
Payables:
Securities loaned	$	1,186,073	$	1,215,093
Correspondents		29,311		30,160
Securities failed to receive		75,015		37,864
Trades in process of settlement		—		—
Other		4,526		4,446
	$	1,294,925	$	1,287,563

27. Deferred Policy Acquisition Costs

Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to the successful issuance of a new or renewal policy incurred by NLC are deferred and charged against income ratably over the terms of the related policies. A summary of the activity in deferred policy acquisition costs is as follows (in thousands).

	Year Ended December 31,
	2018		2017		2016
Balance, beginning of year	$	16,988	$	18,603	$	19,874
Acquisition expenses capitalized		34,328		34,934		37,231
Amortization charged to income		(34,683)		(36,549)		(38,502)
Balance, end of year	$	16,633	$	16,988	$	18,603

Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated statements of operations.

28. Reserve for Losses and Loss Adjustment Expenses

A summary of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated balance sheets, is as follows (in thousands).

	December 31,
	2018		2017
Reserve for unpaid losses and allocated LAE balance, net	$	16,498	$	17,470
Reinsurance recoverables on unpaid losses		3,214		11,495
Unallocated LAE		840		1,248
Reserve for unpaid losses and LAE balance, gross	$	20,552	$	30,213

F-67

Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

A summary of claims loss reserve development activity is presented in the following table (in thousands).

					December 31, 2018
					Total of
					IBNR Reserves
					Plus Expected		Cumulative
Accident	Year Ended December 31, 2018				Development on		Number of
Year	Paid		Incurred		Reported Claims		Reported Claims
2014	$	83,808	$	83,894	$	22		18,832
2015		86,549		86,961		171		20,611
2016		83,169		84,076		401		20,201
2017		86,319		88,025		1,047		20,757
2018		61,922		75,217		6,250		15,296
Total		401,767	$	418,173
		92	All outstanding reserves prior to 2014, net of reinsurance
	$	16,498	Reserve for unpaid losses and allocated LAE, net of reinsurance

29. 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 December 31, 2018, total reinsurance recoverables and receivables had a carrying value of $5.4 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at December 31, 2018, based on NLC’s quality requirements.

Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2018 are listed below (in thousands).

	Balances
	Due From		A.M. Best
	Reinsurers		Rating
R+V Versicherung AG	$	817	N/A
Partner Reinsurance Company Ltd.		812	A
Arch Reinsurance Company		706	A+
Aspen Bermuda Ltd		276	A
	$	2,611

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

	Year Ended December 31,
	2018				2017				2016
	Written		Earned		Written		Earned		Written		Earned
Premiums from direct business	$	129,611	$	133,112	$	137,091	$	144,990	$	152,970	$	159,884
Reinsurance assumed		12,917		12,516		12,150		11,767		11,338		11,024
Reinsurance ceded		(8,749)		(8,877)		(12,280)		(14,459)		(14,962)		(15,363)
Net premiums	$	133,779	$	136,751	$	136,961	$	142,298	$	149,346	$	155,545

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

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

	Year Ended December 31,
	2018		2017		2016
Losses and LAE incurred	$	76,464	$	138,358	$	113,494
Reinsurance recoverables		2,883		(43,657)		(24,251)
Net loss and LAE incurred	$	79,347	$	94,701	$	89,243

Catastrophic coverage

NLC’s liabilities for losses and LAE include liabilities for reported losses, liabilities for IBNR losses and liabilities for LAE less a reduction for reinsurance recoverables related to those liabilities. 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. The amounts of liabilities for IBNR losses and LAE are estimated on the basis of historical trends, adjusted for changes in loss costs, underwriting standards, policy provisions, product mix and other 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. Based upon the contractual terms of the reinsurance agreements, reinsurance recoverables offset, in part, NLC’s gross liabilities.

Effective July 1, 2017, NLC renewed its catastrophic excess of loss reinsurance coverage for a two year-period. At December 31, 2018, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.0 million in excess of its $2.0 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of three layers of protection: $17 million in excess of $8 million retention and/or loss; $30 million in excess of $25 million loss; and $50 million in excess of $55 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At December 31, 2018, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.

Effective January 1, 2019, NLC renewed its underlying excess of loss contract that provides $10.0 million aggregate coverage in excess of NLC’s per event retention of $1.0 million and aggregate retention of $15.0 million for sub-catastrophic events. As of January 1, 2019, NLC retains 37.5% participation in this coverage, up from 17.5% participation during 2018.

During August and September 2017, NLC experienced losses related to Hurricane Harvey in excess of retention. As of December 31, 2018, the total gross losses and LAE incurred associated with Hurricane Harvey was $16.4 million. However, because the losses exceeded retention, net exposure to NLC was $5.9 million retention and $1.4 million in reinstatement premiums. During 2018 and 2016, NLC experienced no significant catastrophes that resulted in losses in excess of retention at NLIC or ASIC.  

There were  11 tornado, hail, monsoon and wind storms during 2018 that fit the coverage criteria for the underlying excess of loss contract providing aggregate coverage for sub-catastrophic events. These events had a gross incurred loss total of $26.1 million. During 2017, the 16 tornado, hail and wind storms that exceeded retention had incurred losses of $38.1 million, which developed a reinsured recoverable of $4.6 million at the 100% subscription level. During 2016, the 15 tornado, hail and wind storms that exceeded retention had incurred losses of $44.0 million, which developed a reinsured recoverable of $10.0 million at the 91% subscription level. These losses have no effect on net loss and LAE incurred beyond retention because the catastrophic events exceeded retention levels and are fully recoverable. Any losses beyond the reinsurance coverage limits of $10.0 million for 2016 are retained by the Company and have an effect on the net loss and LAE incurred. The primary financial effect beyond the reinsurance retention is additional reinstatement premiums payable to the affected reinsurers. In addition to the $1.4 million in reinstatement premiums noted above related to Hurricane Harvey in 2017, reinstatement premiums during 2018,  2017 and 2016 of $0.1 million, $1.4 million and $0.6 million, respectively, were recorded as ceded premiums.

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

30. 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 Company’s President and Co-Chief Executive Officer and the Company’s Vice Chairman and Co-Chief Executive Officer.

The banking segment includes the operations of the Bank, and since August 1, 2018, the operations of the former BORO acquired in the BORO Acquisition. The broker-dealer segment includes the operations of Securities Holdings, the mortgage origination segment is composed of PrimeLending, and the insurance segment is composed of NLC.

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company.

Balance sheet amounts 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						All Other and		Hilltop
Year Ended December 31, 2018	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	370,732	$	50,878	$	1,485	$	3,025	$	(9,176)	$	19,380	$	436,324
Provision (recovery) for loan losses		5,319		(231)		—		—		—		—		5,088
Noninterest income		43,588		301,714		551,860		142,565		4,893		(21,830)		1,022,790
Noninterest expense		256,577		320,241		540,474		139,921		36,628		(592)		1,293,249
Income (loss) before income taxes	$	152,424	$	32,582	$	12,871	$	5,669	$	(40,911)	$	(1,858)	$	160,777

					Mortgage						All Other and		Hilltop
Year Ended December 31, 2017	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	366,581	$	43,735	$	(915)	$	2,861	$	(10,069)	$	19,555	$	421,748
Provision for loan losses		14,073		198		—		—		—		—		14,271
Noninterest income		59,904		368,421		632,388		151,382		12,798		(19,829)		1,205,064
Noninterest expense		248,404		347,314		581,899		158,354		33,983		(699)		1,369,255
Income (loss) before income taxes	$	164,008	$	64,644	$	49,574	$	(4,111)	$	(31,254)	$	425	$	243,286

					Mortgage						All Other and		Hilltop
Year Ended December 31, 2016	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	363,083	$	31,172	$	(11,589)	$	3,164	$	(7,257)	$	18,958	$	397,531
Provision (recovery) for loan losses		40,673		(53)		—		—		—		—		40,620
Noninterest income		52,579		385,766		704,126		164,841		2		(20,349)		1,286,965
Noninterest expense		244,715		377,524		614,741		146,601		29,938		(1,048)		1,412,471
Income (loss) before income taxes	$	130,274	$	39,467	$	77,796	$	21,404	$	(37,193)	$	(343)	$	231,405

					Mortgage						All Other and		Hilltop
	Banking		Broker-Dealer		Origination		Insurance		Corporate		Eliminations		Consolidated
December 31, 2018
Goodwill	$	247,368	$	7,008	$	13,071	$	23,988	$	—	$	—	$	291,435
Total assets	$	10,004,971	$	3,213,115	$	1,627,134	$	253,513	$	2,243,182	$	(3,658,343)	$	13,683,572
December 31, 2017
Goodwill	$	207,741	$	7,008	$	13,071	$	23,988	$	—	$	—	$	251,808
Total assets	$	9,558,718	$	3,394,911	$	1,937,327	$	291,639	$	2,106,978	$	(3,923,787)	$	13,365,786

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

31. Earnings per Common Share

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

	Year Ended December 31,
	2018		2017		2016
Basic earnings per share:
Income attributable to Hilltop	$	121,441	$	132,544	$	145,894
Less: income applicable to participating shares		—		—		(6)
Net earnings available to Hilltop common stockholders	$	121,441	$	132,544	$	145,888
Weighted average shares outstanding - basic		94,969		97,137		98,404
Basic earnings per common share	$	1.28	$	1.36	$	1.48
Diluted earnings per share:
Income attributable to Hilltop	$	121,441	$	132,544	$	145,894
Weighted average shares outstanding - basic		94,969		97,137		98,404
Effect of potentially dilutive securities		98		216		225
Weighted average shares outstanding - diluted		95,067		97,353		98,629
Diluted earnings per common share	$	1.28	$	1.36	$	1.48

32. Financial Statements of Parent

The following tables present the condensed combined financial statements of the Company’s bank holding company entities, Hilltop and PCC. The tables also include the corporate activities associated with Hilltop Opportunity Partners LLC and the Hilltop Plaza Entities (in thousands). Investments in subsidiaries are determined using the equity method of accounting.

Condensed Combined Statements of Operations and Comprehensive Income

	Year Ended December 31,
	2018		2017		2016
Dividends from bank subsidiaries	$	42,000	$	53,000	$	87,826
Dividends from nonbank subsidiaries		37,500		41,500		—
Investment income		3,089		312		382
Interest expense		12,265		10,381		7,639
Other income		4,893		12,798		2
General and administrative expense		36,628		33,983		29,938
Income before income taxes, equity in undistributed earnings of subsidiaries and preferred stock activity		38,589		63,246		50,633
Income tax benefit		(7,767)		(15,577)		(10,077)
Equity in undistributed earnings of subsidiaries		79,371		54,321		87,234
Net income	$	125,727	$	133,144	$	147,944
Other comprehensive income (loss), net		(5,656)		(879)		(2,144)
Comprehensive income	$	120,071	$	132,265	$	145,800

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

Condensed Combined Balance Sheets

	December 31,
	2018		2017		2016
Assets:
Cash and cash equivalents	$	54,405	$	96,764	$	118,290
Investment in subsidiaries:
Bank subsidiaries		1,459,984		1,340,093		1,304,917
Nonbank subsidiaries		483,593		603,631		609,539
Other assets		245,200		66,490		3
Total assets	$	2,243,182	$	2,106,978	$	2,032,749
Liabilities and Stockholders’ Equity:
Accounts payable and accrued expenses	$	58,319	$	46,442	$	13,929
Notes payable		215,620		148,455		148,311
Stockholders’ equity		1,969,243		1,912,081		1,870,509
Total liabilities and stockholders’ equity	$	2,243,182	$	2,106,978	$	2,032,749

Condensed Combined Statements of Cash Flows

	Year Ended December 31,
	2018		2017		2016
Operating Activities:
Net income	$	125,727	$	133,144	$	147,944
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(79,371)		(54,321)		(87,234)
Net realized gains on equity investments		(5,336)		—		—
Deferred income taxes		217		2,511		(2,063)
Other, net		19,368		(57,380)		20,812
Net cash provided by operating activities		60,605		23,954		79,459
Investing Activities:
Reimbursement from nonbank subsidiaries		—		—		6,000
Capital contribution to bank and bank holding company subsidiaries		—		(10,000)		—
Capital contribution to nonbank subsidiaries		—		—		(20,000)
Purchases of equity investments		(12,492)		—		—
Purchases of premises and equipment and other		(42,390)		(4,241)		(98)
Proceeds from sales of equity investments		16,174		—		—
Net cash used in investing activities		(38,708)		(14,241)		(14,098)
Financing Activities:
Proceeds from issuances of common stock		—		—		4,139
Payments to repurchase common stock		(58,990)		(27,388)		—
Dividends paid on common stock		(26,698)		(23,140)		(5,801)
Net cash contributed from noncontrolling interest		19,250		—		—
Other, net		2,182		19,289		(951)
Net cash used in financing activities		(64,256)		(31,239)		(2,613)
Net change in cash, cash equivalents and restricted cash		(42,359)		(21,526)		62,748
Cash, cash equivalents and restricted cash, beginning of year		96,764		118,290		55,542
Cash, cash equivalents and restricted cash, end of year	$	54,405	$	96,764	$	118,290
Supplemental Schedule of Non-Cash Activities:
Construction in progress related to build-to-suit lease obligations	$	27,802	$	—	$	—
Note receivable contributed from nonbank subsidiary	$	111,653	$	—	$	—

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

33. Recently Issued Accounting Standards

Accounting Standards Adopted During 2018

In June 2018, FASB issued ASU 2018-07 which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company early adopted the amendment as of July 1, 2018, which did not have a material effect on its consolidated financial statements.

In February 2018, FASB issued ASU 2018-02 to help organizations address certain stranded income tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”). The amendment provides an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the changes in the U.S. federal corporate income tax rate in the Tax Legislation (or portion thereof) is recorded. The amendment also includes disclosure requirements regarding the issuer’s accounting policy for releasing income tax effects from AOCI. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. As permitted within the amendment, the Company elected to early adopt and apply the provisions of this amendment as of January 1, 2018. The adoption of the amendment resulted in a reclassification of $0.1 million from AOCI to retained earnings, representing an increase to retained earnings. This reclassification is included within the adoption of accounting standards line item in the consolidated statements of stockholders’ equity.

In May 2017, FASB issued ASU 2017-09 which provides clarity and reduces both diversity in practice and cost and complexity associated with changes to the terms or conditions of a share-based payment award and, specifically, which changes require an entity to apply modification accounting. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the amendments as of January 1, 2018, which did not have a material effect on the Company’s consolidated financial statements.

In January 2017, FASB issued ASU 2017-01 which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the prospective method. The Company adopted the amendment as of January 1, 2018, which did not have a material effect on its consolidated financial statements during the current year.

In November 2016, FASB issued ASU 2016-18 which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. We have adopted the requirements of the new standard as of January 1, 2018. As a result, assets segregated for regulatory purposes, which consist of cash and cash equivalents, are now included in the beginning-of-period and end-of-period total amounts shown on the statements of cash flows for 2018, 2017 and 2016. Furthermore, the consolidated statements of cash flows now include disclosure of the line items in the consolidated balance sheets which make up cash, cash equivalents and restricted cash. The adoption of this ASU had no impact on the Company’s financial condition or results of operations.

In October 2016, FASB issued ASU 2016-16 which addresses improvement in accounting for income tax consequences of intra-equity transfers of assets other than inventory. The amendment requires that an entity recognize the income tax consequences of the intra-equity transfer of an asset other than inventory when the transfer occurs. The amendment was effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the modified retrospective transition method. The Company adopted the amendment as of January 1, 2018, which did not have a material effect on its consolidated financial statements.

In August 2016, FASB issued ASU 2016-15 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

December 15, 2017 using a retrospective transition method. The Company adopted the amendments as of January 1, 2018, which did not have a material effect on the Company’s consolidated financial statements.

In January 2016, FASB issued ASU 2016-01 related to financial instruments and subsequently issued technical corrections to the amendment in ASU 2018-03. The amendments require that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The amendments also impact financial liabilities under the Fair Value Option and the presentation and disclosure requirements for financial instruments and modify the required process used to evaluate deferred tax assets on available for sale securities. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the amendments as of January 1, 2018, which resulted in $21.2 million of securities being reclassified from available for sale to equity within the consolidated balance sheets consistent with the provisions of the amendments, while certain other equity investments of $35.8 million are included in other assets within the consolidated balance sheets at December 31, 2018. The adoption of the amendments also resulted in $2.5 million being reclassified from accumulated other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018. This reclassification is included within the adoption of accounting standards line item in the consolidated statement of stockholders’ equity. All subsequent changes in fair value related to these equity investments will be recognized in net income. Additionally, the enhanced disclosures required by the amendments are included within the notes to the consolidated financial statements, including the disclosure of the fair value of the loan portfolio using an exit price method instead of the prior discounted cash flow method. These disclosure changes did not have a material effect on the Company’s consolidated financial statements.

On January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from Contracts with Customers, using the modified, cumulative-effect approach wherein the guidance is applied only to existing contracts as of the date of initial application and to new contracts entered into thereafter. The new standard 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 standard 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. Revenue from the Company’s mortgage origination and insurance segments are not in the scope of the new guidance, while certain revenue from contracts with customers within the broker-dealer and banking segments are subject to the new guidance.

The revenue recognition policies within the Company’s broker-dealer segment were affected upon adoption of ASC 606. Specifically, the new guidance required changes to the principal versus agent conclusion for certain advisory and underwriting revenues and expenses which, as of January 1, 2018, are recorded on a gross basis while legacy guidance required these revenues to be recognized net of the related expenses. Conversely, certain contract costs related to clearing and retail operations are now netted against the revenues while the legacy guidance required these revenues and expenses to be recognized on a gross basis. These changes did not have a material effect on the Company’s consolidated financial statements during 2018. As the measurement and timing of revenue recognition was not affected for any of the Company’s revenue streams, the implementation of the new guidance had no impact on opening retained earnings as of January 1, 2018. 

Accounting Standards Issued But Not Yet Adopted

In August 2018, FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software licenses). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendment also includes presentation and disclosure provisions regarding capitalized implementation costs. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

In August 2018, FASB issued ASU 2018-13 which includes various removals, modifications and additions to existing guidance regarding fair value disclosures. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

evaluating the provisions of the amendments but does not expect the amendments to have a material impact on its future consolidated financial statements.

In July 2018, FASB issued ASU 2018-09 which clarifies, corrects and makes minor improvements to a wide variety of topics in the ASC. The amendments make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. The transition and effective dates are based on the facts and circumstances of each amendment, with some amendments becoming effective upon issuance of the ASU, and others becoming effective for annual periods beginning after December 15, 2018. Those amendments that were effective upon issuance of the ASU did not have a significant impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact of the adoption of the other amendments on its future consolidated financial statements.

In August 2017, FASB issued ASU 2017-12 which provides targeted improvements to accounting for hedging activities. Subsequently, in October 2018, FASB issued ASU 2018-16. The purpose of the amendments is to better align a company’s risk management activities with its financial reporting for hedging relationships, to simplify the hedge accounting requirements and to improve the disclosures of hedging arrangements in addition to clarifying the benchmark interest rates which are eligible for purposes of applying hedge accounting under Topic 815. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and all transition requirements and elections should be applied to hedging relationships existing on the date of adoption. The Company has not historically applied hedge accounting to its derivative transactions. However, the Company is currently evaluating the provisions of the amendments and the impact, if any, on its future consolidated financial statements.

In June 2016, FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model which requires entities to measure all credit losses expected over the life of an exposure (or pool of exposures) for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new standard, which is codified in ASC 326, Financial Instruments – Credit Losses, replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For available for sale debt securities, entities will be required to record allowances for credit losses rather than reduce the carrying amount, as required under the current OTTI model, and will be allowed to reverse previously established allowances in the event the credit of the issuer improves.  The new standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The new standard is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The Company does not intend to adopt the provisions of the new standard early. The Company’s cross-functional team has begun the implementation of new credit forecasting models and a credit scoring system that will be utilized to estimate the likelihood of default and loss severity as a part of its credit loss estimation methodology in accordance with the new standard. In addition, the Company continues to identify and assess key interpretive policy issues, as well as design and build new or modified policies and procedures that will be used to calculate its credit loss reserves. However, the magnitude of the change in allowance for loan losses upon adoption will depend on, among other things, the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time.

In February 2016, FASB issued ASU 2016-02 related to leases and subsequently issued amendments and technical corrections in ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20. The new standard, which is codified in ASC 842, Leases, is intended to increase transparency and comparability among organizations and require lessees to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. Accounting by lessors will remain largely unchanged. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company adopted the new standard as of January 1, 2019, using the required modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the date of adoption. The Company’s implementation efforts are substantially complete, including the installation of an enhanced technology solution, which will aid in determining the magnitude of the increases in assets and liabilities and their impact on the consolidated financial statements. The Company recognized lease liabilities and corresponding right-to-use assets (at their present value) related to predominantly all of the future minimum lease payments required under operating leases as disclosed in Note 18 to the consolidated financial statements. The balance sheet effects of the new lease accounting standard will also impact regulatory capital ratios,

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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)

performance ratios, and other measures which are dependent upon asset or liability balances. The Company expects to record operating lease liabilities in the range of approximately $120 million to $125 million and right-to-use assets in the range of approximately $110 million to $115 million upon completion of its implementation efforts during the first quarter of 2019. In addition, the Company reassessed its accounting ownership of the Hilltop Plaza assets under construction as of January 1, 2019, upon implementation of ASC 842 and concluded it is not the accounting owner under the new lease accounting standard. As such, the assets and liabilities of the project are required to be derecognized during the first quarter of 2019, with the offset recorded directly to retained earnings.

34.  Selected Quarterly Financial Information (Unaudited)

Selected quarterly financial information is summarized as follows (in thousands, except per share data).

	Year Ended December 31, 2018
	Fourth		Third		Second		First		Full
	Quarter		Quarter		Quarter		Quarter		Year
Interest income	$	157,702	$	148,326	$	140,040	$	133,360	$	579,428
Interest expense		39,987		37,985		35,192		29,940		143,104
Net interest income		117,715		110,341		104,848		103,420		436,324
Provision (recovery) for loan losses		6,926		(371)		340		(1,807)		5,088
Noninterest income		238,516		269,697		279,434		235,143		1,022,790
Noninterest expense		310,819		335,711		338,517		308,202		1,293,249
Income before income taxes		38,486		44,698		45,425		32,168		160,777
Income tax expense		8,928		7,600		11,034		7,488		35,050
Net income		29,558		37,098		34,391		24,680		125,727
Less: Net income attributable to noncontrolling interest		1,443		1,293		1,311		239		4,286
Income attributable to Hilltop	$	28,115	$	35,805	$	33,080	$	24,441	$	121,441
Earnings per common share:
Basic	$	0.30	$	0.38	$	0.35	$	0.25	$	1.28
Diluted	$	0.30	$	0.38	$	0.35	$	0.25	$	1.28
Cash dividends declared per common share	$	0.07	$	0.07	$	0.07	$	0.07	$	0.28

	Year Ended December 31, 2017
	Fourth		Third		Second		First		Full
	Quarter		Quarter		Quarter		Quarter		Year
Interest income	$	133,665	$	128,944	$	136,306	$	108,241	$	507,156
Interest expense		24,973		23,964		20,330		16,141		85,408
Net interest income		108,692		104,980		115,976		92,100		421,748
Provision for loan losses		5,453		1,260		5,853		1,705		14,271
Noninterest income		290,456		298,477		344,692		271,439		1,205,064
Noninterest expense		328,670		353,842		366,251		320,492		1,369,255
Income before income taxes		65,025		48,355		88,564		41,342		243,286
Income tax expense		51,350		18,003		25,754		15,035		110,142
Net income		13,675		30,352		62,810		26,307		133,144
Less: Net income attributable to noncontrolling interest		247		146		334		(127)		600
Income attributable to Hilltop	$	13,428	$	30,206	$	62,476	$	26,434	$	132,544
Earnings per common share:
Basic	$	0.14	$	0.31	$	0.64	$	0.27	$	1.36
Diluted	$	0.14	$	0.31	$	0.63	$	0.27	$	1.36
Cash dividends declared per common share	$	0.06	$	0.06	$	0.06	$	0.06	$	0.24

F-76

Schedule I – Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses,

Net of Reinsurance

(in thousands)

	Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance										December 31, 2018
											Total of
											Incurred
											But Not
											Reported
											Reserves Plus		Cumulative
											Development		Number of
Accident	December 31, 2018										On Reported		Reported
Year	2014		2015		2016		2017		2018		Claims		Claims
	Unaudited
2014	$	83,784	$	85,037	$	84,221	$	84,074	$	83,894	$	22	18,832
2015				89,646		88,477		87,262		86,961		171	20,611
2016						84,771		85,189		84,076		401	20,201
2017								87,899		88,025		1,047	20,757
2018										75,217		6,250	15,296
									$	418,173
	Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident	December 31, 2018
Year	2014		2015		2016		2017		2018
	Unaudited
2014	$	70,831	$	79,713	$	81,684	$	83,346	$	83,808
2015				71,820		82,940		85,507		86,549
2016						71,543		81,682		83,169
2017								77,675		86,319
2018										61,922
Total									$	401,767
All outstanding reserves prior to 2014, net of reinsurance										92
Reserve for unpaid losses and allocated loss adjustment expenses, net of reinsurance									$	16,498

F-77