2013 Annual Report,
Notice of 2014 Annual Meeting &
Proxy Statement
To Our Stockholders, Customers, Employees and Board of Directors:
2013 was prosperous for Hilltop and represented our first full year of operations with PlainsCapital.
During the year, we executed on our strategy to build a premier Texas-based bank and prominent
diversified financial services company through the acquisition of First National Bank. Hilltop had $8.9
billion of assets, $1.3 billion of equity and over 4,500 employees at year end. Our four operating
subsidiaries were each profitable and collectively generated $121 million of net income, representing a
return on average equity of 11% for 2013.
On September 13, 2013, we acquired Edinburg, Texas-based First National Bank in an FDIC-assisted
transaction. This transaction illustrated the complementary acquisition and managerial strengths of
Hilltop and PlainsCapital, respectively. We purchased approximately $2.6 billion of assets and assumed
approximately $2.4 billion of liabilities, most of which were deposits. All other real estate owned and
substantially all loans are covered under loss share agreements with the FDIC. The transaction was
immediately accretive to both earnings and tangible book value. Managerially, we have successfully
integrated First National Bank’s systems and instilled PlainsCapital’s procedures and policies,
particularly those regarding credit. We welcome our new customers and employees and look forward to
acclimating them to the strong culture and community banking values of PlainsCapital.
Operating Subsidiaries:
(cid:190) PlainsCapital Bank had a strong year driven by organic growth at the legacy bank and the
acquisition of First National Bank. For 2013, the bank reported a net interest margin of 5.17%
and pre-tax income of $172 million. As a state member bank, PlainsCapital Bank offers
commercial banking, personal banking and wealth management products and services throughout
Texas. With $8.4 billion of assets, $6.8 billion of deposits and 77 branches at year end,
PlainsCapital Bank is now the fifth largest Texas-based bank based on deposits. Prospectively,
we intend to focus on our community banking model to grow organically and our strong credit
practice to resolve problem assets from the First National Bank acquisition.
(cid:190) PrimeLending had a solid first half of 2013, however deteriorating industry trends resulted in a
soft second half of 2013. Our franchise’s strong mortgage purchase originations helped us
mitigate depressed refinance volumes and grow market share. PrimeLending was the 2nd largest
purchase originator in Texas and the 4th largest nationwide in 2013. In 2013, PrimeLending
originated $11.8 billion in mortgage loans through 300 locations in 42 states. Given expectations
for lower nationwide mortgage volume over the near-term, we continue to focus on rationalizing
expenses, while maintaining our platform for a recovery.
(cid:190) First Southwest’s 2013 results were subdued due to a slowdown in municipal bond issuances and
a prolonged low interest rate environment. First Southwest provides financial advisory services
to public sector entities, access to capital markets for institutional and individual investors,
clearing services to correspondent broker-dealers and asset management services for state and
local governments. As a financial advisor, we were ranked 1st nationwide based on number of
municipal issues and 3rd based on par volume in 2013. With over 1,600 public sector clients,
First Southwest is well positioned to benefit from improving local economies and higher
infrastructure spending.
(cid:190) National Lloyds experienced significant weather related losses in the second quarter that led to a
$14.3 million pre-tax loss for the first half of 2013. By refocusing on core products in core states,
managing exposure concentrations and increasing premium rates, National Lloyds was actually
profitable for the full year of 2013 and generated $7.6 million of pre-tax income. National Lloyds
is a niche property and casualty underwriter offering primarily fire and limited homeowners
insurance for low value dwellings and manufactured homes in Texas and other southern states.
Additionally, we are excited to announce the hiring of Bob Otis as CEO of National Lloyds. Bob
has over 25 years of experience in the insurance industry and brings a wealth of knowledge and
energy to our business.
On March 31, 2014, we entered into a definitive merger agreement with SWS Group, Inc., whereby
Hilltop agreed to acquire all SWS common stock not owned by us. We are working diligently to
consummate this transaction and are very excited about the prospects.
As we near the $10 billion asset threshold, with our subsidiaries operating in regulated industries, Hilltop
is faced with heightened regulatory requirements. Given these circumstances, we continue to invest in
our risk management and compliance systems, policies and professionals. Hilltop is committed to
maintaining positive relationships with our regulators and remaining well capitalized.
Acquiring financial institutions is a core strength of our organization, and we continue to seek
opportunities that complement and build upon our strong platform. Our primary focus is banks located or
based in Texas. As of December 31, 2013, we had $164 million of freely useable cash at Hilltop’s parent
company and significant excess capital in our subsidiaries. Additionally, we have the flexibility to use
our stock as acquisition consideration.
In closing, I would like to thank our employees, including new employees from First National Bank, for
their dedicated service to our company, our customers and the communities in which we do businesses. I
would also like to extend my gratitude to our Board members for their sound guidance and commitment
to Hilltop. For our stockholders, I would like to thank you for your confidence in our stewardship and
continued support.
Sincerely,
Jeremy B. Ford
President and Chief Executive Officer
Hilltop Holdings Inc.
May 2, 2014
Hilltop Holdings Inc.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Tel: 214.855.2177
Fax: 214.855.2173
www.hilltop-holdings.com
NYSE: HTH
NOTICE OF 2014 ANNUAL MEETING
AND PROXY STATEMENT
May 2, 2014
You are cordially invited to attend our 2014 Annual Meeting of Stockholders at 10:00 a.m., Dallas, Texas, local
time, on June 11, 2014. The meeting will be held at 2323 Victory Avenue, 5th Floor, Dallas, Texas 75219.
This booklet includes the formal notice of the meeting and our proxy statement. The proxy statement tells you
about the matters to be addressed, and the procedures for voting, at the meeting.
YOUR VOTE IS VERY IMPORTANT. Even if you only have a few shares, we want your shares to be
represented. If your shares are held in a brokerage account, your broker no longer has discretion to vote on
your behalf with respect to electing directors or certain other non-routine matters. Accordingly, you must
provide specific voting instructions to your broker in order to vote. Please vote promptly in order to ensure that
your shares are represented at the meeting.
The Notice of Internet Availability of Proxy Materials or this proxy statement and the accompanying proxy
card, Notice of 2014 Annual Meeting of Stockholders and annual report for the year ended December 31, 2013 were
first provided to all stockholders of record on or about May 2, 2014.
We look forward to seeing you at the meeting.
Very truly yours,
Jeremy B. Ford
Chief Executive Officer
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON JUNE 11, 2014.
Our proxy statement and our annual report for the fiscal year ended December 31, 2013 are both available at
www.proxyvote.com.
Hilltop Holdings Inc.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Tel: 214.855.2177
Fax: 214.855.2173
www.hilltop-holdings.com
NYSE: HTH
Notice of 2014 Annual Meeting of Stockholders
To Be Held on June 11, 2014
WHEN:
WHERE:
Wednesday, June 11, 2014, at 10:00 a.m., Dallas, Texas local time
2323 Victory Avenue, 5th Floor
Dallas, Texas 75219
WHY:
At this meeting, you will be asked to:
1. Elect 21 directors to serve on our Board of Directors until the 2015 annual meeting
of stockholders and until their successors are duly elected and qualified;
2. Conduct an advisory vote to approve executive compensation;
3. Ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for 2014; and
4. Transact any other business that may properly come before the meeting and any
adjournments or postponements of the meeting.
WHO MAY VOTE:
Stockholders of record at the close of business on April 8, 2014.
ANNUAL REPORT:
Our 2013 Annual Report is enclosed.
Pursuant to rules promulgated by the Securities and Exchange Commission, we are providing access to our proxy
materials, including this proxy statement and our annual report for the year ended December 31, 2013, over the
Internet. As a result, we are providing to many of our stockholders a Notice of Internet Availability of Proxy
Materials instead of a paper copy of our proxy materials. The notice contains instructions on how to access those
proxy materials over the Internet, as well as instructions on how to request a paper copy of our proxy materials. All
stockholders who are not sent a notice will be sent a paper copy of our proxy materials by mail. This electronic
distribution process reduces the environmental impact and lowers the costs of printing and distributing our proxy
materials.
Your vote is very important. Please read the proxy statement and voting instructions on the enclosed proxy
card. Then, whether or not you plan to attend the annual meeting in person, and no matter how many shares
you own, please vote by Internet, telephone or by marking, signing, dating and promptly returning the
enclosed proxy card in the enclosed envelope, which requires no additional postage if mailed in the United
States. Please see “General Information - What should I do if I want to attend in person?” for information on
how to obtain directions to be able to attend the meeting and vote in person.
By Order of the Board of Directors,
Corey G. Prestidge
Executive Vice President,
General Counsel & Secretary
May 2, 2014
Dallas, Texas
PROXY STATEMENT
TABLE OF CONTENTS
Page
GENERAL INFORMATION ......................................................................................................................................... 1
PROPOSAL ONE – ELECTION OF DIRECTORS ............................................................................................................. 5
General .............................................................................................................................................................. 5
Nominees for Election as Directors..................................................................................................................... 6
Vote Necessary to Elect Directors..................................................................................................................... 12
Director Compensation..................................................................................................................................... 12
Board Committees............................................................................................................................................ 14
Corporate Governance...................................................................................................................................... 16
Director Nomination Procedures....................................................................................................................... 20
STOCK OWNERSHIP ............................................................................................................................................... 22
Principal Stockholders...................................................................................................................................... 22
Security Ownership of Management ................................................................................................................. 23
MANAGEMENT...................................................................................................................................................... 25
Executive Officers............................................................................................................................................ 25
Compensation Discussion and Analysis ............................................................................................................ 26
Compensation Committee Report ..................................................................................................................... 37
Executive Compensation .................................................................................................................................. 38
Compensation Committee Interlocks and Insider Participation .......................................................................... 50
Section 16(a) Beneficial Ownership Reporting Compliance .............................................................................. 50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ............................................................................ 50
PROPOSAL TWO – ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION ........................................................ 53
PROPOSAL THREE - RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................................. 54
Vote Necessary to Ratify the Appointment ....................................................................................................... 54
Report of the Audit Committee......................................................................................................................... 54
Independent Auditor’s Fees .............................................................................................................................. 55
STOCKHOLDER PROPOSALS FOR 2015 .................................................................................................................... 56
OTHER MATTERS .................................................................................................................................................. 56
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS .............................................................................................. 56
ANNUAL REPORT .................................................................................................................................................. 57
QUESTIONS ........................................................................................................................................................... 57
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HILLTOP HOLDINGS INC.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
PROXY STATEMENT
2014 Annual Meeting of Stockholders
To be Held on June 11, 2014
GENERAL INFORMATION
The Notice of Internet Availability of Proxy Materials or this Proxy Statement and the accompanying proxy card,
Notice of 2014 Annual Meeting of Stockholders and Annual Report on Form 10-K for the year ended December 31,
2013 were first provided to all stockholders of record on or about May 2, 2014.
Unless otherwise indicated or unless the context otherwise requires, all references in this Proxy Statement to the
“Company”, “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect
wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to
“PlainsCapital” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to the “Bank”
refer to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First
National Bank, references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary
of the Bank) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company (a wholly owned
subsidiary of First Southwest), references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a
wholly owned subsidiary of the Bank) and its subsidiaries as a whole, and references to “NLC” refer to National
Lloyds Corporation, formerly known as NLASCO, Inc., (a wholly owned subsidiary of Hilltop) and its subsidiaries
as a whole.
Why am I receiving these proxy materials?
The Board of Directors of Hilltop, or the Board of Directors, has made these materials available to you on the
Internet or has delivered printed versions of these materials to you by mail in connection with the Board of
Directors’ solicitation of proxies for use at our 2014 Annual Meeting of Stockholders, or the Annual Meeting, which
will take place at 10:00 a.m. (Dallas, Texas time) on Wednesday, June 11, 2014, at 2323 Victory Avenue, 5th Floor,
Dallas, Texas 75219. This Proxy Statement describes matters on which you, as a stockholder, are entitled to vote.
This Proxy Statement also gives you information on these matters so that you can make an informed decision.
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead
of printed proxy materials?
In accordance with rules promulgated by the Securities and Exchange Commission, or the SEC, instead of mailing a
printed copy of our proxy materials to all of our stockholders, we have elected to furnish such materials to selected
stockholders by providing access to these documents over the Internet. Accordingly, on or about May 2, 2014, we
provided a Notice of Internet Availability of Proxy Materials, or the Notice, to selected stockholders of record and
beneficial owners. These stockholders have the ability to access the proxy materials on a website referred to in the
Notice or to request to receive a printed set of the proxy materials by calling the toll-free number found on the
Notice. We encourage you to take advantage of the availability of the proxy materials on the Internet in order to
help reduce the environmental impact of the Annual Meeting.
How can I get electronic access to the proxy materials?
The Notice provides you with instructions regarding how to:
(cid:190) view our proxy materials for the Annual Meeting on the Internet;
(cid:190) vote your shares after you have viewed our proxy materials;
(cid:190) register to attend the meeting in-person;
(cid:190) request a printed copy of the proxy materials; and
1
(cid:190) instruct us to send our future proxy materials to you electronically by email.
Copies of the proxy materials are available for viewing at www.proxyvote.com.
You may have received proxy materials by email. Even if you received a printed copy of our proxy materials, you
may choose to receive future proxy materials by email. Choosing to receive your future proxy materials by email
will lower our costs of delivery and will reduce the environmental impact of our annual meetings. If you choose to
receive our future proxy materials by email, you will receive an email next year with instructions containing a link
to view those proxy materials and link to the proxy voting site. Your election to receive proxy materials by email
will remain in effect until you terminate it or for so long as the email address provided by you is valid.
What am I voting on?
At the Annual Meeting, stockholders will be asked to:
(cid:190) Elect 21 directors to serve on our Board of Directors until the 2015 Annual Meeting of Stockholders and
until their successors are duly elected and qualified;
(cid:190) Conduct an advisory vote to approve executive compensation;
(cid:190) Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for 2014; and
(cid:190) Transact any other business that may properly come before the meeting and any adjournments or
postponements of the meeting.
What are the Board of Directors’ recommendations?
The Board of Directors recommends that you vote your shares:
(cid:190) FOR each of our director candidates;
(cid:190) FOR, on an advisory basis, the approval of the compensation of our named executive officers; and
(cid:190) FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for 2014.
Who is entitled to vote?
Holders of record of our common stock at the close of business on April 8, 2014, are entitled to vote at the Annual
Meeting. With respect to each matter presented, a stockholder is entitled to cast one vote for each share of common
stock owned at the close of business on April 8, 2014.
How do I vote?
If you are a stockholder of record, there are four ways to vote:
(cid:190) In Person. You may vote in person at the Annual Meeting. Bring your printed proxy card if you received
one by mail. Otherwise, we will provide stockholders of record a ballot at the Annual Meeting. We
recommend that you vote by proxy even if you plan to attend the Annual Meeting. You always can change
your vote at the Annual Meeting.
(cid:190) Via the Internet. You may vote by proxy via the Internet by visiting www.proxyvote.com. Have your
proxy card or Notice in hand when you access the website and follow the instructions to obtain your
records and to create an electronic voting instruction form.
(cid:190) Via Telephone. If you received or requested printed copies of the proxy materials by mail, you may vote by
proxy by calling the toll-free number found on the proxy card.
(cid:190) Via Mail. If you received or requested printed copies of the proxy materials by mail, you may vote by
proxy by marking, signing and dating the proxy card and sending it back in the envelope provided.
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If you have shares of our common stock that are held by a broker or other nominee, you may instruct your broker or
nominee to vote your shares by following the instructions that the broker or nominee provides you. New York
Stock Exchange rules prohibit your broker from voting for the election of directors and executive compensation on
your behalf without specific voting instructions from you. Many brokers allow stockholders to provide voting
instructions by mail, telephone and the Internet.
How do proxies work?
Our Board of Directors is asking for your proxy. Giving your proxy to the persons named by us means you
authorize them to vote your shares at the Annual Meeting in the manner you direct. You may vote for all, some or
none of our director candidates, and you may vote for or against, or abstain from voting on, executive compensation
and the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for 2014.
If you are a stockholder of record and (a) you indicate when voting on the Internet or by telephone that you wish to
vote as recommended by our Board of Directors or (b) you sign and return the enclosed proxy card but do not
specify how your shares are to be voted, your shares will be voted FOR the election of all of our director candidates,
FOR the approval of our executive compensation and FOR the ratification of the appointment of
PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014.
If you are a beneficial owner of shares held by a broker or other nominee, also referred to as held in “street name,”
and you do not provide the broker or nominee that holds your shares with specific voting instructions, under the
rules promulgated by the New York Stock Exchange, the broker or nominee that holds your shares may generally
vote on “routine” matters at its discretion, but cannot vote on “non-routine” matters. If the broker or nominee that
holds your shares does not receive instructions from you on how to vote your shares on a “non-routine” matter, that
broker or nominee will inform the inspector of election that it does not have the authority to vote on such matters
with respect to your shares, which is generally referred to as a “broker non-vote.”
You may receive more than one proxy or voting card depending on how you hold your shares. Shares registered in
your name are covered by one card. If you also hold shares through a broker or other nominee, you also may
receive material from them asking how you want to vote. To be sure that all of your shares are voted, we encourage
you to respond to each request you receive.
Which matters are considered “routine” or “non-routine”?
The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for 2014 is considered to be a “routine” matter. A broker or other nominee may generally vote on routine
matters and, therefore, no broker non-votes are expected to exist with respect to this matter. All other matters set
forth in this Proxy Statement are matters that we believe will be designated “non-routine” matters. A broker or other
nominee cannot vote without instructions on non-routine matters and, therefore, there will be broker non-votes on all
matters other than the ratification of the appointment of PricewaterhouseCoopers LLP.
Can I change my vote or revoke my proxy after I have voted?
You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting (or before
any earlier deadline specified in the Notice or the proxy card) by (a) voting again via the Internet or by telephone
(only your latest Internet or telephone proxy submitted prior to the Annual Meeting will be counted), (b) signing and
returning a new proxy card or vote instruction form with a later date or (c) attending the Annual Meeting and voting
in person. Your attendance at the Annual Meeting, however, will not automatically revoke your proxy unless you
vote again at the Annual Meeting or specifically request that your prior proxy be revoked by delivering, prior to the
Annual Meeting, a written notice of revocation to the corporate Secretary at the address listed under “Questions” on
page 57.
Will my shares be voted if I don’t sign a proxy?
If you hold your shares directly in your own name, they will not be voted unless you provide a proxy or attend the
Annual Meeting and vote in person. Under certain conditions, shares that you own that are held by a broker or
nominee may be voted even if you do not provide voting instructions to the broker or nominee. As discussed above
under “—How do proxies work?”, brokerage firms have the authority under applicable rules to vote on certain
“routine” matters, including the ratification of the appointment of auditors.
3
What constitutes a quorum?
In order to carry on the business of the Annual Meeting, we must have a quorum present. This means that the
holders of at least a majority of the outstanding shares eligible to be cast must be represented at the Annual Meeting,
either in person or by proxy. Shares owned by us are not voted and do not count for this purpose. Both abstentions
and broker non-votes (described below) are counted as present for purposes of determining the presence of a
quorum. On April 8, 2014, we had 90,177,991 shares of common stock outstanding and entitled to vote at the
Annual Meeting.
How many votes are needed for approval?
Election of Directors
Election of the director nominees requires the affirmative vote of a plurality of the votes cast on the matter. The
director candidates receiving the highest number of affirmative votes of the shares entitled to be voted will be
elected as directors. For purposes of the election of directors, abstentions and broker non-votes will not be counted
as votes cast and will have no effect on the result of the vote. Stockholders may not cumulate votes in the election
of directors.
Advisory Vote to Approve Executive Compensation
The affirmative vote of a majority of the votes cast on the matter is required to approve, on an advisory basis,
executive compensation. The Compensation Committee of the Board of Directors will review the results of this
matter and will take the results into account in making future determinations concerning executive compensation.
For purposes of the advisory vote on executive compensation, abstentions and broker non-votes will not be counted
as votes cast and will have no effect on the result of the vote.
Ratification of Independent Registered Public Accounting Firm
The appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014
will be ratified if this proposal receives the affirmative vote of a majority of the votes cast on the matter. Brokers
have the authority to vote FOR this proposal in the absence of contrary instructions from a beneficial owner. If this
appointment is not ratified by our stockholders, the Audit Committee and Board of Directors may reconsider its
recommendation and appointment, respectively. With respect to this proposal, abstentions and broker non-votes will
not be counted as votes cast and will have no effect on the result of the vote.
Who conducts the proxy solicitation?
Our Board of Directors is soliciting the proxies, and we will bear all costs of this solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement. Copies of proxy materials will be furnished to
banks, brokerage houses and other agents and nominees holding shares in their names that are beneficially owned by
others so that they may forward the proxy materials to those beneficial owners. In addition, if asked, we will
reimburse these persons for their reasonable expenses in forwarding the proxy materials to the beneficial owners.
We have requested banks, brokerage houses and other custodians, nominees and fiduciaries to forward all proxy
materials to the beneficial owners of the shares that they hold of record. Certain of our officers and employees also
may solicit proxies on our behalf by mail, email, phone or fax or in person.
What should I do if I want to attend in person?
You will need an admission ticket to attend the Annual Meeting. Attendance at the Annual Meeting will be limited
to stockholders of record at the close of business on April 8, 2014 (or their authorized representatives) having an
admission ticket or proof of their share ownership, and guests of the Company. If you plan to attend the Annual
Meeting, please indicate this when you are voting by telephone or Internet or follow the instructions on your proxy
card, and we will promptly mail an admission ticket to you.
If your shares are held in the name of a bank, broker or other holder of record and you plan to attend the Annual
Meeting, you can obtain an admission ticket in advance by providing proof of your ownership, such as a bank or
brokerage account statement, to the corporate Secretary at the address listed under “Questions” on page 57. If you
do not have an admission ticket, you must show proof of your ownership of the Company’s common stock at the
registration table at the door.
4
PROPOSAL ONE – ELECTION OF DIRECTORS
General
At the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has
nominated the director candidates named below.
Our Board of Directors oversees our management on your behalf. The Board of Directors reviews our long-
term strategic plans and exercises direct decision-making authority on key issues, such as the approval of business
combination transactions, the authorization of dividends, the selection of the Chief Executive Officer, setting the
scope of his authority to manage our day-to-day operations and the evaluation of his performance.
Our Board of Directors is not classified; thus, all of our directors are elected annually. The Nominating and
Corporate Governance Committee has recommended, and our Board of Directors has nominated, for re-election all
21 persons currently serving as directors whose terms are expiring at the 2014 Annual Meeting of Stockholders.
If elected, each of the persons nominated as a director will serve until the next annual meeting of stockholders
and until his or her successor is duly elected and qualified. Personal information on each of our nominees is given
below.
Our Board of Directors has affirmatively determined that 12 of the 21 nominees for election as directors at the
Annual Meeting have no material relationship with us (either directly or as a partner, stockholder or officer of an
organization that has a relationship with us) and are independent within the meaning of the director independence
requirements of the listing standards of the New York Stock Exchange, or NYSE. The independent directors are
Charlotte Jones Anderson, Rhodes Bobbitt, Tracy A. Bolt, W. Joris Brinkerhoff, Charles R. Cummings, J. Markham
Green, Jess T. Hay, William T. Hill, Jr., Andrew J. Littlefair, W. Robert Nichols, III, A. Haag Sherman and Robert
C. Taylor, Jr. The determinations regarding the independence of these individuals were based upon information
known by the members of the Board of Directors concerning each other and supplied by each of the directors for the
purpose of this determination. In conducting its annual review of director independence, the Board of Directors
considered transactions and relationships between each director and any member of his or her immediate family and
the Company. The Board of Directors considered that four directors it determined to be independent— Ms.
Anderson and Messrs. Bolt, Littlefair and Taylor—have, or a member of their immediate family or an affiliated
company in which they are employed or in which they are a principal equity holder has, received loans from the
Bank in the ordinary course of business, each of which our Board of Directors did not view as compensation. In our
management’s opinion, these loans were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions by the Bank with other unaffiliated persons
and do not involve more than normal risk of collectability. In addition, the Board of Directors considered
transactions between the Bank and Clean Energy Finance, Inc., a subsidiary of Clean Energy Fuels Corp., a
company for which Andrew J. Littlefair serves as a director and president and chief executive officer. Mr. Littlefair
also beneficially owned 2.1% of Clean Energy Fuels Corp. at March 18, 2014. From late 2011 through 2013, the
Bank purchased, in a series of transactions, an aggregate of approximately $9.3 million in original principal amount
of promissory notes issued by unaffiliated third parties from Clean Energy Finance, Inc. Although purchased at a
premium to the outstanding principal balance on the notes, at the time of purchase, the interest rates on the notes
exceeded the market rates charged by the Bank on similar-type loans that it originated. Clean Energy Finance, Inc.
performs the servicing on the notes at no cost to the Bank, and the Bank purchased these notes with recourse to
Clean Energy Finance, Inc. in the event of default. The aggregate yearly payments of the purchase prices in these
transactions constituted less than 2% of the consolidated gross revenues of each of Clean Energy Fuels Corp. and the
Company in the applicable year purchased and were made in the ordinary course of business in arms-length
transactions. Mr. Littlefair did not have a direct financial interest in any of the transactions with Clean Energy
Finance, Inc. Assuming the election of our 21 nominees, all of our directors, other than Messrs. Hill A. Feinberg,
Gerald Ford, Jeremy Ford, James R. Huffines, Lee Lewis, Clifton Robinson, Kenneth D. Russell, Carl Webb and
Alan B. White, also will be “independent” directors, as set forth in our Director Independence Criteria. The full text
of the Director Independence Criteria can be found in the “Corporate Information–Governance Documents” section
of our website at ir.hilltop-holdings.com. A copy also may be obtained upon request by writing our corporate
Secretary at the address provided on page 57.
5
Our Board of Directors met six times during 2013. During 2013, no director attended fewer than 75% of the
meetings of the Board of Directors and of the board committees on which he or she served. Our Board of Directors
has not adopted a formal policy with regard to director attendance at the annual meetings of stockholders. We,
however, encourage members of the Board of Directors to attend annual meetings. Messrs. Gerald Ford, Jeremy
Ford, Alan White, James Huffines, Tracy Bolt, Charles Cummings, Hill Feinberg, Kenneth Russell and Robert
Nichols attended the 2013 annual meeting of stockholders.
Nominees for Election as Directors
Charlotte Jones Anderson
Age 47
Rhodes R. Bobbitt
Age 68
Tracy A. Bolt
Age 50
W. Joris Brinkerhoff
Age 62
Ms. Anderson has served as a director of Hilltop since our acquisition of PlainsCapital
in November 2012. She previously served as a director of PlainsCapital from
September 2009 to November 2012. She currently serves as Executive Vice President,
Brand Management and President of Charities for the Dallas Cowboys Football Club,
Ltd., a National Football League team. She has worked in various capacities for the
Dallas Cowboys organization since 1990. A native of Little Rock, Arkansas, Ms.
Anderson is a graduate of Stanford University where she earned a Bachelor of Science
degree in Human Biology. Ms. Anderson is actively involved with a number of
charitable and philanthropic organizations, including The Boys and Girls Clubs of
America (regional trustee), the Salvation Army (chairman of board of directors), The
Rise School (board of directors), the Southwest Medical Foundation (board of
directors), the Dallas Symphony (board of directors), and the President’s Advisory
Counsel for The Dallas Center for Performing Arts Foundation.
Mr. Bobbitt has served as a director of Hilltop since November 2005. Mr. Bobbitt is
retired. From 1987 until June 2004, he served as a Managing Director and the Regional
Office Manager of the Private Client Service Group of Credit Suisse First
Boston/Donaldson, Lufkin & Jenrette. Mr. Bobbitt was formerly Vice President of
Security Sales in the Dallas office of Goldman, Sachs & Company from 1969 until
1987. He also serves on the Board of Directors of First Acceptance Corporation,
including the Nominating and Corporate Governance, Investment, and Audit
Committees of that company.
Mr. Bolt has served as a director of Hilltop since our acquisition of PlainsCapital in
November 2012. He previously served as a director of PlainsCapital from September
2009 to November 2012. In 1994, Mr. Bolt co-founded Hartman Leito & Bolt, LLP, an
accounting and consulting firm based in Fort Worth, Texas, where he serves as a
partner and is a member of the firm’s leadership committees. Mr. Bolt holds a Bachelor
of Science and Master of Science from the University of North Texas, and he is a
certified public accountant. He currently serves as a business advisor to numerous
management teams, public and private company boards, not for profit organizations and
trusts.
Mr. Brinkerhoff has served as a director of Hilltop since June 2005. Mr. Brinkerhoff
founded a Native American-owned joint venture, Doyon Drilling Inc. J.V., in 1981 and
served as its operations Chief Executive Officer and Chief Financial Officer until
selling his venture interests in 1992. Doyon Drilling Inc. J.V. designed, built, leased
and operated state of the art mobile drilling rigs for ARCO and British Petroleum in
conjunction with their development of the North Slope Alaska petroleum fields.
Mr. Brinkerhoff currently manages, on a full-time basis, family interests, including oil
and gas production, a securities portfolio and various other business interests. He
actively participates in numerous philanthropic organizations.
6
Charles R. Cummings
Age 77
Hill A. Feinberg
Age 67
Gerald J. Ford
Age 69
Mr. Cummings has served as a director of Hilltop since October 2005. Mr. Cummings
currently serves as the Co-Manager of Acoustical Control LLC, a provider of noise
abatement primarily for the oil and gas industry; DQB Solutions, LLC, a service
provider to the waste industry; and Argyle Equipment, LLC, a lessor of equipment to
the waste industry. In addition, Mr. Cummings is the President and Chief Executive
Officer of CB Resources LLC, an investor in the oil and natural gas industry, and
Container Investments, LLC, a lessor of equipment to the waste industry, each of which
positions he has held since 1999 and 1991, respectively. Until its sale in January 2014,
he served as the Chairman of Aaren Scientific, Inc., a manufacturer of intraocular
lenses used in cataract surgery. From 1998 through 2008, he was the Chairman and
Chief Executive Officer of Aaren Scientific, Inc. and its predecessors. In 1994, Mr.
Cummings co-founded I.E.S.I. Corporation, a regional, non-hazardous waste
management company, and serving as a director until its sale in 2005. Prior to that, he
served as a Managing Director of AEA Investors, Inc., a private investment firm. Prior
to 1979, he was a partner with Arthur Young & Company.
Mr. Feinberg has served as Chairman and Chief Executive Officer of First Southwest
since 1991. He has also served as a director of Hilltop since our acquisition of
PlainsCapital in November 2012. He previously served as a director of PlainsCapital
from December 31, 2008 (in conjunction with PlainsCapital’s acquisition of First
Southwest) to November 2012. Prior to joining First Southwest, Mr. Feinberg was a
senior managing director at Bear Stearns & Co. Mr. Feinberg is a past chairman of the
Municipal Securities Rulemaking Board, the self-regulatory organization with
responsibility for authoring the rules that govern the municipal securities activities of
registered brokers. Mr. Feinberg also is a member of the board of directors of Energy
XXI (Bermuda) Limited, a public company. Mr. Feinberg also formerly served as a
member of the board of directors of Compass Bancshares, Inc. and Texas Regional
Bancshares, Inc., as an advisory director of Hall Phoenix Energy, LLC and as the non-
executive chairman of the board of directors of General Cryogenics, Inc.
Mr. Ford has served as Chairman of the Board of Hilltop since August 2007, and has
served as a director of Hilltop since June 2005. Mr. Ford served as interim Chief
Executive Officer of Hilltop from January 1, 2010 until March 11, 2010. Mr. Ford is a
banking and financial institutions entrepreneur who has been involved in numerous
mergers and acquisitions of private and public sector financial institutions, primarily in
the Southwestern United States, over the past 35 years. In that capacity, he acquired
and consolidated 30 commercial banks from 1975 to 1993, forming First United Bank
Group, Inc., a multi-bank holding company for which he functioned as Chairman of the
Board and Chief Executive Officer until its sale in 1994. During this period, he also led
investment consortiums that acquired numerous financial institutions, forming in
succession, First Gibraltar Bank, FSB, First Madison Bank, FSB and First Nationwide
Bank. Mr. Ford also served as Chairman of the Board of Directors and Chief Executive
Officer of Golden State Bancorp Inc. and its subsidiary, California Federal Bank, FSB,
from 1998 to 2002. He currently serves on the boards of directors of Freeport
McMoRan Copper and Gold Inc., SWS Group, Inc. and Scientific Games Corporation.
Mr. Ford previously served as Chairman of Pacific Capital Bancorp and a director of
First Acceptance Corporation, McMoRan Exploration Co. and Triad Financial
Corporation. Mr. Ford also currently serves on the Board of Trustees of Southern
Methodist University, is the Co-Managing Partner of Ford Financial Fund II, L.P., a
private equity fund. Hilltop’s President and Chief Executive Officer, Jeremy B. Ford,
is the son of Mr. Ford, and Hilltop’s Executive Vice President, General Counsel and
Secretary, Corey G. Prestidge, is the son-in-law of Mr. Ford.
7
Jeremy B. Ford
Age 39
J. Markham Green
Age 70
Jess T. Hay
Age 83
William T. Hill, Jr.
Age 71
Mr. Jeremy B. Ford has served as President, Chief Executive Officer and a director
of Hilltop since March 2010. Mr. Jeremy B. Ford worked in the financial services
industry for over thirteen years, primarily focused on investments in, and
acquisitions of, depository institutions and insurance and finance companies. He
also is one of the individuals who provided services to Hilltop under the prior
Management Services Agreement with Diamond A Administration Company, LLC.
Accordingly, he was actively involved in numerous potential acquisitions for Hilltop
prior to 2010, and the divestiture of the mobile home communities business in 2007.
Mr. Jeremy B. Ford also is currently Chairman of the Board of First Acceptance
Corporation. Prior to becoming President and Chief Executive Officer of Hilltop, he
was a principal of Ford Financial Fund, L.P., a private equity fund. From 2004 to
2008, he worked for Diamond A-Ford Corporation, where he was involved in
various investments made by a family limited partnership. Prior to that, he worked
at Liberté Investors Inc. (now First Acceptance Corporation), California Federal
Bank, FSB (now Citigroup Inc.), and Salomon Smith Barney (now Citigroup Inc.).
Jeremy Ford is the son of Gerald J. Ford, Hilltop’s Chairman of the Board, and the
brother-in-law of Corey G. Prestidge, Hilltop’s Executive Vice President, General
Counsel and Secretary.
Mr. Green has served as a director of Hilltop since February 2004. Mr. Green is a
private investor. From 2001 to 2003, he served as Vice Chairman of the Financial
Institutions and Governments Group in investment banking at JP Morgan Chase.
From 1993 until joining JP Morgan Chase, Mr. Green was involved in the start-up,
and served on the boards, of eight companies, including Affordable Residential
Communities Inc., the predecessor company to Hilltop Holdings Inc. From 1973 to
1992, Mr. Green served in various capacities at Goldman, Sachs & Co. in investment
banking. He was a general partner of Goldman, Sachs & Co. and co-head of its
Financial Services Industry Group. Mr. Green is a member of the board of directors
of MENTOR/The National Mentoring Partnership. Mr. Green previously served as
Chairman of the Board of PowerOne Media LLC.
Mr. Hay has served as a director of Hilltop since March 2009. Mr. Hay is the retired
Chairman and Chief Executive Officer of Lomas Financial Corporation, formerly a
diversified financial services company engaged principally in mortgage banking,
retail banking, commercial leasing and real estate lending, and of Lomas Mortgage
USA, a mortgage banking institution, from which he retired in December 1994. As
Chairman and Chief Executive Officer of Lomas Financial Corporation, which
included during his tenure, a total of five different corporations listed on the New
York Stock Exchange, Mr. Hay has had extensive experience with all of the major
functions within the operations of a public company. He was a director of Viad
Corp. from 1981 until 2013, and presently is a Director Emeritus. He previously
served as a director of Trinity Industries, Inc. from 1965 to 2011, Exxon Mobil from
1982 to 2001, SBC Communications (now AT&T) from 1985 to 2004 and
MoneyGram International, Inc. from 2004 to 2010.
Mr. Hill has served as a director of Hilltop since April 2008. He currently has his
own law firm. Prior to 2012, Mr. Hill was of counsel at Fitzpatrick Hagood Smith &
Uhl, a criminal defense firm. Prior to that, Mr. Hill served as the Dallas District
Attorney and the Chief Prosecuting Attorney of the Dallas District Attorney’s office.
During his tenure at the District Attorney’s office, Mr. Hill restructured the office of
250 lawyers and 150 support personnel, including the computerization of the office
in 1999. For more than four decades, Mr. Hill has been a strong community leader
serving on a number of charitable boards and receiving numerous civic awards,
including President of the SMU Mustang Board of Directors and Chairman of the
Doak Walker Running Back Award for its first year. Mr. Hill currently serves on
the board of directors of Oncor Electric Delivery Company LLC, Oncor Electric
8
James R. Huffines
Age 63
Lee Lewis
Age 62
Andrew J. Littlefair
Age 53
W. Robert Nichols, III
Age 69
Delivery Holdings Company LLC and Baylor Hospital Foundation, and is actively
involved in the Mercy Street Mission. Mercy Street is a Christian-based
organization serving West Dallas children by placing mentors with the children.
Mr. Huffines is the President and Chief Operating Officer of PlainsCapital, a
position he has held since November 2010. He has served as a director of Hilltop
since our acquisition of PlainsCapital in November 2012. He previously served as a
director of PlainsCapital from May 2011 to November 2012. Prior to that, Mr.
Huffines served as the Chairman of the Central and South Texas region and a
director of PlainsCapital Bank, a position he held since joining PlainsCapital in
2001. Mr. Huffines holds a Bachelor of Business Administration in Finance from the
University of Texas. He served on the board of Energy Future Holdings (formerly
TXU Corp.), from 2007 until 2012. In addition, Mr. Huffines previously served as
Chairman of the University of Texas System Board of Regents for over four and a
half years. Mr. Huffines also participates in many community and business
organizations, including serving as a board member of the Dallas Citizens Council,
Board of Advisors of Dallas Chamber, the Board of Trustees of the Bob Bullock
Texas State History Museum Foundation, Vice Chair of the Texas Business
Leadership Council, the Executive Committee of the Chancellor’s Council at the
University of Texas System; and a member of the Texas Philosophical Society.
Mr. Lewis has served as a director of Hilltop since our acquisition of PlainsCapital
in November 2012. He previously served as a director of PlainsCapital from 1989 to
November 2012. He founded in 1976, and currently serves as the chief executive
officer of, Lee Lewis Construction, Inc., a construction firm based in Lubbock,
Texas. Mr. Lewis graduated from Texas Tech University and is a member of the
American General Contractors Association, West Texas Chapter, the Chancellors
Council for the Texas Tech University System, and the Red Raider Club.
Mr. Littlefair has served as a director of Hilltop since our acquisition of
PlainsCapital in November 2012. He previously served as a director of
PlainsCapital from September 2009 to November 2012. He is a co-founder of Clean
Energy Fuels Corp., a provider of compressed and liquefied natural gas in the United
States and Canada that is publicly traded on the NASDAQ Global Select Market,
and has served as that company’s President, Chief Executive Officer and a director
since 2001. From 1996 to 2001, Mr. Littlefair served as President of Pickens Fuel
Corp., and from 1987 to 1996, he served in various management positions at Mesa,
Inc., an energy company. From 1983 to 1987, Mr. Littlefair served in the Reagan
Administration as a Staff Assistant to the President. He served as the Chairman of
NGV America, the leading U.S. advocacy group for natural gas vehicles, from
March 1993 to March 2011. Mr. Littlefair served on the board of directors of
Westport Innovations Inc., a Canadian company publicly traded on the NASDAQ
Global Market from 2007 to June 2010.
Mr. Nichols has served as a director of Hilltop since April 2008. Mr. Nichols has
been a leader in the construction machinery business since 1966. He was the
president of Conley Lott Nichols, a dealer for several manufacturers of construction
machinery, until its sale in 2012. In 2013, he purchased an oilfield services
company in Midland, Texas, for which he serves as Chairman and President. He has
served on numerous bank and bank holding company boards, including United
Mexico Bancorp and Ford Bank Group. Mr. Nichols is active in civic and charitable
activities, serving as an active director at M.D. Anderson Hospital, The Nature
Conservancy of Texas and Mercy Street.
9
C. Clifton Robinson
Age 76
Kenneth D. Russell
Age 65
A. Haag Sherman
Age 48
Mr. Robinson has served as a director of Hilltop since March 2007. From 2000 until
its acquisition by a subsidiary of Hilltop in January 2007, Mr. Robinson was
Chairman of the Board and Chief Executive Officer of NLASCO, Inc., an insurance
holding company domiciled in Texas. Until December 2012, Mr. Robinson served
as Chairman of the Board of NLASCO, Inc. In 2000, Mr. Robinson formed
NLASCO, Inc. in conjunction with the acquisition of American Summit Insurance
Company and the reacquisition of National Lloyds Insurance Company, which he
had initially acquired in 1964 and later sold. In 1979, he organized National Group
Corporation for the purpose of purchasing insurance companies and related
businesses. In 1964, he became the President and Chief Executive Officer of
National Lloyds Insurance Company in Waco, Texas, one of the two current
insurance subsidiaries of NLC (formerly known as NLASCO, Inc.). From 1964 to
the present, Mr. Robinson has participated in the formation, acquisition and
management of numerous insurance business enterprises. Mr. Robinson established
the Robinson-Lanham Insurance Agency in 1961. He previously has held positions
with various insurance industry associations, including Vice-Chairman of the Board
of Texas Life and Health Guaranty Association, President of the Independent
Insurance Agents of Waco-McLennan County and member of the board of directors
of the Texas Life Insurance Association and the Texas Medical Liability Insurance
Underwriting Association. Mr. Robinson currently serves on the Board of Trustees
of the Scottish Rite Hospital for Children in Dallas, Texas and the Baylor University
Board of Regents.
Mr. Russell has served as a director of Hilltop since August 2010. Mr. Russell is a
former member of the managing board of directors for KPMG Deutsche Treuhand-
Gesellschaft Aktiengesellschaft (KPMG DTG). While a member of KPMG DTG,
Mr. Russell served in leadership of Audit–Financial Services. Subsequent to his
service as a member of the German firm leadership, he functioned as a freelance
strategic advisory to KPMG DTG’s managing board of directors, working directly
with members of its executive committee. He also participated in the integration of
the UK and German KPMG firms in the formation of KPMG Europe and headed a
partner development program, which focuses on assisting partners in becoming
better businessmen, as well as technicians. Prior to joining KPMG DTG, Mr.
Russell was the lead financial services partner in the US KPMG LLP’s Department
of Professional Practice in New York. His responsibilities in the Department of
Profession Practice included leading the financial instruments, structured financing
and securitization topic teams, and he was one of KPMG’s leading consultants on
financial instruments, hedging and securitization accounting issues. Prior to joining
the Department of Professional Practice at KPMG in 1993, Mr. Russell spent 20
years in KPMG’s Dallas office and had engagement responsibilities for several
significant regional banking, thrift and other financial services clients. He currently
serves as a Financial Advisor with Diamond A Administration Company, LLC, an
affiliate of Gerald J. Ford.
Mr. Sherman has served as a director of Hilltop since our acquisition of
PlainsCapital in November 2012. He previously served as a director of
PlainsCapital from September 2009 to November 2012. Mr. Sherman co-founded
and served in various capacities, including Chief Executive Officer and Chief
Investment Officer, at Salient Partners, L.P., an investment firm based in Houston,
Texas, from 2002 to 2011. Mr. Sherman serves on the board of directors of The
Endowment Fund complex, Salient Absolute Return Fund complex, Salient MLP &
Energy Infrastructure Fund (NYSE: SMF) and Blue Dolphin Energy Company
(Nasdaq: BDCO). Mr. Sherman is an honors graduate of the University of Texas
School of Law and a cum laude graduate of Baylor University. He is a certified
public accountant and a member of the State Bar of Texas.
10
Robert C. Taylor, Jr.
Age 66
Carl B. Webb
Age 64
Alan B. White
Age 65
Mr. Taylor has served as a director of Hilltop since our acquisition of PlainsCapital
in November 2012. He previously served as a director of PlainsCapital from 1997 to
November 2012. He has been engaged in the wholesale distribution business in
Lubbock, Texas since 1971. In February 2009, Mr. Taylor was appointed to serve as
Chief Executive Officer for United Supermarkets, LLC, a retail grocery business in
Texas since 1915. He also serves on the board of directors of United Supermarkets,
LLC. Prior to that appointment, Mr. Taylor served as the Vice President of
Manufacturing and Supply Chain for United Supermarkets since 2007. From 2002 to
2007, Mr. Taylor was the President of R.C. Taylor Distributing, Inc., a business
engaged in the business of general merchandise, candy and tobacco to retail outlets
in West Texas and Eastern New Mexico. Mr. Taylor is a 1971 graduate of Texas
Tech University. He is chairman of the Lubbock Downtown Tax Increment Finance
Redevelopment Committee and serves on the Texas Tech Chancellors Advisory
Board.
Mr. Webb has served as a director of Hilltop since June 2005. From August 2010
until December 2012, Mr. Webb served as the Chief Executive Officer of Pacific
Capital Bancorp and as Chairman of the Board and Chief Executive Officer of Santa
Barbara Bank & Trust, N.A. He was a Senior Principal of Ford Financial Fund,
L.P., a private equity fund that was the parent company of SB Acquisition Company
LLC, the majority stockholder of Pacific Capital Bancorp prior to its sale to
UnionBanCal Corporation. Mr. Webb also is the Co-Managing Partner of Ford
Financial Fund II, L.P., a private equity fund. In addition, Mr. Webb has served as a
consultant to Hunter’s Glen/Ford, Ltd., a private investment partnership, since
November 2002. He served as the Co-Chairman of Triad Financial Corporation, a
privately held financial services company, from July 2007 to October 2009, as was
the interim President and Chief Executive Officer from August 2005 to June 2007.
Previously, Mr. Webb was the President and Chief Operating Officer and a Director
of Golden State Bancorp Inc. and its subsidiary, California Federal Bank, FSB, from
September 1994 to November 2002. Prior to his affiliation with California Federal
Bank, FSB, Mr. Webb was the President and Chief Executive Officer of First
Madison Bank, FSB (1993 to 1994) and First Gibraltar Bank, FSB (1988 to 1993),
as well as President and a Director of First National Bank at Lubbock (1983 to
1988). Mr. Webb also is a director of Prologis, Inc. He is a former director of
Pacific Capital Bancorp, M&F Worldwide Corp., Plum Creek Timber Company and
Triad Financial Corporation.
Mr. White is one of PlainsCapital’s founders. He has served as Chairman and Chief
Executive Officer of PlainsCapital since 1987. He has served as a director of Hilltop
since our acquisition of PlainsCapital in November 2012 and is the Vice-Chairman
of the Board of Directors and the Chairman of Hilltop’s Executive Committee. Mr.
White received his Bachelors of Business Administration in Finance at Texas Tech
University. Mr. White’s current charitable and civic service includes serving as a
member of the Cotton Bowl Athletic Association Board of Directors, the MD
Anderson Cancer Center Living Legend Committee and the Dallas Citizens Council.
He was also the founding chairman of the Texas Tech School of Business Chief
Executive’s Roundtable; the former Chairman of the Texas Tech Board of Regents,
the Covenant Health System Board of Trustees, and the Methodist Hospital System
Board of Trustees; and a member of the Texas Tech University President’s Council
and the Texas Hospital Association Board.
11
Vote Necessary to Elect Directors
Election of the director nominees requires the affirmative vote of a plurality of the votes cast on the matter. The
director candidates receiving the highest number of affirmative votes of the shares entitled to be voted will be
elected as directors. For purposes of the election of directors, abstentions and broker non-votes will not be counted
as votes cast and will have no effect on the result of the vote. Under applicable rules, a broker or other nominee
does not possess the authority to vote for the director nominees in the absence of instructions from the beneficial
owner of the relevant shares. Stockholders may not cumulate votes in the election of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
ELECTION OF EACH OF THE NOMINEES IDENTIFIED ABOVE.
Director Compensation
General
Members of our Board of Directors who also are full-time employees do not receive any compensation for their
service on the Board of Directors or any committee of the Board of Directors. All other directors receive the
following compensation for their service on the Board of Directors:
(cid:120)
(cid:120)
$40,000 annual retainer; and
$2,000 fee for participation in each meeting of the Board of Directors at which attendance in person is
requested (one-half of that fee is paid for participation in any meeting at which attendance is requested
by telephone).
In addition, members of board committees receive the following additional compensation:
(cid:120) Audit Committee—$65,000 annual fee for the chairperson of the committee;
(cid:120) Nominating and Corporate Governance Committee—$10,000 annual fee for the chairperson of the
committee;
(cid:120) Compensation Committee—$10,000 annual fee for the chairperson of the committee;
(cid:120)
Investment Committee—$25,000 annual fee for the chairperson of the committee;
(cid:120) Merger and Acquisition Committee— $10,000 annual fee for the chairperson of the committee; and
(cid:120)
$1,000 fee for participation in each meeting of a board committee.
Members of our Board of Directors may elect to receive their aggregate Board of Directors and board
committee compensation:
(cid:120)
(cid:120)
(cid:120)
entirely in the form of cash;
entirely in the form of common stock; or
one-half in cash and one-half in common stock.
Any elections, or changes in elections, by directors regarding the form of compensation to be received may only
occur during a “trading window” and only become effective at the “trading window” immediately following such
election or change in election. Cash and shares of common stock are paid and issued, respectively, in arrears on a
calendar quarterly basis, with no vesting requirements. Customarily, these payments and issuances occur by the
15th day of the month following the applicable calendar quarter-end. The value of the common stock awarded is
based upon the average closing price per share of our common stock for the last ten consecutive trading days of the
applicable calendar quarter. In lieu of fractional shares of common stock that would otherwise be issuable to
directors, we pay cash to the director based upon the value of those fractional shares at the value the shares are
awarded to the director. If a director does not serve for the entire calendar quarter, that director is compensated
based upon the time of service during the applicable calendar quarter.
12
Each member of our Board of Directors is reimbursed for out-of-pocket expenses associated with his service on,
and attendance at, Board of Directors or board committee meetings. Other than as described above, members of our
Board of Directors receive no additional compensation for their service on the Board of Directors or board
committees.
Political Action Committee Matching Program
The NLASCO Political Action Committee, or the PAC, is a separate segregated fund that was formed to make
political contributions. To encourage participation in the PAC by eligible participants, for each contribution made to
the PAC by an eligible individual contributor, NLC makes a matching contribution to any Section 501(c)(3)
organization of the contributor’s choice, dollar for dollar, up to the maximum amount an eligible individual can
contribute to the PAC in a given calendar year. Under this program, no contributor to the PAC receives any
financial, tax or other tangible benefit or premium from either the recipient charities or us. This program is
completely voluntary.
2013 Director Compensation
Director Compensation Table for 2013(1)
Name
Charlotte Jones Anderson
Rhodes Bobbit
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
Jess T. Hay
William T. Hill, Jr.
James Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
C. Clifton Robinson
Kenneth D. Russell
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
Fees earned or
paid in cash
($)
Stock awards
($)
Total
($)
28,031
89,000
24
56,000
131,000
-
50,000
-
68,000
63,000
62,000
-
54,000
28,541
66,000
50,000
50,000
-
28,031
36
-
27,970
-
65,976
-
-
-
-
-
-
-
-
-
-
28,459
-
-
-
-
27,970
49,964
-
56,000
89,000
66,000
56,000
131,000
-
50,000
-
68,000
63,000
62,000
-
54,000
57,000
66,000
50,000
50,000
73,000
56,000
50,000
-
(1) Fees earned for services performed in 2013 include annual retainers, meeting fees and chairperson remuneration. Aggregate fees paid to
non-employee directors for annual retainers and committee chairmanships were paid quarterly in arrears. Cash was paid in lieu of the
issuance of fractional shares. Service for any partial quarter is calculated and paid on the basis of time served during the applicable calendar
quarter. Non-employee directors are solely responsible for the payment of taxes payable on remuneration paid by the Company. The
number of shares awarded was determined based upon the average closing price per share of our common stock for the last ten consecutive
trading days of the calendar quarter during which the stock was earned; however, the dollar value reported in the table for each stock award
was determined in accordance with FASB ASC Topic 718.
13
As described above, the 2013 stock awards were issued to each non-employee director who elected to receive
all or part of his or her director compensation in the form of our common stock, generally within 15 days following
each applicable calendar quarter-end. All of our personnel, as well as non-employee directors, are subject to trading
restrictions with regard to our common stock, and trading may only occur during a “trading window.” Provided that
any such party does not possess material, non-public information about us, this trading period commences on the
next trading day following two trading days after the public release of quarterly or annual financial information and
continues until the close of business on last day of the month preceding the last month of the next fiscal quarter.
The following numbers of shares of our common stock were issued to our directors for services performed
during 2013:
Name of Director
Charlotte Jones Anderson
Tracy A. Bolt
Andrew J. Littlefair
Robert C. Taylor, Jr.
Carl B. Webb
Number of Shares
1,623
3,826
1,666
1,623
2,908
Each of the following directors had outstanding the following aggregate numbers of shares of our common
stock awarded for services performed on behalf of us from election or appointment through the end of fiscal 2013:
For further information about the stockholdings of these directors and our management, see “Stock Ownership—
Security Ownership of Management” commencing on page 23 of this Proxy Statement.
Name of Director
Charlotte Jones Anderson
Tracy A. Bolt
Rhodes Bobbitt
W. Joris Brinkerhoff
Charles R. Cummings
Gerald J. Ford
J. Markham Green
Andrew J. Littlefair
Robert C. Taylor, Jr.
Carl B. Webb
Board Committees
General
Number of Shares
1,623
3,826
1,562
9,943
5,379
2,893
3,872
1,666
1,623
35,080
The Board of Directors appoints committees to assist it in carrying out its duties. In particular, committees
work on key issues in greater detail than would be practical at a meeting of all the members of the Board of
Directors. Each committee reviews the results of its deliberations with the full Board of Directors.
The standing committees of the Board of Directors currently consist of the Audit Committee, the Compensation
Committee, the Executive Committee, the Investment Committee, the Merger and Acquisition Committee, and the
Nominating and Corporate Governance Committee. Current copies of the charters for the Audit Committee, the
Compensation Committee, and the Nominating and Corporate Governance Committee, as well as our Corporate
Governance Guidelines, Code of Ethics and Business Conduct, or the General Code of Ethics and Business Conduct,
and Code of Ethics for Chief Executive and Senior Financial Officers, or the Senior Officer Code of Ethics, may be
found on our website at ir.hilltop-holdings.com, under the heading “Corporate Information –Governance
Documents.” Printed versions also are available to any stockholder who requests them by writing to our corporate
Secretary at the address listed under “Questions” on page 57. A more detailed description of these committees is set
forth below. Our Board of Directors may, from time to time, establish certain other committees to facilitate our
management.
14
Committee Membership
The following table shows the current membership of, and the 2013 fiscal meeting information for, each of the
committees of the Board of Directors.
Name
Audit Committee
Compensation
Committee
Nominating and
Corporate Governance Committee
Investment
Committee
Merger and
Acquisition Committee
Executive
Committee
Charlotte Jones Anderson
Rhodes Bobbit
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
Jess T. Hay
William T. Hill, Jr.
James Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
C. Clifton Robinson
Kenneth D. Russell
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
Meetings in Fiscal 2013
Audit Committee
(cid:98)
Chairman
(cid:98)
(cid:98)
(cid:98)
(cid:98)
(cid:98)
Chairman
14
7
(cid:98)
(cid:98)
Chairman
(cid:98)
3
Chairman
(cid:98)
(cid:98)
(cid:98)
6
(cid:98)
(cid:98)
(cid:98)
(cid:98)
Chairman
(cid:98)
(cid:98)
(cid:98)
3
(cid:98)
(cid:98)
(cid:98)
(cid:98)
Chairman
5
We have a standing Audit Committee established within the meaning of Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. The Audit Committee helps our Board of Directors
ensure the integrity of our financial statements, the qualifications and independence of our independent registered
public accounting firm and the performance of our internal audit function and independent registered public
accounting firm. In furtherance of those matters, the Audit Committee assists in the establishment and maintenance
of our internal audit controls, selects, meets with and assists the independent registered public accounting firm,
oversees each annual audit and quarterly review and prepares the report that federal securities laws require be
included in our annual proxy statement, which appears on page 54. Mr. Cummings has been designated as
Chairman, and Messrs. Green and Bolt are members, of the Audit Committee. Until January 9, 2013, Mr. Bobbitt
also served as a member of the Audit Committee. Our Board of Directors has reviewed the education, experience
and other qualifications of each member of the Audit Committee. Based upon that review, our Board of Directors
has determined that each of Mr. Cummings and Mr. Bolt qualifies as an “audit committee financial expert,” as
defined by the rules of the SEC, and each member of the Audit Committee is independent in accordance with the
listing standards of the NYSE. Currently, none of our Audit Committee members serve on the audit committees of
three or more public companies.
Compensation Committee
The Compensation Committee reviews and approves the compensation and benefits of our executive officers,
administers the Hilltop Holdings Inc. 2012 Annual Incentive Plan, or the Annual Incentive Plan, the Hilltop
Holdings Inc. 2003 Equity Incentive Plan, or the 2003 Equity Incentive Plan, and the Hilltop Holdings Inc. 2012
Equity Incentive Plan, or the 2012 Equity Incentive Plan, and produces the annual report on executive compensation
for inclusion in our annual proxy statement, which appears on page 37. Each member is independent in accordance
with the listing standards of the NYSE.
15
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee’s purpose is as follows:
(cid:120)
Identify, screen and recommend to our Board of Directors individuals qualified to serve as members,
and on committees, of the Board of Directors;
(cid:120) Advise our Board of Directors with respect to the composition, procedures and committees of the
Board of Directors;
(cid:120) Advise our Board of Directors with respect to the corporate governance principles applicable to the
Company; and
(cid:120) Oversee the evaluation of the Board of Directors and our management.
Each member of the Nominating and Corporate Governance Committee is independent in accordance with the
listing standards of the NYSE.
Investment Committee
The Investment Committee is responsible for, among other things, reviewing investment policies, strategies and
programs; reviewing the procedures that we utilize in determining that funds are invested in accordance with
policies and limits approved by the Investment Committee; and reviewing the quality and performance of our
investment portfolios and the alignment of asset duration to liabilities.
Merger and Acquisition Committee
The purpose of the Merger and Acquisition Committee is to review potential mergers, acquisitions or
dispositions of material assets or a material portion of any business proposed by management and to report its
findings and conclusions to the Board of Directors. Each member is independent in accordance with the listing
standards of the NYSE.
Executive Committee
The Executive Committee, with certain exceptions, has the power and authority of the Board of Directors to
manage the affairs of the Company between meetings of the Board of Directors.
Corporate Governance
General
We are committed to good corporate governance practices and, as such, we have adopted formal corporate
governance guidelines to maintain our effectiveness. The guidelines govern, among other things, board member
qualifications, responsibilities, education, management succession and executive sessions. A copy of the corporate
governance guidelines may be found at our corporate website at ir.hilltop-holdings.com under the heading
“Corporate Information –Governance Documents.” A copy also may be obtained upon request from our corporate
Secretary at the address listed under “Questions” on page 57.
Board Leadership Structure
We have separated the offices of Chief Executive Officer and Chairman of the Board as a means of separating
management of the Company from our Board of Director’s oversight of management. Separating these roles also
enables an orderly leadership transition when necessary. We believe, at this time, that this structure provides
desirable oversight of our management and affairs. We have in the past appointed, and will continue to appoint,
lead independent directors as circumstances require.
Risk Oversight
Our Board of Directors oversees an enterprise-wide approach to risk management, intended to support the
achievement of organizational objectives, including strategic objectives, to improve long-term organizational
performance and enhance stockholder value. Our Board of Directors is actively involved in establishing and
16
refining our business strategy, including assessing management’s appetite for risk and determining the appropriate
level of overall risk for the Company. We may conduct assessments in the future as circumstances warrant.
While the Board of Directors has the ultimate oversight responsibility for the risk management process, various
committees of the Board of Directors also have responsibility for risk management. In particular, the Audit
Committee focuses on financial risk, including internal controls, and, from time to time, discusses and evaluates
matters of risk, risk assessment and risk management with our management team. The Compensation Committee is
responsible for overseeing the management of risk associated with our compensation policies and arrangements.
The Nominating and Corporate Governance Committee ensures that the internal rule processes by which we are
governed are consistent with prevailing governance practices and applicable laws and regulations. Finally, the
Investment Committee ensures that our funds are invested in accordance with policies and limits approved by it.
Our Senior Officer Code of Ethics, General Code of Ethics and Business Conduct, committee charters and other
governance documents are reviewed by the appropriate committees annually to confirm continued compliance,
ensure that the totality of our risk management processes and procedures is appropriately comprehensive and
effective and that those processes and procedures reflect established best practices.
Board Performance
Our Board of Directors conducts an annual survey of its members regarding its performance and reviews the
results of the survey with a view to improving efficacy and effectiveness of the Board of Directors. In addition, the
full Board of Directors reviews annually the qualifications and effectiveness of the Audit Committee and its
members.
Director Qualifications for Service
As described below, the Nominating and Corporate Governance Committee considers a variety of factors when
evaluating a potential candidate to fill a vacancy on the Board of Directors or when nomination of an incumbent
director for re-election is under consideration. The Nominating and Corporate Governance Committee and the
Board of Directors strive to balance a diverse mix of experience, perspective, skill and background with the practical
requirement that the Board of Directors will operate collegially, with the common purpose of overseeing our
business on behalf of our stockholders. All of our directors possess relevant experience, and each of them
approaches the business of the Board of Directors and their responsibilities with great seriousness of purpose. The
following describes, with respect to each director, his or her particular experience, qualifications, attributes and
skills that qualify him or her to serve as a director:
Charlotte Jones Anderson
Ms. Anderson has significant managerial and executive officer experience with
large entrepreneurial businesses and provides the Board of Directors the
perspective of one of PlainsCapital’s significant customers.
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Mr. Bobbitt has an extensive investment background. This is particularly
important given our available cash on hand and the investment portfolios at our
subsidiaries.
Mr. Bolt has significant experience concerning accounting matters that is
essential to our Audit Committee’s and Board of Directors’ oversight
responsibilities.
Mr. Brinkerhoff has participated, and continues to participate, in a number of
business interests. Accordingly, he brings knowledge and additional
perspectives to our Board of Directors from experiences with those interests.
Mr. Cummings has an extensive operational and accounting background. His
expertise in these matters brings considerable strength to our Audit Committee
and Board of Directors in these areas.
17
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
Jess T. Hay
William T. Hill, Jr.
James R. Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols III
Mr. Feinberg has extensive knowledge and experience concerning
PlainsCapital’s financial advisory segment and the industry in which it operates
through his extended period of service to First Southwest.
Mr. Ford has been a financial institutions entrepreneur and private investor
involved in numerous mergers and acquisitions of private and public sector
financial institutions over the past 35 years. His extensive banking industry
experience and educational background provide him with significant knowledge
in dealing with financial, accounting and regulatory matters, making him a
valuable member of our Board of Directors. In addition, his service on the
boards of directors and audit and corporate governance committees of a variety
of public companies gives him a deep understanding of the role of the Board of
Directors.
Mr. Jeremy B. Ford’s career has focused on mergers and acquisitions in the
financial services industry. Accordingly, he has been actively involved in
numerous acquisitions, including our acquisitions of NLC (formerly known as
NLASCO, Inc.), PlainsCapital Corporation and substantially all of the assets of
FNB. His extensive knowledge of our operations makes him a valuable member
of our Board of Directors.
Mr. Green has an extensive background in financial services, as well as board
service. His investment banking background also provides our Board of
Directors with expertise surrounding acquisitions and investments.
Mr. Hay has broad experience in managing and leading significant enterprises in
the financial services industry. His service on the boards of other significant
companies provides the Board of Directors with additional perspective on the
Company’s operations. His prior active involvement with the Democratic
National Committee also provides him with broad exposure to the political
processes on the national, state and local levels.
Mr. Hill’s experience with legal and compliance matters, along with his
management of a large group of highly skilled professionals, have given him
considerable knowledge concerning many matters that come before our Board
of Directors. Mr. Hill has also served on several civic and charitable boards over
the past 35 years, which has given him invaluable experience in corporate
governance matters.
Mr. Huffines’ significant banking and managerial experience provide unique
insights and experience to our Board of Directors.
Through his prior service on PlainsCapital’s Board of Directors, Mr. Lewis has
many years of knowledge of PlainsCapital and the challenges and opportunities
that it is presented. The background of Mr. Lewis as a manager of a Texas-
based company also provides unique insight to the Board of Directors.
Mr. Littlefair has significant experience serving as a chief executive officer and
as a director of publicly traded companies and provides the Board of Directors
with the perspective of one of PlainsCapital’s significant customers.
Mr. Nichols has broad experience in managing and leading enterprises. This
significant experience provides our Board of Directors with additional
perspectives on our operations.
18
C. Clifton Robinson
Kenneth D. Russell
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
Mr. Robinson possesses particular knowledge and experience in the insurance
industry, as we purchased NLC (formerly known as NLASCO, Inc.) from him
in 2007. This provides our Board of Directors with expertise in regards to our
insurance operations.
Mr. Russell’s extensive background in accounting and operating entities
provides valuable insight to our Board of Directors, including merger and
acquisition activities.
Mr. Sherman has significant experience concerning investing, legal and
accounting matters that is essential to our Board of Director’s oversight
responsibilities.
Through his prior service on PlainsCapital’s Board of Directors, Mr. Taylor has
many years of knowledge of PlainsCapital and the challenges and opportunities
that it is presented. The background of Mr. Taylor as a manager of a Texas-
based company also provides unique insight to the Board of Directors.
Mr. Webb possesses particular knowledge and experience in strategic planning
and the financial industry, as well as expertise in finance, that strengthen the
Board of Directors’ collective qualifications, skills and experience.
Mr. White possesses knowledge of our business and industry through his
lengthy tenure as PlainsCapital’s Chief Executive Officer that aids him in
efficiently and effectively identifying and executing our strategic priorities.
Executive Board Sessions
The current practice of our Board of Directors is to hold an executive session of its non-management directors
at least once per quarter. The individual who serves as the chair at these executive sessions is the Chairman of the
Board of Directors. Executive sessions of the independent directors of the Board of Directors also are held at least
once per fiscal year.
Communications with Directors
Our Board of Directors has established a process to receive communications from stockholders and other
interested parties. Stockholders and other interested parties may contact any member or all members of the Board of
Directors by mail. To communicate with our Board of Directors, any individual director or any group or committee
of directors, correspondence should be addressed to the Board of Directors or any such individual director or group
or committee of directors by either name or title. The correspondence should be sent to Hilltop Holdings Inc., c/o
Secretary, 200 Crescent Court, Suite 1330, Dallas, Texas 75201.
All communications received as set forth in the preceding paragraph will be opened by the office of our General
Counsel for the sole purpose of determining whether the contents represent a message to our directors. Any contents
that are not in the nature of advertising, promotions of a product or service or patently offensive material will be
forwarded promptly to the addressee(s). In the case of communications to the Board of Directors or any group or
committee of directors, the General Counsel’s office will make sufficient copies of the contents to send to each
director who is a member of the group or committee to whom the communication is addressed. If the amount of
correspondence received through the foregoing process becomes excessive, our Board of Directors may consider
approving a process for review, organization and screening of the correspondence by the corporate Secretary or
other appropriate person.
Code of Business Conduct and Ethics
We have adopted a Senior Officer Code of Ethics applicable to our Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer. We also have adopted a General Code of Ethics and Business Conduct
applicable to all officers, directors and employees. Both codes are available on our website at ir.hilltop-
19
holdings.com under the heading “Corporate Information—Governance Documents.” Copies also may be obtained
upon request by writing our corporate Secretary at the address listed under “Questions” on page 57. We intend to
disclose any amendments to, or waivers from, our Senior Officer Code of Ethics and our General Code of Ethics and
Business Conduct will be disclosed at the same website address provided above.
Director Nomination Procedures
The Nominating and Corporate Governance Committee believes that, at a minimum, candidates for membership
on the Board of Directors should have a demonstrated ability to make a meaningful contribution to the Board of
Directors’ oversight of our business and affairs and have a record and reputation for honest and ethical conduct. The
Nominating and Corporate Governance Committee recommends director nominees to the Board of Directors based
on, among other things, its evaluation of a candidate’s experience, knowledge, skills, expertise, integrity, ability to
make independent analytical inquiries, understanding of our business environment and a willingness to devote
adequate time and effort to board responsibilities. In making its recommendations to the Board of Directors, the
Nominating and Corporate Governance Committee also seeks to have the Board of Directors nominate candidates
who have diverse backgrounds and areas of expertise so that each member can offer a unique and valuable
perspective.
The Nominating and Corporate Governance Committee expects, in the future, to identify potential nominees by
asking current directors and executive officers to notify the committee if they become aware of persons who meet
the criteria described above. The Nominating and Corporate Governance Committee also, from time to time, may
engage firms, at our expense, that specialize in identifying director candidates. As described below, the Nominating
and Corporate Governance Committee also will consider candidates recommended by stockholders.
Once a person has been identified by the Nominating and Corporate Governance Committee as a potential
candidate, the committee expects to collect and review publicly available information regarding the person to assess
whether the person should be considered further. If the Nominating and Corporate Governance Committee
determines that the candidate warrants further consideration, and if the person expresses a willingness to be
considered and to serve on the Board of Directors, the Nominating and Corporate Governance Committee expects to
request information from the candidate, review the person’s accomplishments and qualifications, including in light
of any other candidates that the committee might be considering, and conduct one or more interviews with the
candidate. In certain instances, members of the Nominating and Corporate Governance Committee may contact one
or more references provided by the candidate or may contact other members of the business community or other
persons that may have greater first-hand knowledge of the candidate’s accomplishments.
In addition to formally nominating individuals for election as directors in accordance with our Second Amended
and Restated Bylaws, as summarized below on page 56 under “Stockholder Proposals for 2015,” stockholders may
send written recommendations of potential director candidates to the Nominating and Corporate Governance
Committee for its consideration. Such recommendations should be submitted to the Nominating and Corporate
Governance Committee “c/o Secretary” at Hilltop Holdings Inc., 200 Crescent Court, Suite 1330, Dallas, Texas
75201. Director recommendations submitted by stockholders should include the following information regarding
the stockholder making the recommendation and the individual(s) recommended for nomination:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
name, age, business address and residence address;
the class, series and number of any shares of Hilltop stock or other securities of Hilltop or any affiliate
of Hilltop owned, beneficially or of record (including the name of the nominee holder if beneficially
owned);
the date(s) that shares of Hilltop stock or other securities of Hilltop or any affiliate of Hilltop were
acquired and the investment intent of such acquisition;
any short interest (including any opportunity to profit or share in any benefit from any decrease in the
price of such stock or other security) in any securities of Hilltop or any affiliate of Hilltop;
(cid:120) whether and the extent to which such person, directly or indirectly (through brokers, nominees or
otherwise), is subject to or during the prior six months has engaged in any hedging, derivative or other
20
transaction or series of transactions or entered into any other agreement, arrangement or understanding
(including any short interest, any borrowing or lending of securities or any proxy or voting agreement),
the effect or intent of which is to (a) manage risk or benefit of changes in the price of Hilltop securities
or any security of any entity listed in the peer group in the stock performance graph included in the
materials distributed with this Proxy Statement or (b) increase or decrease the voting power of such
person in Hilltop disproportionately to such person’s economic interest in Hilltop securities (or, as
applicable, any security of any entity listed in the peer group in the stock performance graph included
in the materials distributed with this Proxy Statement);
any substantial interest, direct or indirect (including, without limitation, any existing or prospective
commercial, business or contractual relationship with us), by security holdings or otherwise of such
person in us or in any of our affiliates, other than an interest arising from the ownership of securities
where such person receives no extra or special benefit not shared on a pro rata basis by all other
holders of the same class or series;
the investment strategy or objective, if any, of the stockholder making the recommendation and a copy
of the prospectus, offering memorandum or similar document, if any, provided to investors, or
potential investors, in such stockholder (if not an individual);
to the extent known by the stockholder making the recommendation, the name and address of any
other stockholder supporting the nominee for election or reelection as a director;
a certificate executed by the proposed nominee that certifies that the proposed nominee is not, and will
not, become a party to, any agreement, arrangement or understanding with any person or entity other
than us in connection with service or action as a director that has not been disclosed to us and that the
proposed nominee consents to being named in a proxy statement and will serve as a director if elected;
completed proposed nominee questionnaire (which will be provided upon request by writing or
telephoning our corporate Secretary at the address or phone number listed under “Questions” on
page 57); and
all other information that would be required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Exchange Act and the rules promulgated thereunder.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The stockholder recommendation and information described above must be delivered to the corporate Secretary not
earlier than the 120th day and not later than 5:00 p.m., Dallas, Texas time, on the 90th day prior to the first
anniversary of the date of the proxy statement for the preceding year’s annual meeting of stockholders; provided,
however, that if the date of the annual meeting is advanced more than thirty days prior to, or delayed by more than
thirty days after, the first anniversary of the date of the preceding year’s annual meeting, the stockholder
recommendation and information must be delivered not earlier than the 120th day prior to the date of such annual
meeting and not later than 5:00 p.m., Dallas, Texas time, on the later of the 90th day prior to the date of such annual
meeting of stockholders and the 10th day following the date on which public announcement of the date of such
annual meeting is first made. In the event, however, the number of directors to be elected to the Board of Directors
is increased and there is no public announcement of such action at least 100 days prior to the first anniversary of the
date of the proxy statement for the preceding year’s annual meeting, a stockholder recommendation also will be
considered timely, but only with respect to nominees for any new positions created by the increase, if it is delivered
to the corporate Secretary not later than 5:00 p.m., Dallas, Texas time, on the tenth day following the day on which
the public announcement is first made.
The Nominating and Corporate Governance Committee expects to use a similar process to evaluate candidates
to the Board of Directors recommended by stockholders as the one it uses to evaluate candidates otherwise identified
by the committee.
Pursuant to an action of the Board of Directors at a meeting held February 25, 2014, the mandatory retirement
age for directors was waived with regard to the service of Messrs. Cummings, Green, Hay, Hill and Robinson.
21
No fee was paid to any third party or parties to identify or evaluate, or assist in identifying or evaluating,
potential nominees.
The Nominating and Corporate Governance Committee did not receive the name of any stockholder
recommendations for director nominees with respect to the 2014 Annual Meeting.
Principal Stockholders
STOCK OWNERSHIP
The following table sets forth information regarding our common stock beneficially owned on April 8, 2014 by
any person or “group,” as that term is used in Section 13(d)(3) of the Exchange Act, known to us to beneficially own
more than five percent of the outstanding shares of our common stock.
Name and Addresss of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Percent of
Class (a)
Gerald J. Ford (b)
200 Crescent Court, Suite 1350
Dallas, Texas 75201
Burgundy Asset Management Ltd. (c)
181 Bay Street, Suite 4510
Toronto, Ontario M5J 2T3
15,548,160
17.2 %
4,655,202
5.2 %
(a) Based on 90,177,991 shares of common stock outstanding on April 8, 2014. Shares issuable under instruments to purchase our common
stock that are exercisable within 60 days of April 8, 2014 are treated as if outstanding for computing the percentage ownership of the person
holding these instruments, but are not treated as outstanding for purposes of computing the percentage ownership of any other person.
(b) The shares of common stock beneficially owned by Mr. Ford include 15,544,674 shares owned by Diamond A Financial, LP. Mr. Ford is
the sole general partner of Diamond A Financial, LP. Mr. Ford has sole voting and dispositive power of these shares.
(c) Based upon Schedule 13G/A (Amendment No. 3) filed on February 3, 2014. Burgundy Asset Management Ltd. has sole voting power with
respect to 2,953,642 of these shares and sole dispositive power with respect to all of these shares. Clients for whom Burgundy Asset
Management Ltd. acts as investment adviser may withdraw dividends or proceeds from the sale securities from the accounts managed by
Burgundy Asset Management Ltd. No one client of Burgundy Asset Management Ltd. has an interest in the common stock of Hilltop in
excess of five percent of the total outstanding shares.
22
Security Ownership of Management
The following table sets forth information regarding the number of shares of our common stock beneficially
owned on April 8, 2014, by:
(cid:120)
(cid:120)
(cid:120)
each of our directors;
each of our named executive officers; and
all of our directors and executive officers presently serving, as a group.
Except as otherwise set forth below, the address of each of the persons listed below is c/o Hilltop Holdings Inc., 200
Crescent Court, Suite 1330, Dallas, Texas 75201. Except as otherwise indicated in the footnotes to this table, the
persons named in the table have specified that they have sole voting and investment power with respect to all shares
of stock shown as beneficially owned by them, subject to any applicable community property law.
Name of Beneficial Owner
Charlotte Jones Anderson
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
200 Crescent Court, Suite 1350
Dallas, Texas 75201
Jeremy B. Ford
J. Markham Green
Jess T. Hay
William T. Hill, Jr.
James R. Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
Darren Parmenter
C. Clifton Robinson
Kenneth D. Russell
Jerry L. Schaffner
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
Common Stock
Amount and Nature of
Beneficial Ownership
Percent of
Class (a)
4,405
126,059 (b)
6,608
35,228
37,476
1,376,552 (c)
15,548,160 (d)
392,500 (e)
119,152
-
48,350 (f)
354,731 (g)
656,199 (h)
12,948
41,000 (i)
5,361 (j)
1,218,880
-
88,546 (k)
14,422
29,918
104,462
2,327,338 (l)
*
*
*
*
*
1.5%
17.2%
*
*
*
*
*
*
*
*
*
1.4%
*
*
*
*
*
2.6%
All Directors and Named Executive Officers,
as a group (26 persons)
22,776,434 (m)
25.2%
*
Represents less than 1% of the outstanding shares of such class.
(a) Based on 90,177,991 shares of common stock outstanding on April 8, 2014. Shares issuable under instruments to purchase our common
stock that are exercisable within 60 days of April 8, 2014 are treated as if outstanding for computing the percentage ownership of the person
holding these instruments, but are not treated as outstanding for purposes of computing the percentage ownership of any other person.
Includes 62,100 shares of common stock held in an IRA account for the benefit of Mr. Bobbitt.
(b)
23
(c)
Includes 25,776 shares of common stock held directly by Mr. Feinberg’s wife. Also includes 776 shares of common stock held by the Max
McDermott Trust for the benefit of Mr. Feinberg’s stepson. Mr. Feinberg’s wife is the trustee of the trust. Includes 15,000 restricted shares
of common stock that cliff vest on April 11, 2016. Mr. Feinberg can vote such restricted shares but may not dispose of them until they have
vested. Excludes 8,887 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of
April 8, 2014.
(d) The shares of common stock beneficially owned by Mr. Ford include 15,544,674 shares owned by Diamond A Financial, LP. Mr. Ford is
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
the sole general partner of Diamond A Financial, LP. Mr. Ford has sole voting and dispositive power of these shares.
Jeremy Ford is a beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, LP (see footnote (d)). Includes
(a) 300,000 shares of common stock acquirable upon the exercise of a stock option and (b) 30,000 restricted shares of common stock that
cliff vest on April 1, 2016. Mr. Jeremy Ford can vote such restricted shares but may not dispose of them until they have vested. Excludes
(x) 200,000 shares of common stock acquirable upon the exercise of a stock option that will not vest within 60 days of April 8, 2014,
(y) 25,392 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014
and (z) 15,544,674 shares of common stock held by Diamond A Financial, LP.
Includes 7,300 shares of common stock held in a SEP IRA account for the benefit of Mr. Hill and 15,750 shares of common stock held by
the William T. Hill P.C. retirement account for the benefit of Mr. Hill.
Includes 952 shares of common stock allocated to an account pursuant to the Plains Capital Corporation Employee Stock Ownership Plan
(the “ESOP”) for the benefit of Mr. Huffines. Each ESOP participant has the right to direct the ESOP trustees how to vote the shares
allocated to his account and may therefore be deemed to beneficially own such shares. Also includes (a) 47,000 shares of common stock
held by the James Huffines 1994 Trust for the benefit of Mr. Huffines, (b) 11,077 shares of common stock held in a self-directed individual
retirement account and (c) 30,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Huffines can vote such restricted
shares but may not dispose of them until they have vested. Excludes 17,774 shares of common stock deliverable upon the vesting of
restricted stock units that will not vest within 60 days of April 8, 2014.
Includes 603,417 shares of common stock held by Lee Lewis Construction. Mr. Lewis is the sole owner of Lee Lewis Construction and
may be deemed to have voting and/or investment power with respect to the shares owned by Lee Lewis Construction.
Includes 11,000 shares of common stock held in an IRA account for the benefit of Mr. Nichols.
Includes 5,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Parmenter can vote such restricted shares but may not
dispose of them until they have vested. Excludes 7,406 shares of common stock deliverable upon the vesting of restricted stock units that
will not vest within 60 days of April 8, 2014.
Includes 36,920 shares of common stock allocated to an account pursuant to the ESOP for the benefit of Mr. Schaffner. Each ESOP
participant has the right to direct the ESOP trustees how to vote the shares allocated to his account and may therefore be deemed to
beneficially own such shares. Also includes (a) 3,931 shares of common stock held directly by Mr. Schaffner’s wife, (b) 11,970 shares of
common stock held in a self-directed individual retirement account and (c) 20,000 restricted shares of common stock that cliff vest on
April 1, 2016. Mr. Schaffner can vote such restricted shares but may not dispose of them until they have vested. Excludes 11,849 shares of
common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.
Includes (a) 9,785 shares of common stock held directly by Mr. White’s wife, (b) 454 shares of common stock allocated to the ESOP
account of Mr. White’s wife, (c) 23,806 shares of common stock held by Double E Investments (“Double E”), (d) 12,883 shares of common
stock held by EAW White Family Partnership, Ltd. (“EAW”), (e) 8,045 shares of common stock held by Maedgen, White and Maedgen
(“MW&M”), (f) 1,853,958 shares of common stock held by Maedgen & White, Ltd., and (g) 952 shares of common stock allocated to an
account pursuant to the ESOP for the benefit of Mr. White. Each ESOP participant has the right to direct the ESOP trustees how to vote the
shares allocated to his account and may therefore be deemed to beneficially own such shares. As the manager of Double E, the managing
partner of MW&M and the sole member of the general partner of EAW, Mr. White has exclusive authority to vote and/or dispose of the
securities held by Double E, MW&M and EAW, respectively, and may, therefore, be deemed to have sole voting and dispositive power
over the shares of common stock held by Double E, MW&M and EAW. Mr. White is the sole general partner of Maedgen & White, Ltd.
and may be deemed to beneficially own the shares held by Maedgen & White, Ltd. As the sole general partner of Maedgen & White, Ltd.,
Mr. White has the power to vote the shares held by Maedgen & White, Ltd. The Agreement of Limited Partnership of Maedgen & White,
Ltd. requires the approval of 80% of the limited partnership interests in Maedgen & White, Ltd. before its general partner may dispose of
the shares held by Maedgen & White, Ltd. Mr. White, directly and indirectly, controls approximately 77% of the limited partnership
interests of Maedgen & White, Ltd. and therefore may be deemed to share dispositive power over the shares held by Maedgen & White,
Ltd. Includes 50,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. White can vote such restricted shares but may
not dispose of them until they have vested. Excludes 29,623 shares of common stock deliverable upon the vesting of restricted stock units
that will not vest within 60 days of April 8, 2014.
(m) Represents 26 persons and includes (a) 360,000 shares of common stock acquirable pursuant to the exercise of stock options and (b)
210,000 restricted shares of common stock that cliff vest on April 1, 2016. The holders of such restricted shares can vote the restricted
shares but may not dispose of them until they have vested. Excludes (x) 240,000 shares of common stock acquirable by our executive
officers pursuant to the exercise of stock options that will not vest within 60 days of April 8, 2014 and (y) 140,076 shares of common stock
deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.
24
Executive Officers
General
MANAGEMENT
We have identified the following officers as “executive officers,” consistent with the definition of that term as
used by the SEC:
Name
Age
Position
Hill A. Feinberg
Jeremy B. Ford
James R. Huffines
John A. Martin
Darren E. Parmenter
Corey G. Prestidge
Todd L. Salmans
Jerry L. Schaffner
Alan B. White
67
39
63
66
51
40
65
56
65
Chief Executive Officer of First Southwest
President, Chief Executive Officer and Director
President and Chief Operating Officer of PlainsCapital
Executive Vice President, Chief Financial Officer of PlainsCapital
Executive Vice President – Principal Financial Officer
Executive Vice President, General Counsel and Secretary
Chief Executive Officer of PrimeLending
President and Chief Executive Officer of the Bank
Chief Executive Officer of PlainsCapital
Business Experience of Executive Officers
Information concerning the business experience of Messrs. Hill A. Feinberg, Jeremy B. Ford, James R. Huffines
and Mr. Alan B. White is set forth above under “Proposal One – Election of Directors – Nominees for Election as
Directors” beginning on page 6.
John A. Martin. Mr. Martin has served as the Executive Vice President and Chief Financial Officer of
PlainsCapital since November 2010 and has continued in that position since our acquisition of PlainsCapital in
November 2012. Mr. Martin also serves on the board of directors of the Bank, First Southwest and various other
subsidiaries of PlainsCapital. Prior to joining PlainsCapital, Mr. Martin most recently served as executive vice
president and chief financial officer of Family Bancorp, Inc. and its subsidiary, San Antonio National Bank, from
April 2010 until October 2010. Before joining Family Bancorp, from 2009 to 2010, Mr. Martin served as a
consultant to community banks, providing strategic planning services. Beginning in 2005, Mr. Martin served as
chief financial officer of Texas Regional Bancshares, Inc. and later served as director of financial planning and
analysis for BBVA Compass after its acquisition of Texas Regional Bancshares in 2006.
Darren E. Parmenter. Mr. Parmenter has served as Executive Vice President – Principal Financial Officer of
Hilltop since February 2014 and previously served as Senior Vice President of Finance of Hilltop from June 2007 to
February 2014. From January 2000 to June 2007, Mr. Parmenter was with Hilltop’s predecessor, Affordable
Residential Communities Inc., and served as the Controller of Operations from April 2002 to June 2007. Prior to
2000, Mr. Parmenter was employed by Albertsons Inc., as an Assistant Controller.
Corey G. Prestidge. Mr. Prestidge has served as an Executive Vice President of Hilltop since February 2014
and General Counsel and Secretary of Hilltop since January 2008. From November 2005 to January 2008,
Mr. Prestidge was the Assistant General Counsel of Mark Cuban Companies. Prior to that, Mr. Prestidge was an
associate in the corporate and securities practice group at Jenkens & Gilchrist, a Professional Corporation, which is a
former national law firm. Mr. Prestidge is the son-in-law of our Chairman of the Board, Gerald J. Ford, and the
brother-in-law of our President and Chief Executive Officer, Jeremy B. Ford.
Todd L. Salmans. Mr. Salmans has served as Chief Executive Officer of PrimeLending since January 2011 and
has continued in that position since our acquisition of PlainsCapital in November 2012. He also previously held the
office of President of PrimeLending until August 2013. As Chief Executive Officer, Mr. Salmans is responsible for
the strategic direction and day-to-day management of PrimeLending, including financial performance, compliance,
business development, board and strategic partner communications and team development. He also serves as a
25
member of PrimeLending’s Board of Directors. Mr. Salmans joined PrimeLending in 2006 as Executive Vice
President and Chief Operating Officer, with responsibility over daily operations, loan processing and sales. He was
promoted to President in April 2007. Mr. Salmans has over 30 year of experience in the mortgage banking industry.
Prior to joining PrimeLending, he served as regional executive vice president of CTX/Centex, regional senior vice
president of Chase Manhattan/Chase Home Mortgage Corp., and regional senior vice president of First Union
National Bank/First Union Mortgage Corp. Mr. Salmans is currently a board member of the Texas Mortgage
Bankers Association.
Jerry L. Schaffner. Mr. Schaffner has served as the President and Chief Executive Officer of the Bank since
November 2010 and has continued in that position since our acquisition of PlainsCapital in November 2012. He
currently serves as a director of the Bank, First Southwest and various other subsidiaries, and previously served as a
director of PlainsCapital from 1993 until March 2009. Mr. Schaffner has over 25 years of banking experience and
joined PlainsCapital in 1988 as part of its original management group. He received his Bachelor of Business
Administration in finance from Texas Tech University. Mr. Schaffner is a licensed Texas real estate broker.
Terms of Office and Relationships
Our executive officers are elected annually or, as necessary, to fill vacancies or newly created offices by our
Board of Directors. Each executive officer holds office until his successor is duly elected or qualifies or, if earlier,
until his retirement, death, resignation or removal. Any officer or agent elected or appointed by our Board of
Directors may be removed by our Board of Directors whenever, in its judgment, our best interests will be served, but
any removal will be without prejudice to the contractual rights, if any, of the person so removed.
Except as disclosed elsewhere in this Proxy Statement, there are no familial relationships among any of our
current directors or executive officers. Except as described under “Proposal One – Election of Directors –
Nominees for Election as Directors” commencing on page 6, none of our director nominees hold directorships in
any company with a class of securities registered pursuant to Section 12 of the Exchange Act or pursuant to Section
15(d) of the Exchange Act or any company registered as an investment company under the Investment Company
Act of 1940.
Except as set forth in this Proxy Statement, there are no arrangements or understandings between any nominee
for election as a director or officer and any other person pursuant to which that director was nominated or that
officer was selected.
Compensation Discussion and Analysis
The Compensation Committee (the “Committee”) is responsible for establishing, implementing and monitoring
adherence with our compensation philosophy. The Committee ensures that the total compensation paid to senior
executives is fair, reasonable, competitive, performance-based and aligned with stockholder interests.
Executive Summary
Year 2013 represented a transformational time for our Company and compensation programs. It was the first year
of full integration of PlainsCapital into Hilltop. In support of this significant change, the Committee established a
new framework that focused on defined performance objectives. The Committee continues to refine compensation
programs to further emphasize pay-for-performance, some of which have already been implemented for 2014.
2013 Highlights
(cid:120)
Profitability increased exponentially. We generated a record $121.0 million in net income. We earned $1.40
per diluted share, up $1.50 per share from 2012. Return on average equity (ROAE) was 10.59% and return
on average assets (ROAA) was 1.66%, compared to 9.61% and 1.01%, respectively, of our peer median.
(cid:120) Asset quality remained strong compared to peers with non-performing assets as a percentage of total assets
of 0.32%.
26
(cid:120) Hilltop capital ratios remained strong with a Tier 1 Leverage Ratio at 12.81% and a Total Capital Ratio of
19.13% at December 31, 2013.
(cid:120) Completed the acquisition of substantially all of the assets and liabilities, including deposits, of First
National Bank, Edinburg, Texas from the FDIC, as receiver, with loss share (the “FNB Transaction”), and
reopened the acquired branches under the “PlainsCapital Bank” name. Accordingly, as of December 31,
2013, we had 77 branch locations, more than double than at December 31, 2012, and our total assets
increased to $8.9 billion at December 31, 2013.
(cid:120) Redeemed the 7.5% Senior Exchangeable Notes due 2025, which was accretive to book value.
(cid:120) Hilltop continued to retain approximately $164 million of freely useable cash at December 31, 2013,
following the redemption of the senior notes and a $35 million capital contribution to the Bank in
connection with the FNB Transaction.
All of this contributed to a substantial increase in stockholder value as our stock price closed out the year at $23.13
per share, up 71% from the 2012 close of $13.54 per share. Additional detail regarding our results and
achievements can be found in our Annual Report on Form 10-K for the year ended December 31, 2013.
Furthermore, we believe that we are well positioned to continue positive growth momentum into 2014 and beyond.
Enhanced Compensation Program
With respect to 2013, the Committee implemented a cash incentive compensation program for all senior executive
officers. In that regard, the Committee developed scorecards for each executive, which weighted cash incentive
compensation on predefined objectives, including net income. The Committee also awarded long-term incentive
compensation in the form of restricted stock that was subject to three-year cliff vesting. This practice was consistent
with awards granted at PlainsCapital Corporation prior to the acquisition and was effective during the integration
and transition period.
The most recent equity grants in February 2014 included a combination of performance-based and time-based
restricted stock units. The Committee developed a long-term incentive plan whereby half of the equity awards
granted to senior executive officers are subject to performance criteria over a three-year period and all awards are
subject to a one-year hold period following vesting, subject to certain exceptions. The Committee also further
refined the 2014 annual cash incentive compensation program to enhance its objectives. The Committee believes the
implementation of these programs has benefited the Company in clearly defining short-term and long-term
objectives.
Philosophy and Objectives of Our Executive Compensation Program
Our compensation program includes the following components: base salary, annual and long-term incentive awards
that are linked to performance and the creation of stockholder value and perquisites. In structuring our compensation
programs, the Committee selected the particular components and the weight given to those components based upon
our strategic objectives. We believe that it is critical to structure the compensation program in such a manner to
retain those with the talent, skill and experience necessary for us to realize our strategic objectives.
With this in mind, the following principles help guide our decisions regarding compensation of our named executive
officers:
(cid:120) Compensation opportunities should be competitive with market practices. In order to attract and retain
executives with the experience and skills necessary to lead our Company and motivate them to deliver
strong performance to our stockholders, we are committed to providing total annual compensation
opportunities that are competitive.
(cid:120)
A significant portion of compensation should be performance-based. Our executive compensation program
now further emphasizes pay-for-performance. This means that compensation based on corporate
performance, as assessed under the criteria established pursuant to the Annual Incentive Plan, has the
possibility to represent a significant portion of the named executive officer’s total compensation. An
27
additional component, which has the ability to reduce annual incentive compensation, is based upon
improper risk taking and non-compliance with applicable laws and regulations.
(cid:120) Management’s interests should be aligned with those of our stockholders. Our long-term incentive
compensation was delivered in the form of restricted stock in 2013 to support our goals for ownership and
retention. However, in 2014, long-term incentive compensation is being awarded in restricted stock units,
half of which vest upon achievement of performance goals. The value of these awards ultimately depends
upon the performance of our stock price or our relative total shareholder return. We also recently
implemented stock ownership guidelines applicable to our Section 16 officers, including our named
executive officers, and directors.
(cid:120) Compensation should be perceived as fair. We strive to create a compensation program that will be
perceived as fair and equitable, both internally and externally.
How We Determine and Assess Executive Compensation Generally
Background
We completed the acquisition of PlainsCapital Corporation on November 30, 2012, and the compensation of our
named executive officers who were employed by PlainsCapital Corporation is therefore largely based upon the
compensation they were paid by PlainsCapital Corporation prior to the acquisition. Three of our named executive
officers, Messrs. White, Huffines and Schaffner, were employed by PlainsCapital Corporation or its subsidiaries
prior to the acquisition, and each had an employment agreement.
PlainsCapital Corporation, we entered into retention agreements with Messrs. White and Schaffner to ensure
continuity following the closing. All other existing employment arrangements at PlainsCapital Corporation were
amended to terminate on November 30, 2014. For a more detailed discussion of these employment contracts, see
“Employment Contracts and Incentive Plans – Employment Contracts” commencing on page 40.
In connection with the acquisition of
Messrs. Ford and Parmenter do not have employment agreements and their compensation was largely discretionary
prior to 2013.
Role of the Compensation Committee
The Committee is responsible for reviewing and approving all aspects of the compensation programs for our named
executive officers and making all decisions regarding specific compensation to be paid or awarded to them. The
Committee is responsible for, among its other duties, the following:
(cid:120) Review and approval of corporate incentive goals and objectives relevant to compensation;
(cid:120)
(cid:120)
Evaluation of individual performance results in light of these goals and objectives;
Evaluation of the competitiveness of the total compensation package; and
(cid:120) Approval of any changes to the total compensation package, including, but not limited to, base salary,
annual and long-term incentive award opportunities and payouts and retention programs.
The Committee is responsible for determining all aspects of compensation of the Chief Executive Officers of Hilltop
and PlainsCapital, as well as assessing their individual performance.
In setting the compensation of our named executive officers, the Committee, in its discretion, considers (i) the
transferability of managerial skills, (ii) the relevance of each named executive officer’s experience to other potential
employees, and (iii) the readiness of the named executive officer to assume a different or more significant role,
either within our organization or with another organization. When making pay-related decisions, the Committee
also has considered our specific circumstances and the associated difficulties with attraction, retention and
motivation of talent and the importance of compensation in supporting achievement of our strategic objectives.
Information about the Committee and its composition, responsibilities and operations can be found under “Board
Committees” beginning on page 14.
28
Role of the Chief Executive Officers in Compensation Decisions
The Chief Executive Officers of Hilltop and PlainsCapital Corporation recommend to the Committee any
compensation changes affecting the other named executive officers. The Chief Executive Officers provide input and
recommendations to the Committee with regards to compensation decisions for their direct reports. These
recommendations are made within the framework of the compensation programs approved by the Committee and
based on market data provided by the Committee’s independent consultant. The input includes base salary changes,
annual incentive and long-term incentive opportunities, specific individual performance objectives, and individual
performance assessments. The Chief Executive Officers make their recommendations based on their assessment of
the individual officer’s performance, performance of the officer’s respective business or function and employee
retention considerations. The Committee reviews and considers the Chief Executive Officers’ recommendations
when determining any compensation changes affecting our officers or executives. Each Chief Executive Officer
does not play any role with respect to any matter impacting his own compensation.
Role of Stockholder Say-on-Pay Votes
The Company provides its stockholders with the opportunity to cast an annual advisory vote on executive
compensation. At the Company’s annual meeting of stockholders held in June 2013, 78% of the votes cast
(excluding abstentions and broker non-votes) on the say-on-pay proposal at that meeting were voted in favor of the
proposal. Following such vote, the Committee has made significant enhancements to the short-term and long-term
programs during 2013 to further focus on pay-for-performance. Highlights of the compensation program for fiscal
2014 are included in this Compensation, Discussion & Analysis in order to assist stockholders in evaluating the
additional changes the Committee has implemented. Accordingly, the Committee will continue to consider the
outcome of the Company’s say-on-pay votes when making future compensation decisions for the named executive
officers. A vote on the frequency of advisory votes on executive compensation will be submitted to stockholders at
the 2015 annual meeting of stockholders.
Role of Compensation Consultant
Pursuant to its charter, the Committee is authorized to retain and terminate any consultant, as well as to approve the
consultant’s fees and other terms of the engagement. The Committee also has the authority to obtain advice and
assistance from internal or external legal, accounting or other advisors. In January 2013, the Committee engaged
Pearl Meyer & Partners (“Pearl Meyer”) as its compensation consultant. The Committee had not engaged a
compensation consultant during any of the previous five years. In June 2013, the lead consultant with Pearl Meyer
transferred to Meridian Compensation Partners, LLC (“Meridian”), and the Committee unanimously agreed to
transfer its relationship to Meridian. The Committee believed that it was important to retain that lead consultant in
order to complete the work already in progress. Meridian had also previously been the compensation consultant for
PlainsCapital Corporation prior to its acquisition by Hilltop. Meridian does not provide any other services to
management.
Meridian provides research, data analyses, survey information and design expertise in developing compensation
programs for executives and incentive programs for eligible employees. In addition, Meridian keeps the Committee
apprised of regulatory developments and market trends related to executive compensation practices. Meridian does
not determine or recommend the exact amount or form of executive compensation for any of the named executive
officers. A representative of Meridian generally attends meetings of the Committee, is available to participate in
executive sessions and communicates directly with the Committee.
Pursuant to the Committee’s charter, if the Committee elects to use a compensation consultant, the consultant must
be independent. The Committee assesses independence taking into account the following factors:
(cid:120)
(cid:120)
(cid:120)
compliance with the NYSE listing standards;
the policies and procedures the consultant has in place to prevent conflicts of interest;
any business or personal relationships between the consulting firm and the members of the Committee;
29
(cid:120)
(cid:120)
any ownership of Company stock by the individuals at the firm performing consulting services for the
Committee; and
any business or personal relationship of the firm with an executive officer of the Company.
Meridian has provided the Committee with appropriate assurances and confirmation of its independent status
pursuant to the charter and other factors. The Committee believes that Meridian has been independent throughout its
service for the Committee and there is no conflict of interest between Meridian and the Committee.
Other Factors
The Committee makes executive compensation decisions following a review and discussion of both the financial
and operational performance of our businesses and the annual performance reviews of the named executive officers
and other members of the management team.
Benchmarking Compensation
During 2013, the Committee consulted with Meridian to assess the competitiveness and effectiveness of our
executive compensation program. In December 2013, Meridian provided an analysis of base salary, short-term
incentive, long-term incentive and benefit practices of comparable companies in the financial industry. Meridian
considered individual compensation elements, as well as the total compensation package, and assessed the
relationship of pay to performance.
In performing this analysis, Meridian used a peer group of financial institutions, which was reviewed and approved
by the Committee. The peer group included institutions of generally similar asset size and, to the extent possible,
organizations with significant other operating segments. At the time the peer group was selected, our Company was
positioned at the 55th percentile of the peer group in terms of total assets, with asset size ranging from $3.2 billion to
$13.1 billion (approximately one-half to two times the size of our Company). The peer group used in the report
presented for consideration consisted of the following financial institutions:
1st Source Corporation
Capital Bank Financial Corp.
First Financial Holdings, Inc.
International Banchares Corp.
Park National Corporation
Southside Bancshares, Inc.
Trustmark Corporation
BancFirst Corporation
Community Trust Bancorp, Inc.
First Midwest Bancorp, Inc.
MB Financial, Inc.
Pinnacle Financial Partners, Inc.
Sterling Financial Corporation
Umpqua Holdings Corporation
Banner Corporation
First Financial Bankshares, Inc.
IBERIABANK Corporation
Old National Bancorp
SCBT Financial Corporation
Texas Capital Bancshares, Inc.
Westamerica Bancorporation
Because a peer group analysis is limited to those positions for which compensation information is disclosed
publicly, these studies typically include only the five most highly compensated officers at each company.
Therefore, the compensation consultant also relied on published compensation surveys to supplement information
for these positions, as well as to provide the basis for analysis for other executives. Similar asset and scope
comparisons were used for that benchmarking analysis.
Elements of our Executive Compensation Program
Overall, our executive compensation program is designed to be consistent with the objectives and principles set forth
in this discussion. The basic elements of our executive compensation program are summarized below, followed by a
more detailed discussion of the programs.
Our compensation policies and programs are considered by the Committee in a total rewards framework,
considering both “pay”—base salary, annual incentive compensation and long-term incentive compensation; and
“benefits”—benefits, perquisites and executive benefits and other compensation. Our executive compensation
program consists primarily of the following components:
30
Compensation Component
Purpose
Base Salary
Fixed component of pay intended to compensate the individual fairly for
the responsibility level of the position held.
Annual Incentive Awards
Variable component of pay intended to motivate and reward the
individual’s contribution to achieving our short-term/annual objectives.
Long-term Incentive Awards
Variable component of pay intended to motivate and reward the
individual’s contribution to achieving our long-term objectives.
Benefits and Perquisites
Fixed component of pay intended to provide an economic benefit to us in
attracting and retaining executive talent.
Base Salary
We provide base salaries for each named executive officer, commensurate with the services each provides to us,
because we believe a portion of total direct compensation should be provided in a form that is fixed and liquid. In
reviewing base salaries, the Committee evaluated the salaries of other named executive officers of the Company and
its peers and any increased level of responsibility, among other items. As a result of that analysis, the Committee
determined to increase the annual salaries of Messrs. Ford and Parmenter for 2014. With respect to the other named
executive officers of the Company, the Committee determined to maintain the current salary for 2014, as they were
found to be competitive with the Company’s peers. The following are the base salaries for the named executive
officers in 2013 and 2014:
Name
Jeremy B. Ford
Darren Parmenter
Alan B. White
James Huffines
Jerry Schaffner
Base Salary
2013
2014
$ Change
$
$
$
$
$
500,000
300,000
1,350,000
690,000
525,000
$
$
$
$
$
550,000
330,000
$
$
1,350,000(a) $
690,000(b) $
525,000(a) $
50,000
30,000
—
—
—
(a) Messrs. White’s and Schaffner’s base salaries are set forth in their respective retention agreements, which
became effective upon the closing of the acquisition of PlainsCapital Corporation.
(b) Mr. Huffines’ salary is the same as that in effect prior to the acquisition of PlainsCapital Corporation.
Annual Incentive Awards
Our named executive officers and other employees are eligible to receive annual cash incentive awards based upon
our financial performance and other factors, including individual performance. The Committee believes that this
element of compensation is important to focus management efforts on, and provide rewards for, annual financial and
strategic results that are aligned with creating value for our stockholders.
Target incentive awards are defined at the start of the year in consideration of market data provided by the
Committee’s consultant, each executive’s total compensation package and the entity’s budgetary considerations.
Targets for 2013 were adjusted slightly lower than 2012 in consideration of these factors.
Each executive officer had defined performance objectives during 2013 based upon measurable performance of both
the individual and our Company. These awards were made pursuant to the Annual Incentive Plan. Annual
Incentive Plan awards are subject to claw back for improper risk management and non-compliance with applicable
laws and regulations. This component of the compensation program is pre-determined at the outset of the year and
based upon measurable criteria.
31
The Committee, in its sole discretion, determines the amount of each participant’s award based on attainment of the
applicable performance goals and assessments of individual performance. For 2013, the applicable performance
goals were among the following:
(cid:120) Consolidated financial results for Hilltop for named executive officers employed by Hilltop;
(cid:120) Consolidated financial results of PlainsCapital, after removing purchase accounting adjustments, for
employees of PlainsCapital and its subsidiaries;
(cid:120)
(cid:120)
Financial results of lines of business for business heads after removing any purchase accounting
adjustments; and
Pre-determined individual objectives.
Additionally, a risk forfeiture of up to 15% of any available Annual Incentive Plan award can occur in the event that
any improper risk management or non-compliance with applicable laws or regulations is identified.
The elements of the annual cash incentive award do not become available until net income equals 60% of the
budgeted annual earnings for the entity at which that named executive officer is employed. In order to be eligible to
receive the target cash annual incentive award, actual earnings must meet budgeted amounts. A maximum of 150%
of the target award may be paid in the event actual earnings exceed budgeted amounts. Threshold awards are set at
50% of target. Between the threshold and target amounts, a range of the potential annual cash incentive award is
defined. Our 2013 goals were intended to be realistic and reasonable but challenging in order to drive performance.
The Committee and management believe that by using these metrics we are encouraging profitable top line growth
and value for stockholders. For 2013 and 2014, the Committee set Annual Incentive Plan compensation target
payments for named executive officers as follows:
Name
Jeremy B. Ford
Darren Parmenter
Alan B. White
James R. Huffines
Jerry L. Schaffner
Annual Incentive Plan Target as a Percent of
Annual Base Salary for Calendar Year:
2014
77%
61%
100%
80%
73%
2013
85%
67%
100%
87%
80%
Based upon evaluation of their respective performance in2013, together with operations of the Company, the
Committee determined the Annual Incentive Plan bonuses for 2013 as follows for the following named executive
officers.
Name
Jeremy B. Ford
Darren Parmenter
Alan B. White
James R. Huffines
Jerry L. Schaffner
2013 Annual Incentive Plan Target
2013 Annual Incentive Plan Payout
Amount ($)
% of Base Salary
Amount ($)
% of Target
$
$
$
$
$
425,000
200,000
1,350,000
(a)
600,000
420,000
85%
77%
100%
87%
80%
$
$
$
$
$
500,000
200,000
1,350,000
(a)
555,000
420,000
118%
100%
100%
93%
100%
(a) Determined pursuant to Mr. White’s retention agreement for the achievement of earnings threshold.
See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table—Annual
Incentive Plan” for more information on possible future payments to the named executive officers.
32
Long-Term Incentive Awards
As described above, we believe that a portion of each named executive officer’s compensation should be tied to the
performance of our stock price, aligning the officer’s interest with that of our stockholders. In this regard, our long-
term incentive compensation for 2013 was delivered in the form of restricted stock, the value of which is ultimately
dependent upon the performance of our stock price. Further discussion of the 2012 Equity Incentive Plan pursuant
to which such shares of restricted stock were awarded is found after the “Grants of Plan-Based Awards” section
below.
Mr. Ford has an award outstanding under the 2003 Equity Incentive Plan. However, with the adoption of the 2012
Equity Incentive Plan, all 2013 equity-based awards, including the named executive officers, have since been made
pursuant to the 2012 Equity Incentive Plan. All equity-based awards made to the named executive officers are
approved by the Committee and not pursuant to delegated authority.
In 2013, long-term incentive awards were made in consideration of each executive’s role, competitive market
practice, and performance. Grants were made in the form of restricted shares on May 2, 2013, to the following
named executive officers as set forth below:
Recipient
Jeremy Ford
Darren Parmenter
Alan B. White
James Huffines
Jerry L. Schaffner
Number of Restricted Shares Granted
30,000
5,000
50,000
30,000
20,000
On February 24, 2014, restricted stock units were granted to the named executive officers as set forth below:
Name
Jeremy B. Ford
Darren Parmenter
Alan B. White
James Huffines
Jerry L. Schaffner
Perquisites and Other Benefits
Time-Based RSUs
Awarded
Performance-Based
RSUs Awarded
(at Target)
Total RSUs
Awarded
12,696
3,703
14,812
8,887
5,925
12,696
3,703
14,811
8,887
5,924
25,392
7,406
29,623
17,774
11,849
We provide a limited number of perquisites and other benefits to our named executive officers at Hilltop. The only
perquisite currently offered to the named executive officers employed directly by Hilltop is $150 per month to be
applied to a gym membership to promote wellness. With respect to named executive officers employed by
PlainsCapital and its subsidiaries, those entities provide them with a monthly car allowance and reimbursement for
country club membership dues. In addition, Messrs. White and Schaffner are provided access to company aircraft
and bank-owned life insurance. Otherwise, generally, our named executive officers receive only medical benefits,
life insurance and long-term disability coverage, as well as supplemental contributions to the Company’s
401(k) program, on the same terms and conditions as available to all employees of that entity.
Severance and Other Post-Termination Compensation
The named executive officers who are employed by PlainsCapital or its subsidiaries currently have certain
contractual post-termination benefits; however, other than Messrs. White and Schaffner, those benefits will expire
on November 30, 2014.
For named executive officers employed directly by Hilltop, other than change in control provisions in our 2012
Equity Incentive Plan, we do not currently maintain any severance or change in control programs. We, however,
have historically paid severance, the amount of which is generally determined both by length of tenure and level of
33
compensation, when termination occurs other than for cause and pursuant to which certain benefits may be provided
to the named executive officers. Absent the negotiation of specific agreements with the named executive officers,
severance benefits would be provided on the same basis as provided to other employees of the Company.
In connection with acquisition of PlainsCapital Corporation, we entered into retention agreements with
Messrs. White and Schaffner, and Mr. Huffines’ employment agreement that was in effect on the date of the
acquisition entitles Mr. Huffines to certain severance benefits. The summary of the severance terms for each of
these agreements is set forth below:
White Retention Agreement
Pursuant to his retention agreement, Mr. White is entitled to the following:
(1) $6,430,890, including interest thereon from November 30, 2012, in full satisfaction of Mr. White’s
rights under Section 6 (Termination Upon Change in Control) of his previous employment agreement
with PlainsCapital Corporation, dated January 1, 2009, payable in a cash lump-sum upon any
termination of his employment; and
(2) upon termination of his employment by us other than for cause or death or disability, or after non-
renewal, cash severance of (i) the sum of Mr. White’s annual base salary and the average of the annual
bonus amounts paid to him for the three most recently completed fiscal years ending immediately prior
to the date of termination, multiplied by (ii) the greater of (A) two, and (B) the number of full and
partial years from the date of termination through the end of the applicable employment period under
the retention agreement. Such severance is payable over the “severance period,” which is the greater of
two years from the date of termination and the number of full and partial years from the date of
termination through the end of the applicable employment period under the retention agreement.
The foregoing cash amounts in subparagraph (1) represent “modified single trigger” benefits, payable assuming the
termination of employment for any reason, and the foregoing cash amounts in subparagraph (2) represent “double
trigger” benefits, payable assuming a qualifying termination of employment. With respect to the amounts described
in subparagraph (1) that are paid in full satisfaction of Section 6 of Mr. White’s previous employment agreement
with PlainsCapital, such amounts are payable upon any termination of employment at any time, subject to any delay
required by Section 409A of the Internal Revenue Code and the execution of a release of claims. The cash severance
amounts described in subparagraph (2) are payable upon a termination of employment other than for cause, death or
disability or a termination due to non-renewal by Hilltop, subject to any delay required by Section 409A of the
Internal Revenue Code and the execution of a release of claims.
Schaffner Retention Agreement
Pursuant to his retention agreement, Mr. Schaffner is entitled to the following:
(1) $2,448,000, including interest thereon from November 30, 2012, in full satisfaction of
Mr. Schaffner’s rights under Section 6 (Termination Upon Change in Control) of his previous
employment agreement with PlainsCapital Corporation, dated January 1, 2009, payable in a cash
lump-sum upon any termination of his employment; and
(2) upon termination of his employment by us other than for cause or death or disability, cash severance
of (i) the sum of Mr. Schaffner’s annual base salary and the average of the annual bonus amounts paid
to him for the three most recently completed fiscal years ending immediately prior to the date of
termination. Such severance is payable in equal installments over a one-year period following the date
of termination.
The foregoing cash amounts in subparagraph (1) represent “modified single trigger” benefits, payable assuming the
termination of employment for any reason, and the foregoing cash amounts in subparagraph (2) represent “double
trigger” benefits, payable assuming a qualifying termination of employment. With respect to the amounts described
in subparagraph (1) that are paid in full satisfaction of Section 6 of Mr. Schaffner’s previous employment agreement
with PlainsCapital Corporation, such amounts are payable upon any termination of employment at any time, subject
34
to any delay required by Section 409A of the Internal Revenue Code and the execution of a release of claims. The
cash severance amounts described in subparagraph (2) are payable upon a termination of employment other than for
cause, death or disability, subject to any delay required by Section 409A of the Internal Revenue Code and the
execution of a release of claims.
Huffines Employment Agreement
Pursuant to the employment agreement of Mr. Huffines with PlainsCapital, he is entitled to cash severance based on
three times the sum of (i) annual base salary, and (ii) the higher of the bonus paid for the most recently completed
calendar year and the average bonus paid with respect to the three most recently completed calendar years ending
immediately prior to the date of termination. The foregoing cash amounts represent “double trigger” benefits, which
are payable upon a termination of the applicable executive’s employment by us without cause or by the executive
for good reason during the six (6) months prior to, or the twenty-four (24) months following, the effective time of
the acquisition of PlainsCapital, which constituted a change in control, subject to the execution of a release of
claims.
Further discussion of the agreements with Messrs. White, Schaffner and Huffines and payments made pursuant
thereto may be found under the headings “Narrative Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table” and “Potential Payments Upon Termination or Change-in-Control” below.
The 2012 Equity Incentive Plan, under which we have granted awards to the named executive officers, contains
specific termination and change in control provisions. We determined to include a change in control provision in the
plan to be competitive with what we believe to be the standards for the treatment of equity upon a change in control
for similar companies and so that employees who remain after a change in control would be treated the same with
regard to equity as the general stockholders who could sell or otherwise transfer their equity upon a change in
control. Under the terms of the plan, if a change in control (as defined below in the discussion of the plan) were to
occur, all awards then outstanding would become vested and/or exercisable and any applicable performance goals
with respect thereto would be deemed to be fully achieved. Further discussion of the change in control payments
made pursuant to the 2012 Equity Incentive Plan may be found in the “Potential Payments Upon Termination or
Change-in-Control” section below.
The Annual Incentive Plan, pursuant to which annual incentive bonuses are awarded, does not contain specific
change in control provisions. Accordingly, the Committee, in its discretion, may determine what constitutes a
change in control and what effects such an event may have any awards made pursuant to such plan.
Executive Compensation Changes for 2014
We made the following key compensation decisions with respect to our named executive officers for 2014, which
build upon our compensation governance framework and our overall pay-for-performance philosophy:
(cid:120) Annual Incentive Compensation Design
(cid:190) Scorecards were refined to weight 70% of awards on budgeted net income for Hilltop or PlainsCapital
executives and 50% of segment budget and 20% of PlainsCapital budget for executives employed
within our banking, financial advisory and mortgage origination segments. The remaining 30% based
upon achievement of measurable, individual objectives.
(cid:190) Increased threshold payouts from 5% of target to 50% of target.
(cid:190) Payout curve generally remains steep until closer to target award and ratable thereafter.
(cid:120)
Long-Term Incentive Compensation Design
(cid:190) The Committee adopted new long-term incentive compensation award guidelines in December 2013.
(cid:190) The Committee approved future awards granted to be made as restricted stock units and established
design for executive officers at a Tier 1 level and at a Tier 2 level for all other key management
employees.
35
(cid:190) Tier 1 awards will be equally allocated 50% performance based vesting and 50% time-based vesting
subject to three year vesting period and a one-year holding period.
(cid:190) The performance based restricted stock units will vest based on 3-year cumulative earnings per share
and total shareholder return performance relative to the KBW Regional Bank Index.
(cid:190) Tier 2 awards will be allocated by Chief Executive Officers of Hilltop and PlainsCapital from a pool
approved by the Committee. The restricted stock unit awards to Tier 2 recipients will be time-vested
awards with a three-year vesting period and a one-year holding period.
(cid:190) The Committee also adopted, and the Board of Directors approved, stock ownership guidelines for all
executive officers and directors.
Risk Considerations in Our Compensation Program
We do not believe that our compensation policies and practices for 2013 give rise to risks that are reasonably likely
to have a material adverse effect on our Company. In reaching this conclusion for 2013, we considered the
following factors:
(cid:120) Base salary is fixed and the only compensation components that are variable are the annual bonuses and
restricted stock awards to named executive officers, which, other than the annual bonus with respect to
Mr. White and Mr. Schaffner, were awarded based upon attainment of a pre-determined level of earnings.
(cid:120) Annual Incentive Plan payments to the remaining named executive officers were determined or approved
following the substantial completion of the audit of the Company’s financial statements by the Company’s
independent registered public accounting firm. Thus, the Committee had ample knowledge of the financial
condition and results of the Company, as well as reports of other committees of the Board of Directors,
upon which to base any decisions.
(cid:120) We have a balanced program that includes multiple performance goals, rewards short and multi -year
performance, pays in cash and equity and provides a meaningful portion of pay in stock which is tied to our
performance long-term.
(cid:120)
(cid:120)
The Annual Incentive Plan awards are subject to claw-back and adjustments for improper risk and
significant compliance issues.
Each year the Committee reviews all compensation programs to ensure existing programs are not
reasonably likely to have a material adverse effect on our Company.
Other Programs and Policies
Stock Ownership Requirements
In February 2014, the Committee recommended, and the Board of Directors adopted, a stock ownership policy
applicable to our executive officers and directors. Within five years of the later of appointment or the date the
policy was adopted, executive officers are required to achieve ownership of a defined market value of Company
common stock equal to a minimum number of equity or equity-based securities as follows:
(cid:120)
(cid:120)
Six times annual base salary for the Chief Executive Officer; and
Three times annual base salary for the other executive officers.
Under this policy, directors are expected to own shares with a value greater than five times their annual retainer for
serving on the Board of Directors of the Company. Our director compensation program permits directors to elect to
receive their director compensation in cash, Company common stock or a combination of cash and Company
common stock.
In calculating equity ownership for purposes of this requirement, we will include all shares beneficially owned by an
individual, such as shares owned by an individual in the Company’s benefit plans (e.g., 401(k)), shares of restricted
36
stock and shares with respect to which an individual has voting or investment power. Shares underlying unexercised
stock options are excluded when determining ownership for these purposes.
Executive officers are expected to hold 50% of any net shares received through compensatory equity based grants
until the ownership guidelines are achieved. Once such officer achieves the ownership requirement, he or she is no
longer restricted by the holding requirement; provided his or her total stock ownership level does not fall below the
ownership guidelines.
In addition, all awards of restricted stock units granted in February 2014 and thereafter are, subject to certain
exceptions, required to be held for one year after vesting.
Clawback Policy
Our compensation program also includes a claw-back from any annual cash incentive award for improper risk and
significant compliance issues. Annual Incentive Plan awards are subject to any clawback, recoupment or forfeiture
provisions (i) required by law or regulation and applicable to Hilltop or its subsidiaries or (ii) set forth in any
policies adopted or maintained by Hilltop or any of its subsidiaries.
Tax Considerations
Section 162(m) of the Internal Revenue Code (the “Code”) imposes a $1.0 million limit on the tax-deductibility of
compensation paid to our five most highly paid executives, which includes the named executive
officers. Exceptions are provided for compensation that is “performance-based” and paid pursuant to a plan meeting
certain requirements of Section 162(m) of the Code. The Committee has carefully considered the implications of
Section 162(m) of the Code and believes that tax deductibility of compensation is an important
consideration. Accordingly, where possible and considered appropriate, the Committee strives to preserve corporate
tax deductions. The Committee, however, reserves the flexibility, where appropriate, to approve compensation
arrangements that may not be tax deductible to the Company, such as base salary and awards of time-based
restricted stock. The Committee will continue to review the Company’s executive compensation practices to
determine if other elements of executive compensation constitute “qualified performance-based compensation”
under Section 162(m) of the Code.
Trading Controls and Hedging, Short Sale and Pledging Policies
Executive officers, including the named executive officers, are required to receive the permission of the General
Counsel prior to entering into any transactions in our securities, including gifts, grants and those involving
derivatives. Generally, trading is permitted only during announced trading periods. Employees who are subject to
trading restrictions, including the named executive officers, may enter into a trading plan under Rule 10b5-1 of the
Exchange Act. These trading plans may be entered into only during an open trading period and must be approved by
the General Counsel. We require trading plans to include a waiting period and the trading plans may not be amended
during their term. The named executive officer bears full responsibility if he or she violates our policy by permitting
shares to be bought or sold without pre-approval or when trading is restricted.
Executive officers are prohibited from entering into hedging and short sale transactions and are subject to
restrictions on pledging our securities.
Compensation Committee Report
The Compensation Committee of the Board of Directors of Hilltop Holdings Inc. has reviewed and discussed
with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on its
review, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in the Proxy Statement.
The foregoing report has been submitted by the following members of the Compensation Committee:
Haag Sherman (Chairman)
Rhodes Bobbitt
W. Joris Brinkerhoff
William T. Hill, Jr.
Andrew Littlefair
37
Executive Compensation
The following tables set forth information concerning the compensation earned for services performed during
2013, 2012 and 2011 by the named executive officers, who were either serving in such capacities on December 31,
2013, or during 2013, or are reportable pursuant to applicable SEC regulations.
Summary Compensation Table
Fiscal Years 2013, 2012 and 2011
Name and principal position
Year
Salary ($)
Bonus (a)
($)
Stock
Awards
($)
Option
awards ($)
Non-Equity
Incentive Plan
Compensation
(h) ($)
Change in pension
value and
nonqualified deferred
compensation
earnings ($)
All other
compensation
($)
Total ($)
Jeremy B. Ford
President and Chief
Executive Officer
2013
2012
2011
466,667(c)
400,000
400,000
Darren Parmenter
2013
Executive Vice President - Principal Financial Officer 2012
2011
296,667(c)
290,000(d)
275,000
-
300,000
230,000
-
100,000
75,000
Alan B. White
Chief Executive Officer of
PlainsCapital Corporation
James R. Huffines
President and Chief Operating Officer of
PlainsCapital Corporation
Jerry L. Schaffner
President and Chief Executive Officer of
PlainsCapital Bank
2013
2012
2011
2013
2012
2011
2013
2012
2011
1,350,000
112,500(e)
-
1,350,000
1,350,000
-
690,000
57,500(e)
-
525,000
43,750(e)
-
-
600,000
-
420,000
420,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
782,602(b)
-
-
-
-
-
-
-
-
-
-
-
-
897,500
-
-
266,250
-
-
662,500
-
-
952,500
-
-
265,000
-
-
1,800
1,800
142,491(g)
1,716(f)
-
51,145(g)
4,039(f)
-
51,815(g)
4,332(f)
-
1,365,967
700,000
1,412,602
564,717
390,000
350,000
3,533,941
7,896,198
-
1,693,645
661,539
-
1,272,831
2,917,018
-
28,950
6,431,982
-
-
-
-
11,016
2,448,936
-
(a) Represents bonuses paid for services during 2013, 2012, and 2011, as applicable.
(b) Represents the FASB ASC Topic 718 expense recognized for stock options granted in fiscal 2011. For more information regarding outstanding stock options held by named executive officers,
refer to section "Outstanding Equity Awards at Fiscal Year-End " below.
(c) Reflects increase in annual salary on April 1, 2013.
(d) Reflects increase in annual salary on April 1, 2012.
(e) Represents annual salaries (Mr. White - $1,350,000; Mr. Schaffner - $525,000; Mr. Huffines - $690,000) prorated for service from December 1, 2012 to December 31, 2012.
(f) Includes group life insurance premiums, auto allowance, and club expenses paid during December 2013, Employee Stock Ownership Plan contributions made by employer for December 2012, use
(g) Includes group life insurance premiums, auto allowance, and club expenses paid during 2013, 401(k) profit sharing contributions made by employer for 2013, use of a company car (Mr.
Schaffner - $1,225; Mr. White - $1,851.52), use of the company aircraft (Mr. White - $58,740.65), and cash incentive payments (Messrs. Huffines and Schaffner - $750 each). The table following
these footnotes is a breakdown of all other compensation included in the "Summary Compensation Table" for the Named Executive Officers.
(h) Reflects the grant date fair values of deferred share awards calculated in accordance with FASB Accounting Standards Codification Topic 718 (“ASC Topic 718”). Reported as "Non-Equity
Incentive Plan Compensation" due to adoption of Long-Term Incentive Plan under which grants were made. Prior grants reported as "option awards".
38
Name
Year
Perquisites
and
Personal
Benefits (1)
All Other Compensation
Gross-Ups or
Other
Amounts
Reimbursed
for the
Payment of
Taxes
Company
Contributions
to Defined
Contribution
Plans (2)
Insurance
Policies(3)
Director
Fees
Total All
Other
Compensation
Jeremy B. Ford
Darren Parmenter
Alan B. White
James R. Huffines
Jerry L. Schaffner
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
1,800
-
-
1,800
-
-
127,729
429
-
36,416
2,704
-
38,898
3,146
-
-
-
-
-
-
-
-
1,287
-
-
-
-
-
-
-
-
-
-
-
-
-
9,614
-
-
9,581
906
-
9,564
906
-
-
-
-
-
-
-
5,148
-
-
5,148
429
-
3,354
280
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,800
0
0
1,800
0
0
142,491
1,716
-
51,145
4,039
-
51,815
4,332
-
(1) 2013. For Messrs. Ford and Parmenter, reflects $150 per month gym membership allowance. For Mr. White, includes a car
allowance of $36,000, club expenses totaling $31,137.17, and the personal use of PlainsCapital airplane ($58,740.65)and automobile
($1,851.52). For Mr. Schaffner, includes a car allowance of $24,000, club expenses totaling $12,922.65, and the personal use of
PlainsCapital automobile ($1,225). For Mr. Huffines, includes a car allowance of $24,000 and club expenses totaling $11,665.59.
(2) 2013. For Messrs. White, Schaffner, and Huffines, includes PlainsCapital’s contribution to the 401(k) Profit Sharing Plan in each of
their names. 2012. For Messrs. White, Schaffner, and Huffines, includes PlainsCapital's prorated contribution to the Employee Stock
Ownership Plan.
(3) Reflects Group term life insurance premiums paid during 2013.
39
Grants of Plan-Based Awards
Grants of Plan-Based Awards
Fiscal Year 2013
Name
Grant Date (a)
Estimated future payouts
under non-equity incentive plan awards (b)
Target
($)
Threshold
($)
Maximum
($)
Jeremy B. Ford
President and Chief Executive Officer
March 28, 2013
May 2, 2013
Darren Parmenter
Executive Vice President - Prinicpal
Financial Officer
March 28, 2013
May 2, 2013
21,250
-
10,000
-
425,000
-
200,000
-
637,500
-
300,000
-
Alan B. White
Chief Executive Officer of
PlainsCapital Corporation
James R. Huffines
Chief Operating Officer of
PlainsCapital Corporation
Jerry L. Schaffner
Chief Executive Officer of
PlainsCapital Bank
March 28, 2013
May 2, 2013
1,089,843 (d)
-
1,350,000
(d)
-
1,350,000 (d)
-
March 28, 2013
May 2, 2013
March 28, 2013
May 2, 2013
30,000
-
371,667 (d)
-
600,000
-
420,000
-
900,000
-
630,000
-
All other
stock
awards:
number of
shares of
stock or
units
(#)
Grant date fair
value of stock
and option
awards (c)
($)
-
30,000
-
10,000
-
50,000
-
30,000
-
20,000
-
397,500
-
66,250
-
662,500
-
397,500
-
265,000
(a) Represents the effective date of grant of restricted stock under the 2012 Equity Incentive Plan and annual cash
incentive awards under the Annual Incentive Plan.
(b) Represent the value of potential payments under the Annual Incentive Plan to the named executive officers based on
2013 performance. Management incentive award amounts shown above represent potential awards that may have been
earned based on performance during 2013. The actual Annual Incentive Plan awards earned for 2013 are reported in
the “Summary Compensation Table” above. For more information regarding the Annual Incentive Plan, see below and
also refer to “Compensation Discussion and Analysis” in this Proxy Statement.
(c) Represents the FASB ASC topic 718 expenses recognized for restricted stock granted in 2013, For more information
regarding outstanding awards held by the named executive officer, refer to section “Outstanding Equity Awards at
Fiscal Year-End” below.
(d) Represents the amount he would be entitled to under his respective retention agreement.
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Contracts and Incentive Plans
Set forth below is a summary of our retention agreements with Messrs. White and Schaffner and our
employment agreement with Mr. Huffines. Our employment agreement with Mr. Parmenter expired in 2010, and we
do not have an employment agreement with Mr. Jeremy Ford. Also set forth below is a description of our incentive
plans, pursuant to which the awards included in the “Outstanding Equity Awards at Fiscal Year-End 2013” below
were made to our named executive officers. The Compensation Committee believes that the arrangements described
below serve our interests and the interests of our stockholders because they help secure the continued employment
and dedication of our named executive officers prior to or following a change in control, without concern for their
own continued employment.
40
Employment Contracts
Mr. White
On November 30, 2012, in connection with our acquisition of PlainsCapital, we entered into a retention
agreement with Mr. White. The term of the retention agreement is three years, with automatic one-year renewals at
the end of the second year of the agreement and each anniversary thereof unless notice has been given otherwise.
Pursuant to the agreement, Mr. White’s annual base salary is $1,350,000. He is also entitled to an annual bonus that
varies based upon the performance of PlainsCapital. If PlainsCapital’s annual net income is less than or equal to
$70,000,000 but greater than $15,000,000, Mr. White is entitled to a bonus equal to the average of his annual bonus
in the prior three calendar years. If PlainsCapital’s annual net income exceeds $70,000,000, he is entitled to a bonus
equal to 100% of his annual base salary. Additionally, in accordance with the agreement, Mr. White is entitled to
participate in all of the Company’s employee benefit plans and programs. Further, the agreement provides that the
Company will provide Mr. White with the use of a corporate aircraft and an automobile allowance, each at the same
level that such benefits were available to Mr. White immediately prior to our acquisition of PlainsCapital. He
continues to have bank-owned life insurance and access to the country club that was available to him through
PlainsCapital’s membership prior to our acquisition of PlainsCapital. For a description of compensation and benefits
to which Mr. White is entitled in the event of his termination or a change in control, see “Potential Payments Upon
Termination or Change-in-Control” below.
Mr. Huffines
PlainsCapital previously entered into an employment agreement with Mr. Huffines. In connection with our
acquisition of PlainsCapital, we entered into an amendment to the employment agreement with Mr. Huffines, which
became effective upon the closing of the acquisition on November 30, 2012 and, among other things, removed his
minimum guaranteed bonus. The term of the employment agreement is two years. The annual base salary under the
agreement is $650,000. Mr. Huffines is entitled to an annual bonus to be determined by our Compensation
Committee. For a description of compensation and benefits to which Mr. Huffines is entitled in the event of his
termination or a change in control, see “Potential Payments Upon Termination or Change-in-Control” below.
Mr. Schaffner
On November 30, 2012, in connection with our acquisition of PlainsCapital, we entered into a retention
agreement with Mr. Schaffner. The term of the retention agreement is two years, with automatic one-year renewals
at the end of the first year of the agreement and each anniversary thereof unless notice has been given otherwise.
Pursuant to the agreement, Mr. Schaffner’s annual base salary is $525,000. He is also entitled to an annual bonus
that varies based upon the performance of PlainsCapital. If PlainsCapital’s annual net income is greater than
$15,000,000, Mr. Schaffner is entitled to a bonus equal to the average of his annual bonus in the prior three calendar
years. Additionally, in accordance with the agreement, Mr. Schaffner is entitled to participate in all of the
Company’s employee benefit plans and programs. Further, the agreement provides that the Company will provide
Mr. Schaffner with the use of corporate aircraft and an automobile allowance, each at the same level that such
benefits were available to Mr. Schaffner immediately prior to our acquisition of PlainsCapital. He continues to have
bank-owned life insurance and access to the country club that was available to him through PlainsCapital’s
membership prior to our acquisition of PlainsCapital. For a description of compensation and benefits to which Mr.
Schaffner is entitled in the event of his termination or a change in control, see “Potential Payments Upon
Termination or Change-in-Control” below.
Equity Incentive Plans
On December 23, 2003, we adopted the 2003 Equity Incentive Plan, which provides for the grant of equity-
based awards, including restricted shares of our common stock, stock options, grants of shares and other equity-
based incentives, to our directors, officers and other employees and certain of our subsidiaries selected by our
Compensation Committee. At inception, 1,992,387 shares were authorized for issuance pursuant to this plan. All
shares granted and outstanding pursuant to the plan, whether vested or unvested, are entitled to receive dividends
and to vote, unless forfeited. No participant in our 2003 Equity Incentive Plan may be granted awards in any fiscal
year representing more than 500,000 shares of our common stock.
41
On September 20, 2012, our stockholders approved the 2012 Equity Incentive Plan, and as a result, we may no
longer grant awards pursuant to the 2003 Equity Incentive Plan. However, all awards that were previously granted
and outstanding under the 2003 Equity Incentive Plan will remain in full force and effect according to their
respective terms and dividend equivalents may continue to be issued in respect of awards that were outstanding
thereunder as of September 20, 2012.
The 2012 Equity Incentive Plan provides for the grant of equity-based awards, including restricted shares of our
common stock, restricted stock units, stock options, grants of shares, stock appreciation rights (SARs) and other
equity-based incentives, to our directors, officers and other employees and those of our subsidiaries selected by our
Compensation Committee. At inception, 4,000,000 shares were authorized for issuance pursuant to this plan. All
shares granted and outstanding pursuant to this plan, whether vested or unvested, are entitled to receive dividends
and to vote, unless forfeited. No participant in our 2012 Equity Incentive Plan may be granted performance-based
equity awards in any fiscal year representing more than 500,000 shares of our common stock or stock options or
SARs representing in excess of 750,000 shares of our common stock. The maximum number of shares underlying
incentive stock options granted under this plan may not exceed 2,000,000.
The 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan are administered by our Compensation
Committee, which has the discretion to, among other things, determine the persons to whom awards will be granted,
the number of shares of our common stock to be subject to awards and the other terms and conditions of the awards.
The Compensation Committee also has authority to establish performance goals for purposes of determining cash
bonuses to be paid under the incentive plans. Such performance goals may be applied to our Company as a whole,
any of our subsidiaries or affiliates, and/or any of our divisions or strategic business units, and may be used to
evaluate performance relative to a market index or a group of other companies. Further, the Compensation
Committee has the authority to adjust the performance goals in recognition of unusual or non-recurring events. The
2003 Equity Incentive Plan and the 2012 Equity Incentive Plan each provide that in no event will the Compensation
Committee be authorized to reprice stock options, or to lower the base or exercise price of any other award granted
under such plan, without obtaining the approval of our stockholders.
Stock options granted under the 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan may be either
“incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock
options. Generally, holders of restricted stock will be entitled to vote and receive dividends on their restricted shares,
but our Compensation Committee may determine, in its discretion, whether dividends paid while the shares are
subject to restrictions may be reinvested in additional shares of restricted stock. Except as otherwise permitted by
our Compensation Committee, awards granted under the 2003 Equity Incentive Plan and the 2012 Equity Incentive
Plan will be transferable only by will or through the laws of descent and distribution, and each stock option will be
exercisable during the participant’s lifetime only by the participant or, upon the participant’s death, by his or her
estate. Director compensation paid in the form of our common stock, whether at our or the director’s election, is
issued through the 2012 Equity Incentive Plan.
Annual Incentive Plan
On September 20, 2012, our stockholders approved the Annual Incentive Plan, which provides for a cash bonus
to key employees of Hilltop and our subsidiaries who are selected by the Compensation Committee for participation
in the plan. The Annual Incentive Plan is intended to permit the payment of amounts that constitute “performance-
based compensation” under Section 162(m) of the Internal Revenue Code and is designed to reward executives
whose performance during the fiscal year enabled Hilltop to achieve favorable business results and to assist Hilltop
in attracting and retaining executives. A participant may receive a cash bonus under the Annual Incentive Plan based
on the attainment, during each performance period, of performance objectives in support of our business strategy
that are established by our Compensation Committee. These performance objectives may be based on one or more
of the following criteria:
42
(cid:120)
(cid:120)
(cid:120)
stock price
earnings (including earnings before interest,
taxes, depreciation and amortization)
earnings per share (whether on pre-tax, after-
tax, operations or other basis)
operating earnings
(cid:120)
total return to shareholders
(cid:120)
ratio of debt to debt plus equity
(cid:120)
net borrowing
(cid:120)
credit quality or debt ratings
(cid:120)
return on assets or operating assets
(cid:120)
asset quality
(cid:120)
net interest margin
(cid:120)
loan portfolio growth
(cid:120)
efficiency ratio
(cid:120)
deposit portfolio growth
(cid:120)
liquidity
(cid:120)
(cid:120) market share
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
objective customer service measures or indices
shareholder value added
embedded value added
loss ratio
expense ratio
combined ratio
premiums
premium growth
investment income
pre- or after-tax income
net income
cash flow (before or after dividends)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
expense or expense levels
economic value added
cash flow per share (before or after dividends)
free cash flow
gross margin
risk-based capital
revenues
revenue growth
sales growth
return on capital (including return on total
capital or return on invested capital)
capital expenditures
cash flow return on investment
cost
cost control
gross profit
operating profit
economic profit
profit before tax
net profit
cash generation
unit volume
sales
net asset value per share
asset quality
cost saving levels
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) market-spending efficiency
core non-interest income
(cid:120)
change in working capital
(cid:120)
The performance objectives may be applied with respect to Hilltop or any one or more of our subsidiaries,
divisions, business units or business segments and may be applied to performance relative to a market index or a
group of other companies. The Compensation Committee may adjust the performance goals applicable to any
awards to reflect any unusual or non-recurring events.
Participation in the Annual Incentive Plan does not guarantee the payment of an award. All awards payable
pursuant to the Annual Incentive Plan are discretionary and subject to approval by our Compensation Committee.
After the performance period ends, the Compensation Committee will determine the payment amount of individual
awards based on the achievement of the performance objectives. No participant in the Annual Incentive Plan may
receive an award that exceeds $10,000,000 per year. Except as otherwise provided in a participant’s employment or
other individual agreement, the payment of a cash bonus to a participant for a performance period will be
conditioned upon the participant’s active employment on the date that the final awards are approved by the
Compensation Committee. We may amend or terminate the Annual Incentive Plan at any time.
Outstanding Equity Awards at Fiscal Year End
The following tables presents information pertaining to all outstanding equity awards held by the named
executive officers as of December 31, 2013.
43
Outstanding Equity Awards at Fiscal Year End Table
Fiscal Year 2013
Option Awards
Stock Awards
Number of
securities
underlying
unexercised
options
(#)
exercisable
Number of
securities
underlying
unexercised
options
(#)
unexercisable
Option
exercise
price (b)
($)
Option expiration
date
Name
Jeremy B. Ford
President & Chief Executive Officer
300,000 (a)
200,000 (a)
7.70
November 2, 2016
Darren Parmenter
Executive Vice President - Principal
Financial Officer
Alan B. White
Chief Executive Officer of
PlainsCapital Corporation
James R. Huffines
Chief Operating Officer of
PlainsCapital Corporation
Jerry L. Schaffner
Chief Executive Officer of
PlainsCapital Bank
Number of
shares or units
that have not
vested
Market value of
shares or units of
stock that have
not vested (c)
(#)
($)
30,000
693,900
10,000
231,300
50,000
1,156,500
30,000
693,900
20,000
462,600
(a) These stock options vested or will vest in five equal installments on each of November 2, 2011, 2012, 2013, 2014 and 2015.
(b) Represents the exercise price of the stock option held by Mr. Jeremy Ford, which is the average of the high and low sales price of
Company common stock on the date of grant of the stock option.
(c) Based upon the closing price of Company common stock on December 31, 2013.
Option Exercises and Stock Vested in 2013
During the fiscal year ended December 31, 2013, none of our named executive officers exercised any options to
purchase shares of common stock or held any outstanding awards of restricted stock, restricted stock units or similar
instruments that vested.
Non-Qualified Deferred Compensation
The following table shows the non-qualified deferred compensation activity for our named executive officers
during the fiscal year ended December 31, 2013.
Executive
contributions in
last fiscal year
($)
Registrant
contributions in
last fiscal year
($) (1)
Aggregate
earnings in last
fiscal year
($) (1)
Aggregate
withdrawals/
distributions
($)
--
--
--
--
$28,950
$11,016
--
--
Aggregate
balance at last
fiscal year end
($)
$6,460,932
$2,459,952
Name
Alan B. White
Jerry L. Schaffner
(1) All amounts reported as registrant contributions in last fiscal year and aggregate earnings in last fiscal year are reported as
compensation in the last completed fiscal year in the Summary Compensation Table.
In connection with acquisition of PlainsCapital, we entered into retention agreements with Messrs. White and
Schaffner. Pursuant to those agreements, we agreed to contribute an amount in cash equal to $6,430,890 and
$2,448,000 as deferred compensation to Messrs. White and Schaffner, respectively, in satisfaction of their respective
rights under Section 6 (Termination Upon Change of Control) of their respective previous employment agreements
44
with PlainsCapital. Such amounts accrue interest at the prevailing money market rate and are payable to Messrs.
White and Schaffner on the 55th day following termination of their respective employment.
Potential Payments Upon Termination or Change-in-Control
The 2012 Equity Incentive Plan, under which we have granted awards to the named executive officers, contains
specific termination and change in control provisions. We determined to include a change in control provision in the
plan to be competitive with what we believe to be the standards for the treatment of equity upon a change in control
for similar companies and so that employees who remain after a change in control would be treated the same with
regard to equity as the general stockholders who could sell or otherwise transfer their equity upon a change in
control. Under the terms of the plan, if a change in control (as defined below in the discussion of the plan) were to
occur, all awards then outstanding would become vested and/or exercisable and any applicable performance goals
with respect thereto would be deemed to be fully achieved.
Employment Contracts
With respect to each of Messrs. Huffines, Schaffner and White, if his employment or retention contract is
terminated by us for cause, by the executive or due to the executive’s death or disability (as such terms are defined
below), he or his estate, as applicable, is entitled to:
(i)
(ii)
(iii)
(iv)
his annual base salary through the date of termination, to the extent not already paid and not deferred;
any annual bonus earned by the executive for a prior award period, to the extent not already paid and
not deferred;
any business expenses he incurred that are not yet reimbursed as of the date of termination; and
any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or
accrued to him, required to be paid or provided or which he is eligible to receive under any plan,
program, policy or practice or contract or agreement, to the extent not already paid and not deferred,
through the date of termination.
In addition, Messrs. White and Schaffner or their respective estates, as applicable, are entitled to a lump-sum
cash payment equal to $6,430,890 and $2,448,000, respectively, which represents the amount Messrs. White and
Schaffner, respectively, would have been entitled to receive under their respective prior employment agreements
with PlainsCapital if their respective employment there was terminated. Such amounts described in the preceding
paragraph are referred to as the “Accrued Amounts.”
For Mr. Huffines, if his employment is terminated by us without cause (as such term is defined below), he is
entitled to the Accrued Amounts, as well as a cash amount equal to the sum of:
(i)
(ii)
his annual base salary rate; and
the average of the bonuses he received for each of the three calendar years immediately preceding the
year of termination of his employment.
Such amount is payable in a lump-sum within 60 days of the effective date of the termination of the executive’s
employment.
If Mr. White’s employment is terminated by us other than for cause (as such term is defined below) or his death
or disability, or if his employment terminates due to non-renewal by us, he is entitled to the Accrued Amounts,
including the lump-sum cash payment equal to $6,430,890 and interest thereon from November 30, 2012, as well as
payments generally equal to the sum of the average of Mr. White’s prior annual bonuses over the preceding three
years plus his annual base salary, multiplied by the greater of (i) the number of full and partial years remaining until
the end of the term of his retention agreement and (ii) two. Mr. White will retain the right to be grossed-up for any
excise tax relating to “excess parachute payments” (as defined in Section 280G of the Internal Revenue Code),
which is set forth in his prior employment agreement, provided that the gross-up will only relate to any excise taxes
arising in connection with our acquisition of PlainsCapital. These severance amounts are payable subject to Mr.
White’s execution of a release of claims.
If Mr. Schaffner’s employment is terminated by us other than for cause (as such term is defined below) or his
death or disability, he is entitled to the Accrued Amounts, including the lump-sum cash payment equal to
45
$2,448,000 and interest thereon from November 30, 2012, as well as payments generally equal to the sum of the
average of Mr. Schaffner’s prior annual bonuses over the preceding three years plus his annual base salary. Mr.
Schaffner will retain the right to be grossed-up for any excise tax relating to “excess parachute payments” (as
defined in Section 280G of the Internal Revenue Code), which is set forth in his prior employment agreement,
provided that the gross-up will only relate to any excise taxes arising in connection with our acquisition of
PlainsCapital. These severance amounts are payable subject to Mr. Schaffner’s execution of a release of claims.
For Mr. Huffines, in the event that his employment is terminated (a) by us without cause within the 24 months
immediately following, or the six months immediately preceding, a change in control (as such term is defined
below), or (b) by Mr. Huffines for good reason (as such term is defined below) within the 24 months immediately
following, or the six months immediately preceding, a change in control, he is entitled to the Accrued Amounts, as
well as a cash amount equal to three times the sum of:
(i)
(ii)
his annual base salary rate; and
the greater of (A) the annual bonus paid or payable with respect to the calendar year prior to the
calendar year in which the effective date of such termination of employment occurs and (B) the
average of the bonuses he received for each of the three calendar years immediately preceding the year
of termination of his employment.
Such amount is payable in a lump-sum within 60 days of the effective date of the termination of his employment,
subject to the execution of a release of claims. In addition, Mr. Huffines is entitled to continued participation in our
benefit plans for a period of two years following the date of his termination, and full vesting of all outstanding stock
options then held, with the option to receive a cash payment equal to the then difference between the option price
and the current fair market value of the stock as of the effective date of such termination of employment in lieu of
the right to exercise such options. In the event that any of the benefits payable upon a termination of employment in
connection with a change in control would constitute “excess parachute payments,” such benefits would be reduced
to the level necessary such that no excise tax will be due. Messrs. White’s and Schaffner’s respective retention
agreements do not provide for such payments upon a change in control.
Pursuant to his employment agreement, Mr. Huffines will not, during the term of his employment agreement
and for a period of one year following the earlier of his termination or the termination of the agreement, compete
with any business that provides services similar to us anywhere within the State of Texas. Pursuant to their
respective retention agreements, Messrs. White and Schaffner will not, during the period of their employment and
for three and two years, respectively, following their respective termination: (i) solicit any person who is employed
by us or any of our affiliates; (ii) interfere with our relationships with our customers, suppliers or other business
contacts; nor (iii) compete with any business that provides services similar to us anywhere within the State of Texas.
Messrs. White and Schaffner have also agreed that all confidential records, material and information concerning us
or our affiliates shall remain our exclusive property and they shall not divulge such information to any person.
For the purposes of each employment or retention contract described above:
(cid:120)
“cause” means: (i) an intentional act of fraud, embezzlement or theft in connection with the executive’s
duties or in the course of his employment with the Company or our affiliates; (ii) intentional wrongful
damage to property of the Company or our affiliates; (iii) intentional wrongful disclosure of trade secrets or
confidential information of the Company or our affiliates; (iv) intentional violation of any law, rule or
regulation (other than traffic violations or similar offenses) or a final “Cease and Desist Order;” (v)
intentional breach of fiduciary duty involving personal profit; or (vi) intentional action or inaction that
causes material economic harm to the Company or our affiliates.
For the purposes of Messrs. White’s and Schaffner’s retention agreements:
(cid:120)
“disability” means he shall have been absent from full-time performance of his duties for 180 consecutive
days as a result of incapacity due to physical or mental illness that is determined to be total and permanent
by a physician.
For the purposes of the employment agreement with Mr. Huffines:
(cid:120)
the acquisition of PlainsCapital constituted a “change in control”;
46
(cid:120)
(cid:120)
“disability” is defined in accordance with our disability policy in effect at the time of the disability; and
“good reason” means (i) without his express written consent, the assignment to Mr. Huffines of any duties
materially inconsistent with his positions, duties, responsibilities and status as then in effect or a significant
material diminishment in his titles or offices as then in effect, or any removal of Mr. Huffines from or any
failures to re-elect executive to any of such positions, in any case, subject to certain exceptions; (ii) a
significant and material adverse diminishment in the nature or scope of the authorities, powers, functions or
duties attached to the position with which Mr. Huffines had immediately prior to a change in control or a
reduction in Mr. Huffines’s aggregate base salary without his prior written consent; (iii) the Company
relocates its principal executive offices or requires Mr. Huffines to have as his principal location of work
any location which is in excess of fifty (50) miles from the location thereof immediately prior to a change
in control; or (iv) any substantial and material breach of his employment agreement by the Company.
Set forth below are the amounts that Messrs. Ford, Parmenter, White, Huffines and Schaffner would have received if
the specified events had occurred on December 31, 2013.
Jeremy B. Ford
Accrued Amounts
Cash Payment
Cash Severance
Stock Options (1)
Restricted Stock (2)
Welfare Benefits
Total
Termination for
Cause
Termination due
to death or
disability
Termination
without cause
Change of
Control
$
$
-
-
-
-
-
-
-
$
$
-
-
-
-
154,200
-
154,200
$
$
-
-
-
-
154,200
-
154,200
$
-
-
-
3,086,000
693,900
-
$
3,779,900
(1) Pursuant to the provisions of the 2003 Equity Incentive Plan under which issuances of stock option awards were made, if a change in
control event, as defined under the plan, were to occur, all awards then outstanding would become vested and, if applicable,
exercisable and any applicable performance goals with respect thereto would be deemed to be fully achieved. The Company has the
discretion to require payment by the option holder of any amount it deems necessary to satisfy its liability to withhold income or any
other taxes incurred by reason of exercise of options. Further, pursuant to the terms of the non-qualified stock option agreements that
govern the issuance of options, upon the death of the option holder all options become fully vested and exercisable. Represents the
value of unvested stock option grants that would vest upon a change in control, assuming a change in control event on the last business
day of 2013. The value realized assumes the exercise of all stock options that became vested as a result of the event and is calculated
as the difference between the option exercise price per share and the closing market price of $23.13 on December 31, 2013.
(2) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing
assumes December 31, 2013.
Darren Parmenter
Accrued Amounts
Cash Payment
Cash Severance
Stock Options
Restricted Stock (1)
Welfare Benefits
Total
Termination for
Cause
Termination due
to death or
disability
Termination
without cause
Change of
Control
$
$
-
-
-
-
-
-
-
$
$
-
-
-
-
51,400
-
51,400
$
$
-
-
-
-
51,400
-
51,400
$
$
-
-
-
-
231,300
-
231,300
(1) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing
assumes December 31, 2013.
47
Alan B. White
Accrued Amounts (1)
Cash Payment (2)
Cash Severance (3)
Stock Options
Restricted Stock (4)
Welfare Benefits
Total
Termination due
to death or
disability or by
Executive for any
Reason
Termination
without cause
or non-renewal
of retention
agreement
Termination for
Cause
$
1,350,000
6,431,982
$
-
-
-
-
1,350,000
6,431,982
-
-
257,000
-
$
1,350,000
6,431,982
4,879,753
-
257,000
-
Change of
Control
$
-
-
-
-
1,156,500
-
$
7,781,982
$
8,038,982
$
12,918,735
$
1,156,500
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. White’s annual base salary through December 31, 2013, to the extent not
already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business expenses
incurred that have not yet been reimbursed as of the date of termination; and (iv) any other amounts or benefits, including all unpaid
and/or vested, nonforfeitable amounts owing or accrued to Mr. White.
(2) Cash Payments refers to a lump-sum cash payment that represents the amount, including interest thereon, Mr. White would have been
entitled to receive under his prior employment agreement with PlainsCapital if his employment had been terminated.
(3) Cash Severance calculation based upon the sum of the average of Mr. White’s prior annual bonuses for each of the preceding three
years plus his annual base salary, multiplied by the greater of: (i) the number of full and partial years remaining until the end of the
term of his employment agreement and (ii) two.
(4) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing
assumes December 31, 2013.
James R. Huffines
Accrued Amounts (1)
Cash Payment
Cash Severance (2)
Stock Options
Restricted Stock (3)
Welfare Benefits
Total
Termination for
Cause
Termination due
to death or
disability
Termination
without cause
Change of
Control
$
$
-
-
-
-
-
-
-
$
$
-
-
-
-
154,200
-
154,200
$
-
-
1,027,567
-
154,200
-
$
-
-
3,726,000
-
693,900
-
$
1,181,767
$
4,419,900
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. Huffines annual base salary through December 31, 2013, to the extent
not already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business
expenses incurred that have not yet been reimbursed as of the date of termination; and (iv) any other amounts or benefits, including all
unpaid and/or vested, nonforfeitable amounts owing or accrued to Mr. Huffines.
(2) Cash severance calculation if Mr. Huffines is terminated without cause is based upon the sum of: (i) Mr. Huffines’ annual base salary
rate and (ii) the average of the bonuses he received for each of the last three calendar years immediately preceding the year of
termination of his employment. If his employment is terminated upon a change in control, the cash severance calculation is based
upon three times the sum of: (i) Mr. Huffines’ annual base salary rate and (ii) the greater of (A) the annual bonus paid or payable with
respect to the calendar year prior to the calendar year in which termination occurs and (B) the averages of the bonuses he received for
each of the last three calendar years immediately preceding the year of termination of his employment.
(3) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing
assumes December 31, 2013.
48
Jerry L. Schaffner
Accrued Amounts (1)
Cash Payment (2)
Cash Severance (3)
Stock Options
Restricted Stock (4)
Welfare Benefits
Total
Termination due
to death or
disability or by
Executive for any
Reason
Termination for
Cause
Termination
without cause
Change of
Control
$
525,000
2,448,000
$
-
-
-
-
$
525,000
2,448,000
-
-
102,800
-
$
525,000
2,448,000
896,667
-
102,800
-
$
2,973,000
$
3,075,800
$
3,972,467
$
-
-
-
-
462,600
-
462,600
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. Schaffner’s annual base salary through December 31, 2013, to the extent
not already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business
expenses incurred that have not yet been reimbursed as of the date of termination; and (iv) any other amounts or benefits, including all
unpaid and/or vested, nonforfeitable amounts owing or accrued to Mr. Schaffner.
(2) Cash Payments refers to a lump-sum cash payment that represents the amount, including interest thereon, Mr. Schaffner would have
been entitled to receive under his prior employment agreement with PlainsCapital if his employment had been terminated.
(3) Cash Severance calculation based upon the sum of the average of Mr. Schaffner’s prior annual bonuses for each of the preceding three
years plus his annual base salary.
(4) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing
assumes December 31, 2013.
Incentive Plans
Each of the incentive plans has a complex definition of “change in control”. Generally speaking, under the 2003
Equity Incentive Plan, a change in control occurs if: (i) with certain exceptions, any person becomes the owner of
50% or more of the combined voting power of our outstanding stock and other voting securities; (ii) a majority of
the directors serving on our Board of Directors are replaced other than by new directors approved by at least two-
thirds of the members of our Board of Directors; (iii) we are not the surviving company after a merger or
consolidation; or (iv) with certain exceptions, our stockholders approve a plan of complete liquidation or dissolution
or an agreement for the sale or disposition of all or substantially all of our assets is consummated. Under the 2012
Equity Incentive Plan, a change in control occurs if: (i) with certain exceptions, any person becomes the owner of
33% or more of the outstanding shares of our common stock or the combined voting power of our outstanding stock
and other voting securities; (ii) a majority of the directors serving on our Board of Directors are replaced other than
by new directors approved by at least two-thirds of the members of our Board of Directors; (iii) we are not the
surviving company after a merger or consolidation or sale of all or substantially all of our assets; or (iv) with certain
exceptions, our stockholders approve a plan of complete liquidation or dissolution.
Both our 2003 Equity Incentive Plan and our 2012 Equity Incentive Plan are “single trigger” plans, meaning
that stock option acceleration occurs upon a change in control even if the award holder remains with us after the
change in control, regardless of whether awards are assumed or substituted by the surviving company. We believe a
“single trigger” change in control provision was appropriate because it allows management to pursue all alternatives
for us without undue concern for their own financial security.
In the event of a change in control, all awards then outstanding under the 2003 Equity Incentive Plan will
become vested and, if applicable, exercisable, and any performance goals imposed with respect to then-outstanding
awards will be deemed to be fully achieved. With respect to awards granted pursuant to the 2012 Equity Incentive
Plan, in the event of a change in control: (i) all outstanding stock options and SARs will become fully vested and
exercisable; (ii) all restrictions on any restricted stock, restricted stock units or other stock-based awards that are not
subject to performance goals will become fully vested; and (iii) all restrictions on any restricted stock, restricted
stock units, performance units or other stock-based awards that are subject to performance goals will be deemed to
be fully achieved.
49
In addition to acceleration of benefits upon a change in control event, the non-qualified stock option agreements
pursuant to which all option awards are granted provide for acceleration of vesting upon the death of the option
holder. No other rights of acceleration are provided for under the terms of the Company’s benefit plans.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2013, directors Rhodes Bobbitt, W. Joris Brinkerhoff, William T. Hill, Jr., Andrew J.
Littlefair and A. Haag Sherman served on the Compensation Committee. During fiscal year 2013:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
none of the members of our Compensation Committee is, or has ever been, one of our officers or
employees;
none of the members of our Compensation Committee had any relationships with the Company
requiring disclosure under “Certain Relationships and Related Party Transactions”;
none of our executive officers served as a member of the compensation committee of another entity,
one of whose executive officers served on our Compensation Committee;
none of our executive officers served as a director of another entity, one of whose executive officers
served on our Compensation Committee; and
none of our executive officers served as a member of the compensation committee of another entity,
one of whose executive officers served as one of our directors.
Each of Mr. White, PlainsCapital’s Chief Executive Officer, Mr. Martin, PlainsCapital’s Executive Vice
President and Chief Financial Officer, Mr. Huffines, PlainsCapital’s Chief Operating Officer, and Mr. Schaffner,
President and Chief Executive Officer of PlainsCapital Bank, serves as a director of First Southwest, a wholly
owned subsidiary of PlainsCapital. Hill A. Feinberg serves as the Chief Executive Officer of First Southwest and on
the Board of Directors of Hilltop. Hilltop’s Compensation Committee is comprised of independent directors,
reviews and sets the compensation of each of Messrs. White, Martin, Feinberg, Huffines and Schaffner and does not
believe that these interlocks pose any risks that are likely to have a material adverse effect on us.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires officers and directors, and persons who beneficially own more than
ten percent of our stock, to file initial reports of ownership and reports of changes in ownership with the SEC.
Officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies furnished to us and representations from our officers and directors, we
believe that all Section 16(a) filing requirements for the year ended December 31, 2013, applicable to our officers,
directors and greater than ten percent beneficial owners were timely satisfied except for the failure to file one
Form 4 by each of Gerald J. Ford and Carl B. Webb, each of whom received a distribution of common stock in a
transaction that he did not initiate. Further, Diamond A Financial, L.P. did not file a Form 3 or subsequent Forms 4;
however, such transactions were reported on Mr. Gerald Ford’s Section 16 filings. Mr. Green has failed to file a
Form 4 reporting the redemption by the Company of partnership units in July 2007.
Based on written representations from our officers and directors, we believe that all Forms 5 for directors,
officers and greater than ten percent beneficial owners that have been filed with the SEC are the only Forms 5
required to be filed for the period ended December 31, 2013.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
General
Transactions with related persons are governed by our General Code of Ethics and Business Conduct, which
applies to all officers, directors and employees. This code covers a wide range of potential activities, including,
among others, conflicts of interest, self-dealing and related party transactions. Waiver of the policies set forth in this
50
code will only be permitted when circumstances warrant. Such waivers for directors and executive officers, or that
provide a benefit to a director or executive officer, may be made only by the Board of Directors, as a whole, or the
Audit Committee of the Board of Directors and must be promptly disclosed as required by applicable law or
regulation. Absent such a review and approval process in conformity with the applicable guidelines relating to the
particular transaction under consideration, such arrangements are not permitted.
Management Services Agreement
Prior to December 2012, Diamond A Administration Company, LLC, or Diamond A, an affiliate of Gerald J.
Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 17.2% of Hilltop common stock as of
April 8, 2014, provided certain management services to Hilltop and its subsidiaries, including, among others,
financial and acquisition evaluation, and office space to Hilltop, pursuant to a Management Services Agreement.
The services and office space were provided at a cost of $91,500 per month, plus reasonable out-of-pocket expenses.
The services provided under this agreement included those of several of Hilltop’s directors, including Gerald J.
Ford, Kenneth Russell and Carl B. Webb. Prior to Jeremy B. Ford assuming the role of Chief Executive Officer of
Hilltop, he provided services to Hilltop under the Management Services Agreement. The Management Services
Agreement was terminated upon our acquisition of PlainsCapital. Hilltop also agreed to indemnify and hold
harmless Diamond A for its performance or provision of these services, except for gross negligence and willful
misconduct. Further, Diamond A’s maximum aggregate liability for damages under this agreement is limited to the
amounts paid to Diamond A under this agreement during twelve months prior to that cause of action.
Jeremy B. Ford, a director and the 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. owns 17.2% of the
outstanding Hilltop common stock at April 8, 2014. He also is a director and the Secretary of Diamond A, which
provided management services to Hilltop under the Management Services Agreement described in the preceding
paragraph. Diamond A 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. The spouse of Corey G. Prestidge is the beneficiary of a trust that also
owns a 46% limited partnership interest in Hunter’s Glen/Ford, Ltd. and a trust that owns a 49% limited partnership
interest in Diamond A Financial, L.P.
Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop’s Executive Vice President, General
Counsel and Secretary, is the son-in-law of Gerald J. Ford. Accordingly, Messrs. Jeremy B. Ford and Corey G.
Prestidge are brothers-in-law.
Hilltop Sublease
In connection with our acquisition of PlainsCapital, we terminated the Management Services Agreement
described above. Hilltop, however, desired to continue to occupy the office space provided pursuant to the
Management Services Agreement. Accordingly, Hilltop entered into a sublease with Hunter’s Glen/Ford, Ltd., an
affiliate of Mr. Gerald J. Ford and the tenant of the office space (See “Management Services Agreement” above for
further discussion regarding Hunter’s Glen/Ford, Ltd.) on December 1, 2012. The Sublease is subject to the base
Lease and on the same terms as the base Lease. Pursuant to the Sublease, until February 27, 2014, Hilltop leased
5,491 square feet for $219,640 annually, plus additional rent due under the base Lease. On February 28, 2014, the
parties amended the Sublease to increase the square footage subleased to 6,902 square feet, increase the rent based
on such additional square footage, and extend the term to July 31, 2018. Hilltop pays the same rate per square foot
as Hunter’s Glen/Ford, Ltd. is required to pay under the base Lease, as amended.
The NLASCO Acquisition
ARC Insurance Holdings Inc., or Holdings, a subsidiary of us, on the one hand, and C. Clifton Robinson, C.C.
Robinson Property Company, Ltd. and The Robinson Charitable Remainder Unitrust, on the other hand, entered into
a stock purchase agreement, dated as of October 6, 2006, or the NLASCO Agreement. Pursuant to the NLASCO
Agreement, on January 31, 2007, Holdings acquired all of the outstanding shares of capital stock of NLASCO, Inc.,
or NLASCO, a privately held property and casualty insurance holding company domiciled in the state of Texas. In
exchange for the stock, NLASCO’s shareholders, consisting of C. Clifton Robinson and affiliates, as specified
above, received $105.75 million in cash and 1,218,880 shares of our common stock issued to Mr. Robinson, for a
51
total consideration of $122.0 million. The NLASCO Agreement included customary representations, warranties and
covenants, as well as indemnification provisions. The purchase price was subject to specified post-closing
adjustments that resulted in the following additional aggregate consideration paid to Mr. Robinson and his affiliates:
$2,852,879 on March 16, 2010 and $252,997 on March 25, 2011. As a result of these payments, no further post-
closing adjustments are required under the stock purchase agreement. The parties also entered into several ancillary
agreements, including a non-competition agreement, a registration rights agreement, a release, employment
agreements and a share lock-up agreement.
C. Clifton Robinson Relationship with the Company
In furtherance of the terms of the NLASCO Agreement, C. Clifton Robinson, Chairman of NLASCO and a
member of our Board of Directors, entered into certain ancillary agreements with us or NLASCO, including, among
others, an employment agreement, a non-competition agreement, a lock-up agreement and a registration rights
agreement.
In conjunction with the closing of the NLASCO acquisition, NLASCO entered into an employment agreement
with C. Clifton Robinson that provides that he was to serve as chairman of NLASCO and would be paid $100,000 a
year. In addition, NLASCO entered into an employment agreement with Mr. Robinson’s son, Gordon B. Robinson,
the former vice chairman and deputy chief executive officer of NLASCO, pursuant to which he was to serve in an
advisory capacity to NLASCO and for which he would be paid $100,000 per year. Each employment agreement
was for a one-year term with automatic one-year extensions by agreement of the parties. Both of these agreements
were terminated on January 1, 2011. The employment agreements also included non-competition and non-
solicitation provisions similar to that in the non-competition agreement discussed below, but with terms until two
years after the termination of employment. Further, each of the Robinsons entered into a non-competition
agreement pursuant to which he agreed not to, directly or indirectly, engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by,
lend credit to, or render services to, any business whose products, services or activities compete with those of
NLASCO or any of its subsidiaries within certain states. Each non-competition agreement included customary non-
solicitation provisions. The term of the non-competition agreements was five years, and such agreements expired in
January 2012. Finally, C. Clifton Robinson executed a share lock-up agreement pursuant to which he agreed not to
offer, sell, contract to sell, hypothecate, pledge, sell or grant any option, right or warrant to purchase, or otherwise
dispose of, or contract to dispose of, our common stock until 20 months after the closing date of the NLASCO
acquisition. This lock-up agreement expired in September 2008. Upon the closing of the NLASCO acquisition in
January 2007, NLASCO became our wholly-owned subsidiary.
Mr. Robinson was elected to our board of directors in March 2007 pursuant to the terms of the NLASCO
Agreement.
Assumption of NLASCO, Inc. Subsidiary Office Leases
With the acquisition of all of the capital stock of NLASCO, we also assumed all assets and liabilities of its
wholly-owned subsidiaries. Prior to Mr. Robinson’s disposition of his office building on August 24, 2011,
NLASCO and its affiliates in Waco, Texas leased office space from affiliates of Mr. Robinson. There were three
separate leases. The first lease was a month-to-month lease for office space at a rate of $900 per month. The second
lease was a month-to-month lease at a monthly rental rate of $3,500 per month. The first and second leases were
terminated in August 2010. The third lease, as amended, currently requires payments of $40,408 per month and
expires on December 31, 2014, but does have renewal options at the discretion of the lessee. Aggregate office space
under lease with regard to the foregoing is approximately 28,863 square feet.
The PlainsCapital Acquisition
Hilltop and PlainsCapital entered into an Agreement and Plan of Merger, dated as of May 8, 2012, pursuant to
which we acquired PlainsCapital on November 30, 2012. Pursuant to the Agreement and Plan of Merger,
PlainsCapital’s shareholders, which included Ms. Anderson and Messrs. Bolt, Feinberg, Huffines, Lewis, Littlefair,
Martin, Salmans, Schaffner, Sherman, Taylor and White, received 0.776 shares of Hilltop common stock and $9.00
in cash for each share of PlainsCapital’s outstanding common stock they held. Based on Hilltop’s closing stock
52
price on November 30, 2012, the total purchase price in the PlainsCapital acquisition was $813.5 million, consisting
of $311.8 million in cash and the issuance of 27.1 million shares of common stock and 114,068 shares of Non-
Cumulative Perpetual Preferred Stock, Series B. In addition, Mrs. Anderson and Messrs. Bolt, Feinberg, Huffines,
Lewis, Littlefair, Sherman, Taylor and White were appointed to serve as members of our Board of Directors. The
Agreement and Plan of Merger contained customary representations, warranties and covenants, as well as
indemnification provisions.
Consultant
We are currently paying Richard P. Hodge $80,000 per year for tax services. Mr. Hodge also provides tax
services Mr. Gerald Ford and his affiliates.
Employment of Certain Family Members
During 2013, Corey Prestidge, the brother-in-law of Jeremy B. Ford, our President and Chief Executive Officer,
and the son-in-law of Gerald J. Ford, the Chairman of our Board, served as Hilltop’s General Counsel and Secretary;
Lee Ann White, the wife of Alan B. White, PlainsCapital’s Chairman and Chief Executive Officer, served as our
Senior Vice President, Director of Public Relations; and Kale Salmans, the son of Todd Salmans, Chief Executive
Officer of PrimeLending, served as a Regional Manager of PrimeLending. Pursuant to our employment
arrangements with these individuals, we paid Corey Prestidge $575,000, Lee Ann White $147,500 and Kale
Salmans $275,000 as compensation for their services as employees during 2013.
Cowboys Stadium Suite
In 2007, PlainsCapital Bank contracted with Cowboys Stadium, L.P., a company affiliated with the employer of
Ms. Anderson and that is beneficially owned by Ms. Anderson and certain of her immediate family members, for the
20-year lease of a suite at Cowboys Stadium beginning in 2009. Pursuant to the lease agreement, PlainsCapital Bank
has agreed to pay Cowboys Stadium, L.P. annual payments of $500,000, subject to possible annual escalations, not
to exceed 3% per year, beginning with the tenth year of the lease.
Indebtedness
The Bank has had, and may be expected to have in the future, lending relationships in the ordinary course of
business with our directors and executive officers, members of their immediate families and affiliated companies in
which they are employed or in which they are principal equity holders. In our management’s opinion, the lending
relationships with these persons were made in the ordinary course of business and on substantially the same terms,
including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions
with persons not related to us and do not involve more than normal collection risk or present other unfavorable
features.
PROPOSAL TWO – ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION
Pursuant to Section 14A(a)(1) of the Exchange Act, we are asking stockholders to cast an advisory vote on the
compensation of our named executive officers disclosed in the Management section of this Proxy Statement. While
this vote is a non-binding advisory vote, we value the opinions of stockholders and will consider the outcome of the
vote when making future compensation decisions.
We believe that our executive compensation programs effectively aligned the interests of our named executive
officers with those of our stockholders by tying compensation to performance.
This annual vote on this matter is not intended to address any specific item of compensation, but rather the
overall compensation of our named executive officers and the policies and practices described in this Proxy
Statement. The vote is advisory and, therefore, not binding on the Company, the Board of Directors or the
Compensation Committee of the Board of Directors.
53
We are asking our stockholders to indicate their support for this Proposal Two and the compensation paid to our
named executive officers as disclosed commencing on page 26 of this Proxy Statement by voting FOR, on an
advisory basis, the following resolution:
“NOW, THEREFORE, BE IT RESOLVED, that the stockholders approve, on an advisory basis,
the compensation paid to the named executive officers of the Company, as disclosed pursuant to
Item 402 of Regulation S-K, including the Compensation Discussion & Analysis, the
compensation tables and the narrative discussion related thereto.”
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
PROPOSAL THREE - RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, or PwC, served as our independent registered public accounting firm during
2013 and has been selected to serve in that capacity for 2014, unless the Audit Committee of the Board of Directors
subsequently determines that a change is desirable. While stockholder ratification is not required for the selection of
PwC as our independent registered public accounting firm, the selection is being submitted for ratification at the
Annual Meeting, solely with a view toward soliciting our stockholders’ opinion. This opinion will be taken into
consideration by the Audit Committee in its future deliberations.
A representative of PwC is expected to be at our Annual Meeting to respond to appropriate questions and, if
PwC desires, to make a statement.
Vote Necessary to Ratify the Appointment
The appointment of PwC as our independent registered public accounting firm for 2014 will be ratified if this
proposal receives the affirmative vote of a majority of the votes cast on the matter. With respect to this proposal,
abstentions and broker non-votes will not be counted as votes cast and will have no effect on the result of the vote.
Under applicable rules, a broker will have the authority to vote for this proposal in the absence of instructions from
the beneficial owner of the relevant shares.
Report of the Audit Committee
The Audit Committee of the Board of Directors of Hilltop Holdings Inc. currently consists of three directors and
operates under a written charter adopted by the Board of Directors. Hilltop considers all members to be independent
as defined by the applicable NYSE listing standards and SEC regulations. Management is responsible for Hilltop’s
internal controls and the financial reporting process. PricewaterhouseCoopers LLP, or PwC, Hilltop’s independent
registered public accounting firm, is responsible for performing an independent audit of Hilltop’s consolidated
financial statements in accordance with generally accepted auditing standards. The Audit Committee’s
responsibility is to monitor and oversee the financial reporting process.
In this context, the Audit Committee reviewed and discussed with management and PwC the audited financial
statements for the year ended December 31, 2013, management’s assessment of the effectiveness of the Company’s
internal control over financial reporting and PwC’s evaluation of the Company’s internal control over financial
reporting. The Audit Committee has discussed with PwC the matters that are required to be discussed by Auditing
Standard No. 16, Communications with Audit Committees, issued by the Public Company Accounting Oversight
Board.
The Audit Committee received from PwC the written disclosures and the letter required by the Public Company
Accounting Oversight Board in Rule 3526, and has discussed with PwC the issue of its independence from the
Company. The Audit Committee also concluded that PwC’s provision of audit and non-audit services to the
Company and its affiliates is compatible with PwC’s independence.
54
Based upon the Audit Committee’s review of the audited consolidated financial statements and its discussion
with management and PwC noted above, the Audit Committee recommended to the Board of Directors that the
audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013.
This report has been furnished by the members of the Audit Committee.
Charles R. Cummings (Chairman)
Tracy A. Bolt
J. Markham Green
Independent Auditor’s Fees
For the fiscal years ended December 31, 2013 and 2012, the total fees paid to our independent registered public
accounting firm, PwC, were as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Fiscal Year Ended
2013
$3,252,350
1,960,200
-
1,800
2012
$2,265,500
256,000
-
1,800
Total
$5,214,350
$2,523,300
Audit Fees
Represents fees billed for the audits of our consolidated financial statements and effectiveness of internal
control over financial reporting as of and for the years ended December 31, 2013 and 2012, reviews of our interim
financial statements included in the Company’s Quarterly Reports on Form 10-Q, statutory and regulatory audits
and related services required for certain of our subsidiaries, and consultations related to miscellaneous SEC and
financial reporting matters. The increase in audit fees was the result of the growth of the Company and the
performance of audits previously not conducted by PwC.
Audit-Related Fees
Represents fees billed for services related to the FNB Transaction and other SEC filings in 2013 and other SEC
filings for the Company in connection with the PlainsCapital transaction in 2012.
Tax Fees
No tax fees were incurred during 2013 and 2012.
All Other Fees
In 2013 and 2012, these fees related to an annual renewal of software licenses for accounting research software.
Audit Committee Pre-Approval Policy
In accordance with applicable laws and regulations, the Audit Committee reviews and pre-approves any non-
audit services to be performed by PricewaterhouseCoopers LLP to ensure that the work does not compromise its
independence in performing its audit services. The Audit Committee also reviews and pre-approves all audit
services. In some cases, pre-approval is provided by the full committee for up to a year, and relates to a particular
category or group of services and is subject to a specific budget. In other cases, the Chairman of the Audit
55
Committee has the delegated authority from the committee to pre-approve additional services, and such pre-
approvals are then communicated to the full Audit Committee. The Audit Committee pre-approved all fees noted
above for 2013 and 2012.
The policy contains a de minimis provision that operates to provide retroactive approval for permissible non-
audit services under certain circumstances. No services were provided by PricewaterhouseCoopers LLP during
either 2013 or 2012 that fell under this provision.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR 2014.
STOCKHOLDER PROPOSALS FOR 2015
Stockholder proposals intended to be presented at our 2015 annual meeting of stockholders pursuant to
Rule 14a-8 under the Exchange Act must be received by us at our principal executive offices no later than 5:00 p.m.,
Dallas, Texas time, on January 1, 2015 and must otherwise comply with the requirements of Rule 14a-8 in order to
be considered for inclusion in the 2015 proxy statement and proxy.
In order for director nominations and proposals of stockholders made outside the processes of Rule 14a-8 under
the Exchange Act to be considered “timely” for purposes of Rule 14a-4(c) under the Exchange Act and pursuant to
our current bylaws, the nomination or proposal must be received by us at our principal executive offices not before
January 1, 2015, and not later than 5:00 p.m. Dallas, Texas time, on January 31, 2015; provided, however, that in the
event that the date of the 2015 annual meeting is not within 30 days before or after June 11, 2015, notice by the
stockholder in order to be timely must be received no earlier than the 120th day prior to the date of the 2015 annual
meeting and not later than 5:00 p.m. Dallas, Texas time, on the 90th day prior to the date of the 2015 annual meeting
or the tenth day following the day on which public announcement of the date of the 2015 annual meeting is first
made, whichever is later. Stockholders are advised to review our charter and bylaws, which contain additional
requirements with respect to advance notice of stockholder proposals and director nominations, copies of which are
available without charge upon request to our corporate Secretary at the address listed under “Questions” below.
Our Board of Directors knows of no other matters that have been submitted for consideration at this Annual
Meeting. If any other matters properly come before our stockholders at this Annual Meeting, the persons named on
the enclosed proxy card intend to vote the shares they represent in their discretion.
OTHER MATTERS
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS
In accordance with Rule 14a-3(e)(1) under the Exchange Act, one set of proxy materials will be delivered to
two or more stockholders who share an address, unless the Company has received contrary instructions from one or
more of the stockholders. The Company will deliver promptly upon written or oral request a separate copy of the
proxy materials to a stockholder at a shared address to which a single copy of the Proxy Statement was delivered.
Requests for additional copies of the proxy materials, and requests that in the future separate proxy materials be sent
to stockholders who share an address, should be directed by writing to Investor Relations, Hilltop Holdings Inc., 200
Crescent Court, Suite 1330, Dallas, Texas 75201, or by calling (214) 855-2177. In addition, stockholders who share
a single address but receive multiple copies of the proxy materials may request that in the future they receive a
single copy by contacting the Company at the address and phone number set forth in the prior sentence.
56
ANNUAL REPORT
A COPY OF OUR ANNUAL REPORT IS INCLUDED WITH THIS PROXY STATEMENT BUT SHALL
NOT BE DEEMED TO BE SOLICITATION MATERIAL. A COPY OF THIS PROXY STATEMENT AND OUR
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013 ALSO IS
AVAILABLE WITHOUT CHARGE FROM OUR COMPANY WEBSITE AT WWW.HILLTOP-
HOLDINGS.COM OR UPON WRITTEN REQUEST TO: INVESTOR RELATIONS, HILLTOP HOLDINGS
INC., 200 CRESCENT COURT, SUITE 1330, DALLAS, TEXAS 75201.
If you have questions or need more information about the annual meeting, you may write to:
QUESTIONS
Corporate Secretary
Hilltop Holdings Inc.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
You may also call us at (214) 855-2177. We also invite you to visit our website at www.hilltop-holdings.com.
57
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Telephone: (214) 855-2177
Facsimile: (214) 855-2173
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2013
For the transition period from to
Commission file number: 1-31987
Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
200 Crescent Court, Suite 1330
Dallas, TX
(Address of principal executive offices)
84-1477939
(I.R.S. Employer
Identification No.)
75201
(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
Common Stock, par value $0.01 per share
Name of each exchange on which registered
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. (cid:134) Yes (cid:95) 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. (cid:134) Yes (cid:95) 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. (cid:134) Yes (cid:95) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). (cid:95) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:95)
Non-accelerated filer
(cid:133) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
(cid:134)
(cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:134) Yes (cid:95) 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, 2013, was approximately $1.1 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 28,
2014 was 90,177,991.
The Registrant’s definitive Proxy Statement pertaining to the 2014 Annual Meeting of Stockholders, filed or to be filed not later than 120 days after
the end of the fiscal year pursuant to Regulation 14A, is incorporated herein by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
FORWARD-LOOKING STATEMENTS
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business ............................................................................................................................................................
Risk Factors .....................................................................................................................................................
Unresolved Staff Comments ...........................................................................................................................
Properties .........................................................................................................................................................
Legal Proceedings ............................................................................................................................................
Mine Safety Disclosures ..................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..............................................................................................................................................
Selected Financial Data ...................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................
Quantitative and Qualitative Disclosures About Market Risk....................................................................
Financial Statements and Supplementary Data ...........................................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..................
Controls and Procedures ................................................................................................................................
Other Information ...........................................................................................................................................
Directors, Executive Officers and Corporate Governance ..........................................................................
Executive Compensation .................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ..........................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .........................................
Principal Accounting Fees and Services........................................................................................................
4
33
48
48
48
48
49
50
53
81
85
85
85
86
86
86
86
86
86
Exhibits, Financial Statement Schedules.......................................................................................................
87
MARKET AND INDUSTRY DATA AND FORECASTS
Market and industry data and other statistical information and forecasts used throughout this Annual Report on Form 10-K (this
“Annual Report”) are based on independent industry publications, government publications and reports by market research firms or
other published independent sources. We have not sought or obtained the approval or endorsement of the use of this third-party
information. Some data also is based on our good faith estimates, which are derived from our review of internal surveys, as well as
independent sources. Forecasts are particularly likely to be inaccurate, especially over long periods of time.
Unless the context otherwise indicates, all references in this Annual Report to the “Company,” “we,” “us,” “our” or “ours” or
similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely
to Hilltop Holdings Inc., references to “PlainsCapital” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop),
references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to
First National Bank, references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of the Bank)
and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company (a wholly owned subsidiary of First
Southwest), references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank)
and its subsidiaries as a whole, and references to “NLC” refer to National Lloyds Corporation, formerly known as NLASCO, Inc., (a
wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.
FORWARD-LOOKING STATEMENTS
This Annual Report and the documents incorporated by reference into this report include “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the
Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical
fact, included in this Annual Report that address results or developments that we expect or anticipate will or may occur in the future,
and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,”
“forecasts,” “goal,” “intends,” “may,” “might,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative
of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our
litigation, our efforts to make strategic acquisitions, our proposal to acquire SWS Group, Inc. (“SWS”), our revenue, our liquidity and
sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, anticipated
changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our
allowance for loan losses and provision for loan losses, and the collectability of loans are forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into
account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and
can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business
plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking
statements. Certain factors that could cause actual results to differ include, among others:
•
•
•
•
•
•
•
•
•
•
•
•
risks associated with merger and acquisition integration;
our ability to estimate loan losses;
changes in the default rate of our loans;
risks associated with concentration in real estate related loans;
our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the Federal Deposit
Insurance Corporation (the “FDIC”);
changes in general economic, market and business conditions in areas or markets where we compete;
severe catastrophic events in our geographic area;
changes in the interest rate environment;
cost and availability of capital;
changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes
in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”);
our ability to use net operating loss carry forwards to reduce future tax payments;
approval of new, or changes in, accounting policies and practices;
3
•
•
•
•
•
•
changes in key management;
competition in our banking, mortgage origination, financial advisory and insurance segments from other banks and financial
institutions as well as insurance companies, mortgage bankers, investment banking and financial advisory firms, asset-based
non-bank lenders and government agencies;
risks related to our proposal to acquire SWS;
failure of our insurance segment reinsurers to pay obligations under reinsurance contracts;
our ability to use excess cash in an effective manner, including the execution of successful acquisitions; and
our participation in governmental programs, including the Small Business Lending Fund (“SBLF”).
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ
materially from those anticipated in these forward-looking statements, see Item 1A, “Risk Factors,” and Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” herein. We caution that the foregoing list of factors is not
exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All
subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf
are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any
forward-looking statement, whether written or oral, relating to the matters discussed in this Annual Report except to the extent
required by federal securities laws.
PART I
Item 1. Business.
Company Background
Beginning in 1995, we operated as several companies under the name “Affordable Residential Communities” or “ARC,” a Maryland
corporation. We engaged in the business of acquiring, renovating, repositioning and operating manufactured home communities, as
well as certain related businesses.
In January 2007, we acquired NLC, a property and casualty insurance holding company.
On July 31, 2007, we sold substantially all of the operating assets used in our manufactured home communities business and our retail
sales and financing business to American Residential Communities LLC. In conjunction with this transaction, we transferred to the
buyer the rights to the “Affordable Residential Communities” name, changed our name to Hilltop Holdings Inc., and moved our
headquarters to Dallas, Texas. As a result, our primary operations from August 2007 through November 2012 were limited to
providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the
southern United States through NLC. NLC operates through its wholly owned subsidiaries, National Lloyds Insurance Company
(“NLIC”) and American Summit Insurance Company (“ASIC”).
On November 30, 2012, we acquired PlainsCapital Corporation through a plan of merger (the “PlainsCapital Merger”), whereby
PlainsCapital Corporation merged into our wholly owned subsidiary, which continued as the surviving entity under the name
“PlainsCapital Corporation”. Concurrent with the consummation of the PlainsCapital Merger, we became a financial holding company
registered under the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”), as amended by the Gramm-Leach-
Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”).
On September 13, 2013, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially
all of the assets, of FNB from the FDIC, as receiver, and reopened former FNB branches acquired from the FDIC under the
“PlainsCapital Bank” name (the “FNB Transaction”).
We intend to make acquisitions with certain of the remaining proceeds from the American Residential Communities transaction and, if
necessary or appropriate, from additional equity or debt financing sources.
Following the PlainsCapital Merger, our primary line of business has been to provide business and consumer banking services from
offices located throughout central, north and west Texas through the Bank. The acquisition of FNB’s expansive branch network allows
4
the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo and El
Paso markets, among others. In addition to the Bank, our other subsidiaries have specialized areas of expertise that allow us to provide
an array of financial products and services such as mortgage origination, insurance and financial advisory services.
At December 31, 2013, on a consolidated basis, we had total assets of $8.9 billion, total deposits of $6.7 billion, total loans, including
loans held for sale, of $5.6 billion and stockholders’ equity of $1.3 billion. Our operating results beginning December 1, 2012 include
the banking, mortgage origination and financial advisory operations acquired in the PlainsCapital Merger and the results of our
banking operations beginning September 14, 2013 include the operations acquired in the FNB Transaction.
Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “HTH.”
Our principal office is located at 200 Crescent Court, Suite 1330, Dallas, Texas 75201, and our telephone number at that location is
(214) 855-2177. Our internet address is www.hilltop-holdings.com. Our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available on our website at http://ir.hilltop-holdings.com/ under the tab “SEC Filings” as soon as reasonably
practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission (the “SEC”).
The references to our website in this Annual Report are inactive textual references only. The information on our website is not
incorporated by reference into this Annual Report.
Organizational Structure
Our organizational structure is comprised of two primary operating business units, NLC (insurance) and PlainsCapital (financial
services and products). Within the PlainsCapital unit are three primary wholly owned operating subsidiaries: the Bank, PrimeLending
and First Southwest. The following provides additional details regarding our updated organizational structure at December 31, 2013.
Geographic Dispersion of our Businesses
The Bank provides traditional banking services, residential mortgage lending, wealth and investment management, treasury
management and capital equipment leasing. Substantially all of our banking operations are in Texas, and as a result of the FNB
Transaction, the Bank has a presence in every major market in Texas.
5
For the year ended December 31, 2013, approximately 66% of PrimeLending’s origination volume was concentrated in nine states
(none of the other states in which PrimeLending operated during 2013 had volume of 3% or more). The following table is a summary
of the origination volume by state for the year ended December 31, 2013 (dollars in thousands).
Texas ............................
California .....................
North Carolina .............
Virginia ........................
Florida ..........................
Arizona ........................
Maryland ......................
Ohio .............................
Washington ..................
All other states .............
Volume
2,660,810
2,082,184
618,802
466,531
456,643
392,006
385,215
383,518
360,100
3,986,753
11,792,562
$
$
% of
Total
22.6%
17.7%
5.2%
4.0%
3.9%
3.3%
3.3%
3.2%
3.0%
33.8%
100.0%
Our insurance products are distributed through a broad network of independent agents and a select number of managing general
agents, referred to as MGAs, which are concentrated in five states (none of the other states in which we operated during 2013 had
gross written premiums of 3% or more). The following table sets forth our total gross written premiums by state for the periods shown
(dollars in thousands).
Year Ended December 31,
% of
Total
Texas .......................
Oklahoma ................
Arizona ...................
Tennessee ................
Georgia ...................
All other states ........
Total ....................
$
$
2013
125,696
16,494
15,904
10,589
6,393
6,892
181,968
% of
Total
69.1% $
9.1%
8.7%
5.8%
3.5%
3.8%
100.0% $
2012
118,361
15,398
13,914
10,527
5,454
6,547
170,201
2011
117,046
10,804
12,376
9,489
4,380
6,346
160,441
% of
Total
73.0%
6.7%
7.7%
5.9%
2.7%
4.0%
100.0%
69.5% $
9.1%
8.2%
6.2%
3.2%
3.8%
100.0% $
FSC, a diversified investment banking firm and a registered broker-dealer, competes for business nationwide. Public finance financial
advisory revenues, of which 76% are from entities located in Texas, represent a significant portion of total segment revenues.
Business Segments
Under U.S. generally accepted accounting principles (“GAAP”), our two business units are comprised of four reportable business
segments organized primarily by the core products offered to the segments’ respective customers: banking, mortgage origination,
insurance and financial advisory. These segments reflect the manner in which operations are managed and the criteria used by our
chief operating decision maker function to evaluate segment performance, develop strategy and allocate resources. Our chief operating
decision maker function consists of the President and Chief Executive Officer of Hilltop and the Chief Executive Officer of
PlainsCapital.
For more financial information about each of our business segments, see Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” herein. See also Note 30 in the notes to our consolidated financial statements included under
Item 8, “Financial Statements and Supplementary Data.”
Banking
The banking segment includes the operations of the Bank and, since September 14, 2013, the operations acquired in the FNB
Transaction. At December 31, 2013, our banking segment had $8.0 billion in assets and total deposits of $6.7 billion. The primary
sources of our deposits are residents and businesses located in Texas.
Business Banking. Our business banking customers primarily consist of agribusiness, energy, health care, institutions of higher
education, real estate (including construction and land development) and wholesale/retail trade companies. We provide these
customers with extensive banking services, such as Internet banking, business check cards and other add-on services as determined on
6
a customer-by-customer basis. Our treasury management services, which are designed to reduce the time, burden and expense of
collecting, transferring, disbursing and reporting cash, are also available to our business customers. We offer these business customers
lines of credit, equipment loans and leases, letters of credit, agricultural loans, commercial real estate loans and other loan products.
The table below sets forth a distribution of the banking segment’s non-covered and covered loans, classified by portfolio segment and
segregated between those considered to be purchased credit impaired (“PCI”) loans and all other originated or acquired loans at
December 31, 2013 (dollars in thousands). PCI loans showed evidence of credit deterioration that makes it probable that all
contractually required principal and interest payments will not be collected. The banking segment’s loan portfolio includes “covered
loans” acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC, while all other loans held by the
Bank are referred to as “non-covered loans.” The commercial and industrial non-covered loans category includes a $1.3 billion
warehouse line of credit extended to PrimeLending, of which $1.0 billion was drawn at December 31, 2013, as well as term loans at
First Southwest that had an outstanding balance of $23.0 million at December 31, 2013. Amounts advanced against the warehouse line
and the First Southwest term loans are included in the table below, but are eliminated from the consolidated balance sheets.
Non-covered loans
Commercial and industrial:
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Non-Covered
Loans
Secured .............................................................
Unsecured .........................................................
$
2,229,778 $
106,855
35,372 $
1,444
2,265,150
108,299
Real estate:
Secured by commercial properties ....................
Secured by residential properties ......................
1,012,613
406,593
36,255
2,995
1,048,868
409,588
Construction and land development:
Residential construction loans ..........................
Commercial construction loans and land
development ..................................................
Consumer ..............................................................
Total non-covered loans ....................................
65,079
—
65,079
279,655
51,067
4,151,640 $
19,817
4,509
100,392 $
299,472
55,576
4,252,032
$
53.3%
2.6%
24.7%
9.6%
1.5%
7.0%
1.3%
100.0%
Covered loans
Commercial and industrial:
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Covered
Loans
Secured .............................................................
Unsecured .........................................................
$
24,913 $
3,620
28,520 $
9,890
Real estate:
Secured by commercial properties ....................
Secured by residential properties ......................
54,143
169,161
365,306
199,372
53,433
13,510
419,449
368,533
Construction and land development:
Residential construction loans ..........................
Commercial construction loans and land
development ..................................................
Total covered loans ...........................................
7,463
4,705
12,168
$
17,913
277,213 $
121,363
729,156 $
139,276
1,006,369
13.8%
100.0%
5.3%
1.4%
41.7%
36.6%
1.2%
Our lending policies seek to achieve 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. In support of that goal, we have designed our
underwriting standards to determine:
•
•
•
•
That our borrowers possess sound ethics and competently manage their affairs;
That we know the source of the funds the borrower will use to repay the loan;
That the purpose of the loan makes economic sense; and
That we identify relevant risks of the loan and determine that the risks are acceptable.
7
We implement our underwriting standards according to the facts and circumstances of each particular loan request, as discussed
below.
Commercial and industrial loans are primarily made within Texas and are underwritten on the basis of the borrower’s ability to service
the debt from cash flow from an operating business. In general, commercial and industrial loans involve more credit risk than
residential and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial and
industrial loans results primarily from the type of collateral securing these loans, which typically includes commercial real estate,
accounts receivable, equipment and inventory. Additionally, increased risk arises from the expectation that commercial and industrial
loans generally will be serviced principally from operating cash flow of the business, and such cash flows are dependent upon
successful business operations. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans.
As a result of the additional risk and complexity associated with commercial and industrial loans, such loans require more thorough
underwriting and servicing than loans to individuals. To manage these risks, our policy is to attempt to secure commercial and
industrial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In
addition, depending on the size of the credit, we actively monitor the financial condition of the borrower by analyzing the borrower’s
financial statements and assessing certain financial measures, including cash flow, collateral value and other appropriate credit factors.
We also have processes in place to analyze and evaluate on a regular basis our exposure to industries, products, market changes and
economic trends.
The Bank also offers term financing on commercial real estate properties that include retail, office, multi-family, industrial, warehouse
and non-owner occupied single family residences. Commercial mortgage lending can involve high principal loan amounts, and the
repayment of these loans is dependent, in large part, on a borrower’s on-going business operations or on income generated from the
properties that are leased to third parties. Accordingly, we apply the measures described above for commercial and industrial loans to
our commercial real estate lending, with increased emphasis on analysis of collateral values. As a general practice, the Bank requires
its commercial mortgage loans to (i) be secured with first lien positions on the underlying property, (ii) generate adequate equity
margins, (iii) be serviced by businesses operated by an established management team and (iv) be guaranteed by the principals of the
borrower. The Bank seeks lending opportunities where cash flow from the collateral provides adequate debt service coverage and/or
the guarantor’s net worth is comprised of assets other than the project being financed.
The Bank offers construction financing for (i) commercial, retail, office, industrial, warehouse and multi-family developments,
(ii) residential developments and (iii) single family residential properties. Construction loans involve additional risks because loan
funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. If
the Bank is forced to foreclose on a project prior to completion, it may not be able to recover the entire unpaid portion of the loan.
Additionally, it may be required to fund additional amounts to complete a project and may have to hold the property for an
indeterminate period of time. Because of uncertainties inherent in estimating construction costs, the market value of the completed
project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to
complete a project and the related loan-to-value ratio. As a result of these uncertainties, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a
borrower or guarantor to repay the loan. We generally require that the subject property of a construction loan for commercial real
estate be pre-leased, since cash flows from the completed project provide the most reliable source of repayment for the loan. Loans to
finance these transactions are generally secured by first liens on the underlying real property. The Bank conducts periodic completion
inspections, either directly or through an agent, prior to approval of periodic draws on these loans.
In addition to the real estate lending activities described above, a portion of the Bank’s real estate portfolio consists of single family
residential mortgage loans typically collateralized by owner occupied properties located in its market areas. These residential
mortgage loans are generally secured by a first lien on the underlying property and have maturities up to thirty years. At December 31,
2013, the Bank had $582.6 million in one-to-four family residential loans, which represented 12.9% of its total loans held for
investment.
Personal Banking. We offer a broad range of personal banking products and services for individuals. Similar to our business banking
operations, we also provide our personal banking customers with a variety of add-on features such as check cards, safe deposit
boxes, Internet banking, bill pay, overdraft privilege services, gift cards and access to automated teller machine (ATM) facilities
throughout the United States. We offer a variety of deposit accounts to our personal banking customers including savings, checking,
interest-bearing checking, money market and certificates of deposit.
We loan to individuals for personal, family and household purposes, including lines of credit, home improvement loans, home equity
loans, credit cards and loans for purchasing and carrying securities. At December 31, 2013, we had $55.6 million of loans for these
purposes, which are shown in the non-covered loans table above as “Consumer.”
8
Wealth and Investment Management. Our private banking team personally assists high net worth individuals and their families with
their banking needs, including depository, credit, asset management, and trust and estate services. We offer trust and asset
management services in order to assist these customers in managing, and ultimately transferring, their wealth. Our wealth management
services provide personal trust, investment management and employee benefit plan administration services, including estate planning,
management and administration, investment portfolio management, employee benefit accounts and individual retirement accounts.
Mortgage Origination
Our mortgage origination segment operates through a wholly owned subsidiary of the Bank, PrimeLending. Founded in 1986,
PrimeLending is a residential mortgage banker licensed to originate and close loans in all 50 states and the District of Columbia. At
December 31, 2013, it operated from over 300 locations in 42 states, originating approximately 23% of its mortgages from its Texas
locations and approximately 18% of its mortgages from locations in California. The mortgage lending business is subject to
seasonality, as we typically experience increased loan origination volume from purchases of homes during the spring and summer,
when more people tend to move and buy or sell homes, and the overall demand for mortgage loans is driven largely by the applicable
interest rates at any given time.
PrimeLending handles loan processing, underwriting and closings in-house. Mortgage loans originated by PrimeLending are funded
through a warehouse line of credit maintained with the Bank. PrimeLending sells substantially all mortgage loans it originates to
various investors in the secondary market, the majority with servicing released. While PrimeLending’s loan origination volume
decreased during the third and fourth quarters of 2013 compared to the first and second quarters of 2013, PrimeLending increased the
amount of loans on which it retained servicing between the same periods. As mortgage loans are sold in the secondary market,
PrimeLending pays down its warehouse line of credit with the Bank. Loans sold are subject to certain standard indemnification
provisions with investors, including the repurchase of loans sold and the repayment of sales proceeds to investors under certain
conditions.
Our mortgage lending underwriting strategy, driven in large measure by secondary market investor standards, seeks primarily to
originate conforming loans. Our underwriting practices include:
•
•
•
•
granting loans on a sound and collectible basis;
obtaining a balance between maximum yield and minimum risk;
ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; and
ensuring that each loan is properly documented and, if appropriate, adequately insured.
Since its inception, PrimeLending has grown from a staff of 20 individuals producing approximately $80 million in annual closed
mortgage loan volume to a staff of approximately 2,600 producing $11.8 billion in 2013. PrimeLending offers a variety of loan
products catering to the specific needs of borrowers seeking purchase or refinancing options, including 30-year and 15-year fixed rate
conventional mortgages, adjustable rate mortgages, jumbo loans, and Federal Housing Administration (“FHA”) and Veteran Affairs
(“VA”) loans. Mortgage loans originated by PrimeLending are secured by a first lien on the underlying property. PrimeLending does
not currently originate subprime loans (which we define to be loans to borrowers having a Fair Isaac Corporation (FICO) score lower
than 620 on conventional mortgages and VA loans or 600 on FHA loans or loans that do not comply with applicable agency or
investor-specific underwriting guidelines).
Insurance
The operations of NLC comprise our insurance segment. NLC specializes in providing fire and limited homeowners insurance for low
value dwellings and manufactured homes primarily in Texas and other areas of the south, southeastern and southwestern United
States. NLC’s product lines also include enhanced homeowners products offering higher coverage limits with distribution restricted to
select agents. NLC targets underserved markets through a broad network of independent agents currently operating in 14 states and a
select number of MGAs, which require underwriting expertise that many larger carriers have been unwilling to develop given the
relatively small volume of premiums produced by local agents.
Ratings. Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist them in
assessing the financial strength and overall quality of the companies from which they purchase insurance. The ratings for NLIC and
ASIC of “A” (Excellent) were affirmed by A.M. Best in April 2013. An “A” rating is the third highest of 16 rating categories used
by A.M. Best. In evaluating a company’s financial and operating performance, A.M. Best reviews a company’s profitability, leverage
and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of
9
its assets, the adequacy of its liabilities for losses and loss adjustment expenses (“LAE”), the adequacy of its surplus, its capital
structure, the experience and competence of its management and its market presence. This rating assignment is subject to the ability to
meet A.M. Best’s expectations as to performance and capitalization on an ongoing basis, and is subject to revocation or revision at any
time at the sole discretion of A.M. Best. NLC cannot ensure that NLIC and ASIC will maintain their present ratings.
Product Lines. NLC’s business is conducted in two product lines: personal lines and commercial lines. The personal lines include
homeowners, dwelling fire, manufactured home, flood and vacant policies. The commercial lines include commercial multi-peril,
builders risk, builders risk renovation, sports liability and inland marine policies.
The NLC companies specialize in writing fire and homeowners insurance coverage for low value dwellings and manufactured homes.
The vast majority of NLC’s property coverage is written on policies that provide actual cash value payments, as opposed to
replacement cost. Under actual cash value policies, the insured is entitled to receive only the cost of replacing or repairing damaged or
destroyed property with comparable new property, less depreciation. Replacement cost does not include such a deduction for
depreciation. In 2010, NLC expanded its homeowners insurance products to include replacement cost coverage, which also includes
limited water coverage. These new products have been marketed and sold primarily in Texas. The development and implementation of
these new products contributed to the premium growth at NLC since 2011. Rate increases and exposure management are expected to
moderate future policy growth.
Underwriting and Pricing. NLC applies its regional expertise, underwriting discipline and a risk-adjusted, return-on-equity-based
approach to capital allocation to primarily offer short-tail insurance products in its target markets. NLC’s underwriting process
involves securing an adequate level of underwriting information from its independent agents, identifying and evaluating risk
exposures and then pricing the risks it chooses to accept. Management reviews pricing on an ongoing basis to monitor any emerging
issues on a specific coverage or geographic territory.
Catastrophe Exposure. NLC maintains a comprehensive risk management strategy, which includes actively monitoring its
catastrophe prone territories by zip code to ensure a diversified book of risks. NLC utilizes software and risk support from its
reinsurance brokers to analyze its portfolio and catastrophe exposure. Biannually, NLC has its entire portfolio analyzed by its
reinsurance broker who utilizes hurricane and severe storm models to predict risk.
Reinsurance. NLC purchases reinsurance to reduce its exposure to liability on individual risks and claims and to protect against
catastrophe losses. NLC’s management believes that less volatile, yet reasonable returns are in the long-term interest of NLC.
Reinsurance involves an insurance company transferring, or ceding, a portion of its risk to another insurer, the reinsurer. The reinsurer
assumes the exposure in return for a portion of the premium. The ceding of risk to a reinsurer does not legally discharge the primary
insurer from its liability for the full amount of the policies on which it obtains reinsurance. Accordingly, the primary insurer remains
liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement, and as a result, the primary
insurer is exposed to the risk of non-payment by its reinsurers. In formulating its reinsurance programs, NLC believes that it is
selective in its choice of reinsurers and considers numerous factors, the most important of which are the financial stability of the
reinsurer, its history of responding to claims and its overall reputation.
NLC purchases catastrophe excess of loss reinsurance to a limit that exceeds the Hurricane 200-year return time as modeled by RMS
Risk Link v.13.0 and equals the Hurricane 500-year return time as modeled by AIR Classic v.15.0.
Liabilities for Unpaid Losses and Loss Adjustment Expenses. NLC’s liabilities for losses and loss adjustment expenses include
liabilities for reported losses, liabilities for incurred but not reported, or 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.
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the
insurer’s payment of that loss. NLC’s liabilities for unpaid losses represent the best estimate at a given point in time of what it expects
to pay claimants, based on facts, circumstances and historical trends then known. During the loss settlement period, additional facts
regarding individual claims may become known and, consequently, it often becomes necessary to refine and adjust the estimates of
liability.
10
Loss Development. The following tables set forth the annual calendar year-end reserves of NLIC and ASIC since 2004 and the
subsequent development of these reserves through December 31, 2013. These tables present accident year development data. The first
line of each table shows, for the years indicated, net liability, including IBNR, as originally estimated. The next section sets forth the
re-estimates in later years of incurred losses, including payments, for the years indicated. The changes in the original estimate are
caused by a combination of factors, including: (1) claims being settled for amounts different than originally estimated; (2) the net
liability being increased or decreased for claims remaining open as more information becomes known about those individual claims;
and (3) more or fewer claims being reported after December 31, 2004 than had occurred prior to that date. The bottom section of the
table shows, by year, the cumulative amounts of net losses and LAE paid as of the end of each succeeding year.
The “net cumulative redundancy (deficiency)” represents, as of December 31, 2013, the difference between the latest re-estimated net
liability and the net liability as originally estimated for losses and LAE retained by us. A redundancy means the original estimate was
higher than the current estimate; and a deficiency means that the original estimate was lower than the current estimate. The following
loss development tables for NLIC and ASIC are presented net of reinsurance recoverable (in thousands).
National Lloyds Insurance Company
Original Reserve* ..........................
$
33,951 $
41,282 $
47,684 $
44,613 $
65,592 $
60,392 $
55,482 $
81,589 $
87,943 $
86,524
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year Ended December 31,
1 year later ......................................
2 years later ...................................
3 years later ...................................
4 years later ...................................
5 years later ...................................
6 years later ...................................
7 years later ...................................
8 years later ....................................
9 years later ....................................
Net cumulative redundancy
28,106
27,593
25,747
25,712
25,579
25,582
25,568
25,565
25,565
36,332
40,391
41,231
39,735
39,699
39,675
39,674
39,677
43,640
43,465
43,394
43,387
43,366
43,365
43,363
44,064
44,134
43,950
43,788
43,649
43,679
64,864
65,070
64,702
64,569
64,547
62,337
62,014
61,759
61,328
54,987
54,672
54,554
82,065
81,782
88,708
(deficiency) ...............................
8,386
1,605
4,321
934
1,045
(936)
928
(193)
(765)
Cumulative amount of net liability
paid as of:
1 year later .....................................
2 years later ....................................
3 years later ...................................
4 years later ...................................
5 years later ...................................
6 years later ...................................
7 years later ...................................
8 years later ...................................
9 years later ....................................
24,747
25,149
25,388
25,462
25,521
25,538
25,564
25,565
25,565
32,871
34,625
36,157
39,533
39,646
37,674
39,674
39,677
42,301
42,668
43,140
43,361
43,365
43,365
43,363
42,478
43,245
43,495
43,563
43,648
43,650
63,761
64,203
64,391
64,477
64,538
59,977
60,517
61,081
61,233
53,387
53,872
54,161
79,853
80,591
82,762
American Summit Insurance Company
Original Reserve* ..........................
$
8,297 $
11,041 $
13,003 $
9,351 $
12,769 $
9,773 $
12,486 $
14,829 $
13,547 $
15,152
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year Ended December 31,
1 year later ......................................
2 years later ...................................
3 years later ...................................
4 years later ...................................
5 years later ...................................
6 years later ...................................
7 years later ...................................
8 years later ....................................
9 years later ....................................
Net cumulative redundancy
7,388
6,999
6,859
6,772
6,714
6,787
6,743
6,730
6,730
9,932
9,918
9,918
9,797
9,820
9,815
9,812
9,913
13,014
12,998
13,435
13,216
13,195
13,188
13,187
9,154
9,335
9,235
9,200
9,197
9,196
12,009
11,943
11,880
12,048
12,342
9,423
9,088
9,023
8,701
13,153
12,974
12,873
14,126
14,044
13,235
(deficiency) ...............................
1,567
1,128
(184)
155
427
1,072
(387)
785
312
Cumulative amount of net liability
paid as of:
1 year later .....................................
2 years later ....................................
3 years later ...................................
4 years later ...................................
5 years later ...................................
6 years later ...................................
7 years later ...................................
8 years later ...................................
9 years later ....................................
6,566
6,610
6,682
6,699
6,714
6,720
6,723
6,730
6,730
9,341
9,578
9,679
9,740
9,813
9,813
9,812
9,813
12,429
12,639
13,326
13,161
13,188
13,188
13,187
8,732
9,095
9,193
9,196
9,196
9,196
11,560
11,637
11,726
12,040
12,341
11
8,800
8,803
8,917
8,672
12,390
12,632
12,792
13,511
13,842
12,423
* Including amounts paid in respective year.
Please refer to Note 28 in the notes to consolidated financial statements for a reconciliation of the reserves presented in the tables
above to the reserves for losses and loss adjustment expenses set forth in the consolidated balance sheets at December 31, 2013 and
2012.
Current loss reserve development has been generally favorable with the exception of accident year 2012. Accident years 2007 through
2011 have shown cumulative favorable loss development of $3.8 million through December 31, 2013. Accident year 2012 had net
unfavorable loss development of $0.5 million, with unfavorable development of $0.8 million at NLIC, offset by favorable loss
development of $0.3 million at ASIC. The unfavorable loss development at NLIC is significantly attributable to extraordinary
increases in losses from wind and hail losses and storms that occurred in Texas during 2012.
The following table is a reconciliation of the gross liability to net liability for losses and loss adjustment expenses (in thousands).
2007
2008
2009
December 31, *
2010
2011
2012
2013
Gross unpaid losses ........
Reinsurance
recoverable .................
$ 18,091 $ 34,023 $
33,780 $
58,882 $
44,835 $ 34,012 $
27,468
(2,692)
(14,613)
(21,102)
(43,773)
(25,083)
(10,385)
(4,508)
Net unpaid losses ............
$ 15,399 $ 19,410 $
12,678 $
15,109 $
19,752 $ 23,627 $
22,960
*
Information is not presented for the periods ended prior to January 31, 2007, as that is the date Hilltop Holdings Inc.
acquired the insurance operations.
The methods that our actuaries utilize to estimate ultimate loss and LAE amounts are the paid and reported loss development method
and the paid and reported Bornhuetter-Ferguson method (the “BF method”). Insured losses for a given accident year change in value
over time as additional information on claims is received, as claim conditions change and as new claims are reported. This process is
commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses
and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are
based upon a review of the loss development patterns indicated in the companies’ historical loss triangles and applicable insurance
industry loss development factors.
The BF method is a procedure that weights an expected ultimate loss and LAE amount, and the result of the loss development method.
This method is useful when loss data is immature or sparse because it is not as sensitive as the loss development method to unusual
variations in the paid or reported amounts. The BF method requires an initial estimate of expected ultimate losses and LAE. For each
year, the expected ultimate losses and LAE is based on a review of the ultimate loss ratios indicated in the companies’ historical data
and applicable insurance industry ultimate loss ratios. Each loss development factor, paid or reported, implies a certain percent of the
ultimate losses and LAE is still unpaid or unreported. The amounts of unpaid or unreported losses and LAE by year are estimated as
the percentage unpaid or unreported, times the expected ultimate loss and LAE amounts. To project ultimate losses and LAE, the
actual paid or reported losses and LAE to date are added to the estimated unpaid or unreported amounts.
The results of each actuarial method performed by year are reviewed to select an ultimate loss and LAE amount for each accident
year. In general, more weight is given to the loss development projections for more mature accident periods and more weight is given
to the BF methods for less mature accident periods.
The combination of the methodologies described above is used for all insurance lines of business, regardless of whether the line is a
short-tailed or long-tailed line of business, though specific parameter selections within the methods vary to reflect the nature of the
underlying line of business. ASIC and NLIC specialize in writing fire and extended coverage for low-value dwellings, mobile homes
and homeowners, which generally are considered short-tailed coverages. In addition, ASIC and NLIC write a small amount of
commercial risks, which are still predominantly property coverages, along with some low-limit liability coverages.
12
The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-
end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group
considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the
extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the
actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of
case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
In arriving at our best estimate of the unpaid losses and LAE, and based on management discussion with our actuaries, we would
consider reasonably likely changes in the key assumptions, such as the underlying loss development pattern or the expected loss ratio,
to have an impact on our best estimate by plus or minus 10%. At December 31, 2013, this equates to approximately plus or minus $2.3
million, or 1.8% of insurance segment equity, and 2.1% of calendar year 2013 insurance losses.
Financial Advisory
Our financial advisory segment operates through First Southwest. FSC, a wholly owned subsidiary of First Southwest, is a diversified
investment banking firm and a registered broker-dealer with the SEC and the Financial Industry Regulatory Authority (“FINRA”).
First Southwest’s primary focus is on providing public finance services.
At December 31, 2013, First Southwest employed approximately 400 people and maintained 25 locations nationwide, nine of which
are in Texas. At December 31, 2013, First Southwest had consolidated assets of $520.4 million, maintained $118.9 million in equity
capital and had more than 1,600 public sector clients.
First Southwest has four primary lines of business: (i) public finance, (ii) capital markets, (iii) correspondent clearing services, and
(iv) asset management.
Public Finance. First Southwest’s public finance group represents its largest department. This group advises cities, counties, school
districts, utility districts, tax increment zones, special districts, state agencies and other governmental entities nationwide. In addition,
the group provides specialized advisory and investment banking services for airports, convention centers, healthcare institutions,
institutions of higher education, housing, industrial development agencies, toll road authorities, and public power and utility providers.
Capital Markets. Through its capital markets group, First Southwest trades fixed income securities to support sales and other
customer activities, underwrites tax-exempt and taxable fixed income securities and trades equities on an agency basis on behalf of its
retail and institutional clients. In addition, First Southwest provides asset and liability management advisory services to community
banks.
Correspondent Clearing Services. The correspondent clearing services group offers omnibus and fully disclosed clearing services to
FINRA member firms for trade executing, clearing and back office services. Services are provided to approximately 80 correspondent
firms.
Asset Management. First Southwest Asset Management is an investment advisor registered under the Investment Advisers Act of
1940 providing state and local governments with advice and assistance with respect to arbitrage rebate compliance, portfolio
management and local government investment pool administration. In the area of arbitrage rebate, First Southwest Asset Management
advises municipalities with respect to the emerging regulations relating to arbitrage rebates. Further, First Southwest Asset
Management assists governmental entities with the complexities of investing public funds in the fixed income markets. As an
investment adviser registered with the SEC, First Southwest Asset Management promotes cash management-based investment
strategies that seek to adhere to the standards imposed by the fiduciary responsibilities of investment officers of public funds. At
December 31, 2013, First Southwest Asset Management served as investment manager of $6.9 billion in short-term fixed income
portfolios of municipal governments and investment adviser for $5.6 billion invested by municipal governments, and a group within
FSC served as administrator for local government investment pools totaling $7.7 billion.
Competition
We face significant competition with respect to the business segments in which we operate and the geographic markets we serve.
Many of our competitors have substantially greater financial resources, lending limits and larger branch networks than we do, and
offer a broader range of products and services.
13
Our lending and mortgage origination competitors include commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and
investment banking firms, asset-based non-bank lenders, government agencies and certain other non-financial institutions.
Competition for deposits and in providing lending and mortgage origination products and services to businesses in our market area is
intense and pricing is important. Other factors encountered in competing for savings deposits are convenient office locations, interest
rates and fee structures of products offered. Direct competition for savings deposits also comes from other commercial bank and thrift
institutions, money market mutual funds and corporate and government securities that may offer more attractive rates than insured
depository institutions are willing to pay. Competition for loans includes such additional factors as interest rates, loan origination fees
and the range of services offered by the provider. We seek to distinguish ourselves from our competitors through our commitment to
personalized customer service and responsiveness to customer needs while providing a range of competitive loan and deposit products
and other services.
Our insurance business competes with a large number of other companies in its selected lines of business, including major U.S. and
non-U.S. insurers, regional companies, mutual companies, specialty insurance companies, underwriting agencies and diversified
financial services companies. The personal lines market in Texas is dominated by a few large carriers and their subsidiaries and
affiliates. We seek to distinguish ourselves from our competitors by targeting underserved market segments that provide us with the
best opportunity to obtain favorable policy terms, conditions and pricing.
We also face significant competition for financial advisory services on a number of factors, including price, perceived expertise,
quality of advice, range of services, innovation and local presence. Our financial advisory business competes directly with numerous
other financial advisory and investment banking firms, broker-dealers and banks, including large national and major regional firms
and smaller niche companies, some of whom are not broker-dealers and, therefore, are not subject to the broker-dealer regulatory
framework.
Employees
At December 31, 2013, we employed approximately 4,550 people, substantially all of which are full-time. None of our employees are
represented by any collective bargaining unit or a party to any collective bargaining agreement.
Government Supervision and Regulation
General
We are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection
of customers and clients of our financial advisory services, depositors, borrowers, the insurance funds of the FDIC and the Securities
Investment Protection Corporation (the “SIPC”) and the banking system as a whole, and not for the protection of our stockholders or
creditors. In many cases, the applicable regulatory authorities have broad enforcement power over bank holding companies, banks and
their subsidiaries, including the power to impose substantial fines and other penalties for violations of laws and regulations. The
following discussion describes the material elements of the regulatory framework that applies to us and our subsidiaries. References in
this Annual Report to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified
in their entirety by reference to such statutes and regulations.
Recent Regulatory Developments. New regulations and statutes are regularly proposed and/or adopted that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships of financial institutions operating and doing business in
the United States. Certain of these recent proposals and changes are described below.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act aims to restore responsibility and
accountability to the financial system by significantly altering the regulation of financial institutions and the financial services
industry. Most of the provisions contained in the Dodd-Frank Act have delayed effective dates. Full implementation of the Dodd-
Frank Act will require many new rules to be issued by federal regulatory agencies over the next several years, which will profoundly
affect how financial institutions will be regulated in the future. The ultimate effect of the Dodd-Frank Act and its implementing
regulations on the financial services industry in general, and on us in particular, is uncertain at this time.
14
The Dodd-Frank Act, among other things:
•
•
Established the Consumer Financial Protection Bureau (the “CFPB”), an independent organization within the Federal
Reserve which has the authority to promulgate consumer protection regulations applicable to all entities offering consumer
financial products or services, including banks and mortgage originators. The CFPB has broad rule-making authority for a
wide range of consumer protection laws, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.
The CFPB has exclusive examination authority and primary enforcement authority with respect to financial institutions with
total assets of more than $10.0 billion and their affiliates for purposes of federal consumer protection laws. After June 30,
2011, a financial institution becomes subject to the CFPB’s exclusive examination authority and primary enforcement
authority after it has reported total assets of greater than $10.0 billion in its quarterly call reports for four consecutive
quarters.
Established the Financial Stability Oversight Council, tasked with the authority to identify and monitor institutions and
systems which pose a systemic risk to the financial system, and to impose standards regarding capital, leverage, liquidity, risk
management, and other requirements for financial firms.
• Changed the base for FDIC insurance assessments.
•
•
Increased the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35% (the FDIC subsequently increased
it by regulation to 2.00%).
Permanently increased the deposit insurance coverage amount from $100,000 to $250,000.
• Directed the Federal Reserve to establish interchange fees for debit cards pursuant to a restrictive “reasonable and
proportional cost” per transaction standard.
•
Limits the ability of banking organizations to sponsor or invest in private equity and hedge funds and to engage in proprietary
trading in a provision known as the “Volcker Rule”.
• Grants the U.S. government authority to liquidate or take emergency measures with respect to troubled nonbank financial
companies that fall outside the existing resolution authority of the FDIC, including the establishment of an orderly liquidation
fund.
•
•
•
Increases regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least
5% of the risk of the asset-backed securities.
Increases regulation of consumer protections regarding mortgage originations, including banker compensation, minimum
repayment standards, and prepayment consideration.
Establishes new disclosure and other requirements relating to executive compensation and corporate governance.
On June 21, 2010, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the
FDIC jointly issued comprehensive final guidance on incentive compensation policies (the “Incentive Compensation Guidance”)
intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of
such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance sets expectations for banking
organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes.
The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon three primary principles: (i) balanced risk-taking incentives,
(ii) compatibility with effective controls and risk management, and (iii) strong corporate governance. Any deficiencies in
compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability
to make acquisitions or perform other actions. In addition, under the Incentive Compensation Guidance, a banking organization’s
federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety
and soundness of the organization.
On April 14, 2011, the Federal Reserve Board and various other federal agencies published a notice of proposed rulemaking
implementing provisions of the Dodd-Frank Act that would require reporting of incentive-based compensation arrangements by a
covered financial institution and prohibit incentive-based compensation arrangements at a covered financial institution that provide
excessive compensation or that could expose the institution to inappropriate risks that could lead to material financial loss. The Dodd-
15
Frank Act defines “covered financial institution” to include, among other entities, a depository institution or depository institution
holding company that has $1 billion or more in assets. There are enhanced requirements for institutions with more than $50 billion in
assets. The proposed rule states that it is consistent with the Incentive Compensation Guidance.
On January 10, 2013, the CFPB issued a final rule to implement the “qualified mortgage”, or “QM” provisions of the Dodd-Frank Act
requiring mortgage lenders to consider consumers’ ability to repay home loans before extending them credit. The final rule describes
certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular
underwriting models. Lenders will be presumed to have complied with the ability-to-repay rule if they issue “qualified mortgages”,
which are generally defined as mortgage loans prohibiting or limiting certain risky features. Loans that do not meet the ability-to-
repay standard can be challenged in court by borrowers who default and the absence of ability-to-repay status can be used against a
creditor in foreclosure proceedings. The CFPB’s QM rule took effect on January 10, 2014.
We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may
be affected by any new regulation or statute.
Hilltop
Hilltop is a legal entity separate and distinct from PlainsCapital and its other subsidiaries. On November 30, 2012, concurrent with the
consummation of the PlainsCapital Merger, Hilltop became a financial holding company registered under the Bank Holding Company
Act, as amended by the Gramm-Leach-Bliley Act. Accordingly, it is subject to supervision, regulation and examination by the Federal
Reserve Board. The Dodd-Frank Act, Gramm-Leach-Bliley Act, the Bank Holding Company Act and other federal laws subject
financial and bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of
supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
Changes of Control. Federal and state laws impose additional notice, approval and ongoing regulatory requirements on any investor
that seeks to acquire direct or indirect “control” of a regulated holding company, such as Hilltop. These laws include the Bank
Holding Company Act, the Change in Bank Control Act and the Texas Insurance Code. Among other things, these laws require
regulatory filings by an investor that seeks to acquire direct or indirect “control” of a regulated holding company. The determination
whether an investor “controls” a regulated holding company is based on all of the facts and circumstances surrounding the
investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or
controls 25% or more of any class of voting stock. Subject to rebuttal, an investor may be presumed to control the regulated holding
company if the investor owns or controls 10% or more of any class of voting stock. Accordingly, these laws would apply to a person
acquiring 10% or more of Hilltop’s common stock. Furthermore, these laws may discourage potential acquisition proposals and may
delay, deter or prevent change of control transactions, including those that some or all of our stockholders might consider to be
desirable.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that bank holding companies
should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention
is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies
should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its
banking subsidiaries. The Dodd-Frank Act requires the regulatory agencies to issue regulations requiring that all bank and savings and
loan holding companies serve as a source of financial and managerial strength to their subsidiary depository institutions by providing
capital, liquidity and other support in times of financial stress; however, no such proposals have yet been published.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking
subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board
policy, a holding company may not be inclined to provide it. As discussed herein, a bank holding company, in certain circumstances,
could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
Scope of Permissible Activities. Under the Bank Holding Company Act, Hilltop and PlainsCapital generally may not acquire a direct
or indirect interest in, or control of more than 5% of, the voting shares of any company that is not a bank or bank holding company.
Additionally, the Bank Holding Company Act may prohibit Hilltop from engaging in activities other than those of banking, managing
or controlling banks or furnishing services to, or performing services for, its subsidiaries, except that it may engage in, directly or
indirectly, certain activities that the Federal Reserve Board has determined to be closely related to banking or managing and
controlling banks as to be a proper incident thereto. In approving acquisitions or the addition of activities, the Federal Reserve Board
considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to
the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as
undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
16
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated the barriers to affiliations among
banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to become
financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are
financial in nature. The Gramm-Leach-Bliley Act defines “financial in nature” to include: securities underwriting; dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve Board has determined to be closely related to banking. Prior to enactment of the Dodd-Frank Act,
regulatory approval was not required for a financial holding company to acquire a company, other than a bank or savings association,
engaged in activities that were financial in nature or incidental to activities that were financial in nature, as determined by the Federal
Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company by filing a declaration with
the Federal Reserve Board if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation
Improvement Act prompt corrective action provisions, is “well managed”, and has at least a “satisfactory” rating under the
Community Reinvestment Act of 1977 (the “CRA”). The Dodd-Frank Act underscores the criteria for becoming a financial holding
company by amending the Bank Holding Company Act to require that bank holding companies be “well capitalized” and “well
managed” in order to become financial holding companies. Hilltop became a financial holding company on December 1, 2012.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices.
The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board
prior notice of any redemption or repurchase of its equity securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. In
addition, bank holding companies are required to consult with the Federal Reserve Board prior to making any redemption or
repurchase, even within the foregoing parameters. The Federal Reserve Board may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances,
the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that
represent unsafe and unsound banking practices or that constitute violations of laws or regulations, and can assess civil money
penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1.425 million for each day the activity continues. In addition, the Dodd-Frank Act
authorizes the Federal Reserve Board to require reports from and examine bank holding companies and their subsidiaries, and to
regulate functionally regulated subsidiaries of bank holding companies.
Anti-tying Restrictions. Subject to various exceptions, bank holding companies and their affiliates are generally prohibited from tying
the provision of certain services, such as extensions of credit, to certain other services offered by a bank holding company or its
affiliates.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the
capital adequacy of bank holding companies. Under the guidelines, a risk weight factor of 0% to 100% is assigned to each category of
assets based generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset
balances to determine a “risk-weighted” asset base. At least half of the risk-based capital must consist of core (Tier 1) capital, which is
comprised of:
•
•
common stockholders’ equity (includes common stock and any related surplus, undivided profits, disclosed capital reserves
that represent a segregation of undivided profits and foreign currency translation adjustments, excluding changes in other
comprehensive income (loss));
certain noncumulative perpetual preferred stock and related surplus; and
• minority interests in the equity capital accounts of consolidated subsidiaries (excludes goodwill and various intangible
assets).
The remainder, supplementary (Tier 2) capital, may consist of:
•
•
•
allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets;
certain perpetual preferred stock and related surplus;
hybrid capital instruments;
17
•
perpetual debt;
• mandatory convertible debt securities;
•
•
•
term subordinated debt;
intermediate term preferred stock; and
certain unrealized holding gains on equity securities.
Total capital is the sum of Tier 1 and Tier 2 capital. The guidelines require a minimum ratio of total capital to total risk-weighted
assets of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). At December 31, 2013, our ratio of Tier 1
capital to total risk-weighted assets was 18.53% and our ratio of total capital to total risk-weighted assets was 19.13%.
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the
capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated
assets. We are required to maintain a leverage ratio of 4.0%, and, at December 31, 2013, our leverage ratio was 12.81%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking
organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not
meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory
agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when
circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
The Dodd-Frank Act directs federal banking agencies to establish minimum leverage capital requirements and minimum risk-based
capital requirements for insured depository institutions, depository institution holding companies, and nonbank financial companies
supervised by the Federal Reserve Board. These minimum capital requirements may not be less than the “generally applicable
leverage and risk-based capital requirements” applicable to insured depository institutions, in effect applying the same leverage and
risk-based capital requirements that apply to insured depository institutions to most bank holding companies. The Dodd-Frank Act, for
the first time, embeds in the law a leverage capital requirement as opposed to leaving it to the regulators to use a risk-based capital
requirement. However, it is left to the discretion of the agencies to set the leverage ratio requirement through the rulemaking process.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to resolve
problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution
becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is
entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at
the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank
regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to
submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior
Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates.
Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control
of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting
shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider,
among other things, the financial and managerial resources and future prospects of the bank holding company and the banks
concerned, the convenience and needs of the communities to be served, and various competitive factors. In addition, the Dodd-Frank
Act requires the Federal Reserve Board to consider “the risk to the stability of the U.S. banking or financial system” when evaluating
acquisitions of banks and nonbanks under the Bank Holding Company Act. With respect to interstate acquisitions, the Dodd-Frank
Act amends the Bank Holding Company Act by raising the standard by which interstate bank acquisitions are permitted from a
standard that the acquiring bank holding company be “adequately capitalized” and “adequately managed”, to the higher standard of
being “well capitalized” and “well managed”.
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Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank
holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding
company with a class of securities registered under Section 12 of the Exchange Act, would, under the circumstances set forth in the
presumption, constitute acquisition of control of such company.
In addition, an entity is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before
acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of our outstanding common stock,
or otherwise obtaining control or a “controlling influence” over us.
Emergency Economic Stabilization Act of 2008 and the Small Business Jobs Act of 2010. The U.S. Congress, the U.S. Department of
the Treasury (“U.S. Treasury”) and the federal banking regulators took broad action beginning in early September 2008 to address
volatility in the U.S. banking system. The Emergency Economic Stabilization Act of 2008 authorized the U.S. Treasury to purchase
from financial institutions and their holding companies certain mortgage loans, mortgage-backed securities and certain other financial
instruments, including debt and equity securities issued by financial institutions and their holding companies in the Troubled Asset
Relief Program (“TARP”) Capital Purchase Program.
On December 19, 2008, PlainsCapital sold 87,631 shares of its Fixed Rate Cumulative Perpetual Stock, Series A and a warrant to
purchase, upon net exercise, 4,382 shares of its Fixed Rate Cumulative Perpetual Stock, Series B to the U.S. Treasury for $87.6
million pursuant to the TARP Capital Purchase Program. The U.S. Treasury immediately exercised its warrant on December 19, 2008,
and PlainsCapital issued the underlying shares of its Series B Preferred Stock to the U.S. Treasury. On September 27, 2011,
PlainsCapital entered into a Securities Purchase Agreement with the Secretary of the Treasury (the “Purchase Agreement”) pursuant to
which PlainsCapital issued 114,068 shares of its newly designated Non-Cumulative Perpetual Preferred Stock, Series C for a total
purchase price of $114,068,000. The proceeds from the sale of PlainsCapital’s Series C Preferred Stock were used to redeem and
repurchase PlainsCapital’s Series A and Series B Preferred Stock. PlainsCapital’s Series C Preferred Stock was issued pursuant to the
Small Business Lending Fund program, a $30 billion fund established under the Small Business Jobs Act of 2010 that was created to
encourage lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. In
connection with the PlainsCapital Merger, Hilltop assumed PlainsCapital’s obligations under the Purchase Agreement and redeemed
PlainsCapital’s outstanding Series C Preferred Stock in exchange for the Non-Cumulative Perpetual Preferred Stock, Series B of
Hilltop (the “Hilltop Series B Preferred Stock”).
On November 29, 2012, Hilltop filed with the State Department of Assessments and Taxation of the State of Maryland articles
supplementary for the Hilltop Series B Preferred Stock, setting forth its terms. Holders of the Hilltop Series B Preferred Stock are
entitled to noncumulative cash dividends at a fluctuating dividend rate based on the Bank’s level of qualified small business lending
(“QSBL”). The Hilltop Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to Hilltop’s common
stock with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.
The terms of the Hilltop Series B Preferred Stock restrict Hilltop’s ability to pay dividends on, make distributions with respect to, or
redeem, purchase or acquire, or make a liquidation payment on its common stock and other Hilltop capital stock ranking junior to the
Hilltop Series B Preferred Stock, and on other preferred stock and other stock ranking on a parity with the Hilltop Series B Preferred
Stock, in the event that Hilltop does not declare dividends on the Hilltop Series B Preferred Stock during any dividend period.
The Hilltop Series B Preferred Stock qualifies as Tier 1 capital and is entitled to receive non-cumulative dividends, payable quarterly,
on each January 1, April 1, July 1 and October 1. Until December 31, 2013, the dividend rate, as a percentage of the liquidation
amount, fluctuated based upon changes in the level of QSBL by the Bank. From January 1, 2014 until March 26, 2016, the dividend
rate is fixed at 5.0% based upon the Bank’s level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on
any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.
Except as noted in the next sentence, the Hilltop Series B Preferred Stock may be redeemed at any time at the Company’s option, at a
redemption price of 100 percent of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current
period, subject to approval of the Federal Reserve Board. In the agreement and plan of merger with PlainsCapital Corporation, the
Company agreed not to redeem or otherwise acquire the Hilltop Series B Preferred Stock prior to the second anniversary of the closing
date of the PlainsCapital Merger, or November 30, 2014. For more information, see “Risk Factors — The Treasury’s investment in us
imposes restrictions and obligations upon us that could adversely affect the rights of our common stockholders.”
Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of
the U.S. government and its agencies. The monetary policies of the Federal Reserve Board have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in
19
order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the
levels of bank loans, investments and deposits through its influence over the issuance of U.S. government securities, its regulation of
the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We
cannot predict the nature or impact of future changes in monetary and fiscal policies.
PlainsCapital Bank
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation, supervision and
regular examination by the Texas Department of Banking. The Bank, as a state member bank, is also subject to regulation and
examination by the Federal Reserve Board. As a bank with less than $10 billion in assets, the Bank became subject to the regulations
issued by the CFPB on July 21, 2011, although the Federal Reserve Board continued to examine the Bank for compliance with federal
consumer protection laws. As of December 31, 2013, the Bank’s total assets were $8.0 billion. If the Bank’s total assets were to
increase, either organically or through an acquisition, merger or combination, to over $10.0 billion (as measured on four consecutive
quarterly call reports of the Bank and any institutions it acquires), the Bank would become subject to the CFPB’s supervisory and
enforcement authority with respect to federal consumer financial laws beginning in the following quarter. The Bank is also an insured
depository institution and, therefore, subject to regulation by the FDIC, although the Federal Reserve Board is the Bank’s primary
federal regulator. The Federal Reserve Board, the Texas Department of Banking, the CFPB and the FDIC have the power to enforce
compliance with applicable banking statutes and regulations. Such requirements and restrictions include requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon
and restrictions relating to investments and other activities of the Bank. In July 2010, the FDIC voted to revise its Memorandum of
Understanding with the primary federal regulators to enhance the FDIC’s existing backup authorities over insured depository
institutions that the FDIC does not directly supervise. As a result, the Bank may be subject to increased supervision by the FDIC.
Restrictions on Transactions with Affiliates. Transactions between the Bank and its nonbanking affiliates, including Hilltop and
PlainsCapital, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such
transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third
parties that are collateralized by the securities or obligations of Hilltop or its subsidiaries. Among other changes, the Dodd-Frank Act
expands the definition of “covered transactions” and clarifies the amount of time that the collateral requirements must be satisfied for
covered transactions, and amends the definition of “affiliate” in Section 23A to include “any investment fund with respect to which a
member bank or an affiliate thereof is an investment advisor.”
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain transactions
between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the
time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also issued Regulation W,
which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to
affiliate transactions.
Loans to Insiders. The restrictions on loans to directors, executive officers, principal stockholders and their related interests
(collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured institutions
and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These
loans cannot exceed the institution’s total unimpaired capital and surplus, and the Federal Reserve Board may determine that a lesser
amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
The Dodd-Frank Act amends the statutes placing limitations on loans to insiders by including credit exposures to the person arising
from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities
borrowing transaction between the member bank and the person within the definition of an extension of credit.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have provided a substantial part of
PlainsCapital’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to PlainsCapital will
continue to be PlainsCapital’s and Hilltop’s principal source of operating funds. Capital adequacy requirements serve to limit the
amount of dividends that may be paid by the Bank. Pursuant to the Texas Finance Code, a Texas banking association may not pay a
dividend that would reduce its outstanding capital and surplus unless it obtains the prior approval of the Texas Banking
Commissioner. Additionally, the FDIC and the Federal Reserve Board have the authority to prohibit Texas state banks from paying a
dividend when they determine the dividend would be an unsafe or unsound banking practice. As a member of the Federal Reserve
System, the Bank must also comply with the dividend restrictions with which a national bank would be required to comply. Those
provisions are generally similar to those imposed by the state of Texas. Among other things, the federal restrictions require that if
losses have at any time been sustained by a bank equal to or exceeding its undivided profits then on hand, no dividend may be paid.
20
In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or
subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its
stockholders, including any depository institution holding company (such as PlainsCapital and Hilltop) or any stockholder or creditor
thereof.
Branching. The establishment of a branch must be approved by the Texas Department of Banking and the Federal Reserve Board,
which consider a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs
of the community and consistency with corporate powers. The regulators will also consider the applicant’s CRA record.
Interstate Branching. Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-
Neal Act”) amended the Federal Deposit Insurance Act and certain other statutes to permit state and national banks with different
home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a
participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act
amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches
at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches
under applicable federal or state law. If a state opted out of interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through an acquisition or de novo. Under the Dodd-Frank Act,
de novo interstate branching by national banks is permitted if, under the laws of the state where the branch is to be located, a state
bank chartered in that state would have been permitted to establish a branch.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt
corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators
have established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized”) in which all institutions are placed. Federal banking regulators are required to take
various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally,
subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized” is required to
submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s
obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it
became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new
line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures
for downgrading an institution to a lower capital category based on supervisory factors other than capital.
FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to
one of three capital categories: (1) “well capitalized;” (2) “adequately capitalized;” or (3) “undercapitalized.” These three categories
are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including
institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the
institution’s primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the
institution’s financial condition and the risk posed to the deposit insurance funds. The FDIC may terminate its insurance of deposits if
it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
In 2009, the FDIC adopted a final rule requiring a special assessment on insured institutions as part of its effort to rebuild the FDIC
deposit insurance fund (“DIF”). The FDIC administers the DIF, and all insured depository institutions are required to pay assessments
to the FDIC that fund the DIF. The Dodd-Frank Act broadens the base for FDIC insurance assessments. Assessments will now be
based on the average consolidated total assets less tangible equity capital of a financial institution during the assessment period. On
February 7, 2011, the FDIC issued a final rule implementing revisions to the assessment system mandated by the Dodd-Frank Act.
The new regulation was effective April 1, 2011 and was reflected in the June 30, 2011 FDIC DIF balance and the invoices for
assessments due September 30, 2011. Accruals for DIF assessments were $1.0 million for the year ended December 31, 2013.
21
The FDIC is required to maintain a designated reserve ratio of the DIF to insured deposits in the United States. The Dodd-Frank Act
requires the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September 30, 2020.
Pursuant to its authority in the Dodd-Frank Act, the FDIC on December 20, 2010, published a final rule establishing a higher long-
term target DIF ratio of greater than 2%. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted
by the overall economy and the stability of the banking industry as a whole. The FDIC will notify the Bank concerning an assessment
rate that we will be charged for the assessment period. As a result of the new regulations, we expect to incur higher annual deposit
insurance assessments, which could have a significant adverse impact on our financial condition and results of operations.
The Dodd-Frank Act permanently increased the standard maximum deposit insurance amount from $100,000 to $250,000. The FDIC
insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.
The Dodd-Frank Act instituted, for all insured depository institutions, unlimited deposit insurance on noninterest-bearing transaction
accounts for the period from December 31, 2010 through December 31, 2012 for all depositors, including consumers, businesses and
government entities. This unlimited insurance coverage, which expired on December 31, 2012, was separate from, and in addition to,
the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution up to the permissible limit
of $250,000.
Community Reinvestment Act. The CRA requires, in connection with examinations of financial institutions, that federal banking
regulators (in the Bank’s case, the Federal Reserve Board) evaluate the record of each financial institution in meeting the credit needs
of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the terms of various CRA-related agreements.
During the second quarter of 2013, the Bank received a “satisfactory” CRA rating in connection with its most recent CRA
performance evaluation. A CRA rating of less than “satisfactory” adversely affects a bank’s ability to establish new branches and
impairs a bank’s ability to commence new activities that are “financial in nature” or acquire companies engaged in these activities. See
“Risk factors — We are subject to extensive supervision and regulation that could restrict our activities and impose financial
requirements or limitations on the conduct of our business and limit our ability to generate income.”
Privacy. Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and protecting
confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial
information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the
consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally,
financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing,
direct mail marketing or other marketing to consumers. The Bank and all of its subsidiaries have established policies and procedures
to comply with the privacy provisions of the Gramm-Leach-Bliley Act.
Federal Laws Applicable to Credit Transactions. The loan operations of the Bank are also subject to federal laws applicable to credit
transactions, such as the:
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
•
•
•
•
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies and
preventing identity theft;
Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
Service Members Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the
repayment terms of, and property rights underlying, secured obligations of persons in military service;
22
•
•
The Dodd-Frank Act, which establishes the CFPB, an independent entity within the Federal Reserve, dedicated to
promulgating and enforcing consumer protection laws applicable to all entities offering consumer financial services or
products; and
The rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest
rates.
Federal Laws Applicable to Deposit Operations. The deposit operations of the Bank are subject to:
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
•
•
Truth in Savings Act, which requires the Bank to disclose the terms and conditions on which interest is paid and fees are
assessed in connection with deposit accounts; and
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board and the CFPB to implement that act,
which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from
the use of ATMs and other electronic banking services. The Dodd-Frank Act amends the Electronic Funds Transfer Act to,
among other things, give the Federal Reserve Board the authority to establish rules regarding interchange fees charged for
electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory
requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
Capital Requirements. The Federal Reserve Board and the Texas Department of Banking monitor the capital adequacy of the Bank by
using a combination of risk-based guidelines and leverage ratios. The agencies consider the Bank’s capital levels when taking action
on various types of applications and when conducting supervisory activities related to the safety and soundness of individual banks
and the banking system.
Under the regulatory capital guidelines (without giving effect to Basel III discussed below), the Bank must maintain a total risk-based
capital to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to risk-weighted assets ratio of at least 4.0%, and a Tier 1 capital
to average total assets ratio of at least 4.0% (3.0% for banks receiving the highest examination rating) to be considered “adequately
capitalized.” See the discussion herein under “The FDIC Improvement Act.” At December 31, 2013, the Bank’s ratio of total risk-
based capital to risk-weighted assets was 14.00%, the Bank’s ratio of Tier 1 capital to risk-weighted assets was 13.38% and the Bank’s
ratio of Tier 1 capital to average total assets was 9.29%.
BASEL III. In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) released revised final
frameworks for the regulation of capital and liquidity of internationally active banking organizations. These new frameworks are
generally referred to as “Basel III.” On July 2, 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency
released three final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank.
These final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Hilltop,
PlainsCapital and the Bank will begin transitioning to the new final rules on January 1, 2015 when new minimum capital
requirements, as set forth in the table below, are effective. However, the new capital conservation buffer and certain deductions from
common equity Tier 1 capital phase in over a time period from 2015 through 2019.
The following table summarizes the Basel III transition schedule for new ratios and capital definitions beginning January 1, 2015.
Year (as of January 1)
Minimum common equity Tier 1
capital ratio ............................
Common equity Tier 1 capital
conservation buffer ................
Minimum common equity Tier 1
capital ratio plus capital
conservation buffer ................
Phase-in of most deductions from
common equity Tier 1
(including 10 percent & 15
percent common equity Tier 1
2015
2016
2017
2018
2019
4.5%
4.5%
4.5%
4.5%
N/A
0.625%
1.25%
1.875%
4.5%
2.5%
4.5%
5.125%
5.75%
6.375%
7.0%
40.0%
60.0%
80.0%
100.0%
100.0%
23
Year (as of January 1)
2015
2016
2017
2018
2019
threshold deduction items that
are over the limits)(1) ............
Minimum Tier 1 capital ratio .....
Minimum Tier 1 capital ratio plus
capital conservation buffer ....
Minimum total capital ratio .......
Minimum total capital ratio plus
conservation buffer ................
* N/A means not applicable.
6.0%
N/A
8.0%
N/A
6.0%
6.625%
8.0%
8.625%
6.0%
7.25%
8.0%
9.25%
6.0%
7.875%
8.0%
6.0%
8.5%
8.0%
9.875%
10.5%
(1) Deductions from common equity Tier 1 capital include goodwill and other intangibles, deferred tax assets that arise from
net operating loss and tax credit carryforwards (above certain levels), gains-on-sale in connection with a securitization,
any defined benefit pension fund net asset (for banking organizations that are not insured depository institutions),
investments in a banking organization’s own capital instruments, mortgage servicing assets (above certain levels) and
investments in the capital of unconsolidated financial institutions (above certain levels).
The new final Basel III rules take important steps toward improving the quality and increasing the quantity of capital for all banking
organizations as well as setting higher standards for large, internationally active banking organizations. The regulatory agencies
believe that the new rules will result in capital requirements that better reflect banking organizations’ risk profiles, thereby improving
the overall resilience of the banking system. The regulatory agencies carefully considered the potential impacts on all banking
organizations, including community banking organizations such as Hilltop and the Bank, and sought to minimize the potential burden
of these changes where consistent with applicable law and the agencies’ goals of establishing a robust and comprehensive capital
framework.
The new final Basel III rules treatment of one- to four-family residential mortgage exposures remains the same as under current
general risk-based capital rules. This includes a 50 percent risk weight for prudently underwritten first lien mortgage loans that are not
past due, reported as nonaccrual, or restructured, and a 100 percent risk weight for all other residential mortgages. Also in the new
rules, non-advanced approaches banking organizations, such as Hilltop and the Bank, are given a one-time option to filter certain
Accumulated Other Comprehensive Income (“AOCI”) components, comparable to the treatment under the current general risk-based
capital rule. The AOCI opt-out election must be made on the institution’s first regulatory filing after January 1, 2015.
The new final Basel III rules also make certain major changes from the current general risk-based capital rules, including, but not
limited to the following:
•
Implementing higher minimum capital requirements, including a new common equity Tier 1 capital requirement, and
establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1
capital or Tier 2 capital. The new minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital
ratio of 4.5 percent and a Tier 1 capital ratio of 6.0 percent (an increase from 4.0 percent), and a total capital ratio that
remains at 8.0 percent. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0 percent. The new rules maintain the
general structure of the current prompt corrective action framework (described below) while incorporating these increased
minimum requirements starting January 1, 2015.
• Changing the definition of capital by incorporating stricter eligibility criteria for regulatory capital instruments that would
disallow the including of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on
the inclusion of minority interests, mortgage-servicing rights, deferred tax assets, and other certain investments in the capital
of unconsolidated financial institutions. In addition, the new rules require that most regulatory capital deductions be made
from common equity Tier 1 capital.
•
The Dodd-Frank Act prohibits references to, and reliance on, external credit ratings in the banking regulations and directs the
agencies to use alternative standards of creditworthiness. The new rules replace the ratings-based approach with a simplified
supervisory formula approach in order to determine the appropriate risk-weights of securitization exposures. Alternatively,
banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or
choose to assign such exposures a 1,250 percent risk weight.
• Mortgage servicing assets and deferred tax assets are subject to stricter individual and aggregate limitations as a percentage
of common equity Tier 1 capital than those applicable under the current general risk-based capital rules.
24
•
•
Increasing the risk-weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes
selected other changes in risk-weights and credit conversion factors.
In order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments
to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1
capital 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. Phase-in of the capital conservation buffer requirements will begin on January 1, 2016.
The following table summarizes how much a banking organization can pay out in the form of distributions or discretionary bonus
payments in a quarter based on its capital conservation buffer. A banking organization with a buffer greater than 2.5 percent would not
be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less
than 2.5 percent would be subject to increasingly stringent limitations as the buffer approaches zero.
Capital Conservation Buffer
(as a percentage of risk-weighted assets)
Greater than 2.5 percent ..........................................
Less than or equal to 2.5 percent and greater
than 1.875 percent ...................................................
Less than or equal to 1.875 percent and greater
than 1.25 percent .....................................................
Less than or equal to 1.25 percent and greater
than 0.625 percent ...................................................
Less than or equal to 0.625 percent .........................
Maximum Payout
(as a percentage of eligible retained income)
No payout limitation applies
60 percent
40 percent
20 percent
0 percent
The new rules also prohibit a banking organization from making distributions or discretionary bonus payments during any quarter if
its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the
beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar
quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and
associated tax effects not already reflected in net income. When the new rules are fully phased-in in 2019, the minimum capital
requirements plus the capital conservation buffer will exceed the prompt corrective action well-capitalized thresholds.
On January 6, 2013, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, met and
unanimously endorsed a four year delay in the Basel Committee’s rules establishing a liquidity coverage ratio (“LCR”).
Under the revised liquidity requirements, large, internationally active banks would be required to meet 60 percent of the LCR
obligations by 2015, and the full rule would be phased in annually through 2019. The proposal would also apply a less stringent,
modified LCR to bank holding companies and savings and loan holding companies that are not internally active but have more than
$50 billion in total assets. The proposal would not apply to bank holding companies with less than $50 billion in total assets. We
continue to monitor developments related to Basel III.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, includes various provisions that
affect or may affect the Bank. Among other matters, FIRREA generally permits bank holding companies to acquire healthy thrifts as
well as failed or failing thrifts. FIRREA removed certain cross marketing prohibitions previously applicable to thrift and bank
subsidiaries of a common holding company. Furthermore, a multi-bank holding company may now be required to indemnify the DIF
against losses it incurs with respect to such company’s affiliated banks, which in effect makes a bank holding company’s equity
investments in healthy bank subsidiaries available to the FDIC to assist such company’s failing or failed bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has been chartered less than two years, is not in compliance with the
minimum capital requirements of its primary federal banking regulator, or is otherwise in a troubled condition must notify its primary
federal banking regulator of the proposed addition of any person to its board of directors or the employment of any person as a senior
executive officer of the institution at least 30 days before such addition or employment becomes effective. During such 30 day period,
the applicable federal banking regulatory agency may disapprove of the addition of or employment of such director or officer. The
Bank is not subject to any such requirements. FIRREA also expanded and increased civil and criminal penalties available for use by
the appropriate regulatory agency against certain “institution affiliated parties” primarily including: (i) management, employees and
agents of a financial institution; (ii) independent contractors such as attorneys and accountants and others who participate in the
conduct of the financial institution’s affairs and who caused or are likely to cause more than minimum financial loss to or a significant
adverse effect on the institution, who knowingly or recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe
25
or unsound practices. Such practices can include the failure of an institution to timely file required reports or the submission of
inaccurate reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue cease and desist orders that may, among
other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets
or take other action as determined by the ordering agency to be appropriate.
The FDIC Improvement Act. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, made a number of
reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository
institutions, and improvement of accounting standards. This statute also limited deposit insurance coverage, implemented changes in
consumer protection laws and provided for least-cost resolution and prompt regulatory action with regard to troubled institutions.
FDICIA requires every bank with total assets in excess of $500 million to have an annual independent audit made of the bank’s
financial statements by a certified public accountant to verify that the financial statements of the bank are presented in accordance
with GAAP and comply with such other disclosure requirements as prescribed by the FDIC.
FDICIA also places certain restrictions on activities of banks depending on their level of capital. FDICIA divides banks into five
different categories, depending on their level of capital. Under regulations adopted by the FDIC:
•
•
•
•
•
a bank is deemed to be “well capitalized” if it has a total Risk-Based Capital Ratio of 10.0% or more, a Tier 1 Capital Ratio
of 6.0% or more, a Leverage Ratio of 5.0% or more, and the bank is not subject to an order or capital directive to meet and
maintain a certain capital level;
a bank is deemed to be “adequately capitalized” if it has a total Risk-Based Capital Ratio of 8.0% or more, a Tier 1 Capital
Ratio of 4.0% or more and a Leverage Ratio of 4.0% or more (unless it receives the highest composite rating at its most
recent examination and is not experiencing or anticipating significant growth, in which instance it must maintain a Leverage
Ratio of 3.0% or more);
a bank is deemed to be “undercapitalized” if it has a total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio
of less than 4.0% or a Leverage Ratio of less than 4.0%;
a bank is deemed to be “significantly undercapitalized” if it has a Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Capital
Ratio of less than 3.0% and a Leverage Ratio of less than 3.0%; and
a bank is deemed to be “critically undercapitalized” if it has a Leverage Ratio of less than or equal to 2.0%.
In addition, the FDIC has the ability to downgrade a bank’s classification (but not to “critically undercapitalized”) based on other
considerations even if the bank meets the capital guidelines. According to these guidelines, the Bank was classified as “well
capitalized” at December 31, 2013.
In addition, if a bank is classified as “undercapitalized,” the bank is required to submit a capital restoration plan to the federal banking
regulators. Pursuant to FDICIA, an “undercapitalized” bank is prohibited from increasing its assets, engaging in a new line of
business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except
under certain circumstances, including the acceptance by the federal banking regulators of a capital restoration plan for the bank.
Furthermore, if a bank is classified as “undercapitalized,” the federal banking regulators may take certain actions to correct the capital
position of the bank; if a bank is classified as “significantly undercapitalized” or “critically undercapitalized,” the federal banking
regulators would be required to take one or more prompt corrective actions. These actions would include, among other things,
requiring: sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on
transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank
is classified as “critically undercapitalized,” FDICIA requires the bank to be placed into conservatorship or receivership within 90
days, unless the federal banking regulators determines that other action would better achieve the purposes of FDICIA regarding
prompt corrective action with respect to undercapitalized banks.
The capital classification of a bank affects the frequency of examinations of the bank and impacts the ability of the bank to engage in
certain activities and affects the deposit insurance premiums paid by such bank. Under FDICIA, the federal banking regulators are
required to conduct a full-scope, on-site examination of every bank at least once every 12 months. An exception to this rule is made,
however, that provides that banks (i) with assets of less than $100 million, (ii) that are categorized as “well capitalized,” (iii) that were
found to be well managed and composite rating was outstanding and (iv) have not been subject to a change in control during the last
12 months, need only be examined once every 18 months.
26
Brokered Deposits. Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital
classification. “Well capitalized” banks are permitted to accept brokered deposits, but banks that are not “well capitalized” are not
permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are “adequately capitalized” to accept
brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice
with respect to the bank. At December 31, 2013, the Bank was “well capitalized” and therefore not subject to any limitations with
respect to its brokered deposits. Brokered deposits are the subject of a study under the Dodd-Frank Act.
Federal limitations on activities and investments. The equity investments and activities, as a principle of FDIC-insured state-chartered
banks, are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is
not permissible for a national bank.
Check Clearing for the 21st Century Act. The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital
image of a check and copies made from that image, the same legal standing as the original paper check.
Federal Home Loan Bank System. The Federal Home Loan Bank, or FHLB, system, of which the Bank is a member, consists of 12
regional FHLBs governed and regulated by the Federal Housing Finance Board. The FHLBs serve as reserve or credit facilities for
member institutions within their assigned regions. The reserves are funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system. The FHLBs make loans (i.e., advances) to members in accordance with policies and
procedures established by the FHLB and the boards of directors of each regional FHLB.
As a system member, according to currently existing policies and procedures, the Bank is entitled to borrow from the FHLB of its
respective region and is required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock
ownership rules with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations.
All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the respective mortgage
loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.
Anti-terrorism and Money Laundering Legislation. The Bank is subject to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism of 2001 (the “USA PATRIOT Act”), the Bank Secrecy Act and
rules and regulations of the Office of Foreign Assets Control. These statutes and related rules and regulations impose requirements and
limitations on specific financial transactions and account relationships intended to guard against money laundering and terrorism
financing. The Bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and the
Bank Secrecy Act, and otherwise has implemented policies and procedures intended to comply with the foregoing rules.
PrimeLending
PrimeLending and the Bank are subject to the rules and regulations of the CFPB, FHA, VA, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation and Government National Mortgage Association with respect to
originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and
regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for
inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA
loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act, Secure and Fair Enforcement of Mortgage Licensing Act, Home Mortgage Disclosure Act, Fair Credit
Reporting Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things,
prohibit discrimination and require the disclosure of certain basic information to borrowers concerning credit terms and settlement
costs. PrimeLending and the Bank are also subject to regulation by the Texas Department of Banking with respect to, among other
things, the establishment of maximum origination fees on certain types of mortgage loan products. PrimeLending and the Bank are
also subject to the provisions of the Dodd-Frank Act. Among other things, the Dodd-Frank Act established the CFPB and provides
mortgage reform provisions regarding a customer’s ability to repay, restrictions on variable-rate lending, loan officers’ compensation,
risk retention, and new disclosure requirements. The Dodd-Frank Act also clarifies that applicable state laws, rules and regulations
related to the origination, processing, selling and servicing of mortgage loans continue to apply to PrimeLending. The additional
regulatory requirements affecting our mortgage origination operations will result in increased compliance costs and may impact
revenue.
27
On August 16, 2010, the Federal Reserve Board published a final rule on loan broker compensation, pursuant to the Dodd-Frank Act,
which prohibits certain compensation payments to loan brokers and the practice of steering consumers to loans not in their interest
when it will result in greater compensation for a loan broker. This final rule became effective on April 1, 2011, however, the Federal
Reserve Board noted in the final rule that the CFPB may clarify the rule in the future pursuant to the CFPB’s authority granted under
the Dodd-Frank Act. The CFPB’s final rule addressing mortgage loan originator compensation is discussed in more detail below.
In addition, the Dodd-Frank Act directed the Federal Reserve Board to promulgate regulations requiring lenders and securitizers to
retain an economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer
issues if the loans have not complied with the ability to repay standards spelled out in the Dodd-Frank Act and its implementing
regulations. The risk retention requirement has not become effective to date but is expected to be 5%, subject to increase or decrease
by regulation. Final regulations have not yet been issued.
On March 2, 2011, the Federal Reserve Board published a final rule implementing a provision in the Dodd-Frank Act that provides a
separate, higher rate threshold for determining when the escrow requirements apply to higher-priced mortgage loans that exceed the
maximum principal obligation eligible for purchase by Freddie Mac.
In January 2013, the CFPB published final rules that will impact mortgage origination and servicing. Had these final rules not been
published, many of the statutory requirements in Title XIV of the Dodd-Frank Act would have become effective on January 21, 2013
without any implementing regulations. Unless noted below, these final rules became effective in January 2014.
The final rules concerning mortgage origination and servicing address the following topics:
Ability to Repay. This final rule implements the Dodd-Frank Act provisions requiring that for residential mortgages, creditors must
make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable
ability to repay the loan according to its terms. The final rule also establishes a presumption of compliance with the ability to repay
determination for a certain category of mortgages called “qualified mortgages” meeting a series of detailed requirements. The final
rule also provides a rebuttable presumption for higher-priced mortgage loans.
High-Cost Mortgage. This final rule strengthens consumer protections for high-cost mortgages (generally bans balloon payments and
prepayment penalties, subject to exceptions and bans or limits certain fees and practices) and requires consumers to receive
information about homeownership counseling prior to taking out a high-cost mortgage.
Appraisals for High-Risk Mortgages. The final rule permits a creditor to extend a higher-priced (subprime) mortgage loan (“HPML)
only if the following conditions are met (subject to exceptions): (i) the creditor obtains a written appraisal; (ii) the appraisal is
performed by a certified or licensed appraiser; and (iii) the appraiser conducts a physical property visit of the interior of the property.
The rule also requires that during the application process, the applicant receives a notice regarding the appraisal process and their right
to receive a free copy of the appraisal.
Copies of Appraisals. This final rule amends Regulation B that implements the Equal Credit Opportunity Act. It requires a creditor to
provide a free copy of appraisal or valuation reports prepared in connection with any closed-end loan secured by a first lien on a
dwelling. The final rule requires notice to applicants of the right to receive copies of any appraisal or valuation reports and creditors
must send copies of the reports whether or not the loan transaction is consummated. Creditors must provide the copies of the appraisal
or evaluation reports for free, however, the creditors may charge reasonable fees for the cost of the appraisal or valuation unless
applicable law provides otherwise.
Escrow Requirements. This final rule implements Dodd-Frank Act changes that generally extend the required duration of an escrow
account on certain higher-priced mortgage loans from a minimum of one year to a minimum of five years, subject to certain
exemptions for loans made by certain creditors that operate predominantly in rural or underserved areas, as long as certain other
criteria are met. This final rule became effective on June 1, 2013.
Servicing. Two final rules were published to implement laws to protect consumers from detrimental actions by mortgage servicers
and to provide consumers with better tools and information when dealing with mortgage servicers. One final rule amends Regulation
Z, which implements the Truth in Lending Act, and a second final rule amends Regulation X, which implements the Real Estate
Settlement Procedures Act. The rules cover nine major topics implementing the Dodd-Frank Act provisions related to mortgage
servicing. The final rules include a number of exemptions and other adjustments for small servicers, defined as servicers that service
5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own.
28
Mortgage Loan Originator Compensation. This final rule implements Dodd-Frank Act requirements, as well as revises and clarifies
existing regulations and commentary on loan originator compensation. The rule also prohibits, among other things: (i) certain
arbitration agreements; (ii) financing certain credit insurance in connection with a mortgage loan; (iii) compensation based on a term
of a transaction or a proxy for a term of a transaction; and (iv) dual compensation from a consumer and another person in connection
with the transaction. The final rule also imposes a duty on individual loan officers, mortgage brokers and creditors to be “qualified”
and, when applicable, registered or licensed to the extent required under applicable State and Federal law.
Additional rules and regulations are expected including risk retention rules which would require lenders and securitizers to retain an
economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the
loans have not complied with the ability to repay standards spelled out in the Dodd-Frank Act and its implementing regulations. The
risk retention requirement has not become effective to date but is expected to be 5%, subject to increase or decrease by regulation.
Any additional regulatory requirements affecting PrimeLending mortgage origination operations will result in increased compliance
costs and may impact revenue.
NLC
NLC’s insurance subsidiaries, NLIC and ASIC, are subject to regulation and supervision in each state where they are licensed to do
business. This regulation and supervision is vested in state agencies having broad administrative power over the various aspects of the
business of NLIC and ASIC.
State insurance holding company regulation. NLC controls two operating insurance companies, NLIC and ASIC, and is subject to the
insurance holding company laws of Texas, the state in which those insurance companies are domiciled. These laws generally require
NLC to register with the Texas Department of Insurance and periodically to furnish financial and other information about the
operations of companies within its holding company structure. Generally under these laws, all transactions between an insurer and an
affiliated company in its holding company structure, including sales, loans, reinsurance agreements and service agreements, must be
fair and reasonable and, if satisfying a specified threshold amount or of a specified category, require prior notice and approval or non-
objection by the Texas Department of Insurance.
National Association of Insurance Commissioners. The National Association of Insurance Commissioners, or NAIC, is a group
consisting of state insurance commissioners that discuss issues and formulate policy with respect to regulation, reporting and
accounting for insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject
to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is
influential in determining the form in which such laws are enacted. Certain Model Insurance Laws, Regulations and Guidelines, or
Model Laws, have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are
measured. Adoption of state laws that provide for substantially similar regulations to those described in the Model Laws is a
requirement for accreditation by the NAIC.
The NAIC provides authoritative guidance to insurance regulators on current statutory accounting issues by promulgating and
updating a codified set of statutory accounting practices in its Accounting Practices and Procedures Manual. The Texas Department of
Insurance has generally adopted these codified statutory accounting practices.
Texas also has adopted laws substantially similar to the NAIC’s risk based capital, or RBC laws, which require insurers to maintain
minimum levels of capital based on their investments and operations. Domestic property and casualty insurers are required to report
their RBC based on a formula that attempts to measure statutory capital and surplus needs based on the risks in the insurer’s mix of
products and investment portfolio. The formula is designed to allow the Texas Department of Insurance to identify potential
inadequately capitalized companies. Under the formula, a company determines its RBC by taking into account certain risks related to
its assets (including risks related to its investment portfolio and ceded reinsurance) and its liabilities (including underwriting risks
related to the nature and experience of its insurance business). Among other requirements, an insurance company must maintain
capital and surplus of at least 200% of the RBC computed by the NAIC’s RBC model (known as the “Authorized Control Level” of
RBC). At December 31, 2013, NLIC and ASIC capital and surplus levels exceeded the minimum RBC requirements that would
trigger regulatory attention. In their 2013 statutory financial statements, both NLIC and ASIC complied with the NAIC’s RBC
reporting requirements.
The NAIC’s Insurance Regulatory Information System, or IRIS, was developed to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance companies. IRIS identifies twelve industry ratios and specifies a
range of “usual values” for each ratio. Departure from the usual values on four or more of these ratios can lead to inquiries from state
insurance commissioners as to certain aspects of an insurer’s business. For 2013, all ratios for both NLIC and ASIC were within the
usual values with two exceptions. Both companies fell below the indicated minimum investment yield range of 3%, with NLIC at
2.0% and ASIC at 1.4%, due to the concentration in cash at each company. We expect improvement in the yields at both companies as
appropriate investment opportunities are identified. Additionally, NLIC’s two-year operating ratio was calculated at 100%, which
equals the threshold of 100%, primarily due to the significant weather events experienced over the past two year period.
29
The NAIC adopted an amendment to its “Model Audit Rule” in response to the passage of the Sarbanes-Oxley Act of 2002, or
SOX. The amendment is effective for financial statements for accounting periods after January 1, 2010. This amendment addresses
auditor independence, corporate governance and, most notably, the application of certain provisions of Section 404 of SOX regarding
internal control reporting. The rules relating to internal controls apply to insurers with gross direct and assumed written premiums of
$500 million or more, measured at the legal entity level (rather than at the insurance holding company level), and to insurers that the
domiciliary commissioner selects from among those identified as in hazardous condition, but exempts SOX compliant entities. Neither
NLIC nor ASIC currently has direct and assumed written premiums of at least $500 million, but it is conceivable that this may change
in the future; however, NLC must be SOX compliant because it is wholly owned by Hilltop, a public company subject to SOX
compliance.
Legislative changes. From time to time, various regulatory and legislative changes have been, or are, proposed that would adversely
affect the insurance industry. Among the proposals that have been, or are being, considered are the possible introduction of Federal
regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures
(some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various Model Laws
adopted by the NAIC. NLC is unable to predict whether any of these laws and regulations will be adopted, the form in which any such
laws and regulations would be adopted, or the effect, if any, these developments would have on its financial condition or results of
operations.
In November 2002, in response to the tightening supply in certain insurance and reinsurance markets resulting from, among other
things, the September 11, 2001 terrorist attacks, the Terrorism Risk Insurance Act, or TRIA, was enacted. TRIA was modified and
extended by the Terrorism Risk Insurance Extension Act of 2005 and extended again by the Terrorism Risk Insurance Program
Reauthorization Act of 2007. These Acts created a Federal Program designed to ensure the availability of commercial insurance
coverage for terrorist acts in the United States. This Program helped the commercial property and casualty insurance industry cover
claims related to terrorism-related losses and requires such companies to offer coverage for certain acts of terrorism. As a result, NLC
is prohibited from adding certain terrorism exclusions to the policies written by its insurance company subsidiaries. The 2005 Act
extended the Program through 2007, but eliminated commercial auto, farm-owners and certain other commercial coverages from its
scope. The Reauthorization Act further extended the Program through December 31, 2014 and fixed the reimbursement percentage at
85% and the deductible at 20%. Although NLC is protected by federally funded terrorism reinsurance as provided for in the TRIA,
there is a substantial deductible that must be met, the payment of which could have an adverse effect on its financial condition and
results of operations. NLC’s deductible under the Program was $1.7 million for 2013 and is estimated to be $1.2 million in 2014.
Potential future changes to the TRIA could also adversely affect NLC by causing its reinsurers to increase prices or withdraw from
certain markets where terrorism coverage is required. NLC had no terrorism-related losses in 2013.
State insurance regulations. State insurance authorities have broad powers to regulate U.S. insurance companies. The primary
purposes of these powers are to promote insurer solvency and to protect individual policyholders. The extent of regulation varies, but
generally has its source in statutes that delegate regulatory, supervisory and administrative power to state insurance
departments. These powers relate to, among other things, licensing to transact business, accreditation of reinsurers, admittance of
assets to statutory surplus, regulating unfair trade and claims practices, establishing actuarial requirements and solvency standards,
regulating investments and dividends, and regulating policy forms, related materials and premium rates. State insurance laws and
regulations require insurance companies to file financial statements prepared in accordance with accounting principles prescribed by
insurance departments in states in which they conduct insurance business, and their operations are subject to examination by those
departments.
As part of the broad authority that state insurance commissioners hold, they may impose periodic rules or regulations related to local
issues or events. An example is the State of Oklahoma’s prohibition on the cancellation of policies for nonpayment of premium in the
wake of severe tornadic activity. Due to the extent of damage and displacement of people, inability of mail to reach policyholders and
inaccessibility of entire neighborhoods, the State of Oklahoma prohibited insurance companies from canceling or non-renewing
policies for a period of time following the specific event.
Periodic financial and market conduct examinations. The insurance departments in every state in which NLC’s insurance companies
do business may conduct on-site visits and examinations of its insurance companies at any time to review the insurance companies’
financial condition, market conduct and relationships and transactions with affiliates. In addition, the Texas Department of Insurance
will conduct comprehensive examinations of insurance companies domiciled in Texas every three to five years. Examinations are
generally carried out in cooperation with the insurance departments of other licensing states under guidelines promulgated by the
NAIC.
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The Texas Department of Insurance completed their last examinations of NLIC and ASIC through December 31, 2010 in an
examination report dated May 12, 2012. This examination report contained no information of any significant compliance issues and
there is no indication of any significant changes to our financial statements as a result of the examination by the domiciliary state.
State dividend limitations. The Texas Department of Insurance must approve any dividend declared or paid by an insurance company
domiciled in the state if the dividend, together with all dividends declared or distributed by that insurance company during the
preceding twelve months, exceeds the greater of (1) 10% of its policyholders’ surplus as of December 31 of the preceding year or
(2) 100% of its net income for the preceding calendar year. The greater number is known as the insurer’s extraordinary dividend
limit. At December 31, 2013, the extraordinary dividend limit for NLIC and ASIC was $9.9 million and $2.6 million, respectively. In
addition, NLC’s insurance companies may only pay dividends out of their earned surplus.
Statutory accounting principles. Statutory accounting principles, or SAP, are a comprehensive basis of accounting developed to assist
insurance regulators in monitoring and regulating the solvency of insurance companies. SAP rules are different from GAAP, and are
intended to reflect a more conservative view of the insurer. SAP is primarily concerned with measuring an insurer’s surplus to
policyholders. Accordingly, SAP focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with
insurance laws and regulatory provisions applicable in each insurer’s domiciliary state.
While GAAP is concerned with a company’s solvency, it also stresses other financial measurements, such as income and cash flows.
Accordingly, GAAP gives more consideration to appropriate matching of revenues and expenses and accounting for management’s
stewardship of assets than does SAP. As a direct result, different amounts of assets and liabilities will be reflected in financial
statements prepared in accordance with GAAP as opposed to SAP. SAP, as established by the NAIC and adopted by Texas regulators,
determines the statutory surplus and statutory net income of the NLC insurance companies and, thus, determines the amount they have
available to pay dividends.
Guaranty associations. In Texas, and in all of the jurisdictions in which NLIC and ASIC are, or in the future may be, licensed to
transact business, there is a requirement that property and casualty insurers doing business within the jurisdiction must participate in
guaranty associations, which are organized to pay limited covered benefits owed pursuant to insurance policies issued by impaired,
insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state
on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired,
insolvent or failed insurer was engaged. States generally permit member insurers to recover assessments paid through full or partial
premium tax offsets.
NLC did not incur any levies in 2013, 2012 or 2011. Property and casualty insurance company insolvencies or failures may, however,
result in additional guaranty fund assessments at some future date. At this time NLC is unable to determine the impact, if any, that
these assessments may have on its financial condition or results of operations. NLC has established liabilities for guaranty fund
assessments with respect to insurers that are currently subject to insolvency proceedings.
National Flood Insurance Program. NLC’s insurance subsidiaries voluntarily participate as Write Your Own carriers in the National
Flood Insurance Program, or NFIP. The NFIP is administered and regulated by the Federal Emergency Management Agency
(FEMA). NLIC and ASIC operates as a fiscal agent of the Federal government in the selling and administering of the Standard Flood
Insurance Policy. This involves writing the policy, the collection of premiums and the paying of covered claims. All pricing is set by
FEMA and all collections are made by NLIC and ASIC.
NLIC and ASIC cede 100% of the policies written by NLIC and ASIC on the Standard Flood Insurance Policy to FEMA; however, if
FEMA were unable to perform, NLIC and ASIC would have a legal obligation to the policyholders. The terms of the reinsurance
agreement are standard terms, which require NLIC and ASIC to maintain its rating criteria, determine policyholder eligibility, issue
policies on NLIC and ASIC’s paper, endorse and cancel policies, collect from insureds and process claims. NLIC and ASIC receive
ceding commissions from NFIP for underwriting administration, claims management, commission and adjuster fees.
Participation in involuntary risk plans. NLC’s insurance companies are required to participate in residual market or involuntary risk
plans in various states where they are licensed that provide insurance to individuals or entities that otherwise would be unable to
purchase coverage from private insurers. If these plans experience losses in excess of their capitalization, they may assess participating
insurers for proportionate shares of their financial deficit. These plans include the Georgia Underwriting Association, Texas FAIR
Plan Association, Texas Windstorm Insurance Agency, or TWIA, the Louisiana Citizens Property Insurance Corporation, the
Mississippi Residential Property Insurance Underwriting Association and the Mississippi Windstorm Underwriting Association. For
example in 2005, following Hurricanes Katrina and Rita, the above plans levied collective assessments totaling $10.4 million on
NLC’s insurance subsidiaries. Additional assessments, including emergency assessments, may follow. In some of these instances,
NLC’s insurance companies should be able to recover these assessments through policyholder surcharges, higher rates or reinsurance.
The ultimate impact hurricanes have on the Texas and Louisiana facilities is currently uncertain and future assessments can occur
whenever the involuntary facilities experience financial deficits.
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Other. Insurance activities are subject to state insurance laws and regulations as determined by the particular insurance commissioner
for each state in accordance with the McCarran-Ferguson Act, as well as subject to the Gramm-Leach-Bliley Act and the privacy
regulations promulgated by the Federal Trade Commission.
Changes in any of the laws governing our conduct could have an adverse impact on our ability to conduct our business or could
materially affect our financial position, operating income, expense or cash flow.
First Southwest
FSC is a broker-dealer registered with the SEC, FINRA, all 50 U.S. states, the District of Columbia and Puerto Rico. Much of the
regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally FINRA, the Municipal
Securities Rulemaking Board and national securities exchanges. These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) for governing its members and the industry. Broker-dealers are also subject to the laws and rules of the states in
which a broker-dealer conducts business. FSC is a member of, and is primarily subject to regulation, supervision and regular
examination by, FINRA.
The regulations to which broker-dealers are subject cover all aspects of the securities business, including, but not limited to, sales and
trade practices, capital structure, record keeping and reporting procedures, relationships and conflicts with customers, the handling of
cash and margin accounts, and the conduct of registered persons, directors, officers and employees. Broker-dealers are also subject to
the privacy and anti-money laundering laws and regulations discussed previously. Additional legislation, changes in rules promulgated
by the SEC and by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules often
directly affects the method of operation and profitability of broker-dealers. The SEC, the self-regulatory organizations and states may
conduct administrative and enforcement proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its
registered persons, officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets rather than protection of creditors and stockholders of broker-dealers.
Limitation on Businesses. The businesses that FSC may conduct are limited by its agreements with, and its oversight by, FINRA and
by federal and state law. Participation in new business lines, including trading of new products or participation on new exchanges or in
new countries often requires governmental and/or exchange approvals, which may take significant time and resources. In addition,
FSC is an operating subsidiary of the Bank, which means its activities are further limited by those that are permissible for the Bank.
As a result, FSC may be prevented from entering new businesses that may be profitable in a timely manner, if at all.
Net Capital Requirements. The SEC, FINRA and various other regulatory authorities have stringent rules and regulations with respect
to the maintenance of specific levels of net capital by regulated entities. Rule 15c3-1 of the Exchange Act (the “Net Capital Rule”)
requires that a broker-dealer maintain minimum net capital. Generally, a broker-dealer’s net capital is net worth plus qualified
subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational charges. At
December 31, 2013, FSC was in compliance with applicable net capital requirements.
The SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria. These rules also
dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-dealer, and constrain the ability of a broker-dealer
to expand its business under certain circumstances. If a broker-dealer fails to maintain the required net capital, it may be subject to
suspension or revocation of registration by the SEC or applicable regulatory authorities, and suspension or expulsion by these
regulators could ultimately lead to the broker-dealer’s liquidation. Additionally, the Net Capital Rule and certain FINRA rules impose
requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior
notice to, and approval from, the SEC and FINRA for certain capital withdrawals.
Securities Investor Protection Corporation. FSC is required by federal law to belong to SIPC, whose primary function is to provide
financial protection for the customers of failing brokerage firms. SIPC provides protection for customers up to $500,000, of which a
maximum of $250,000 may be in cash.
Changing Regulatory Environment. The regulatory environment in which FSC operates is subject to frequent change. Its business,
financial condition and operating results may be adversely affected as a result of new or revised legislation or regulations imposed by
the U.S. Congress, the SEC or other U.S. and state governmental regulatory authorities, or FINRA. FSC’s business, financial
condition and operating results also may be adversely affected by changes in the interpretation and enforcement of existing laws and
rules by these governmental and regulatory authorities. In the current era of heightened regulation of financial institutions, FSC can
expect to incur increasing compliance costs, along with the industry as a whole.
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Item 1A. Risk Factors.
Risks Related to our Business
We may fail to realize all of the anticipated benefits of the PlainsCapital Merger or the FNB Transaction.
Achieving the anticipated cost savings and financial benefits of the PlainsCapital Merger, the FNB Transaction and any other
acquisitions we may complete will depend, in part, on our ability to successfully integrate the operations of the respective companies
with our own in an efficient and effective manner. It is possible that the integration process could result in the loss of key employees,
the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to
maintain relationships with clients, customers, depositors and employees. In addition, the integration of certain operations will require
the dedication of significant management resources, which may temporarily distract management’s attention from our day-to-day
business. Any inability to realize the full extent, or any, of the anticipated cost savings and financial benefits of the PlainsCapital
Merger, the FNB Transaction, as well as any delays encountered in the integration process, could have an adverse effect on our
business and results of operations, which could adversely affect our financial condition and cause a decrease in our earnings per share
or decrease or delay the expected accretive effect of the FNB Transaction and contribute to a decrease in the price of our common
stock.
If our allowance for loan losses is insufficient to cover actual loan losses, our banking segment earnings will be adversely affected.
As a lender, we are exposed to the risk that we could sustain losses because our borrowers may not repay their loans in accordance
with the terms of their loans. We have historically accounted for this risk by maintaining an allowance for loan losses in an amount
intended to cover Bank management’s estimate of losses inherent in the loan portfolio. As a result of the PlainsCapital Merger and the
FNB Transaction, we were required under GAAP to estimate the fair value of the loan portfolio after the consummation of the
PlainsCapital Merger in 2012 and the FNB Transaction in 2013 and write-down the recorded value of the portfolio to that estimate.
For most loans, this process was accomplished by computing the net present value of estimated cash flows to be received from
borrowers of these loans. PlainsCapital’s and FNB’s respective allowance for loan losses that had been maintained prior to the
PlainsCapital Merger and the FNB Transaction were eliminated in this accounting process. A new allowance for loan losses has been
established for loans made by the Bank subsequent to consummation of the PlainsCapital Merger and for any decrease from that
originally estimated as of the acquisition date in the estimate of cash flows to be received from the loans acquired in the PlainsCapital
Merger and the FNB Transaction.
The estimates of fair value as of the consummation of the PlainsCapital Merger and the FNB Transaction were based on economic
conditions at such time and on Bank management’s projections concerning both future economic conditions and the ability of the
borrowers to continue to repay their loans. If management’s assumptions and projections prove to be incorrect, however, the estimate
of fair value may be higher than the actual fair value and we may suffer losses in excess of those estimated. Further, the allowance for
loan losses established for new loans or for revised estimates may prove to be inadequate to cover actual losses, especially if economic
conditions worsen.
While management will endeavor to estimate the allowance to cover anticipated losses, no underwriting and credit monitoring policies
and procedures that we could adopt to address credit risk could provide complete assurance that we will not incur unexpected losses.
These losses could have a material adverse effect on our business, financial condition, results of operations and cash flows. In
addition, federal regulators periodically evaluate the adequacy of the allowance for loan losses and may require us to increase our
provision for loan losses or recognize further loan charge-offs based on judgments different from those of our Bank management.
An adverse change in real estate market values may result in losses in our banking segment and otherwise adversely affect our
profitability.
At December 31, 2013, approximately 42.7% of the loan portfolio of our banking segment was comprised of loans with real estate as
the primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of
default by the borrower and may deteriorate in value during the time the credit is extended. A decline in real estate values generally
and in Texas specifically could impair the value of our collateral and our ability to sell the collateral upon any foreclosure. In the event
of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the
outstanding principal and interest on the loan. As a result, our profitability and financial condition may be adversely affected by a
decrease in real estate market values.
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Loans acquired in the FNB Transaction may not be covered by the loss-share agreements if the FDIC determines that we have not
adequately managed these loans.
Under the terms of the loss-share agreements we entered into with the FDIC in connection with the FNB Transaction, the FDIC is
obligated to reimburse us for the following losses on covered loans: (i) 80% of losses on the first $240.4 million of losses incurred;
(ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of
$365.7 million of losses incurred. The loss-share agreements for commercial and single family residential loans are in effect for 5
years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from
September 13, 2013 (the “Bank Closing Date”). Although the FDIC has agreed to reimburse us for the substantial portion of losses on
covered loans, the FDIC has the right to refuse or delay payment for loan losses if we do not manage covered loans in accordance with
the loss-share agreements. In addition, reimbursable losses are based on the book value of the relevant loans as determined by the
FDIC as of the effective dates of the transactions. The amount that we realize on these loans could differ materially from the carrying
value that will be reflected in our consolidated financial statements, based upon the timing and amount of collections on the covered
loans in future periods. Any losses we experience in the assets acquired in the FNB Transaction that are not covered under the loss-
share agreements could have an adverse effect on our results of operations and financial condition.
In addition, in accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC,
approximately ten years following the Bank Closing Date, if the FDIC’s initial estimate of losses on covered assets is greater than the
actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the purchase and assumption agreement
we entered into with the FDIC in connection with the FNB Transaction.
Our business and results of operations may be adversely affected by unpredictable economic, market and business conditions.
Our business and results of operations are affected by general economic, market and business conditions. The credit quality of our
loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business.
Our continued financial success depends to a degree on factors beyond our control, including:
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national and local economic conditions, such as the level and volatility of short-term and long-term interest rates, inflation,
home prices, unemployment and under-employment levels, bankruptcies, household income and consumer spending;
general economic consequences of international conditions, such as weakness in European sovereign debt and emerging
markets and the impact of that weakness on the U.S. and global economies;
the availability and cost of capital and credit;
incidence of customer fraud; and
federal, state and local laws affecting these matters.
The deterioration of any of these conditions, as we have experienced with the past economic downturn and continuation of a
weakened economy and employment growth, could adversely affect our consumer and commercial businesses and securities
portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, the investment
portfolio of our insurance segment, our capital levels and liquidity, and our results of operations.
Continued elevated unemployment, under-employment and household debt, along with continued stress in the consumer real estate
market and certain commercial real estate markets, pose challenges for economic performance and the financial services industry. The
sustained high unemployment rate and the lengthy duration of unemployment have directly impaired consumer finances and pose risks
to the financial services industry. Continued uncertainty in the housing markets and elevated levels of distressed and delinquent
mortgages pose further risks to the housing market. The current environment of heightened scrutiny of financial institutions has
resulted in increased public awareness of and sensitivity to banking fees and practices. Each of these factors may adversely affect our
fees and costs.
Our geographic concentration may magnify the adverse effects and consequences of any regional or local economic downturn.
We conduct our banking operations primarily in Texas. Substantially all of the real estate loans in our loan portfolio are secured by
properties located in Texas, with more than 78% and 82% secured by properties located in the Dallas/Fort Worth and Austin/San
Antonio markets at December 31, 2013 and 2012, respectively. Adverse economic conditions in Texas may result in a reduction in the
value of the collateral securing these loans. Likewise, substantially all of the real estate loans in our loan portfolio are made to
borrowers who live and conduct business in Texas. In addition, mortgage origination fee income is dependent to a significant degree
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on economic conditions in Texas and California. During 2013, approximately 23% and 18% by dollar volume of our mortgage loans
originated were collateralized by properties located in Texas and California, respectively. Texas insureds accounted for approximately
69% and 70% of our insurance segment’s gross premiums written in 2013 and 2012, respectively. Any regional or local economic
downturn that affects Texas or, to a lesser extent, California, may affect us and our profitability more significantly and more adversely
than our competitors that are less geographically concentrated.
Our geographic concentration may also exacerbate the adverse effects on our insurance segment of inherently unpredictable
catastrophic events.
Our insurance segment expects to have large aggregate exposures to inherently unpredictable natural and man-made disasters of great
severity, such as hurricanes, hail, tornados, windstorms, wildfires and acts of terrorism. Hurricanes Ike, Katrina and Rita highlighted
the challenges inherent in predicting the impact of catastrophic events. The catastrophe models utilized by our insurance segment to
assess its probable maximum insurance losses generally failed to adequately project the financial impact of these hurricanes. Although
our insurance segment may attempt to exclude certain losses, such as terrorism and other similar risks, from some coverage that our
insurance segment writes, it may be prohibited from, or may not be successful in, doing so. The occurrence of losses from catastrophic
events may have a material adverse effect on our insurance segment’s ability to write new business and on its financial condition and
results of operations. Increases in the values and geographic concentrations of policyholder property and the effects of inflation have
resulted in increased severity of industry losses in recent years, and our insurance segment expects that these factors will increase the
severity of losses in the future. Factors that may influence our insurance segment’s exposure to losses from these types of events, in
addition to the routine adjustment of losses, include, among others:
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exhaustion of reinsurance coverage;
increases in reinsurance rates;
unanticipated litigation expenses;
unrecoverability of ceded losses;
impact on independent agent operations and future premium income in areas affected by catastrophic events;
unanticipated expansion of policy coverage or reduction of premium due to regulatory, legislative and/or judicial action
following a catastrophic event; and
unanticipated demand surge related to other recent catastrophic events.
Our insurance segment writes insurance primarily in the states of Texas, Oklahoma, Arizona, Tennessee, Georgia and Louisiana. In
2013, Texas accounted for 69.1%, Oklahoma accounted for 9.1%, Arizona accounted for 8.7%, Tennessee accounted for 5.8% and
Georgia accounted for 3.5% of our premiums. As a result, a single catastrophe, destructive weather pattern, wildfire, terrorist attack,
regulatory development or other condition or general economic trend affecting these regions or significant portions of these regions
could adversely affect our insurance segment’s financial condition and results of operations more significantly than other insurance
companies that conduct business across a broader geographic area. Although our insurance segment purchases catastrophe reinsurance
to limit its exposure to these types of catastrophes, in the event of one or more major catastrophes resulting in losses to it in excess of
$140.0 million, our insurance segment’s losses would exceed the limits of its reinsurance coverage.
Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings, capital levels and
overall results.
The majority of our assets are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates.
Changes in interest rates may impact our net interest income in our banking segment as well as the valuation of our assets and
liabilities in each of our segments. Earnings in our banking segment are significantly dependent on our net interest income, which is
the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. We expect to periodically experience “gaps” in the interest rate sensitivities of our
banking segment’s assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market
interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our
position, this “gap” may work against us, and our earnings may be adversely affected.
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An increase in the general level of interest rates may also, among other things, adversely affect the demand for loans and our ability to
originate loans. In particular, if mortgage interest rates increase, the demand for residential mortgage loans and the refinancing of
residential mortgage loans will likely decrease, which will have an adverse effect on our income generated from mortgage origination
activities. Conversely, a decrease in the general level of interest rates, among other things, may lead to prepayments on our loan and
mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the general level of market
interest rates may adversely affect our net yield on interest-earning assets, loan origination volume and our overall results.
Our insurance segment invested over 86% of its invested assets in fixed maturity assets such as bonds and mortgage-backed securities
at December 31, 2013. Because bond trading prices decrease as interest rates rise, a significant increase in interest rates could have a
material adverse effect on our insurance segment’s financial condition and results of operations. On the other hand, decreases in
interest rates could have an adverse effect on our insurance segment’s investment income and results of operations. For example, if
interest rates decline, investment of new premiums received and funds reinvested will earn less. Additionally, mortgage-backed
securities typically are prepaid more quickly when interest rates fall and the holder must reinvest the proceeds at lower interest rates.
In periods of increasing interest rates, mortgage-backed securities typically are prepaid more slowly, which may require our insurance
segment to receive interest payments that are below the then prevailing interest rates for longer time periods than expected. The
volatility of our insurance segment’s claims may force it to liquidate securities, which may cause it to incur capital losses. If our
insurance segment’s investment portfolio is not appropriately matched with its insurance liabilities, it may be forced to liquidate
investments prior to maturity at a significant loss to cover these liabilities. In addition, if we experience market disruption and
volatility, such as that experienced in 2009 and 2010, we may experience additional losses on our investments and reductions in our
earnings. Investment losses could significantly decrease the asset base and statutory surplus of our insurance segment, thereby
adversely affecting its ability to conduct business and potentially its A.M. Best financial strength rating.
Our financial advisory segment holds securities, principally fixed-income municipal bonds, to support sales, underwriting and other
customer activities. If interest rates increase, the value of debt securities held in the financial advisory segment’s inventory would
decrease. Rapid or significant changes in interest rates could adversely affect the segment’s bond sales, underwriting activities and
financial advisory businesses.
In addition, we hold securities that may be sold in response to changes in market interest rates, changes in securities’ prepayment risk,
increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at
estimated fair value, which may fluctuate with changes in market interest rates. The effects of an increase in market interest rates may
result in a decrease in the value of our available for sale investment portfolio.
Market interest rates are affected by many factors outside of our control, including inflation, recession, unemployment, money supply,
international disorder and instability in domestic and foreign financial markets. We may not be able to accurately predict the
likelihood, nature and magnitude of such changes or how and to what extent such changes may affect our business. We also may not
be able to adequately prepare for, or compensate for, the consequences of such changes. Any failure to predict and prepare for changes
in interest rates, or adjust for the consequences of these changes, may adversely affect our earnings and capital levels and overall
results of operations.
Our banking segment is subject to funding risks associated with its high deposit concentration and its potential reliance on
brokered deposits.
At December 31, 2013, the Bank’s fifteen largest depositors, excluding Hilltop and First Southwest, accounted for 15.49% of the
Bank’s total deposits, and the Bank’s five largest depositors, excluding First Southwest, accounted for 10.03% of the Bank’s total
deposits. Brokered deposits at December 31, 2013 accounted for 7.0% of the Bank’s total deposits, and we may increase our reliance
on brokered deposits in the future. The loss of one or more of our largest Bank customers, a significant decline in our deposit balances
due to ordinary course fluctuations related to these customers’ businesses, or if we increase our reliance on brokered deposits, the loss
of a significant amount of our brokered deposits could adversely affect our liquidity. Additionally, such circumstances could require
us to raise deposit rates in an attempt to attract new deposits, or purchase federal funds or borrow funds on a short-term basis at higher
rates, which would adversely affect our results of operations. Under applicable regulations, if the Bank were no longer “well
capitalized,” the Bank would not be able to accept brokered deposits without the approval of the FDIC.
We are heavily dependent on dividends from our subsidiaries.
We are a financial holding company engaged in the business of managing, controlling and operating our subsidiaries, including NLC
and its two insurance company subsidiaries, NLIC and ASIC, as well as the Bank and the Bank’s subsidiaries, PrimeLending and First
Southwest. We conduct no material business or other activity other than activities incidental to holding stock in NLC and the Bank. As
a result, we rely substantially on the profitability of, and dividends from, these subsidiaries to pay our operating expenses, to satisfy
our obligations and to pay dividends on our preferred stock. As with most financial institutions, the profitability of the Bank is subject
36
to the fluctuating cost and availability of money, changes in interest rates and in economic conditions in general. PrimeLending and
First Southwest contribute to the Bank’s profitability and, in turn, on its ability to pay dividends to us. If the Bank, however, is unable
to make cash distributions to us, then we may also be unable to obtain funds from PrimeLending and First Southwest, and we may be
unable to satisfy our obligations or make distributions on our preferred stock.
Likewise, our insurance segment also operates as a holding company. Dividends and other permitted payments from its operating
subsidiaries are expected to be its primary source of funds to meet ongoing cash requirements, including any future debt service
payments and other expenses, and to pay dividends, if any, to us. NLIC and ASIC are subject to significant regulatory restrictions and
limitations under debt agreements limiting their ability to declare and pay dividends, including the indenture governing NLC’s London
Interbank Offered Rate (“LIBOR”) plus 3.40% notes due 2035 and the surplus indentures governing NLIC’s two LIBOR plus 4.10%
and 4.05% notes due 2033 and ASIC’s LIBOR plus 4.05% notes due 2034. Together these restrictions could, in turn, limit NLC’s
ability to pay dividends.
We are subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or
limitations on the conduct of our business and limit our ability to generate income.
We are subject to extensive federal and state regulation and supervision, including that of the Federal Reserve Board, the Texas
Department of Banking, the Texas Department of Insurance, the FDIC, the CFPB, the SEC and FINRA. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders.
Insurance regulations promulgated by state insurance departments are primarily intended to protect policyholders rather than
stockholders. Likewise, regulations promulgated by FINRA are primarily intended to protect customers of broker-dealer businesses
rather than stockholders.
These regulations affect our lending practices, capital structure, capital requirements, investment practices, dividend policy and
growth, among other things. Failure to comply with laws, regulations or policies could result in damages, civil money penalties or
reputational damage, as well as sanctions and supervisory actions by regulatory agencies that could subject us to significant
restrictions on our business and our ability to expand through acquisitions or branching. While we have implemented policies and
procedures designed to prevent any such violations of laws and regulations, such violations may occur from time to time, which could
have a material adverse effect on our financial condition and results of operations.
The U.S. Congress and federal regulatory agencies frequently revise banking and securities laws, regulations and policies. On July 21,
2010, President Obama signed into law the Dodd-Frank Act, which significantly alters the regulation of financial institutions and the
financial services industry. The Dodd-Frank Act establishes the CFPB and requires the CFPB and other federal agencies to implement
many provisions of the Dodd-Frank Act. We expect that several aspects of the Dodd-Frank Act may affect our business, including,
without limitation, increased capital requirements, increased mortgage regulation, restrictions on proprietary trading in securities,
restrictions on investments in hedge funds and private equity funds, executive compensation restrictions and disclosure and reporting
requirements. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will
affect our business. Compliance with these new laws and regulations likely will result in additional costs, which could be significant
and may adversely impact our results of operations, financial condition, and liquidity.
During the second quarter of 2013, the Bank received a “satisfactory” CRA rating in connection with its most recent CRA
performance evaluation. A CRA rating of less than “satisfactory” adversely affects a bank’s ability to establish new branches and
impairs a bank’s ability to commence new activities that are “financial in nature” or acquire companies engaged in these activities.
Other regulatory exam ratings or findings also may otherwise impact our ability to branch, commence new activities or make
acquisitions.
We cannot predict whether or in what form any other proposed regulations or statutes will be adopted or the extent to which our
business may be affected by any new regulation or statute. Such changes could subject our business to additional costs, limit the types
of financial services and products we may offer and increase the ability of non-banks to offer competing financial services and
products, among other things.
The impact of the changing regulatory capital requirements and new capital rules are uncertain.
In July 2013, the Federal Reserve Board approved a final rule that will substantially amend the risk-based capital rules applicable to
Hilltop and the Bank. The final rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for Hilltop and the Bank on
January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum
capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final
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rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios and will result in the
following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and
(iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at
0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to
limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the
buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for Hilltop and the Bank could, among other things, adversely affect our results
of operations and growth, require the raising of additional capital, restrict our ability to pay dividends or repurchase shares and result
in regulatory actions if we were to be unable to comply with such requirements.
In addition, the Federal Reserve Board published an interim final rule in September 2013 that clarifies how companies should
incorporate the Basel III regulatory capital reforms into their capital and business projections during the next cycle of capital plan
submissions and stress tests. For companies and their subsidiary banks with between $10.0 billion and $50.0 billion in total
consolidated assets, the initial capital planning and stress testing cycle began on October 1, 2013 and continues through the fourth
quarter of 2015, which overlaps with the implementation of the Basel III capital reforms beginning on January 1, 2015. At
December 31, 2013, Hilltop and the Bank had approximately $8.9 billion and $8.0 billion, respectively, in total consolidated assets
and their average of total consolidated assets for the four most recent consecutive quarters was $8.2 billion and $7.2 billion,
respectively. Accordingly, Hilltop and the Bank are not subject to the 2014 capital planning and stress testing cycle. If we grow to
have more than $10.0 billion in assets on average over the four most recent consecutive quarters through additional acquisitions or
organic growth, we may become subject to future capital planning and stress testing cycles, which would likely increase our cost of
regulatory compliance. Management continues to study the implementation of Basel III regulatory capital reforms and stress testing
requirements.
The CFPB recently issued “ability-to-repay” and “qualified mortgage” rules that may have a negative impact on our loan
origination process and foreclosure proceedings, which could adversely affect our business, operating results, and financial
condition.
On January 10, 2013, the CFPB issued a final rule to implement the “qualified mortgage” provisions of the Dodd-Frank Act requiring
mortgage lenders to consider consumers’ ability to repay home loans before extending them credit. The CFPB’s “qualified mortgage”
rule took effect on January 10, 2014. The final rule describes certain minimum requirements for lenders making ability-to-repay
determinations, but does not dictate that they follow particular underwriting models. Lenders will be presumed to have complied with
the ability-to-repay rule if they issue “qualified mortgages,” which are generally defined as mortgage loans prohibiting or limiting
certain risky features. Loans that do not meet the ability-to-repay standard can be challenged in court by borrowers who default and
the absence of ability-to-repay status can be used against a lender in foreclosure proceedings. Any loans that we make outside of the
“qualified mortgage” criteria could expose us to an increased risk of liability and reduce or delay our ability to foreclose on the
underlying property. It is difficult to predict how the CFPB’s “qualified mortgage” rule will impact us when it takes effect, but any
decreases in loan origination volume or increases in compliance and foreclosure costs caused by the rule could negatively affect our
business, operating results and financial condition.
Our mortgage origination segment is subject to investment risk on loans that it originates.
We intend to sell, and not hold for investment, substantially all residential mortgage loans that we originate through PrimeLending. At
times, however, we may originate a loan or execute an interest rate lock commitment (“IRLC”) with a customer pursuant to which we
agree to originate a mortgage loan on a future date at an agreed-upon interest rate without having identified a purchaser for such loan
or the loan underlying such IRLC. An identified purchaser may also decline to purchase a loan for a variety of reasons. In these
instances, we will bear interest rate risk on an IRLC until, and unless, we are able to find a buyer for the loan underlying such IRLC
and the risk of investment on a loan until, and unless, we are able to find a buyer for such loan. In addition, if a customer defaults on a
mortgage payment shortly after the loan is originated, the purchaser of the loan may have a put right, whereby the purchaser can
require us to repurchase the loan at the full amount that it paid. During periods of market downturn, we have at times chosen to hold
mortgage loans when the identified purchasers have declined to purchase such loans because we could not obtain an acceptable
substitute bid price for such loan. The failure of mortgage loans that we hold on our books to perform adequately could have a
material adverse effect on our financial condition, liquidity and results of operations.
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Changes in interest rates may change the value of our mortgage servicing rights portfolio which may increase the volatility of our
earnings.
We have recently expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage
origination segment. As a result of our mortgage servicing business, we have a portfolio of mortgage servicing rights (“MSR”). A
MSR is the right to service a mortgage loan-collect principal, interest and escrow amounts-for a fee. We measure and carry all of our
residential MSRs using the fair value measurement method. Fair value is determined as the present value of estimated future net
servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.
One of the principal risks associated with MSRs is that in a declining interest rate environment, they will likely lose a substantial
portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash
we receive over the life of the mortgage loans would be reduced. In the future, we may use various derivative financial instruments to
provide a level of protection against such interest rate risk. However, no hedging strategy can protect us completely, and hedging
strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions
and, as a result, could actually increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate
risk and correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our
MSRs.
At December 31, 2013, our MSRs had a fair value of $20.1 million. Changes in fair value of our MSRs are recorded to earnings in
each period. Depending on the interest rate environment, it is possible that the fair value of our MSRs may be reduced in the future. If
such changes in fair value significantly reduce the carrying value of our MSRs, our financial condition and results of operations would
be negatively affected.
Our financial advisory business is subject to various risks associated with the securities industry, particularly those impacting the
public finance industry.
Our financial advisory business is subject to uncertainties that are common in the securities industry. These uncertainties include:
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intense competition in the public finance and other sectors of the securities industry;
the volatility of domestic and international financial, bond and stock markets;
extensive governmental regulation;
litigation; and
substantial fluctuations in the volume and price level of securities.
As a result, the revenues and operating results of our financial advisory segment may vary significantly from quarter to quarter and
from year to year. Unfavorable financial or economic conditions could reduce the number and size of transactions in which we
provide financial advisory, underwriting and other services. Disruptions in fixed income and equity markets could lead to a decline in
the volume of transactions executed for customers and, therefore, to declines in revenues from commissions and clearing services.
First Southwest is much smaller and has much less capital than many competitors in the securities industry. In addition, First
Southwest is an operating subsidiary of the Bank, which means that its activities are limited to those that are permissible for the Bank.
Income that we recognized as a bargain purchase gain in connection with the FNB Transaction is based upon a preliminary
valuation and is subject to change.
In September 2013, we assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the
assets, of FNB from the FDIC in the FNB Transaction. We acquired approximately $2.2 billion in assets and assumed $2.2 billion in
liabilities in the FNB Transaction. The FNB Transaction was accounted for under the purchase method of accounting. Based upon a
preliminary valuation, we recorded a pre-tax bargain purchase gain totaling $12.6 million as a result of the FNB Transaction, which
was included as a component of noninterest income in our consolidated statement of operations for the year ended December 31,
2013. The amount of the gain was equal to the amount by which the estimated fair value of assets purchased exceeded the estimated
fair value of liabilities assumed. The bargain purchase gain resulting from the FNB Transaction was a non-recurring gain that is not
expected to be repeated in future periods. As we complete our purchase accounting, we may revise our estimates, which could result in
the recognition of additional bargain purchase gain, which would be recorded as noninterest income, or the recognition of less or no
bargain purchase gain, in which case we would reduce noninterest income and may be required to record goodwill that would be
subject to an ongoing impairment analysis.
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Income that we recognize in connection with the purchase discount of the credit-impaired loans acquired in the PlainsCapital
Merger and the FNB Transaction and accounted for under Accounting Standards Codification 310-30 could be volatile in nature
and have significant effects on reported net income.
In connection with the PlainsCapital Merger and the FNB Transaction, we acquired loans at a discount of $146.6 million and
$343.1 million, respectively. The PlainsCapital Merger and the FNB Transaction were each accounted for under the purchase method
of accounting. Accordingly, these discounts are amortized and accreted to interest income on a monthly basis. The effective yield and
related discount accretion on credit-impaired loans is initially determined at the acquisition date based upon estimates of the timing
and amount of future cash flows as well as the amount of credit losses that will be incurred. These estimates are updated quarterly. In
future periods, if actual historical results combined with future projections of these factors (amount, timing, or credit losses) differ
from the initial projections, the effective yield and the amount of discount recognized will change. Volatility may increase as the
variance of actual results from initial projections increases. As the acquired loans are removed from our books, the related discount
will no longer be available for accretion into income. Accretion of $61.8 million on loans purchased at a discount in the PlainsCapital
Merger was recorded as interest income during the year ended December 31, 2013, and accretion of $7.5 million on loans purchased at
a discount in the FNB Transaction was recorded as interest income during the period from September 14, 2013 to December 31, 2013.
As of December 31, 2013, the balance of our discount on loans in the aggregate was $396.0 million.
We ultimately may write-off goodwill and other intangible assets resulting from business combinations.
As a result of purchase accounting in connection with our acquisition of NLC, the PlainsCapital Merger and the FNB Transaction, our
consolidated balance sheet at December 31, 2013, contained goodwill of $251.8 million and other intangible assets of $70.9 million.
On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of value of intangible assets. As
circumstances change, the value of these intangible assets may not be realized by us. If we determine that a material impairment has
occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our
results of operations in the period in which the write-off occurs.
The accuracy of our financial statements and related disclosures could be affected if we are exposed to actual conditions different
from the judgments, assumptions or estimates used in our critical accounting policies.
The preparation of financial statements and related disclosure in conformity with GAAP requires us to make judgments, assumptions
and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical
accounting policies, which are included in this Annual Report, describe those significant accounting policies and methods used in the
preparation of our consolidated financial statements that are considered “critical” by us because they require judgments, assumptions
and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events differ
significantly from the judgments, assumptions and estimates in our critical accounting policies, such events or assumptions could have
a material impact on our audited consolidated financial statements and related disclosures.
We are dependent on our management team, and the loss of our senior executive officers or other key employees could impair our
relationship with customers and adversely affect our business and financial results.
Our success is dependent, to a large degree, upon the continued service and skills of our existing management team and other key
employees with long-term customer relationships. Our business and growth strategies are built primarily upon our ability to retain
employees with experience and business relationships within their respective segments. The loss of one or more of these key personnel
could have an adverse impact on our business because of their skills, knowledge of the market, years of industry experience and the
difficulty of finding qualified replacement personnel. In addition, we currently do not have non-competition agreements with certain
members of management and other key employees. If any of these personnel were to leave and compete with us, our business,
financial condition, results of operations and growth could suffer.
A decline in the market for advisory services could adversely affect our business and results of operations.
Our financial advisory segment has historically earned a significant portion of its revenues from advisory fees paid to it by its clients,
in large part upon the successful completion of the client’s transaction. Financial advisory revenues from the public finance group of
First Southwest represented the largest component of our financial advisory segment’s net revenues for the year ended December 31,
2013. Unlike other investment banks, First Southwest earns most of its revenues from its advisory fees and, to a lesser extent, from
other business activities such as commissions and underwriting. New issuances in the municipal market by cities, counties, school
districts, state and other governmental agencies, airports, healthcare institutions, institutions of higher education and other clients that
First Southwest’s public finance group serves can be subject to significant fluctuations based on by factors such as changes in interest
rates, property tax bases, budget pressures on certain issuers caused by uncertain economic times and other factors. We expect that the
reliance of our financial advisory segment on advisory fees will continue for the foreseeable future, and a decline in public finance
advisory engagements or the market for advisory services generally would have an adverse effect on our business and results of
operations.
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Negative publicity regarding us, or financial institutions in general, could damage our reputation and adversely impact our
business and results of operations.
Our ability to attract and retain customers and conduct our business could be adversely affected to the extent our reputation is
damaged. Reputational risk, or the risk to our business, earnings and capital from negative public opinion regarding our company, or
financial institutions in general, is inherent in our business. Adverse perceptions concerning our reputation could lead to difficulties in
generating and maintaining accounts as well as in financing them. In particular, negative perceptions concerning our reputation could
lead to decreases in the level of deposits that consumer and commercial customers and potential customers choose to maintain with us.
Negative public opinion could result from actual or alleged conduct in any number of activities or circumstances, including lending or
foreclosure practices; sales practices; corporate governance and potential conflicts of interest; ethical failures or fraud, including
alleged deceptive or unfair lending or pricing practices; regulatory compliance; protection of customer information; cyber-attacks,
whether actual, threatened, or perceived; negative news about us or the financial institutions industry generally; general company
performance; or from actions taken by government regulators and community organizations in response to such activities or
circumstances. Furthermore, our failure to address, or the perception that we have failed to address, these issues appropriately could
impact our ability to keep and attract customers and/or employees and could expose us to litigation and/or regulatory action, which
could have an adverse effect on our business and results of operations.
Our operational systems and networks have been, and will continue to be, subject to an increasing risk of continually evolving
cybersecurity or other technological risks, which could result in a loss of customer business, financial liability, regulatory
penalties, damage to our reputation or the disclosure of confidential information.
We rely heavily on communications and information systems to conduct our business and maintain the security of confidential
information and complex transactions, which subjects us to an increasing risk of cyber incidents from these activities due to a
combination of new technologies and the increasing use of the Internet to conduct financial transactions, as well as a potential failure
of interruption or breach in the security of these systems, including those that could result from attacks or planned changes, upgrades
and maintenance of these systems. Such cyber incidents could result in failures or disruptions in our customer relationship
management, securities trading, general ledger, deposits, computer systems, electronic underwriting servicing or loan origination
systems. Third parties with which we do business may also be sources of cybersecurity or other technological risks.
Although we devote significant resources to maintain and regularly upgrade our systems and networks with measures such as intrusion
and detection prevention systems and monitoring firewalls to safeguard critical business applications, there is no guarantee that these
measures or any other measures can provide absolute security. Our computer systems, software and networks may be adversely
affected by cyber incidents such as unauthorized access; loss or destruction of data (including confidential client information); account
takeovers; unavailability of service; computer viruses or other malicious code; cyber attacks; and other events. These threats may
derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure.
Additional challenges are posed by external extremist parties, including foreign state actors, in some circumstances, as a means to
promote political ends. If one or more of these events occurs, it could result in the disclosure of confidential client information,
damage to our reputation with our clients and the market, customer dissatisfaction, additional costs such as repairing systems or
adding new personnel or protection technologies, regulatory penalties, exposure to litigation and other financial losses to both us and
our clients and customers. Such events could also cause interruptions or malfunctions in our operations.
We have been the subject of denial of services attacks from external sources that have limited or interrupted the availability of our
online banking services. Although to date we are not aware of any material losses relating to cyber attacks or other information
security breaches, we may suffer such losses in the future. We have taken steps to improve and upgrade the security of our systems in
response to such threats, such incidents could occur again, but they could occur more frequently or on a more significant scale.
We face strong competition from other financial institutions and financial service and insurance companies, which may adversely
affect our operations and financial condition.
Our banking and mortgage origination businesses face vigorous competition from banks and other financial institutions, including
savings and loan associations, savings banks, finance companies and credit unions. A number of these banks and other financial
institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services than
we do. We also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer
finance companies, insurance companies and governmental organizations, each of which may offer more favorable financing than we
are able to provide. In addition, some of our non-bank competitors are not subject to the same extensive regulations that govern us.
The banking business in Texas has become increasingly competitive over the past several years, and we expect the level of
competition we face to further increase. Our profitability depends on our ability to compete effectively in these markets. This
competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of
operations and financial condition.
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The insurance industry also is highly competitive and has, historically, been characterized by periods of significant price competition,
alternating with periods of greater pricing discipline during which competitors focus on other factors. In the current market
environment, competition in our insurance business’ industry is based primarily on products offered, service, experience, the strength
of agent and policyholder relationships, reputation, speed and accuracy of claims payment, perceived financial strength, ratings, scope
of business, commissions paid and policy and contract terms and conditions. Our insurance business competes with many other
insurers, including large national companies who have greater financial, marketing and management resources than our insurance
segment. Many of these competitors also have better ratings and market recognition than our insurance business. Our insurance
segment seeks to distinguish itself from its competitors by providing a broad product line and targeting those market segments that
provide the best opportunity to earn an underwriting profit.
In addition, a number of new, proposed or potential industry developments also could increase competition in our insurance business’
industry. These developments include changes in practices and other effects caused by the Internet (including direct marketing
campaigns by our insurance segment’s competitors in established and new geographic markets), which have led to greater competition
in the insurance business and increased expectations for customer service. These developments could prevent our insurance business
from expanding its book of business. Our insurance business also faces competition from new entrants into the insurance market. New
entrants do not have historic claims or losses to address and, therefore, may be able to price policies on a basis that is not favorable to
our insurance business. New competition could reduce the demand for our insurance segment’s insurance products, which could have
a material adverse effect on its financial condition and results of operations.
The financial advisory and investment banking industries also are intensely competitive industries and will likely remain competitive.
Our financial advisory business competes directly with numerous other financial advisory and investment banking firms, broker-
dealers and banks, including large national and major regional firms and smaller niche companies, some of whom are not broker-
dealers and, therefore, not subject to the broker-dealer regulatory framework. In addition to competition from firms currently in the
industry, there has been increasing competition from others offering financial services, including automated trading and other services
based on technological innovations. Our financial advisory business competes on the basis of a number of factors, including the
quality of advice and service, innovation, reputation and price. Many of our financial advisory segment’s competitors in the
investment banking industry have a greater range of products and services, greater financial and marketing resources, larger customer
bases, greater name recognition, more managing directors to serve their clients’ needs, greater global reach and more established
relationships with their customers than our financial advisory business. Additionally, certain competitors of our financial advisory
business have reorganized or plan to reorganize from investment banks into bank holding companies which may provide them with a
competitive advantage. These larger and better capitalized competitors may be more capable of responding to changes in the
investment banking market, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for
market share generally. Increased pressure created by any current or future competitors, or by competitors of our financial advisory
business collectively, could materially and adversely affect our business and results of operations. Increased competition may result in
reduced revenue and loss of market share. Further, as a strategic response to changes in the competitive environment, our financial
advisory business may from time to time make certain pricing, service or marketing decisions that also could materially and adversely
affect our business and results of operations.
Our mortgage origination and insurance businesses are subject to seasonal fluctuations and, as a result, our results of operations
for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
Our mortgage origination business is subject to several variables that can impact loan origination volume, including seasonal and
interest rate fluctuations. We typically experience increased loan origination volume from purchases of homes during the second and
third calendar quarters, when more people tend to move and buy or sell homes. In addition, an increase in the general level of interest
rates may, among other things, adversely affect the demand for mortgage loans and our ability to originate mortgage loans. In
particular, if mortgage interest rates increase, the demand for residential mortgage loans and the refinancing of residential mortgage
loans will likely decrease, which will have an adverse effect on our mortgage origination activities. Conversely, a decrease in the
general level of interest rates, among other things, may lead to increased competition for mortgage loan origination business. As a
result of these variables, our results of operations for any single quarter are not necessarily indicative of the results that may be
achieved for a full fiscal year.
Generally, our insurance segment’s insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal
concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high
winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter, historically, has experienced the
highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of
the year.
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If the actual losses and loss adjustment expenses of our insurance segment exceed its loss and expense estimates, its financial
condition and results of operations could be materially adversely affected.
The financial condition and results of operations of our insurance segment depend upon its ability to assess accurately the potential
losses associated with the risks that it insures. Our insurance segment establishes reserve liabilities to cover the payment of all losses
and loss adjustment expenses incurred under the policies that it writes. These liability estimates include case estimates, which are
established for specific claims that have been reported to our insurance segment, and liabilities for claims that have been incurred but
not reported (“IBNR”). Loss adjustment expenses represent expenses incurred to investigate and settle claims. To the extent that losses
and loss adjustment expenses exceed estimates, NLIC and ASIC will be required to increase their reserve liabilities and reduce their
income in the period in which the deficiency is identified. In addition, increasing reserves causes a reduction in policyholders’ surplus
and could cause a downgrade in the ratings of NLIC and ASIC. This, in turn, could diminish our ability to sell insurance policies.
The liability estimation process for our insurance segment’s casualty insurance coverage possesses characteristics that make case and
IBNR reserving inherently less susceptible to accurate actuarial estimation than is the case with property coverages. Unlike property
losses, casualty losses are claims made by third-parties of which the policyholder may not be aware and, therefore, may be reported a
significant time after the occurrence, including sometimes years later. As casualty claims most often involve claims of bodily injury,
assessment of the proper case estimates is a far more subjective process than claims involving property damage. In addition, in
determining the case estimate for a casualty claim, information develops slowly over the life of the claim and can subject the case
estimation to substantial modification well after the claim was first reported. Numerous factors impact the casualty case reserving
process, such as venue, the amount of monetary damage, legislative activity, the permanence of the injury and the age of the claimant.
The effects of inflation could cause the severity of claims from catastrophes or other events to rise in the future. Increases in the values
and geographic concentrations of policyholder property and the effects of inflation have resulted in increased severity of industry
losses in recent years, and our insurance segment expects that these factors will increase the severity of losses in the future. As NLC
observed in 2008, the severity of some catastrophic weather events, including the scope and extent of damage and the inability to gain
access to damaged properties, and the ensuing shortages of labor and materials and resulting demand surge, provide additional
challenges to estimating ultimate losses. Our insurance segment’s liabilities for losses and loss adjustment expenses include
assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation
costs. To the extent inflation causes these costs to increase above liabilities established for these costs, our insurance segment expects
to be required to increase its liabilities, together with a corresponding reduction in its net income in the period in which the deficiency
is identified.
Estimating an appropriate level of liabilities for losses and loss adjustment expense is an inherently uncertain process. Accordingly,
actual loss and loss adjustment expenses paid will likely deviate, perhaps substantially, from the liability estimates reflected in our
insurance segment’s consolidated financial statements. Claims could exceed our insurance segment’s estimate for liabilities for losses
and loss adjustment expenses, which could have a material adverse effect on its financial condition and results of operations.
If our insurance segment cannot obtain adequate reinsurance protection for the risks it underwrites or its reinsurers do not pay
losses in a timely fashion, or at all, our insurance segment will suffer greater losses from these risks or may reduce the amount of
business it underwrites, which may materially adversely affect its financial condition and results of operations.
Our insurance segment purchases reinsurance to protect itself from certain risks and to share certain risks it underwrites. During 2013
and 2012, our insurance segment’s personal lines ceded 10.2% and 12.1%, respectively, of its direct insurance premiums written
(primarily through excess of loss, quota share and catastrophe reinsurance treaties) and its commercial lines ceded 4.6% and 4.9%,
respectively, of its direct insurance premiums written (primarily through excess of loss and catastrophe reinsurance treaties). The total
cost of reinsurance, inclusive of per risk excess and catastrophe, decreased 9.3% in the year ended December 31, 2013, which is
partially attributable to reduced limits, lower rates and lower reinstatement premiums in 2013 of $0.2 million. Reinsurance cost
generally fluctuates as a result of storm costs or any changes in capacity within the reinsurance market.
From time to time, market conditions have limited, and in some cases have prevented, insurers from obtaining the types and amounts
of reinsurance that they have considered adequate for their business needs. Accordingly, our insurance segment may not be able to
obtain desired amounts of reinsurance. Even if our insurance segment is able to obtain adequate reinsurance, it may not be able to
obtain it from entities with satisfactory creditworthiness or negotiate terms that it deems appropriate or acceptable. Although the cost
of reinsurance is, in some cases, reflected in our insurance segment’s premium rates, our insurance segment may have guaranteed
certain premium rates to its policyholders. Under these circumstances, if the cost of reinsurance were to increase with respect to
policies for which our insurance segment guaranteed the rates, our insurance segment would be adversely affected. In addition, if our
insurance segment cannot obtain adequate reinsurance protection for the risks it underwrites, it may be exposed to greater losses from
these risks or it may be forced to reduce the amount of business that it underwrites for such risks, which will reduce our insurance
segment’s revenue and may have a material adverse effect on its results of operations and financial condition.
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At December 31, 2013, our insurance segment had $5.2 million in reinsurance recoverables, including ceded paid loss recoverables,
ceded losses and loss adjustment expense recoverables and ceded unearned insurance premiums. Our insurance segment expects to
continue to purchase substantial reinsurance coverage in the foreseeable future. Because our insurance segment remains primarily
liable to its policyholders for the payment of their claims, regardless of the reinsurance it has purchased relating to those claims, in the
event that one of its reinsurers becomes insolvent or otherwise refuses to reimburse our insurance segment for losses paid, or delays in
reimbursing our insurance segment for losses paid, its liability for these claims could materially and adversely affect its financial
condition and results of operations.
We are subject to legal claims and litigation that could have a material adverse effect on our business.
We face significant legal risks in each of the business segments in which we operate, and the volume of legal claims and amount of
damages and penalties claimed in litigation and regulatory proceedings against financial service companies remains high. These risks
often are difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time.
Substantial legal liability or significant regulatory action against us or any of our subsidiaries could have a material adverse effect on
our results of operations or cause significant reputational harm to us, which could seriously harm our business and prospects. Further,
regulatory inquiries and subpoenas, other requests for information, or testimony in connection with litigation may require incurrence
of significant expenses, including fees for legal representation and fees associated with document production. These costs may be
incurred even if we are not a target of the inquiry or a party to the litigation. Any financial liability or reputational damage could have
a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of
operations.
We may be subject to environmental liabilities in connection with the foreclosure on real estate assets securing the loan portfolio
of our banking segment.
Hazardous or toxic substances or other environmental hazards may be located on the real estate that secures our loans. If we acquire
such properties as a result of foreclosure, or otherwise, we could become subject to various environmental liabilities. For example, we
could be held liable for the cost of cleaning up or otherwise addressing contamination at or from these properties. We could also be
held liable to a governmental entity or third party for property damage, personal injury or other claims relating to any environmental
contamination at or from these properties. In addition, we could be held liable for costs relating to environmental contamination at or
from our current or former properties. We may not detect all environmental hazards associated with these properties. If we ever
became subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be
harmed.
If we fail to maintain an effective system of internal controls over financial reporting, the accuracy and timing of our financial
reporting may be adversely affected.
Effective internal controls are necessary for us to provide timely and reliable financial reports and effectively prevent fraud. Any
inability to provide reliable financial reports or prevent fraud could harm our business. If we fail to maintain the adequacy of our
internal controls, our financial statements may not accurately reflect our financial condition. Inadequate internal controls over
financial reporting could impact the reliability and timeliness of our financial reports and could cause investors to lose confidence in
our reported financial information, which could have a negative effect on our business and the value of our securities.
The debt agreements of our insurance segment and its controlled affiliates contain financial covenants and impose restrictions on
its business.
The indenture governing NLC’s LIBOR plus 3.40% notes due 2035 contains restrictions on its ability to, among other things, declare
and pay dividends and merge or consolidate. In addition, this indenture contains a change of control provision, which provides that
(i) if a person or group becomes the beneficial owner, directly or indirectly, of 50% or more of NLC’s equity securities and (ii) if
NLC’s ratings are downgraded by a nationally recognized statistical rating organization (as defined in 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 then outstanding principal amount. Likewise, the surplus indentures governing NLIC’s two LIBOR plus
4.10% and 4.05% notes due 2033 and ASIC’s LIBOR plus 4.05% notes due 2034 contain restrictions on dividends and mergers and
consolidations. In addition, NLC has other credit arrangements with its affiliates and other third-parties.
NLC’s ability to comply with these covenants may be affected by events beyond its control, including prevailing economic, financial
and industry conditions. The breach of any of these restrictions could result in a default under the loan agreements or indentures
governing the notes or under its other debt agreements. An event of default under its debt agreements would permit some of its lenders
to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If NLC were unable to
44
repay debt to its secured lenders, these lenders could proceed against the collateral securing that debt. In addition, acceleration of its
other indebtedness may cause NLC to be unable to make interest payments on the notes. Other agreements that NLC or its insurance
company subsidiaries may enter into in the future may contain covenants imposing significant restrictions on their respective
businesses that are similar to, or in addition to, the covenants under their respective existing agreements. These restrictions may affect
NLC’s ability to operate its business and may limit its ability to take advantage of potential business opportunities as they arise.
Risks Related to our Substantial Cash Position and Related Strategies for its Use
There are risks associated with our proposed acquisition of SWS.
On January 9, 2014, we delivered to the President and Chief Executive Officer of SWS a letter in which we proposed to acquire all of
the outstanding shares of SWS common stock that we do not already own for $7.00 per share in 50% cash and 50% Company
common stock. The cash portion of our offer would be funded through available cash. There is no assurance that we will enter into a
merger agreement with SWS or that any transaction will be consummated.
In addition to the risks we face in connection with acquisitions and indebtedness generally as described under Item 1A of this Annual
Report, we face risks associated with a potential acquisition of SWS, each of which may have an adverse impact on our business,
financial condition, operating results and prospects. Such risks include the following: any issuance of shares of our common stock in
such an acquisition will result in dilution to our existing stockholders; our credit ratings may be adversely affected, which may impact
the cost of future borrowings; the need for required approvals, including regulatory approvals and approval by SWS’s stockholders,
may delay, prevent or otherwise adversely impact an acquisition of SWS or impose conditions that could require divestitures and
otherwise have an impact on our business; the market price of our common stock or other securities may decline as a result of a
proposed or actual acquisition of SWS; a proposed or actual acquisition of SWS may result in our being subject to unknown liabilities
and litigation; such an acquisition could involve unexpected costs and distractions; our ability to successfully integrate our business
and operations with SWS’s is uncertain; and our business may suffer as a result of uncertainty surrounding the timing and likelihood
of any proposed acquisition.
Because we intend to use a substantial portion of our remaining available cash to make acquisitions or effect a business
combination, we may become subject to risks inherent in pursuing and completing any such acquisitions or business combination.
We are endeavoring to make acquisitions or effect business combinations with a substantial portion of our remaining available cash.
We may not, however, be able to identify suitable targets, consummate acquisitions or effect a combination on commercially
acceptable terms or, if consummated, successfully integrate personnel and operations.
The success of any acquisition or business combination will depend upon, among other things, the ability of management and our
employees to integrate personnel, operations, products and technologies effectively, to retain and motivate key personnel and to retain
customers and clients of targets. In addition, any acquisition or business combination we undertake may consume available cash
resources, result in potentially dilutive issuances of equity securities and divert management’s attention from other business concerns.
Even if we conduct extensive due diligence on a target business that we acquire or with which we merge, our diligence may not
surface all material issues that may adversely affect a particular target business, and we may be forced to later write-down or write-off
assets, restructure our operations or incur impairment or other charges that could result in our reporting losses. Consequently, we also
may need to make further investments to support the acquired or combined company and may have difficulty identifying and
acquiring the appropriate resources.
We may enter, through acquisitions or a business combination, into new lines of business or initiate new service offerings subject to
the restrictions imposed upon us as a regulated financial holding company. Accordingly, there is no basis for you to evaluate the
possible merits or risks of the particular target business with which we may combine or that we may ultimately acquire.
Existing circumstances may result in several of our directors having interests that may conflict with our interests.
A director who has a conflict of interest with respect to an issue presented to our board will have no inherent legal obligation to
abstain from voting upon that issue. We do not have provisions in our bylaws or charter that require an interested director to abstain
from voting upon an issue, and we do not expect to add provisions in our charter and bylaws to this effect. Although each director has
a duty to act in good faith and in a manner he or she reasonably believes to be in our best interests, there is a risk that, should
interested directors vote upon an issue in which they or one of their affiliates has an interest, their vote may reflect a bias that could be
contrary to our best interests. In addition, even if an interested director abstains from voting, the director’s participation in the meeting
and discussion of an issue in which they have, or companies with which they are associated have, an interest could influence the votes
of other directors regarding the issue.
45
Difficult market conditions have adversely affected the yield on our available cash.
Our primary objective is to preserve and maintain the liquidity of our available cash, while at the same time maximizing yields
without significantly increasing risk. The capital and credit markets have been experiencing volatility and disruption for a prolonged
period. This volatility and disruption reached unprecedented levels, resulting in dramatic declines in interest rates and other yields
relative to risk. This downward pressure has negatively affected the yields we receive on our available cash. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we will receive any significant yield on our available cash.
Further, given current market conditions, no assurance can be given that we will be able to preserve our available cash.
If regulators determine that we control SWS, we will be required to file appropriate reports with the Federal Reserve Board and
potentially provide financial support.
As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or
more of any class of voting stock. Subject to rebuttal, an investor may be presumed to control a depository institution or other
company if the investor owns or controls ten percent or more of any class of voting stock. At December 31, 2013, we beneficially
owned 24.4% of the outstanding common stock of SWS. In connection with the transactions entered into with SWS, we filed a
Rebuttal of Control, which the Office of Thrift Supervision, now a part of the Office of the Comptroller of the Currency, accepted
based upon the facts represented by us. The transaction documents also provide for mechanisms to prevent us from being deemed to
“control” SWS through our ownership of voting securities. Notwithstanding this finding by the Office of Thrift Supervision, in the
event that we were determined to “control” SWS, we would be required to file appropriate reports as a financial holding company
regulated by the Federal Reserve Board reflecting our controlling interest in SWS. In connection with PlainsCapital Merger, we
provided certain passivity commitments to the Federal Reserve Board related to SWS. These passivity commitments provide that we
cannot take certain actions, namely exercising any controlling influence over management or policies, without the prior approval of
the Federal Reserve Bank.
In addition, it is a policy of the Federal Reserve Board that a bank holding company should serve as a source of financial and
managerial strength to the depository institutions that it controls. The Dodd-Frank Act requires by statute that all holding companies
serve as a source of financial strength for any subsidiary of the holding company. The Federal Reserve Board and the other banking
agencies have not published a proposed rule implementing these “source of strength” requirements. Given that the Federal Reserve
Board became the primary federal regulator of savings and loan holding companies (“SLHCs”), such as SWS, the policy for SLHCs
on this subject likely will be altered to align more closely with those for bank holding companies. The regulators may require certain
financial and other action by a regulated holding company in support of controlled depository institutions even if such action is not in
the best interests of the regulated holding company or its stockholders.
Risks Related to Our Common Stock
We may issue shares of preferred stock or additional shares of common stock to complete an acquisition or effect a combination or
under an employee incentive plan after consummation of an acquisition or combination, which would dilute the interests of our
stockholders and likely present other risks.
The issuance of shares of preferred stock or additional shares of common stock:
• may significantly dilute the equity interest of our stockholders;
• may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded our
common stock;
•
could cause a change in control if a substantial number of shares of common stock are issued, which may affect, among other
things, our ability to use our net operating loss carry forwards; and
• may adversely affect prevailing market prices for our common stock.
Our authorized capital stock includes ten million shares of preferred stock, and we currently have 114,068 shares of Series B Preferred
Stock issued and outstanding, liquidation preference $1,000 per share, to the Secretary of the Treasury pursuant to the SBLF. Our
board of directors, in its sole discretion, may designate and issue one or more additional series of preferred stock from the authorized
and unissued shares of preferred stock. Subject to limitations imposed by law or our articles of incorporation, our board of directors is
empowered to determine the designation and number of shares constituting each series of preferred stock, as well as any designations,
qualifications, privileges, limitations, restrictions or special or relative rights of additional series. The rights of preferred stockholders
may supersede the rights of common stockholders. Preferred stock could be issued with voting and conversion rights that could
adversely affect the voting power of the shares of our common stock. The issuance of preferred stock could also result in a series of
securities outstanding that would have preferences over the common stock with respect to dividends and in liquidation.
46
Our common stock price may experience substantial volatility, which may affect your ability to sell our common stock at an
advantageous price.
Price volatility of our common stock may affect your ability to sell our common stock at an advantageous price. Market price
fluctuations in our common stock may arise due to acquisitions, dispositions or other material public announcements, including those
regarding dividends or changes in management, along with a variety of additional factors, including, without limitation, other risks
identified in “Forward-looking Statements” and these “Risk Factors.” In addition, the stock markets in general, including the NYSE,
have experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of
securities that often have been unrelated or disproportionate to changes in operating performance. These broad market fluctuations
may adversely affect the market price of our common stock.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
We are organized under Maryland law, which provides that a director or officer has no liability in that capacity if he or she performs
his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’
liability to us and our stockholders for money damages, except for liability resulting from actual receipt of an improper benefit or
profit in money, property or services or active and deliberate dishonesty established by a final judgment and that is material to the
cause of action. Our bylaws require us to indemnify our directors and officers for liability resulting from actions taken by them in
those capacities to the maximum extent permitted by Maryland law. As a result, our stockholders and we may have more limited
rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the
defense costs incurred by our directors and officers.
The Treasury’s investment in us imposes restrictions and obligations upon us that could adversely affect the rights of our common
stockholders.
We have sold 114,068 shares of our Series B Preferred Stock, liquidation preference $1,000 per share, for $114.1 million, to the
Secretary of the Treasury pursuant to the SBLF. The shares of Series B Preferred Stock are senior to shares of our common stock with
respect to dividends and liquidation preference. The terms of the Series B Preferred Stock provided for the payment of non-cumulative
dividends on a quarterly basis. As long as shares of Series B Preferred Stock remain outstanding, we may not pay dividends to our
common stockholders (nor may we repurchase or redeem any shares of our common stock) during any quarter in which we fail to
declare and pay dividends on the Series B Preferred Stock and for the next three quarters following such failure. In addition, under the
terms of the Series B Preferred Stock, we may only declare and pay dividends on our common stock (or repurchase shares of our
common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least ninety percent (90%) of
Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Series B Preferred Stock.
Our charter and laws contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect
the market price of our common stock.
Authority to Issue Additional Shares. Under our charter, our board of directors may issue up to an aggregate of ten million shares of
preferred stock without stockholder action. The preferred stock may be issued, in one or more series, with the preferences and other
terms designated by our board of directors that may delay or prevent a change in control of us, even if the change is in the best
interests of stockholders. At December 31, 2013, 114,068 shares of preferred stock were designated or outstanding.
Banking Laws. Any change in control of our company is subject to prior regulatory approval under the Bank Holding Company Act or
the Change in Bank Control Act, which may delay, discourage or prevent an attempted acquisition or change in control of us.
Insurance Laws. NLIC and ASIC are domiciled in the State of Texas. Before a person can acquire control of an insurance company
domiciled in Texas, prior written approval must be obtained from the Texas Department of Insurance. Acquisition of control would be
presumed on the acquisition, directly or indirectly, of ten percent or more of our outstanding voting stock, unless the regulators
determine otherwise. Prior to granting approval of an application to acquire control of a domestic insurer, the Texas Department of
Insurance will consider several factors, such as:
•
•
•
the financial strength of the acquirer;
the integrity and management experience of the acquirer’s board of directors and executive officers;
the acquirer’s plans for the management of the insurer;
47
•
•
•
•
•
the acquirer’s plans to declare dividends, sell assets or incur debt;
the acquirer’s plans for the future operations of the domestic insurer;
the impact of the acquisition on continued licensure of the domestic insurer;
the impact on the interests of Texas policyholders; and
any anti-competitive results that may arise from the consummation of the acquisition of control.
These laws may discourage potential acquisition proposals for us and may delay, deter or prevent a change of control of us, including
transactions that some or all of our stockholders might consider desirable.
Restrictions on Calling Special Meeting, Cumulative Voting and Director Removal. Our bylaws includes a provision prohibiting the
holders of less than a majority of the voting power represented by all of our shares issued, outstanding and entitled to be voted at a
proposed meeting, from calling a special meeting of stockholders. Our charter does not provide for the cumulative voting in the
election of directors. In addition, our charter provides that our directors may only be removed for cause and then only by an
affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. Any amendment to our charter relating
to the removal of directors requires the affirmative vote of two-thirds of all of the votes entitled to be cast on the matter. These
provisions of our bylaws and charter may delay, discourage or prevent an attempted acquisition or change in control of us.
An investment in our common stock is not an insured deposit.
An investment in our common stock is not a bank deposit and is not insured or guaranteed by the FDIC, SIPC, the Texas Department
of Insurance or any other government agency. Accordingly, you should be capable of affording the loss of any investment in our
common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease office space for our principal executive offices in Dallas, Texas. In addition to our principal office, our various business
segments conduct business at various locations.
Banking. At December 31, 2013, our banking segment conducted business at 92 locations throughout Texas, including seven support
facilities. Our banking segment’s principal executive offices are located in Dallas, Texas, in space leased by PlainsCapital. We lease
35 banking locations including our principal offices and we own the remaining 57 banking locations. We have options to renew leases
at most locations.
Mortgage Origination. Our mortgage origination segment is headquartered in Dallas, Texas and at December 31, 2013 conducted
business from over 300 locations in 42 states. Each of these locations is leased by PrimeLending.
Insurance. At December 31, 2013, our insurance segment leases office space in Waco, Texas for all corporate, claims, customer
service and data center operations.
Financial Advisory. Our financial advisory segment is headquartered in Dallas, Texas and at December 31, 2013 conducted business
at 25 locations in 14 states. Each of these offices is leased by First Southwest.
Item 3. Legal Proceedings.
For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 18 to
our Consolidated Financial Statements, which is incorporated by reference herein.
Item 4. Mine Safety Disclosures.
Not applicable.
48
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Securities, Stockholder and Dividend Information
Our common stock is listed on the New York Stock Exchange under the symbol “HTH”. Our common stock has no public trading
history prior to February 12, 2004. Our common stock closed at $24.51 on February 28, 2014. At February 28, 2014, there were
90,177,991 shares of our common stock outstanding with 558 stockholders of record.
In connection with the PlainsCapital Merger, on November 29, 2012, we filed with the State Department of Assessments and Taxation
of the State of Maryland articles supplementary for the Series B Preferred Stock, setting forth its terms. Holders of the Series B
Preferred Stock are entitled to noncumulative cash dividends at a fluctuating dividend rate based on the Bank’s level of qualified small
business lending. The Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to our common stock
with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.
Subject to the restrictions discussed below, our stockholders are entitled to receive dividends when, as, and if declared by our board of
directors out of funds legally available for that purpose. Our board of directors exercises discretion with respect to whether we will
pay dividends and the amount of such dividend, if any. Factors that affect our ability to pay dividends on our common stock in the
future include, without limitation, our earnings and financial condition, liquidity and capital resources, the general economic and
regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant
by our board of directors. We have not declared or paid any dividends over the past two completed fiscal years.
As a holding company, we are ultimately dependent upon our subsidiaries to provide funding for our operating expenses, debt service
and dividends. Various laws limit the payment of dividends and other distributions by our subsidiaries to us, and may therefore limit
our ability to pay dividends on our common stock. In addition, as long as shares of Series B Preferred Stock remain outstanding, we
may not pay dividends to our common stockholders (nor may we repurchase or redeem any shares of our common stock) during any
quarter in which we fail to declare and pay dividends on the Series B Preferred Stock and for the next three quarters following such
failure. In addition, under the terms of the Series B Preferred Stock, we may only declare and pay dividends on our common stock (or
repurchase shares of our common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least
ninety percent (90%) of Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Series B Preferred
Stock.
If required payments on our outstanding junior subordinated debentures held by our unconsolidated subsidiary trusts are not made or
suspended, we may be prohibited from paying dividends on our common stock. Regulatory authorities could impose administratively
stricter limitations on the ability of our subsidiaries to pay dividends to us if such limits were deemed appropriate to preserve certain
capital adequacy requirements. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Liquidity and Capital Resources — Restrictions on Dividends and Distributions.”
The following table discloses the high and low sales prices per quarter for our common stock during 2013 and 2012. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Year Ended December 31, 2013
First Quarter ....................................
Second Quarter ................................
Third Quarter ..................................
Fourth Quarter .................................
Year Ended December 31, 2012
First Quarter ....................................
Second Quarter ................................
Third Quarter ..................................
Fourth Quarter .................................
$
$
$
$
$
$
$
$
Price Range
High
Low
14.21
16.94
18.71
24.05
9.10
10.89
12.80
14.49
$
$
$
$
$
$
$
$
12.34
12.59
15.46
17.09
7.87
7.75
10.21
12.57
49
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2013 with respect to compensation plans under which shares of our
common stock may be issued. Additional information concerning our stock-based compensation plans is presented in Note 20, Stock-
Based Compensation, in the notes to our consolidated financial statements.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by
security holders* .................................................
Total ...................................................................
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)
600,000
600,000
$
$
7.70
7.70
3,519,657
3,519,657
*Excludes shares of restricted stock granted under the 2003 equity incentive plan (the “2003 Plan”), as all such shares are vested. No
exercise price is required to be paid upon the vesting of the restricted shares of common stock granted. In September 2012, our
stockholders approved the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”), which allows for the granting of
nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent
rights and other awards to employees of Hilltop, its subsidiaries and outside directors of Hilltop. Upon the effectiveness of the 2012
Plan, no additional awards are permissible under the 2003 Plan. In the aggregate, 4,000,000 shares of common stock may be delivered
pursuant to awards granted under the 2012 Plan. At December 31, 2013, 480,343 awards had been granted pursuant to the 2012 Plan.
All shares outstanding under the 2003 Plan and the 2012 Plan, whether vested or unvested, are entitled to receive dividends and to
vote, unless forfeited. No participant in our 2012 Plan may be granted awards in any fiscal year covering more than 1,250,000 shares
of our common stock.
Issuer Repurchases of Equity Securities
There were no repurchases of shares of common stock during the three months ended December 31, 2013.
Recent Sales of Unregistered Securities
All sales of unregistered securities have previously been reported.
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2013 and 2012 and our consolidated statements of operations data for
the years ended December 31, 2013, 2012 and 2011 have been derived from our audited historical consolidated financial statements
included elsewhere in this Annual Report. The following table shows our selected historical financial data for the periods indicated.
You should read our selected historical financial data, together with the notes thereto, in conjunction with the more detailed
information contained in our consolidated financial statements and related notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Annual Report. Our operating results for 2012 include the results from
the operations acquired in the PlainsCapital Merger for the month of December 2012 and the operations acquired in the FNB
Transaction are included in our operating results beginning September 14, 2013 (dollars in thousands, except per share data and
weighted average shares outstanding).
50
2013
2012
2011
2010
2009
Statement of Operations Data:
Total interest income...................................................
Total interest expense .................................................
Net interest income (loss) ...........................................
Provision for loan losses .............................................
Net interest income (loss) after provision for loan
losses .......................................................................
Total noninterest income .............................................
Total noninterest expense ...........................................
Income (loss) before income taxes ..............................
Income tax expense (benefit) ......................................
Net income (loss) ........................................................
Less: Net income attributable to
noncontrolling interest ............................................
Income (loss) attributable to Hilltop ...........................
Dividends on preferred stock and other (1) .................
Income (loss) applicable to Hilltop common
$
329,075
32,874
296,201
37,158
259,043
850,085
911,735
197,393
70,684
126,709
1,367
125,342
4,327
$
$
$
39,038
10,196
28,842
3,800
11,049
8,985
2,064
—
$
8,154
8,971
(817)
—
25,042
224,232
255,517
(6,243)
(1,145)
(5,098)
494
(5,592)
259
2,064
141,650
155,254
(11,540)
(5,009)
(6,531)
—
(6,531)
—
(817)
124,073
124,811
(1,555)
(1,007)
(548)
—
(548)
12,939
6,866
9,668
(2,802)
—
(2,802)
122,377
123,036
(3,461)
(1,349)
(2,112)
—
(2,112)
10,313
stockholders ............................................................
$
121,015
$
(5,851) $
(6,531) $
(13,487) $
(12,425)
Per Share Data:
Net income (loss) - basic .............................................
Weighted average shares outstanding - basic ..............
Net income (loss) - diluted ..........................................
Weighted average shares outstanding - diluted ...........
Book value per common share ....................................
Tangible book value per common share .....................
$
$
$
$
1.43
84,382
1.40
90,331
13.27
9.70
$
$
$
$
(0.10) $
(0.12) $
(0.24) $
58,754
56,499
56,492
(0.10) $
(0.12) $
(0.24) $
58,754
12.34
8.37
56,499
11.60
11.01
$
$
56,492
11.56
10.95
$
$
(0.22)
56,474
(0.22)
56,474
11.77
11.13
Balance Sheet Data:
Total assets ..................................................................
Cash and due from banks ............................................
Securities .....................................................................
Loans held for sale ......................................................
Non-covered loans, net of unearned income ...............
Covered loans .............................................................
Allowance for loan losses ...........................................
Goodwill and other intangible assets, net ...................
Total deposits ..............................................................
Notes payable ..............................................................
Junior subordinated debentures ...................................
Total stockholders’ equity ...........................................
$ 8,903,223
713,099
1,261,989
1,089,039
3,514,646
1,006,369
(34,302)
322,729
6,722,019
56,327
67,012
1,311,922
$ 7,286,865
722,039
1,081,066
1,401,507
3,152,396
—
(3,409)
331,508
4,700,461
141,539
67,012
1,146,550
925,425
578,520
224,200
—
—
—
—
33,062
—
131,450
—
655,383
$ 939,641
649,439
148,965
—
—
—
—
34,587
—
138,350
—
653,055
$ 1,040,752
790,013
129,968
—
—
—
—
36,229
—
138,350
—
783,777
$
$
$
2013
2012
2011
2010
2009
Performance Ratios (2):
Return on average stockholders’ equity ......................
Return on average assets .............................................
Net interest margin (taxable equivalent) (3) ...............
Efficiency ratio (4)(5)(6) .............................................
11.00%
1.67%
4.47%
42.58%
-0.62%
-0.08%
4.64%
NM
Asset Quality Ratios (2):
Total nonperforming assets to total loans and
other real estate (5)..................................................
3.70%
Allowance for loan losses to
nonperforming loans (5) .........................................
Allowance for loan losses to total loans (5) ................
Net charge-offs to average loans outstanding (5) ........
Capital Ratios:
136.39%
0.76%
0.18%
51
NM
NM
NM
NM
Equity to assets ratio ...................................................
Tangible common equity to tangible assets ................
Regulatory Capital Ratios (2):
Hilltop - Leverage ratio (7) .........................................
Hilltop - Tier 1 risk-based capital ratio .......................
Hilltop - Total risk-based capital ratio ........................
Bank - Leverage ratio (7) ............................................
Bank - Tier 1 risk-based capital ratio ..........................
Bank - Total risk-based capital ratio ...........................
Other Data (8):
Net loss and LAE ratio ................................................
Expense ratio...............................................................
GAAP combined ratio .................................................
Statutory surplus (9) ....................................................
Statutory premiums to surplus ratio ............................
2013
2012
2011
2010
2009
14.73%
10.19%
15.71%
10.05%
70.82%
69.74%
69.50%
68.33%
75.31%
62.56%
12.81%
18.53%
19.13%
9.29%
13.38%
14.00%
70.3%
32.3%
102.6%
13.08%
17.72%
17.81%
8.84%
11.83%
11.93%
74.4%
34.4%
108.8%
72.2%
34.0%
106.2%
60.5%
36.0%
96.5%
61.0%
35.7%
96.8%
$
125,054
$
120,319
$
118,708
$ 119,297
$ 117,063
130.7%
125.0%
119.4%
102.0%
98.0%
(1) Series A preferred stock was redeemed in September 2010.
(2) Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations prior to the
PlainsCapital Merger are limited to our insurance operations. Therefore, noted measures for periods prior to 2012 are not a useful
measure and have been excluded.
(3) Taxable equivalent net interest income divided by average interest-earning assets. Our operations prior to the PlainsCapital Merger
are limited to our insurance operations. Therefore, noted measure for 2012 reflects the ratio for the month ended December 31,
2012.
(4) Noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(5) Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations prior to the
PlainsCapital Merger are limited to our insurance operations. Additionally, noted measure is not meaningful (“NM”) in 2012.
(6) Only considers operations of banking segment.
(7) Ratio for 2012 was calculated using the average assets for the month of December.
(8) Only considers operations of insurance segment.
(9) Statutory surplus includes combined surplus of NLIC and ASIC.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We present two measures in our selected financial data that are not measures of financial performance recognized by GAAP.
“Tangible book value per common share” is defined as our total stockholders’ equity, excluding preferred stock, reduced by goodwill
and other intangible assets, divided by total common shares outstanding. “Tangible common stockholders’ equity to tangible assets” is
defined as our total stockholders’ equity, excluding preferred stock, reduced by goodwill and other intangible assets divided by total
assets reduced by goodwill and other intangible assets.
These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive
of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can
result in the recording of significant amounts of goodwill and other intangible assets related to those transactions.
You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not
necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these non-GAAP
financial measures to the most comparable GAAP financial measures, “book value per common share” and “Hilltop stockholders’
equity to total assets” (dollars in thousands, except per share data).
52
Book value per common share ...........................
Effect of goodwill and intangible
assets per share ...............................................
Tangible book value per common share .............
Hilltop stockholders’ equity ...............................
Less: preferred stock ...........................................
Less: goodwill and intangible assets, net ............
Tangible common equity ....................................
Total assets .........................................................
Less: goodwill and intangible assets, net ............
Tangible assets ....................................................
Equity to assets ...................................................
Tangible common equity to tangible assets ........
2013
2012
December 31,
2011
2010
2009
$
13.27
$
12.34
$
11.60
$
11.56
$
11.77
(3.97) $
(3.57) $
$
$
$
$
8.37
9.70
$ 1,144,496
$ 1,311,141
$
114,068
114,068
331,508
322,729
698,920
874,344
7,286,865
8,903,223
331,508
322,729
6,955,357
8,580,494
(0.64)
(0.61) $
(0.59) $
$
$
11.13
10.95
11.01
$ 783,777
$ 653,055
655,383
119,108
—
—
36,229
34,587
33,062
628,440
618,468
622,321
1,040,752
939,641
925,425
36,229
34,587
33,062
1,004,523
905,054
892,363
14.73%
10.19%
15.71%
10.05%
70.82%
69.74%
69.50%
68.33%
75.31%
62.56%
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to help the reader understand our results of operations and financial condition and is provided as
a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes
thereto commencing on page F-1. In addition to historical financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our results and the timing of selected events may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under
“Item 1A. Risk Factors” and elsewhere in this Annual Report. See “Forward-Looking Statements.” All dollar amounts in the
following discussion are in thousands, except per share amounts.
Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and
its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to
“PlainsCapital” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to the “Bank” refer to
PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First National Bank, references to
“First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole,
references to “FSC” refer to First Southwest Company (a wholly owned subsidiary of First Southwest), references to
“PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a
whole and references to “NLC” refer to National Lloyds Corporation, formerly known as NLASCO, Inc., (a wholly owned subsidiary
of Hilltop) and its subsidiaries as a whole.
OVERVIEW
Beginning in 1995, we operated as several companies under the name “Affordable Residential Communities” or “ARC,” now known
as Hilltop Holdings Inc., a Maryland corporation. We engaged in the business of acquiring, renovating, repositioning and operating
manufactured home communities, as well as certain related businesses.
In January 2007, we acquired NLC. NLC owns National Lloyds Insurance Company, or NLIC, and American Summit Insurance
Company, or ASIC, both of which are licensed property and casualty insurers operating in multiple states. In addition, NLC also owns
NALICO GA, a general agency that operates in Texas. NLIC commenced business in 1949 and currently operates in 14 states, with its
largest market being the state of Texas. NLIC carries a financial strength rating of “A” (Excellent) by A.M. Best. ASIC was formed in
1955 and currently operates in 13 states, its largest market being the state of Arizona. ASIC carries a financial strength rating of “A”
(Excellent) by A.M. Best. Both of these companies are regulated by the Texas Department of Insurance.
On July 31, 2007, we sold substantially all of the operating assets used in our manufactured home communities business and our retail
sales and financing business to American Residential Communities LLC. We received gross proceeds of approximately $890 million
in cash, which represents the aggregate purchase price of $1.8 billion, less the indebtedness assumed by the buyer. After giving effect
to expenses, taxes and our preferred stock and senior notes that remained outstanding following the sale, our net cash balance was
approximately $550 million. As a result of the sale, our primary operations through November 2012 were limited to providing fire and
homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United
States through NLC.
53
On November 30, 2012, we acquired PlainsCapital Corporation in a stock and cash transaction, whereby PlainsCapital Corporation
merged with and into our wholly owned subsidiary, which continued as the surviving entity under the name “PlainsCapital
Corporation” (the “PlainsCapital Merger”). Based on Hilltop’s closing stock price on November 30, 2012, the total purchase price was
$813.5 million, consisting of 27.1 million shares of common stock, $311.8 million in cash and the issuance of 114,068 shares of
Hilltop Non-Cumulative Perpetual Preferred Stock, Series B (“Hilltop Series B Preferred Stock”). The fair value of assets acquired,
excluding goodwill, totaled $6.5 billion, including $3.2 billion of loans, $730.8 million of investment securities and $70.7 million of
identifiable intangibles. The fair value of the liabilities assumed was $5.9 billion, including $4.5 billion of deposits.
Concurrent with the consummation of the PlainsCapital Merger, we became a financial holding company registered under the Bank
Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999.
On September 13, 2013 (the “Bank Closing Date”), the Bank assumed substantially all of the liabilities, including all of the deposits,
and acquired substantially all of the assets of Edinburg, Texas-based FNB from the Federal Deposit Insurance Corporation (the
“FDIC”), as receiver, and reopened former branches of FNB acquired from the FDIC under the “PlainsCapital Bank” name (the “FNB
Transaction”). Pursuant to the Purchase and Assumption Agreement by and among the FDIC as receiver for FNB, the FDIC and the
Bank (the “P&A Agreement”), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the
losses of certain covered loans and covered other real estate owned (“OREO”) that the Bank acquired in the FNB Transaction. Based
on preliminary purchase date valuations, the fair value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans,
$286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2
billion in liabilities, consisting primarily of deposits.
Following the PlainsCapital Merger, our primary line of business has been to provide business and consumer banking services from
offices located throughout central, north and west Texas through the Bank. Further, the acquisition of FNB’s expansive branch
network allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus
Christi, Laredo and El Paso markets, among others. In addition to the Bank, our other subsidiaries have specialized areas of expertise
that allow us to provide an array of financial products and services such as mortgage origination, insurance and financial advisory
services.
At December 31, 2013, on a consolidated basis, we had total assets of $8.9 billion, total deposits of $6.7 billion, total loans, including
loans held for sale, of $5.6 billion and stockholders’ equity of $1.3 billion. Our operating results beginning December 1, 2012 include
the banking, mortgage origination and financial advisory operations acquired in the PlainsCapital Merger. Accordingly, our operating
results and financial condition for the year ended December 31, 2013 are not comparable to prior years. Additionally, the presentation
of our historical consolidated financial statements for 2011 has been modified and certain items have been reclassified to conform to
the 2012 and 2013 presentation, which is more consistent with that of a financial institution that provides an array of financial
products and services. Our banking operations include the operations acquired in the FNB Transaction since September 14, 2013.
Segment Information
As a result of the PlainsCapital Merger, we have two primary operating business units, PlainsCapital (financial services and products)
and NLC (insurance). Within the PlainsCapital unit are three primary wholly owned operating subsidiaries: the Bank, PrimeLending
and First Southwest. Under accounting principles generally accepted in the United States (“GAAP”), following the PlainsCapital
Merger our business units were comprised of four reportable business segments organized primarily by the core products offered to
the segments’ respective customers: banking, mortgage origination, insurance and financial advisory. These segments reflect the
manner in which operations are managed and the criteria used by our chief operating decision maker function to evaluate segment
performance, develop strategy and allocate resources. Our chief operating decision maker function consists of the President and Chief
Executive Officer of Hilltop and the Chief Executive Officer of PlainsCapital. During the fourth quarter of 2013, we began presenting
certain amounts previously allocated to the four reportable business segments within Corporate to better reflect our internal
organizational structure. This change had no impact on our consolidated results of operations. Our historical segment disclosures and
MD&A have been revised to conform to the current presentation. Consistent with the segment operating results during 2013, we
anticipate that future revenues will be driven primarily from the banking and mortgage origination segments, with the remainder being
generated by our insurance and financial advisory segments. Based on historical results of PlainsCapital Corporation, the relative
share of total revenue provided by our banking and mortgage origination segments fluctuates depending on market conditions, and
operating results for the mortgage origination segment tend to be more volatile than operating results for the banking segment.
The banking segment includes the operations of the Bank and, since September 14, 2013, the operations acquired in the FNB
Transaction. The banking segment primarily provides business and consumer banking products and services from offices located
throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent
54
on net interest income, while also deriving revenue from other sources, including service charges on customer deposit accounts and
trust fees.
The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products from offices in 42
states and generates revenue predominantly from fees charged on the origination of loans and from selling these loans in the secondary
market.
The insurance segment includes the operations of NLC, which operates through its wholly owned subsidiaries, NLIC and ASIC.
Insurance segment income is primarily generated from revenue earned on net insurance premiums less loss and loss adjustment
expenses (“LAE”) and policy acquisition and other underwriting expenses in Texas and other areas of the southern United States.
The financial advisory segment generates a majority of its revenues from fees and commissions earned from investment advisory and
securities brokerage services at First Southwest. The principal subsidiaries of First Southwest are FSC, a broker-dealer registered with
the Securities and Exchange Commission (the “SEC”) and Financial Industry Regulatory Authority, and First Southwest Asset
Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940. FSC holds trading securities to support
sales, underwriting and other customer activities. These securities are marked to market through other noninterest income. FSC uses
derivatives to support mortgage origination programs of certain non-profit housing organization clients. FSC hedges its related
exposure to interest rate risk from these programs with U.S. Agency to-be-announced, or TBA, mortgage-backed securities. These
derivatives are marked to market through other noninterest income.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing
and investing activities, and management and administrative services to support the overall operations of the Company including, but
not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business
segments. Balance sheet amounts for remaining subsidiaries not discussed previously and the elimination of intercompany transactions
are included in “All Other and Eliminations.”
Additional information concerning our reportable segments is presented in Note 30, Segment and Related Information, in the notes to
our consolidated financial statements. The following tables present certain information about the operating results of our reportable
segments (in thousands).
Year Ended December 31, 2013
Net interest income (expense)
Provision for loan losses .........
Noninterest income .................
Noninterest expense ................
Income (loss) before
Banking
$ 293,254 $
37,140
71,045
155,102
Mortgage
Origination Insurance
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
(37,840) $
—
537,497
472,284
7,442 $
—
166,163
166,006
12,064 $
18
102,714
112,360
(1,597 ) $
—
—
10,439
22,878 $
—
(27,334)
(4,456)
Consolidated
296,201
37,158
850,085
911,735
income taxes ..................
$ 172,057 $
27,373 $
7,599 $
2,400 $
(12,036 ) $
— $
197,393
Year Ended December 31, 2012
Net interest income (expense)
Provision for loan losses ..........
Noninterest income ..................
Noninterest expense .................
Income (loss) before
Banking
$ 24,885 $
Mortgage
Origination Insurance
(4,987) $
—
57,618
50,296
4,730 $
—
154,147
163,585
3,670
4,601
16,130
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
1,191 $
130
10,909
11,078
39 $
—
—
14,487
Consolidated
28,842
3,800
224,232
255,517
2,984 $
—
(3,043)
(59)
income taxes ....................
$
9,686 $
2,335 $
(4,708) $
892 $ (14,448) $
— $
(6,243)
Year Ended December 31, 2011
Net interest income (expense)
Provision for loan losses ..........
Noninterest income ..................
Noninterest expense .................
Income (loss) before
Banking
$
Mortgage
Origination Insurance
— $
—
—
—
4,915 $
—
141,650
146,386
— $
—
—
—
— $
—
—
—
(2,851) $
—
—
8,868
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
Consolidated
2,064
—
141,650
155,254
— $
—
—
—
income taxes ....................
$
— $
— $
179 $
— $ (11,719) $
— $
(11,540)
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the
income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the
deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results.
55
Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect
net interest income. We generated $296.2 million in net interest income during the year ended December 31, 2013, compared with net
interest income of $28.8 million in 2012 and net interest income of $2.1 million in 2011. The significant year-over-year increases in
net interest income were primarily due to $267.5 million and $21.1 million in net interest income during the year ended December 31,
2013 and the month ended December 31, 2012, respectively, generated by those operations acquired as part of the PlainsCapital
Merger.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i)
(ii)
(iii)
Income from mortgage operations. Through our wholly owned subsidiary, PrimeLending, we generate noninterest
income by originating and selling mortgage loans. During the year ended December 31, 2013, we generated $537.3
million in net gains from the sale of loans, other mortgage production income (including income associated with
retained mortgage servicing rights), and mortgage loan origination fees, compared with $57.6 million during the
month ended December 31, 2012.
Net insurance premiums earned. Through our wholly owned insurance subsidiary, NLC, we provide fire and
limited homeowners insurance for low value dwellings and manufactured homes. We generated $157.5 million,
$146.7 million and $134.0 million in net insurance premiums earned during 2013, 2012 and 2011, respectively.
Investment advisory fees and commissions and securities brokerage fees and commissions. Through our wholly
owned subsidiary, First Southwest, we provide public finance advisory and various investment banking and
brokerage services. We generated $93.1 million in investment advisory fees and commissions and securities
brokerage fees and commissions during the year ended December 31, 2013, compared with $11.2 million during the
month ended December 31, 2012.
In the aggregate, we generated $850.1 million, $224.2 million and $141.7 million in noninterest income during 2013, 2012 and 2011,
respectively. The significant year-over-year increases in noninterest income during 2013 and 2012 were primarily due to the inclusion
of the mortgage origination and financial advisory operations that we acquired as a part of the PlainsCapital Merger.
We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and,
consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.
Consolidated Operating Results
The income applicable to common stockholders for the year ended December 31, 2013 was $121.0 million, or $1.40 per diluted share,
compared to losses applicable to common stockholders of $5.9 million, or $0.10 per diluted share for the year ended December 31,
2012, and $6.5 million, or $0.12 per diluted share, for the year ended December 31, 2011.
As a result of the PlainsCapital Merger on November 30, 2012, the net income of PlainsCapital is included in our operating results for
the year ended December 31, 2013 and the month ended December 31, 2012. The operations acquired in the FNB Transaction are
included in our operating results beginning September 14, 2013, and are therefore not fully reflected in our consolidated statement of
operations for the year ended December 31, 2013. FNB’s results of operations prior to September 14, 2013 are not included in our
consolidated operating results. We expect the operations acquired in the FNB Transaction to have a significant effect on the Bank’s
operating results in future periods.
The FNB Transaction was accounted for using the purchase method of accounting, and accordingly, purchased assets, including
identifiable intangible assets and assumed liabilities, were recorded at their respective Bank Closing Date fair values using significant
estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. During the quarter ended December 31,
2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were
adjusted as a result of additional information obtained primarily related to the fair values of loans, covered OREO, amounts receivable
under the loss-share agreements with the FDIC (“FDIC Indemnification Asset”), premises and equipment and other intangible assets.
These adjustments resulted in a preliminary bargain purchase gain associated with the FNB Transaction during 2013 of $12.6 million,
before taxes of $4.5 million, which is included within noninterest income. Due to the short time period between the Bank Closing Date
and December 31, 2013, the real estate appraisal validation exercise remains outstanding and the Bank Closing Date valuations related
to covered OREO and FDIC Indemnification Asset are considered preliminary and could differ significantly when finalized.
Certain items included in net income for 2012 and 2013 resulted from purchase accounting associated with the PlainsCapital Merger
and FNB Transaction. Income before taxes for 2013 includes net accretion of $58.5 million and $10.2 million on earning assets and
liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of
56
$9.8 million and $0.3 million, respectively. Loss before taxes for 2012 includes net accretion of $5.9 million on earning assets and
liabilities acquired in the PlainsCapital Merger and amortization of identifiable intangibles of $0.8 million.
We consider the ratios shown in the table below to be key indicators of our performance.
Performance Ratios (1):
Return on average stockholders’ equity ..................................................
Return on average assets .........................................................................
Net interest margin (taxable equivalent) (2) ...........................................
Year ended
December 31, 2013
11.00%
1.67%
4.47%
(1) Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations
prior to the acquisition of PlainsCapital are limited to our insurance operations. Therefore, noted measures for periods
prior to 2013 are not useful measures and have been excluded.
(2) Taxable equivalent net interest income divided by average interest-earning assets.
During the year ended December 31, 2013, the consolidated taxable equivalent net interest margin of 4.47% was impacted by
PlainsCapital Merger related accretion of discount on loans of $61.8 million, amortization of premium on acquired securities of $5.7
million and amortization of premium on acquired time deposits of $2.4 million. Additionally, FNB Transaction related accretion of
discount on loans of $7.5 million and amortization of premium on acquired time deposits of $2.7 million also impacted the
consolidated taxable equivalent net interest margin during the year ended December 31, 2013. These items increased the consolidated
taxable equivalent net interest margin by 103 basis points for the year ended December 31, 2013. The consolidated taxable equivalent
net interest margin was 4.64% for the month ended December 31, 2012. The taxable equivalent net interest margin was impacted by
PlainsCapital Merger related accretion of discount on loans of $6.3 million, amortization of premium on acquired securities of $0.7
million and amortization of premium on acquired time deposits of $0.4 million. These items increased the consolidated taxable
equivalent interest margin by 110 basis points for the month ended December 31, 2012.
The table below provides additional details regarding our consolidated net interest income (dollars in thousands). Our operations prior
to the PlainsCapital Merger were limited to our insurance operations. Therefore, the consolidated net interest income for 2012 reflects
details for the month ended December 31, 2012.
Year Ended
December 31, 2013
Average
Interest
Outstanding
Earned or
Month Ended
December 31, 2012
Annualized
Yield or
Average
Outstanding
Interest
Earned or
Balance
Paid
Rate
Balance
Paid
Annualized
Yield or
Rate
Assets
Interest-earning assets
Loans, gross (1) ..................................
Investment securities - taxable ...........
Investment securities -
non-taxable (2) ...............................
Federal funds sold and securities
purchased under agreements to
resell ................................................
Interest-bearing deposits in other
$ 4,584,079 $
993,389
284,782
27,078
6.21% $ 4,513,214 $
2.75%
719,910
23,900
1,604
6.21%
2.69%
192,933
7,150
3.71%
230,733
698
2.51%
27,996
113
0.40%
54,017
106
2.35%
financial institutions ........................
Other ...................................................
Interest-earning assets, gross...................
Allowance for loan losses ...................
Interest-earning assets, net ......................
Noninterest-earning assets ......................
Total assets ................................................
727,284
160,320
6,686,001
(22,906)
6,663,095
985,308
$ 7,648,403
1,848
10,479
331,450
574,913
0.25%
159,181
6.11%
4.96% 6,251,968
(159)
6,251,809
747,284
$ 6,999,093
80
651
27,039
0.25%
4.43%
5.04%
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits .....................
$ 5,088,963 $
14,877
0.29% $ 4,339,928 $
1,013
0.28%
57
Notes payable and other borrowings ...
Total interest-bearing liabilities ..............
Noninterest-bearing liabilities .................
Noninterest-bearing deposits ...............
Other liabilities ...................................
Total liabilities ........................................
Stockholders’ equity ...............................
Noncontrolling interest ...........................
Total liabilities and stockholders’
equity ......................................................
Net interest income (2) ..............................
Net interest spread (2) ..............................
Net interest margin (2) ..............................
709,642
5,798,605
203,996
449,197
6,451,798
1,195,961
644
17,997
32,874
2.19%
910,010
0.56% 5,249,938
1,351
2,364
1.51%
0.52%
214,586
636,479
6,101,003
896,567
1,523
$ 7,648,403
$ 6,999,093
$
298,576
$
24,675
4.40%
4.47%
4.52%
4.64%
(1) Average balance includes non-accrual loans.
(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $2.4 million and $0.2 million
for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.
On a consolidated basis, net interest income increased $267.4 million during 2013, compared with 2012, while net interest income
increased $26.8 million during 2012, compared with 2011. These increases were primarily due to the inclusion of the results of
operations of the banking segment, which was acquired in the PlainsCapital Merger on November 30, 2012. Net interest income prior
to December 2012 was limited to interest income on securities and interest expense on notes payable of the insurance segment.
The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb
probable losses within the existing loan portfolio. The consolidated provision for loan losses, primarily in the banking segment, was
$37.2 million during 2013. During 2013, the provision for loan losses was comprised of charges relating to newly originated loans and
acquired loans without credit impairment at acquisition of $33.1 million and purchased credit impaired (“PCI”) loans of $4.1 million.
Consolidated noninterest income increased $625.9 million during 2013, compared with 2012, while consolidated noninterest income
increased $82.6 million during 2012, compared with 2011. These increases were primarily due to the inclusion of $640.2 million and
$68.5 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, of noninterest income
generated from the operations of the mortgage origination and financial advisory segments acquired in the PlainsCapital Merger.
Consolidated noninterest income during 2013 also included an increase in net insurance premiums earned of $10.8 million, compared
with 2012, and an increase of $12.7 million during 2012, compared with 2011. In addition, as previously discussed, the FNB
Transaction resulted in the recognition of a preliminary pre-tax bargain purchase gain of $12.6 million during 2013.
Our consolidated noninterest expense during 2013 increased $656.2 million, compared with 2012, while consolidated noninterest
expense during 2012 increased $100.3 million, compared with 2011. The increases primarily resulted from the inclusion of $739.7
million and $77.5 million during the year ended December 31, 2013 and month ended December 31, 2012, respectively, in employees’
compensation and benefits, occupancy and equipment and other expenses specifically attributable to those segments acquired as a part
of the PlainsCapital Merger. Included in employee’s compensation and benefits expense during 2012 includes an $8.9 million expense
related to the separate retention agreements between Hilltop and two executive officers of PlainsCapital entered into in connection
with the PlainsCapital Merger. Other noninterest expenses during 2012 include PlainsCapital Merger related expenses of $6.6 million.
The balance of increases in our consolidated noninterest expenses during 2013 and 2012 were primarily related to loss and LAE and
policy acquisition and other underwriting expenses specific to our insurance segment.
Consolidated income tax expense during 2013 was $70.7 million, reflecting an effective rate of 35.8%. During 2012 and 2011, we
recorded income tax benefits, due to losses from operations, of $1.1 million and $5.0 million, respectively, reflecting effective rates of
18.3% and 43.4%, respectively. The increase in income tax expense during 2013 was due to the operating income generated by our
business segments. The effective income tax rates for 2012 and 2011 are not indicative of future effective income tax rates as a result
of the PlainsCapital Merger.
58
Segment Results
Banking Segment
Income before income taxes in our banking segment for the year ended December 31, 2013 and the month ended December 31, 2012
was $172.1 million and $9.7 million, respectively, and was primarily driven by net interest income of $293.3 million and $24.9
million, respectively, partially offset by noninterest expenses of $155.1 million and $16.1 million, respectively.
At December 31, 2013, the Bank exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of
14.00%, Tier 1 capital to risk weighted assets ratio of 13.38% and a Tier 1 capital to average assets, or leverage, ratio of 9.29%. At
December 31, 2013, the Bank was also considered to be “well-capitalized” under regulatory requirements without giving effect to the
final Basel III capital rules adopted by the Federal Reserve Board on July 2, 2013. For additional discussion of the final Basel III
capital rules, see Item 1, “Business — Government Supervision and Regulation — PlainsCapital Bank — Basel III.”
We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.
Performance Ratios (1):
Efficiency ratio (2) ........................................................................
Return on average assets ...............................................................
Net interest margin (taxable equivalent) (3) ..................................
Year ended
December 31, 2013
42.58%
1.79%
5.17%
(1) The banking segment was acquired on November 30, 2012. Therefore, noted measures for periods prior to 2013 are not useful
measures and have been excluded.
(2) Noninterest expenses divided by the sum of total noninterest income and net interest income for the period.
(3) Taxable equivalent net interest income divided by average interest-earning assets.
During the year ended December 31, 2013, the banking segment’s taxable equivalent net interest margin of 5.17% was impacted by
PlainsCapital Merger related accretion of discount on loans of $61.8 million, amortization of premium on acquired securities of $5.7
million and amortization of premium on acquired time deposits of $2.4 million. Additionally, FNB Transaction related accretion of
discount on loans of $7.5 million and amortization of premium on acquired time deposits of $2.7 million also impacted the banking
segment’s taxable equivalent net interest margin during the year ended December 31, 2013. These items increased the banking
segment’s taxable equivalent net interest margin by 120 basis points for the year ended December 31, 2013. The banking segment’s
taxable equivalent net interest margin for the month ended December 31, 2012 of 5.83% was impacted by PlainsCapital Merger
related accretion of discount on loans of $6.3 million, amortization of premium on acquired securities of $0.7 million and amortization
of premium on acquired time deposits of $0.4 million. These items increased the banking segment’s taxable equivalent interest margin
by 140 basis points for the month ended December 31, 2012.
The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
Year Ended
December 31, 2013
Average
Interest
Outstanding
Earned or
Month Ended
December 31, 2012
Annualized
Yield or
Average
Outstanding
Interest
Earned or
Balance
Paid
Rate
Balance
Paid
Annualized
Yield or
Rate
Assets
Interest-earning assets
Loans, gross (1) ..................................
Subsidiary warehouse lines of
$ 3,279,228 $
238,314
7.27% $ 2,886,549 $
19,228
7.99%
credit ..............................................
Investment securities - taxable ...........
Investment securities - non-taxable (2)
Federal funds sold and securities
purchased under agreements to
resell ................................................
Interest-bearing deposits in other
financial institutions .......................
Other ...................................................
Interest-earning assets, gross...................
947,064
792,860
158,739
51,114
14,625
5,715
5.40% 1,261,768
494,285
1.84%
175,850
3.60%
5,984
444
479
5.69%
1.08%
3.27%
26,373
75
0.28%
33,180
48
1.74%
494,220
31,794
5,730,278
1,319
1,311
312,473
299,464
0.27%
33,594
4.12%
5.45% 5,184,690
68
57
26,308
0.27%
2.04%
6.09%
59
Year Ended
December 31, 2013
Average
Interest
Outstanding
Earned or
Month Ended
December 31, 2012
Annualized
Yield or
Average
Outstanding
Interest
Earned or
Allowance for loan losses ...................
Interest-earning assets, net ......................
Noninterest-earning assets ......................
Total assets ................................................
(22,752)
5,707,526
939,916
$ 6,647,442
248
5,184,938
814,461
$ 5,999,399
Balance
Paid
Rate
Balance
Paid
Annualized
Yield or
Rate
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits .....................
Notes payable and other borrowings ...
Total interest-bearing liabilities (3) .........
Noninterest-bearing liabilities .................
Noninterest-bearing deposits ...............
Other liabilities ...................................
Total liabilities ........................................
Stockholders’ equity ...............................
Total liabilities and stockholders’
equity ......................................................
Net interest income (2) ..............................
Net interest spread (2) ..............................
Net interest margin (2) ..............................
$ 5,065,935 $
391,111
5,457,046
253,562
39,028
5,749,636
897,806
14,889
1,340
16,229
0.29% $ 4,267,736 $
0.34%
560,572
0.30% 4,828,308
1,009
123
1,132
0.28%
0.26%
0.28%
289,871
58,492
5,176,671
822,728
$ 6,647,442
$ 5,999,399
$
296,244
$
25,176
5.15%
5.17%
5.81%
5.83%
(1) Average balance includes non-accrual loans.
(2) Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $2.0 million and $0.2 million
for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.
(3) Excludes the allocation of interest expense on PlainsCapital debt of $1.0 million and $0.1 million for the year ended December 31,
2013 and the month ended December 31, 2012, respectively.
The banking segment’s net interest margin shown above exceeds our consolidated net interest margin. Our consolidated net interest
margin includes the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the
financial advisory segment, as well as the borrowing costs of Hilltop and PlainsCapital, both of which reduce our consolidated net
interest margin. In addition, the banking segment’s interest earning assets include lines of credit extended to subsidiaries, the yields on
which increase the banking segment’s net interest margin. Such yields and costs are eliminated from the consolidated financial
statements.
Because the operations of the banking segment acquired in the PlainsCapital Merger are not included in our results of operations for
the full fiscal year ended December 31, 2012, the table summarizing the changes in our net interest income due to variances in the
volume of our interest-earning assets and interest-bearing liabilities would not be meaningful and has therefore been omitted.
The banking segment’s noninterest income was $71.0 million and $4.6 million during the year ended December 31, 2013 and the
month ended December 31, 2012 and primarily related to intercompany financing charges associated with the lending commitment on
the PrimeLending warehouse line of credit. Noninterest income during the year ended December 31, 2013 also included the
recognition of a preliminary pre-tax bargain purchase gain of $12.6 million in connection with the FNB Transaction.
The banking segment’s noninterest expenses were $155.1 million and $16.1 million during the year ended December 31, 2013 and the
month ended December 31, 2012, respectively, and were primarily comprised of employees’ compensation and benefits, and
occupancy expenses.
Mortgage Origination Segment
Income before income taxes in our mortgage origination segment for the year ended December 31, 2013 and the month ended
December 31, 2012 was $27.4 million and $2.3 million, respectively. Income before income taxes was primarily driven by noninterest
income of $537.5 million and $57.6 million during the year ended December 31, 2013 and the month ended December 31, 2012,
respectively, partially offset by noninterest expense of $472.3 million and $50.3 million during the year ended December 31, 2013 and
the month ended December 31, 2012, respectively. Additionally, net interest expense of $37.8 million and $5.0 million during the year
ended December 31, 2013 and the month ended December 31, 2012, respectively, resulted from interest incurred on a warehouse line
of credit held at the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for
sale.
60
PrimeLending originates all of its mortgage loans through a retail channel. The following table provides certain details regarding our
mortgage loan originations for the year ended December 31, 2013 (dollars in thousands).
Mortgage Loan Originations -
units ...................................................
Mortgage Loan Originations -
volume ..............................................
Mortgage Loan Originations:
Conventional .................................
Government ...................................
Jumbo ............................................
Other .............................................
Home purchases ............................
Refinancings .................................
Texas .............................................
California ......................................
North Carolina ..............................
Virginia .........................................
Florida ...........................................
Arizona ..........................................
Maryland .......................................
Ohio ..............................................
Washington ...................................
All other states ..............................
Volume
55,781
11,792,562
7,505,437
3,465,078
780,604
41,443
11,792,562
8,178,970
3,613,592
11,792,562
2,660,810
2,082,184
618,802
466,531
456,643
392,006
385,215
383,518
360,100
3,986,753
11,792,562
$
$
$
$
$
$
$
% of
Total
63.65%
29.38%
6.62%
0.35%
100.00%
69.36%
30.64%
100.00%
22.56%
17.66%
5.25%
3.96%
3.87%
3.32%
3.27%
3.25%
3.05%
33.81%
100.00%
The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate
fluctuations. Historically, we have typically experienced increased loan origination volume from purchases of homes during the spring
and summer, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in
decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased
refinancings. Changes in interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.
Beginning in May 2013 and continuing through the fourth quarter of 2013, mortgage interest rates increased at a pace that, along with
other factors, resulted in a 21.2% decrease in the mortgage origination segment’s total loan origination volume during the third and
fourth quarters of 2013 when compared to the first and second quarters of 2013. Home purchases volume during the six months ended
June 30, 2013 and December 31, 2013 was $4.0 billion and $4.2 billion, respectively, reflecting a 5.1% increase, while refinancing
volume decreased from $2.6 billion (39.5% of total loan origination volume) to $1.0 billion (19.3% of total loan origination volume)
between the same periods. Due to recent volatility in mortgage interest rates and uncertain consumer confidence, 2014 mortgage loan
origination volume may vary from origination trends historically experienced by the mortgage origination segment.
While PrimeLending’s total loan origination volume decreased 21.2% during the third and fourth quarters of 2013 compared to the
first and second quarters of 2013, income before income taxes decreased 107.4% between the same periods ($29.6 million income
compared to a $2.2 million loss). Income before income taxes decreased at a greater rate primarily because segment operating costs
included in noninterest expenses, such as employee related (salaries and benefits), occupancy and administrative expenses, decreased
at a lesser rate, approximately 4%, than loan origination volume decreased between the two periods. To address negative trends in
loan origination volume resulting from changes in interest rates that began in May 2013, the mortgage origination segment reduced its
non-origination employee headcount approximately 22% during the third and fourth quarters of 2013. Third quarter segment operating
costs were not significantly impacted by the headcount reductions, because the decreases in employees’ salaries and benefits resulting
from the reductions were mostly offset by related severance expenses incurred during the quarter. Salaries and benefits expenses
decreased approximately 9% between the third and fourth quarters, as the benefits of the headcount reductions in the third quarter of
2013 began to be realized. We are also engaged in other initiatives to reduce segment operating costs that were primarily responsible
61
for the decrease of approximately 4% in non-employee related expenses between the third and fourth quarters noted above. We
anticipate that we will begin to realize the full benefits of the employee reductions and the other cost savings initiatives during the first
quarter of 2014. Also impacting the trend in income before taxes, to a lesser extent, was a decrease in loan revenue margins resulting
from increased competition.
PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing
released. During the first and second quarters of 2013, PrimeLending retained servicing on approximately 8% of loans sold. This rate
was increased to approximately 22% during the third and fourth quarters of 2013. The related mortgage servicing rights asset was
valued at $20.1 million on $2.0 billion of serviced loan volume as of December 31, 2013, compared to a value of $2.1 million at
December 31, 2012. All income related to retained servicing, including changes in the value of the mortgage servicing rights asset, is
included in noninterest income.
Noninterest income of $537.5 million and $57.6 million for the year ended December 31, 2013 and the month ended December 31,
2012, respectively, was comprised of net gains on the sale of loans and other mortgage production income, and mortgage origination
fees. As a result of increased competition, noninterest income decreased at a greater rate, 27.6%, during the third and fourth quarters
of 2013 when compared to the first and second quarters of 2013 than the decrease in loan origination volume experienced during the
same periods, which was 21.2%. Noninterest income during the year ended December 31, 2013 included $11.1 million of net losses
resulting from changes in the fair value of the mortgage origination segment’s interest rate lock commitments (“IRLCs”) and loans
held for sale, and the related activity associated with forward commitments used by PrimeLending to mitigate interest rate risk
associated with its IRLCs and mortgage loans held for sale. The loss was primarily the result of a decrease in the volume of IRLCs
and mortgage loans held for sale between December 31, 2012 and December 31, 2013.
Noninterest expenses were $472.3 million and $50.3 million for the year ended December 31, 2013 and the month ended
December 31, 2012, respectively. Employees’ compensation and benefits accounted for the majority of the noninterest expenses
incurred. Compensation that varies with the volume of mortgage loan originations and overall segment profitability comprised
approximately 59% of the total employees’ compensation and benefits expenses during the year ended December 31, 2013.
PrimeLending records unreimbursed closing costs when it pays a customer’s closing costs in return for the customer choosing to
accept a higher interest rate on the customer’s mortgage loan. Unreimbursed closing costs during the year ended December 31, 2013
and the month ended December 31, 2012 were $30.1 million and $5.9 million, respectively.
Between January 1, 2005, and December 31, 2013, the mortgage origination segment sold mortgage loans totaling $55.5 billion. These
loans were sold under sales contracts that generally include provisions which hold the mortgage origination segment responsible for
errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as
to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales
contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early
payment default. While the mortgage origination segment sold loans prior to 2005, it has not experienced, nor does it anticipate
experiencing, significant losses on loans originated prior to 2005 as a result of investor claims under these provisions of its sales
contracts.
When an investor claim for indemnification of a loan sold is made, we evaluate the claim and determine if the claim can be satisfied
through additional documentation or other deliverables. If the claim cannot be satisfied in that manner, we negotiate with the investor
to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the investor for
losses incurred on the loan. The following table summarizes the mortgage origination segment’s claims resolution activity relating to
loans sold between January 1, 2005, and December 31, 2013 (dollars in thousands).
Original Loan Balance
% of
Loans
Sold
Amount
Loss Recognized
% of
Loans
Sold
Amount
Claims resolved with no payment .................................
$
130,917
0.24% $
—
0.00%
Claims resolved as a result of a loan repurchase or
payment to an investor for losses incurred (1) ..........
172,006
302,923
$
0.31%
0.55% $
21,929
21,929
0.04%
0.04%
(1) Losses incurred include refunded purchased servicing rights.
62
At December 31, 2013 and 2012, the mortgage origination segment’s indemnification liability reserve totaled $21.1 million and $19.0
million, respectively. The related provision for indemnification losses was $3.5 million and $0.4 million for the year ended
December 31, 2013 and the month ended December 31, 2012, respectively.
Insurance Segment
Income before income taxes in our insurance segment was $7.6 million during 2013, compared with a loss before income taxes of $4.7
million during 2012 and income before income taxes of $0.2 million during 2011. Included within noninterest income of the insurance
segment during 2013 is the recognition of a non-recurring gain of $3.7 million. This non-recurring gain, which is eliminated upon
consolidation, is due to our redemption during the fourth quarter of 2013 of $6.9 million in aggregate principal amount of 7.50%
Senior Exchangeable Notes due 2025 (the “Notes”) of HTH Operating Partnership LP (“OP”), a wholly owned subsidiary of Hilltop,
which were held by our insurance subsidiaries. The insurance segment is subject to claims arising out of severe weather, the incidence
and severity of which are inherently unpredictable. Generally, the insurance segment’s insured risks exhibit higher losses in the second
and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although
weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar
quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more
likely to occur in the third calendar quarter of the year.
The insurance segment had positive results during 2013, despite experiencing three tornado, wind and hail storms during the second
quarter of 2013. Based on estimates of the ultimate cost, two of these storms are now considered catastrophic losses as they exceeded
our $8.0 million reinsurance retention during the third quarter of 2013. The estimate of ultimate losses from these storms totaled $26.5
million at December 31, 2013 with a net loss, after reinsurance, of $22.1 million during 2013. These net costs compare favorably to
the prior year given our improved containment of expected losses from the weather events in May 2013 at June 30, 2013 compared to
prior year activity. This year-over-year improvement contributed to a combined ratio of 102.6% during 2013, compared with 108.8%
and 106.2% during 2012 and 2011, respectively. The 6.2% decrease in the combined ratio in 2013 compared to 2012 was primarily
driven by the increase in earned premiums and improved containment of expected losses as previously noted. The 2.6% increase in the
combined ratio in 2012 compared to 2011 was primarily driven by higher incurred losses associated with wind and hail losses and
storms that occurred in Texas during 2012 compared to the prior year, offset slightly by the increase in earned premiums. The
combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of the loss and LAE ratio and the
underwriting expense ratio, which are discussed in more detail below.
Noninterest income of $166.2 million, $154.1 million and $141.7 million during 2013, 2012 and 2011, respectively, included net
insurance premiums earned of $157.5 million, $146.7 million and $134.0 million, respectively. The increases in earned premiums are
primarily attributable to volume and, to a lesser extent, rate increases in homeowners and mobile home products.
Direct insurance premiums written by major product line are presented in the table below (in thousands).
Direct Insurance Premiums Written:
Homeowners ..........................................
Fire .........................................................
Mobile Home .........................................
Commercial ...........................................
Other ......................................................
2013
Year Ended December 31,
2012
2011
2013 vs 2012
2012 vs 2011
Variance
$
$
79,711 $
54,566
34,940
4,489
276
173,982 $
73,943 $
51,345
30,123
8,043
326
163,780 $
70,177 $
49,812
26,353
8,380
332
155,054 $
5,768 $
3,221
4,817
(3,554)
(50)
10,202 $
3,766
1,533
3,770
(337)
(6)
8,726
Total direct insurance premiums written for our three largest insurance product lines increased by $13.8 million during 2013,
compared to 2012, and by $9.1 million during 2012, compared to 2011. These increases were due to growth in our core insurance
products, partially offset by decreases of $3.5 million and $0.3 million in 2013 and 2012, respectively, related to a commercial product
line that was non-renewed.
63
Net insurance premiums earned by major product line are presented in the table below (in thousands).
Net Insurance Premiums Earned:
Homeowners ..........................................
Fire .........................................................
Mobile Home .........................................
Commercial ...........................................
Other ......................................................
2013
Year Ended December 31,
2012
2011
2013 vs 2012
2012 vs 2011
Variance
$
$
72,175 $
49,407
31,636
4,065
250
157,533 $
66,233 $
45,990
26,982
7,204
292
146,701 $
60,671 $
43,063
22,783
7,244
287
134,048 $
5,942 $
3,417
4,654
(3,139)
(42)
10,832 $
5,562
2,927
4,199
(40)
5
12,653
Net insurance premiums earned during 2013 and 2012 increased compared to 2012 and 2011, respectively, primarily due to the
increases in net insurance premiums written of $13.0 million and $8.7 million in 2013 and 2012, respectively. These increases were
offset by increases in unearned insurance premiums of $2.1 million and $3.9 million during 2013 and 2012, respectively, in each case
as compared to the prior year.
Noninterest expenses of $166.0 million, $163.6 million and $146.4 million during 2013, 2012 and 2011, respectively, include both
loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE
are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported
losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE during 2013 was
$110.8 million, as compared to $109.2 million and $96.7 million during 2012 and 2011, respectively. As a result, the loss and LAE
ratio during 2013, 2012 and 2011 was 70.3%, 74.4% and 72.2%, respectively. The ratio improvement during 2013, compared to 2012,
was primarily a result of growth of earned premium and the improved containment of expected losses from the prior year weather
events as previously discussed. The increase in the loss and LAE ratio during 2012, compared to 2011, was primarily due to increased
severity of wind and hail storms from April, May and June 2012 weather events, partially offset by earned premium growth.
We seek to generate underwriting profitability through our insurance segment. Management evaluates NLC’s loss and LAE ratio by
bifurcating the losses to derive catastrophic and non-catastrophic loss ratios. The non-catastrophic loss ratio excludes Property Claims
Services events that exceed $1.0 million of losses to NLC. Catastrophic events, including those that do not exceed our reinsurance
retention, affect insurance segment loss ratios. During 2013, catastrophic events that did not exceed our reinsurance retention
accounted for $22.3 million of the total loss and loss adjustment expense, as compared to $23.3 million and $20.3 million during 2012
and 2011, respectively. Excluding catastrophic events, our combined ratios during 2013, 2012 and 2011 would have improved by
14.3%, 15.8% and 15.2%, respectively.
Policy acquisition and other underwriting expenses encompass all expenses incurred relative to NLC operations, and include elements
of multiple categories of expense otherwise reported as noninterest expense in the consolidated statements of operations. Included in
other underwriting expenses during 2012 is a $1.7 million write down of a policy administration system NLC was unable to
successfully implement. Excluding this 2012 write down, the expense ratio during 2012 would have decreased by 1.1%.
The following table details the calculation of the underwriting expense ratio for the periods presented (dollars in thousands).
Amortization of deferred policy
acquisition costs .................................
Other underwriting expenses .................
Total ......................................................
Agency expenses ....................................
Total less agency expenses ....................
Net insurance premiums earned .............
Expense ratio..........................................
$
$
$
2013
Year Ended December 31,
2012
2011
2013 vs 2012
2012 vs 2011
Variance
40,592 $
12,859
53,451
(2,571)
50,880 $
157,533 $
32.3%
38,757 $
13,829
52,586
(2,073)
50,513 $
146,701 $
34.4%
34,755 $
12,670
47,425
(1,789)
45,636 $
134,048 $
34.0%
1,835 $
(970)
865
(498)
367 $
10,832 $
-2.1%
4,002
1,159
5,161
(284)
4,877
12,653
0.4%
During 2013, the insurance segment initiated a review of the pricing of its primary products in each state of operation utilizing a
consulting actuarial firm to supplement normal review processes. Rate filings have been made for certain products in several states for
increases effective in 2014, and the process will continue through the remainder of its products and states in which it operates.
Concurrently, business concentrations were reviewed and actions initiated, including cancellation of agents, non-renewal of policies
and cessation of new business writing on certain products in problematic geographic areas. We expect that these actions will reduce
the rate of premium growth for 2014 when compared with the patterns exhibited in prior years. However, we expect the reduced
exposure to volatile weather to improve our loss experience during 2014.
64
Financial Advisory Segment
Income before income taxes in our financial advisory segment for the year ended December 31, 2013 and the month ended
December 31, 2012 were $2.4 million and $0.9 million, respectively. Rising interest rates along with increased volatility in fixed
income markets have resulted in reduced sales of fixed income securities to institutional customers, some trading losses on securities
held to support those sales and reduction in financial advisory fee income.
The financial advisory segment had net interest income of $12.1 million and $1.2 million during the year ended December 31, 2013
and the month ended December 31, 2012, respectively, consisting of securities lending activity, customer margin loan balances and
investment securities used to support sales, underwriting and other customer activities.
The majority of noninterest income for the year ended December 31, 2013 and the month ended December 31, 2012 of $102.7 million
and $10.9 million, respectively, was generated from fees and commissions earned from investment advisory and securities brokerage
activities of $93.1 million and $11.2 million, respectively. The financial advisory segment participates in programs in which it issues
forward purchase commitments of mortgage-backed securities to certain clients and sells TBAs. Changes in the fair values of these
derivative instruments during the year ended December 31, 2013 and the month ended December 31, 2012 produced net gains of
$11.4 million and $0.2 million, respectively. Changes in the fair value of the financial advisory segment’s trading portfolio, which is
used to support sales, underwriting and other customer activities, produced losses of $1.8 million and $0.6 million during the year
ended December 31, 2013 and the month ended December 31, 2012, respectively.
Noninterest expenses were $112.4 million and $11.1 million for the year ended December 31, 2013 and the month ended
December 31, 2012, respectively. Employees’ compensation and benefits and occupancy and equipment accounted for the majority of
the costs incurred.
Corporate
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing
and investing activities, and management and administrative services to support the overall operations of the Company including, but
not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business
segments.
As a holding company, Hilltop’s primary investment objectives are to preserve capital and have available cash resources to utilize in
making acquisitions. Investment and interest income earned, primarily from available cash and available-for-sale securities, including
our note receivable from SWS Group Inc. (“SWS”), were $6.6 million, $7.0 million and $4.3 million during 2013, 2012 and 2011,
respectively.
Interest expense of $8.2 million, $7.0 million and $7.1 million during 2013, 2012 and 2011 was entirely due to interest costs
associated with the Notes. During 2013, interest expense included the recognition of a non-recurring charge of $2.1 million due to the
write-off of remaining unamortized loan origination fees associated with the Notes being called for redemption during the fourth
quarter of 2013.
Noninterest expenses of $10.4 million, $14.5 million and $8.9 million during 2013, 2012 and 2011, respectively, primarily include
compensation and benefits, professional fees and transaction costs associated with acquisition efforts. During 2013, noninterest
expenses included the recognition of a non-recurring loss of $3.7 million associated with the Notes held by our insurance segment
being called for redemption during the fourth quarter of 2013. This loss was eliminated in consolidation. In addition, noninterest
expenses included $0.1 million, $6.4 million and $2.6 million of transaction costs associated with acquisition efforts during 2013,
2012 and 2011, respectively.
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2013 as compared to 2012 and
2011.
65
Securities Portfolio
At December 31, 2013, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies,
obligations of municipalities and other political subdivisions, primarily in the State of Texas, mortgage-backed, corporate debt, and
equity securities, a note receivable and a warrant. We have the ability to categorize investments as trading, available for sale, and held
to maturity.
Our securities portfolio consists of two major components: trading securities and securities available for sale. Trading securities are
bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through
operations and held at the Bank and First Southwest. Securities that may be sold in response to changes in market interest rates,
changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as
available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other
comprehensive income (loss).
The table below summarizes our securities portfolio (in thousands).
2013
December 31,
2012
2011
Trading securities, at fair value
$
58,846 $
90,113 $
Securities available for sale, at fair value
U.S. Treasury securities .......................
U.S. government agencies:
Bonds ...............................................
Residential mortgage-backed
securities ......................................
Collateralized mortgage
obligations ...................................
Corporate debt securities .....................
States and political subdivisions ..........
Commercial mortgage-
43,528
7,185
662,732
526,237
60,087
18,893
120,461
76,608
156,835
97,924
87,177
175,759
backed securities..............................
Equity securities ..................................
Note receivable ....................................
Warrant ................................................
Total securities portfolio .......................
$
760
22,079
47,909
12,144
1,261,989 $
1,073
20,428
44,160
12,117
1,081,066 $
—
—
29,165
12,652
—
100,681
—
2,303
19,022
38,588
21,789
224,200
We had a net unrealized loss of $53.7 million and net unrealized gains of $12.5 million and $21.5 million related to the available for
sale investment portfolio at December 31, 2013, 2012 and 2011, respectively. The significant increase in the net unrealized loss
position of our available for sale investment portfolio during 2013 was due to effects of an increase in market interest rates since
May 2013 that resulted in a decrease in the fair value of our debt securities.
Banking Segment
The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional
interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold
under agreements to repurchase and other purposes. The available for sale securities portfolio serves as a source of liquidity.
Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of
municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At December 31, 2013, the
banking segment’s securities portfolio of $1.0 billion was comprised of trading securities of $21.0 million and available for sale
securities of $1.0 billion. The banking segment’s portfolio at December 31, 2013 included available for sale securities acquired in
connection with the FNB Transaction with a book value of $60.4 million, down from a book value of $286.3 million at the Bank
Closing Date. Subsequent to the Bank Closing Date, securities acquired in the FNB Transaction with a book value of $223.5 million
were either sold, matured or called. These additions to the Bank’s balance sheet represent additional support for its liquidity needs.
66
Insurance Segment
Our insurance segment’s primary investment objective is to preserve capital and manage for a total rate of return. NLC’s strategy is to
purchase securities in sectors that represent the most attractive relative value. Our insurance segment invests the premiums it receives
from policyholders until they are needed to pay policyholder claims or other expenses. At December 31, 2013, the insurance
segment’s securities portfolio was comprised of $131.6 million in available for sale securities and $5.3 million of other investments
included in other assets within the consolidated balance sheet.
Financial Advisory Segment
Our financial advisory segment holds securities to support sales, underwriting and other customer activities. Because FSC is a broker-
dealer, it is required to carry its securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly,
FSC classifies its securities portfolio of $37.9 million at December 31, 2013 as trading.
Corporate
Available for sale securities of Hilltop at December 31, 2013 include the note receivable from, and warrant to purchase shares of SWS
of $60.1 million, and equity securities of $9.0 million representing those shares of SWS common stock held by Hilltop.
The following table sets forth the estimated maturities of securities, excluding trading and available for sale equity securities.
Contractual maturities may be different (dollars in thousands, yields are tax-equivalent).
One Year
Or Less
One Year to
Five Years
December 31, 2013
Five Years to
Greater Than
Ten Years
Ten Years
Total
U.S. government agencies:
U.S. Treasury securities:
Amortized cost ........................
Fair value ................................
Weighted average yield ..........
$
25,705 $
25,712
0.10%
13,041 $
13,014
0.91%
4,938 $
4,802
2.65%
— $
—
—
43,684
43,528
0.63%
Bonds:
Amortized cost ........................
Fair value ................................
Weighted average yield ..........
Residential mortgage-backed
securities:
Amortized cost ........................
Fair value ................................
Weighted average yield ..........
Collateralized mortgage
obligations:
Amortized cost ........................
Fair value ................................
Weighted average yield ..........
Corporate debt securities:
Amortized cost ............................
Fair value ....................................
Weighted average yield ..............
States and political subdivisions:
Amortized cost ............................
Fair value ....................................
Weighted average yield ..............
Commercial mortgage-backed
securities:
Amortized cost ............................
Fair value ....................................
Weighted average yield ..............
Note receivable:
Amortized cost ............................
12,249
12,654
2.67%
24,415
24,595
2.63%
76,382
74,376
1.65%
40,201
43,825
4.74%
5,303
5,349
2.86%
—
—
—
42,674
89,697
89,706
0.36%
—
—
—
7,344
7,419
2.54%
4,248
4,278
3.72%
700
720
5.57%
—
—
—
—
67
26,524
26,338
2.71%
589,439
534,034
1.94%
717,909
662,732
1.78%
14,145
14,205
3.93%
26,852
24,697
1.48%
27,011
27,590
3.66%
13,309
13,162
2.92%
—
—
—
—
21,376
21,287
4.00%
59,936
60,087
3.42%
13,924
13,969
4.45%
916
915
6.22%
143,643
137,604
3.76%
124,502
120,461
1.98%
72,376
76,608
4.30%
162,955
156,835
3.67%
691
760
6.08%
691
760
6.08%
—
42,674
Fair value ....................................
Weighted average yield ..............
Warrant:
Amortized cost ............................
Fair value ....................................
Weighted average yield ..............
Total securities portfolio:
Amortized cost ............................
Fair value ....................................
Weighted average yield ..............
Non-Covered Loan Portfolio
One Year
Or Less
One Year to
Five Years
December 31, 2013
Five Years to
Greater Than
Ten Years
Ten Years
Total
—
—
—
—
—
47,909
10.25%
12,068
12,144
0.61%
—
—
—
—
—
—
—
—
—
—
47,909
10.25%
12,068
12,144
0.61%
127,694
127,835
0.58%
226,333
233,866
3.91%
112,779
110,794
2.82%
769,989
708,569
1,236,795
1,181,064
2.39%
2.52%
Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and segregated
between those considered to be purchased credit impaired (“PCI”) loans and all other originated or acquired loans at December 31,
2013 (in thousands). PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal
and interest payments will not be collected.
$
December 31, 2013
Commercial and industrial ................
Real estate..........................................
Construction and land development ..
Consumer ..........................................
Non-covered loans, gross ..............
Allowance for loan losses ..................
Non-covered loans,
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
1,600,450 $
1,418,003
344,734
51,067
3,414,254
(30,104)
36,816 $
39,250
19,817
4,509
100,392
(3,137)
1,637,266
1,457,253
364,551
55,576
3,514,646
(33,241)
net of allowance .........................
$
3,384,150 $
97,255 $
3,481,405
$
December 31, 2012
Commercial and industrial ................
Real estate..........................................
Construction and land development ..
Consumer ..........................................
Non-covered loans, gross ..............
Allowance for loan losses ..................
Non-covered loans,
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
1,588,907 $
1,122,667
247,413
26,629
2,985,616
(3,409)
71,386 $
62,247
33,070
77
166,780
—
1,660,293
1,184,914
280,483
26,706
3,152,396
(3,409)
net of allowance .........................
$
2,982,207 $
166,780 $
3,148,987
Banking Segment
The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the
maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally
parallels the quality and yield of its loan portfolio. The banking segment’s loan portfolio is presented below in two sections, “— Non-
Covered Loan Portfolio” and “— Covered Loan Portfolio.” The “Covered Loan Portfolio” consists of loans acquired in the FNB
Transaction that are subject to loss-share agreements with the FDIC and is discussed below. The “Non-Covered Loan Portfolio”
includes all other loans held by the Bank, which we refer to as “non-covered loans,” and is discussed herein.
The banking segment’s total non-covered loans, net of the allowance for non-covered loan losses, were $4.3 billion and $4.1 billion at
December 31, 2013 and 2012, respectively. The banking segment’s non-covered loan portfolio includes a $1.3 billion warehouse line
of credit extended to PrimeLending, of which $1.0 billion was drawn at December 31, 2013, as well as term loans to First Southwest
that had an outstanding balance of $23.0 million at December 31, 2013. Amounts advanced against the warehouse line of credit and
the First Southwest term loans are eliminated from net loans on our consolidated balance sheets. Prior to September 2013, the
warehouse line of credit extended to PrimeLending had $1.6 billion of availability, of which $1.3 billion was drawn at December 31,
2012, while the outstanding balance on a term loan to First Southwest was $4.0 million at December 31, 2012.
68
The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. At
December 31, 2013, the banking segment’s only non-covered loan concentration (loans to borrowers engaged in similar activities) that
exceeded 10% of its total non-covered loans was non-construction residential real estate loans within our non-covered real estate
portfolio. At December 31, 2013, non-construction residential real estate loans were 41.27% of the banking segment’s total non-
covered loans. The banking segment’s non-covered loan concentrations were within regulatory requirements at December 31, 2013.
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages
funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and
funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total
loans held for sale were $1.1 billion and $1.4 billion at December 31, 2013 and 2012, respectively.
The components of the mortgage origination segment’s loans held for sale and pipeline loans are as follows (in thousands).
Loans held for sale:
Unpaid principal balance .......................
Fair value adjustment .............................
Pipeline loans:
Unpaid principal balance .......................
Fair value adjustment .............................
December 31,
2013
2012
$
$
$
$
1,066,850
21,555
1,088,405
602,467
12,151
614,618
$
$
$
$
1,359,829
40,908
1,400,737
968,083
15,150
983,233
Financial Advisory Segment
The loan portfolio of the financial advisory segment consists primarily of margin loans to customers and correspondents. These loans
are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are
believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as
well as FSC’s internal policies. The financial advisory segment’s total non-covered loans, net of the allowance for non-covered loan
losses, were $281.6 million and $277.0 million at December 31, 2013 and 2012, respectively. This increase was primarily attributable
to increased borrowings in margin accounts held by FSC customers and correspondents.
Covered Loan Portfolio
Banking Segment
Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as “covered loans” and
reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to
reimburse the Bank for: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up
to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-
share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss
recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with
the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the
Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up”
payment is calculated using a defined formula set forth in the P&A Agreement.
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since
origination. Based on purchase date valuations, the banking segment’s portfolio of acquired covered loans had a fair value of $1.1
billion as of the Bank Closing Date, with no carryover of any allowance for loan losses.
69
Covered loans held for investment at December 31, 2013 are detailed in the table below and classified by portfolio segment (in
thousands).
Loans, excluding
PCI Loans
PCI
Loans
Commercial and industrial .............................
Real estate.......................................................
Construction and land development ...............
Consumer .......................................................
Covered loans, gross ...................................
Allowance for loan losses ...............................
Covered loans, net of allowance .................
$
$
28,533
223,304
25,376
—
277,213
(179)
277,034
$
$
38,410
564,678
126,068
—
729,156
(882)
728,274
$
$
Total
Loans
66,943
787,982
151,444
—
1,006,369
(1,061)
1,005,308
At December 31, 2013, the banking segment had covered loan concentrations (loans to borrowers engaged in similar activities) that
exceeded 10% of total covered loans in its real estate portfolio. The areas of concentration within our covered real estate portfolio
were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real
estate loans. At December 31, 2013, construction and land development loans, non-construction residential real estate loans, and non-
construction commercial real estate loans were 21.98%, 28.63% and 36.67%, respectively, of the banking segment’s total covered
loans. The banking segment’s covered loan concentrations were within regulatory requirements at December 31, 2013.
Loan Portfolio Maturities
Banking Segment
The following table provides information regarding the maturities of the banking segment’s non-covered and covered commercial and
real estate loans held for investment, net of unearned income (in thousands).
Commercial and industrial ..................................................
Real estate (including construction and
December 31, 2013
Due Within
One Year
Due From One
To Five Years
Due After
Five Years
$
1,928,236 $
413,160 $
98,996 $
Total
2,440,392
land development) ...........................................................
Total ................................................................................
$
437,650
2,365,886 $
903,358
1,316,518 $
1,421,425
1,520,421 $
2,762,433
5,202,825
Fixed rate loans ...................................................................
Floating rate loans ...............................................................
Total ................................................................................
$
$
2,169,850 $
196,036
2,365,886 $
1,243,462 $
73,056
1,316,518 $
1,332,608 $
187,813
1,520,421 $
4,745,920
456,905
5,202,825
In the table above, floating rate loans that have reached their applicable rate floor or ceiling are classified as fixed rate loans rather
than floating rate loans. The majority of floating rate loans carry an interest rate tied to The Wall Street Journal Prime Rate, as
published in The Wall Street Journal.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents
management’s best estimate of probable losses inherent in our existing non-covered and covered loan portfolios. Our management has
responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our board of
directors and the Loan Review Committee of the Bank’s board of directors.
It is our management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the
allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Estimated credit losses are the probable current
amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management
determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged-off against the allowance for loan
losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs that occurred prior to
the PlainsCapital Merger represent contractual cash flows not expected to be collected and are recorded as accretion income.
Recoveries on loans charged-off subsequent to the PlainsCapital Merger are credited to the allowance for loan loss, except for
recoveries on loans accounted for in pools, which are credited to the pool discount.
70
We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies
Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired
loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment
measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the
loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided
in our estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent
loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss
for the Contingencies Topic are calculated based on historical loss experience by collateral type adjusted for changes in trends,
conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience
provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to
determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors
that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including
but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and business
conditions and developments that affect the collectability of the portfolio; the condition of various market segments; changes in the
nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume and
severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations
of credit and changes in the level of such concentrations.
We design our loan review program to identify and monitor problem loans by maintaining a credit grading process, requiring that
timely and appropriate changes are made to reviewed loans and coordinating the delivery of the information necessary to assess the
appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed,
typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified,
(iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a
problem. We review on an individual basis all loan relationships over $0.5 million that exhibit probable or observed credit
weaknesses, the top 25 loan relationships by dollar amount in each market we serve, and additional relationships necessary to achieve
adequate coverage of our various lending markets.
Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually
reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of
loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic
conditions. At December 31, 2013, we had no material delinquencies in these types of loans.
The allowance is subject to regulatory examination and determination as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for
our existing non-covered and covered portfolios at December 31, 2013, additional provisions for losses on existing loans may be
necessary in the future. Within our non-covered portfolio, we recorded net charge-offs in the amount of $6.3 million and $0.4 million
for the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Our allowance for non-covered loan
losses totaled $33.2 million and $3.4 million at December 31, 2013 and 2012, respectively. The ratio of the allowance for non-covered
loan losses to total non-covered loans held for investment at December 31, 2013 and 2012 was 0.95% and 0.11%, respectively.
In connection with the PlainsCapital Merger and the FNB Transaction, we acquired loans both with and without evidence of credit
quality deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis,
while PCI loans acquired in the FNB Transaction are accounted for in pools as well as on an individual loan basis. We have
established under our PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a
minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their
acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment
testing. The common risk characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type. The
acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Our allowance for covered loan
losses totaled $1.1 million at December 31, 2013.
Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the
banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing
loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations,
generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its
portfolio. The provision for loan losses, primarily in the banking segment, was $37.2 million and $3.8 million for the year ended
December 31, 2013 and the month ended December 31, 2012, respectively.
71
The following tables present the activity in our allowance for loan losses within our non-covered and covered loan portfolios for the
periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment, which was
acquired as a part of the PlainsCapital Merger.
Non-Covered Portfolio
Balance, beginning of period .......................................................................
Provisions charged to operating expenses ...................................................
Recoveries of non-covered loans previously charged off:
Commercial and industrial .......................................................................
Real estate ................................................................................................
Construction and land development ........................................................
Consumer .................................................................................................
Total recoveries ...........................................................................................
Non-covered loans charged off:
Commercial and industrial .......................................................................
Real estate ................................................................................................
Construction and land development ........................................................
Consumer .................................................................................................
Total charge-offs..........................................................................................
Net charge-offs ............................................................................................
Balance, end of period .................................................................................
Year Ended
December 31, 2013
3,409
36,093
$
Month Ended
December 31, 2012
—
3,800
$
3,439
282
265
61
4,047
9,359
209
524
216
10,308
(6,261)
33,241
$
—
—
—
—
—
391
—
—
—
391
(391)
3,409
$
Covered Portfolio
Balance, beginning of period ..........................................................................
Provisions charged to operating expenses ......................................................
Recoveries of covered loans previously charged off:
Commercial and industrial ..........................................................................
Real estate ...................................................................................................
Construction and land development ...........................................................
Consumer ....................................................................................................
Total recoveries ..............................................................................................
Covered loans charged off:
Commercial and industrial ..........................................................................
Real estate ...................................................................................................
Construction and land development ...........................................................
Consumer ....................................................................................................
Total charge-offs.............................................................................................
Net charge-offs ...............................................................................................
Balance, end of period ....................................................................................
Year Ended
December 31, 2013
—
1,065
$
—
—
—
—
—
4
—
—
—
4
(4)
1,061
$
The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans,
excluding unearned income, within our non-covered and covered loan portfolios are presented in the table below (dollars in
thousands).
Non-Covered Portfolio
Commercial and industrial .............
Real estate (including
construction and land
development) .............................
Consumer .......................................
Total ...........................................
2013
2012
December 31,
Reserve
$
16,865
% of
Gross
Non-Covered
Loans
% of
Gross
Non-Covered
Loans
Reserve
46.58% $
1,845
52.67%
16,288
88
33,241
$
51.84%
1.58%
100.00% $
1,559
5
3,409
46.48%
0.85%
100.00%
72
December 31, 2013
Covered Portfolio
Commercial and industrial ..............................................
Real estate (including construction and
land development) ......................................................
Consumer ........................................................................
Total ............................................................................
$
$
Reserve
1,053
8
—
1,061
Potential Problem Loans
% of
Gross
Covered
Loans
6.65%
93.35%
0.00%
100.00%
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has
concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or
financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans
contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving,
the loan is subject to downgrade, typically to substandard, in three to six months. Within our non-covered loan portfolio at
December 31, 2013, we had ten credit relationships totaling $24.7 million of potential problem loans, which are assigned a grade of
special mention within our risk grading matrix. At December 31, 2012, we had four credit relationships totaling $2.7 million of non-
covered potential problem loans.
Non-Performing Assets
The following table presents components of our non-covered non-performing assets (dollars in thousands).
Non-covered loans accounted for on a non-accrual basis:
Commercial and industrial .......................................................................
Real estate ................................................................................................
Construction and land development ........................................................
Consumer .................................................................................................
Non-covered non-performing loans as a percentage of total non-
covered loans ...........................................................................................
Non-covered other real estate owned ...........................................................
Other repossessed assets ..............................................................................
Non-covered non-performing assets ............................................................
Non-covered non-performing assets as a percentage of total assets ............
Non-covered loans past due 90 days or more and still accruing ..................
Troubled debt restructurings included in accruing non-covered loans ........
December 31,
2013
2012
16,730
6,511
112
—
23,353
0.51%
4,805
13
28,171
0.32%
534
1,055
$
$
$
$
$
$
$
—
1,756
—
—
1,756
0.04%
11,098
557
13,411
0.18%
2,000
—
$
$
$
$
$
$
$
At December 31, 2013, total non-covered non-performing assets increased $14.8 million to $28.2 million, compared with $13.4
million at December 31, 2012, primarily due to an increase in non-covered non-accrual PCI loans of $15.8 million. Non-covered non-
performing loans totaled $23.4 million at December 31, 2013 and $1.8 million at December 31, 2012. At December 31, 2013, non-
covered non-accrual loans included five commercial and industrial relationships with loans totaling $14.0 million secured by accounts
receivable, inventory, aircraft and life insurance, and a total of $1.0 million in lease financing receivables. Non-covered non-accrual
loans at December 31, 2013 also included $6.5 million characterized as real estate loans, including three commercial real estate loan
relationships totaling $2.5 million and loans secured by residential real estate totaling $3.5 million, substantially all of which were
classified as loans held for sale, as well as construction and land development loans of $0.1 million. At December 31, 2012, non-
covered non-accrual loans of $1.8 million included real estate loans secured by residential real estate and classified as loans held for
sale.
Non-covered OREO decreased $6.3 million to $4.8 million at December 31, 2013, compared with $11.1 million at December 31,
2012. The decrease was primarily due to the disposal of two properties totaling $5.7 million. At December 31, 2013, non-covered
OREO included commercial properties of $4.2 million, commercial real estate property consisting of parcels of unimproved land of
$0.5 million and residential lots under development of $0.1 million. At December 31, 2012, non-covered OREO included commercial
properties of $6.8 million, commercial real estate property consisting of parcels of unimproved land of $3.1 million and residential lots
under development of $1.2 million.
73
At December 31, 2013, troubled debt restructurings (“TDRs”) granted on non-covered loans totaled $11.4 million, all of which relate
to modifications of non-covered PCI loans. These TDRs were comprised of $1.1 million of non-covered PCI loans that are considered
to be performing due to the application of the accretion method and non-covered non-performing PCI loans of $10.3 million for which
discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be
reasonably estimated. There were no troubled debt restructurings granted on non-covered loans at December 31, 2012.
Non-covered loans past due 90 days or more and still accruing totaled $0.5 million and $2.0 million at December 31, 2013 and 2012,
respectively, and included secured commercial and industrial loans, and a real estate loan.
The following table presents components of our covered non-performing assets (dollars in thousands).
Covered Portfolio
Covered loans accounted for on a non-accrual basis:
Commercial and industrial .........................................................................
Real estate ..................................................................................................
Construction and land development ...........................................................
Consumer ...................................................................................................
Covered non-performing loans as a percentage of total covered loans ..........
Covered other real estate owned .....................................................................
Other repossessed assets .................................................................................
Covered non-performing assets ......................................................................
Covered non-performing assets as a percentage of total assets ......................
Covered loans past due 90 days or more and still accruing ............................
Troubled debt restructurings included in accruing covered loans ..................
$
$
$
$
$
$
$
973
249
575
—
1,797
0.18%
142,833
—
144,630
1.62%
—
—
At December 31, 2013, covered non-performing assets totaled $144.6 million. Covered non-performing loans of $1.8 million at
December 31, 2013 included one commercial and industrial relationship with loans totaling $1.0 million secured by accounts
receivable, inventory and equipment. Covered non-accrual loans at December 31, 2013 also included one commercial real estate loan
relationship totaling $0.2 million, as well as construction and land development loans of $0.6 million.
OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as “covered OREO” and
reported separately in our consolidated balance sheets. At December 31, 2013, covered OREO was $142.8 million and included
commercial properties of $90.5 million, commercial real estate property consisting of parcels of unimproved land of $21.4 million and
residential lots under development of $30.9 million.
Insurance Losses and Loss Adjustment Expenses
At December 31, 2013 and 2012, our reserves for unpaid losses and LAE were $27.5 million and $34.0 million, respectively. The
liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all losses incurred, including losses for
claims that have not yet been reported. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the
liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact
of reinsurance.
Insured losses for a given accident year change in value over time as additional information on claims is received, as claim conditions
change and as new claims are reported. This process is commonly referred to as loss development. To project ultimate losses and
LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss
development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the
companies’ historical loss triangles and applicable insurance industry loss development factors.
The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-
end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group
considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the
extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the
actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of
case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
74
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investment in loans and
securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin.
The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings) is constantly changing due to
the banking segment’s needs and market conditions. Overall, average deposits totaled $5.3 billion for the year ended December 31,
2013, an increase from average deposits of $4.6 billion for the month ended December 31, 2012. The table below presents the average
balance of deposits and the average rate paid on those deposits (dollars in thousands).
Noninterest-bearing demand
deposits ......................................
Interest-bearing demand deposits ..
Savings deposits ............................
Certificates of deposit ....................
Year Ended
December 31, 2013
Month Ended
December 31, 2012
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
$
$
203,996
3,095,691
247,789
1,745,483
5,292,959
0.00% $
0.15%
0.32%
0.54%
0.28% $
214,586
2,806,690
177,803
1,355,435
4,554,514
0.00%
0.15%
0.32%
0.53%
0.26%
The maturity of interest-bearing time deposits of $100,000 or more at December 31, 2013 is set forth in the table below (in thousands).
Months to maturity:
3 months or less .............................................................
3 months to 6 months .....................................................
6 months to 12 months ...................................................
Over 12 months ..............................................................
$
$
453,642
272,461
492,140
456,146
1,674,389
The banking segment experienced growth of $693.1 million in interest-bearing time deposits of $100,000 or more at December 31,
2013 compared with December 31, 2012, primarily due to those deposits assumed as a part of the FNB Transaction. At December 31,
2013, there were $1.7 billion in interest-bearing time deposits scheduled to mature within one year.
Borrowings
Our borrowings are shown in the table below (dollars in thousands).
Short-term borrowings ...................
Notes payable ................................
Junior subordinated debentures .....
2013
2012
December 31,
Balance
342,087
56,327
67,012
465,426
$
$
Average
Rate Paid
0.36% $
6.33%
3.59%
2.10% $
Balance
728,250
141,539
67,012
936,801
Average
Rate Paid
0.33%
5.89%
3.53%
1.40%
Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase, borrowings at the Federal
Home Loan Bank (“FHLB”) and short-term bank loans. The $386.2 million decrease in short-term borrowings at December 31, 2013
compared with December 31, 2012 included decreases of $250.0 million in borrowings at the FHLB and $132.4 million in federal
funds purchased. These decreases were primarily the result of lower funding requirements due to a reduction in our mortgage
origination segment’s balance on its warehouse line of credit with the Bank. Notes payable at December 31, 2013 of $56.3 million is
comprised of insurance segment term notes and nonrecourse notes owed by First Southwest. The $85.2 million decrease in notes
payable at December 31, 2013 compared to December 31, 2012 was primarily due to the Notes at OP, a wholly owned subsidiary of
Hilltop, being called for redemption on October 15, 2013.
Liquidity and Capital Resources
Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s
primary investment objectives, as a holding company, are to preserve capital and have available cash resources to utilize in making
acquisitions. At December 31, 2013, Hilltop had approximately $164 million in freely available cash and cash equivalents. This
75
decrease from the $205 million balance at December 31, 2012 primarily resulted from Hilltop’s $35.0 million capital investment to
provide additional capital in connection with the FNB Transaction on September 13, 2013 and Hilltop’s $11.1 million cash payment to
our insurance company subsidiaries in connection with our redemption of Notes that they held. If necessary or appropriate, we may
also finance acquisitions with the proceeds from equity or debt issuances. The current short-term liquidity needs of Hilltop include
operating expenses and dividends on preferred stock.
Recent Events
On January 9, 2014, we delivered to the President and Chief Executive Officer of SWS a letter in which we proposed to acquire all of
the outstanding shares of SWS common stock that we do not already own for $7.00 per share in 50% cash and 50% Company
common stock. We intend to finance the cash portion of our offer through available cash.
On October 15, 2013, OP called for redemption all of its outstanding Notes on November 14, 2013 (the “Redemption Date”). At
October 15, 2013, OP had $90.9 million in aggregate principal amount of Notes outstanding, including $6.9 million aggregate
principal amount held by our insurance company subsidiaries. The Notes were redeemed at a redemption price equal to the principal
amount of the Notes, plus accrued and unpaid interest up to, but excluding, the Redemption Date. At any time prior to the Redemption
Date, holders of the Notes could exchange the Notes for shares of Hilltop common stock at the rate of 73.94998 shares per $1,000
principal amount of the Notes (or approximately $13.52 per share). In lieu of delivery of Hilltop common stock upon the exercise of a
holder of its exchange right, OP could elect to pay such holder of the Notes an amount in cash (or a combination of Hilltop common
stock and cash) in respect of all or a portion of such holder’s Notes equal to the closing price of Hilltop’s common stock for the five
consecutive trading days commencing on and including the third business day following the exercise of such exchange right. As of the
closing of the redemption, the Notes held by third party investors were exchanged for 6,208,005 shares of Hilltop common stock and
an aggregate cash payment of $11.1 million was made in exchange for the Notes held by our insurance company subsidiaries.
During September 2013, Hilltop and PlainsCapital contributed capital of $35.0 million and $25.0 million, respectively, to the Bank to
provide additional capital in connection with the FNB Transaction.
Series B Preferred Stock
As a result of the PlainsCapital Merger, the outstanding shares of PlainsCapital Corporation’s Non-Cumulative Perpetual Preferred
Stock, Series C, all of which were held by the U.S. Treasury, were converted on a one-for-one basis into shares of Hilltop Series B
Preferred Stock. The terms of our Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis.
The dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of
“qualified small business lending” (“QSBL”) by the Bank. The shares of Hilltop Series B Preferred Stock are senior to shares of our
common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At both
December 31, 2013 and 2012, $114.1 million of our Series B Preferred Stock was outstanding. During the three months ended
December 31, 2013, we accrued dividends of $1.3 million on the Hilltop Series B Preferred Stock.
The dividend rate on the Hilltop Series B Preferred Stock was 4.706% for the three months ended December 31, 2013. From
January 1, 2014 until March 26, 2016, the dividend rate is fixed at 5.0% based upon our level of QSBL at September 30, 2013.
Beginning March 27, 2016, the dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine
percent (9%) per annum.
Loss-Share Agreements
In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2
billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse
the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred;
(ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of
$365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share
agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank
Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing
Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC,
approximately ten years following the Bank Closing Date, if the FDIC’s initial estimate of losses on covered assets is greater than the
actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.
76
Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our
financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
At December 31, 2013, Hilltop exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of
19.13%, Tier 1 capital to risk weighted assets ratio of 18.53% and a Tier 1 capital to average assets, or leverage, ratio of 12.81%. At
December 31, 2013, the Bank was also considered to be “well-capitalized” under regulatory requirements. We discuss regulatory
capital requirements in more detail in Note 21 to our consolidated financial statements.
Cash Flow Activities
Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled $746.0 million at December 31,
2013, an increase of $19.6 million from $726.5 million at December 31, 2012. Deposit flows, calls of investment securities and
borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local
economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of
funds.
Cash provided by operations during 2013 was $396.7 million, an increase in cash flow of $281.5 million compared with 2012. Cash
provided by operations increased primarily due to the PlainsCapital Merger on November 30, 2012 and inclusion of operating
activities of the banking, mortgage origination and financial advisory segments for the year ended December 31, 2013 compared with
the month ended December 31, 2012.
Cash provided by our investment activities during 2013 was $223.9 million, including $362.7 million in net cash from the FNB
Transaction and net proceeds from securities in our investment portfolio of $8.9 million, partially offset by $140.4 million for the
origination of loans held for investment and net purchases of premises and equipment and other assets of $11.9 million. During 2012,
cash provided by our investment activities was $12.9 million and primarily included $165.7 million in net cash from the PlainsCapital
Merger, offset by $147.4 million in net purchases of securities for investment.
Cash used in financing activities during 2013 was $601.1 million, an increase in cash used of $620.9 million compared with 2012. The
increase in cash used was due primarily to the PlainsCapital Merger on November 30, 2012 and the inclusion of financing activities of
the banking segment for the year ended December 31, 2013 compared with the month ended December 31, 2012.
Banking Segment
Within our banking segment, liquidity refers to the measure of our ability to meet our customers’ short-term and long-term deposit
withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Interest rate sensitivity involves
the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on
our net interest income.
Our asset and liability group is responsible for continuously monitoring our liquidity position to ensure that assets and liabilities are
managed in a manner that will meet our short-term and long-term cash requirements. Funds invested in short-term marketable
instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-
backed securities and collateralized mortgage obligations, the possible sale of available for sale securities, and the ability to securitize
certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through
deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit
with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under
lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the FHLB. To supply
liquidity over the longer term, we have access to brokered certificates of deposit, term loans at the FHLB and borrowings under lines
of credit with other financial institutions.
We had deposits of $6.7 billion at December 31, 2013, an increase of $2.0 billion from $4.7 billion at December 31, 2012, primarily
due to the inclusion of $2.2 billion of deposits assumed as a part of the FNB Transaction. Deposit flows are affected by the level of
market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. At
December 31, 2013, money market deposits, including brokered deposits, were $3.4 billion; time deposits, including brokered
77
deposits, were $2.3 billion, and noninterest bearing demand deposits were $409.3 million. Money market deposits, including brokered
deposits, increased by $779.2 million from $2.6 billion and time deposits, including brokered deposits, increased $910.7 million from
$1.4 billion at December 31, 2012.
The Bank’s 15 largest depositors, excluding Hilltop and First Southwest, accounted for 15.49% of the Bank’s total deposits, and the
Bank’s five largest depositors, excluding First Southwest, accounted for 10.03% of the Bank’s total deposits at December 31, 2013.
The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course
fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to
attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. We have not experienced
any liquidity issues to date with respect to brokered deposits or our other large balance deposits, and we believe alternative sources of
funding are available to more than compensate for the loss of one or more of these customers.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse line of credit of up to $1.3 billion maintained with the
Bank. At December 31, 2013, PrimeLending had outstanding borrowings of $1.0 billion against the warehouse line of credit.
PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with
servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit
with the Bank. In addition, PrimeLending has an available line of credit with JPMorgan Chase Bank, NA (“JPMorgan Chase”) of up
to $1.0 million. At December 31, 2013, PrimeLending had no borrowings under the JPMorgan Chase line of credit.
Insurance Segment
Our insurance operating subsidiary’s primary investment objectives is to preserve capital and manage for a total rate of return. NLC’s
strategy is to purchase securities in sectors that represent the most attractive relative value. Bonds, cash and short-term investments of
$196.6 million, or 91.5%, equity investments of $13.1 million and other investments of $5.3 million comprised NLC’s $215.0 million
in total cash and investments at December 31, 2013. NLC does not currently have any significant concentration in both direct and
indirect guarantor exposure or any investments in subprime mortgages. NLC has custodial agreements with Wells Fargo and an
investment management agreement with DTF Holdings, LLC.
Financial Advisory Segment
FSC relies on its equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances,
correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and
operations. FSC has credit arrangements with three unaffiliated banks of up to $255.0 million, which are used to finance securities
owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit
arrangements are provided on an “as offered” basis and are not committed lines of credit. At December 31, 2013, FSC had borrowed
$97.4 million under these credit arrangements.
Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2013 (in thousands). Our reserve for
losses and loss adjustment expenses does not have a contractual maturity date. However, based on historical payment patterns, the
amounts presented are management’s estimate of the expected timing of these payments. The timing of payments is subject to
significant uncertainty. NLC maintains a portfolio of investments with varying maturities to provide adequate cash flows for such
payments. Payments related to leases are based on actual payments specified in the underlying contracts. Payments related to short-
term borrowings and long-term debt obligations include the estimated contractual interest payments under the respective agreements.
1 year
or Less
More than 1
Year but Less
than 3 Years
Payments Due by Period
3 Years or
More but Less
than 5 Years
5 Years
or More
Reserve for losses and loss
adjustment expenses .......................
Short-term borrowings ........................
Long-term debt obligations.................
Capital lease obligations .....................
Operating lease obligations .................
Total ................................................
$
$
15,904
343,604
6,965
1,080
25,541
393,094
$
$
9,120
—
9,395
2,193
39,311
60,019
$
$
2,308
—
10,053
2,296
23,241
37,898
$
$
136
—
259,560
9,514
30,041
299,251
$
$
Total
27,468
343,604
285,973
15,083
118,134
790,262
78
Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to
measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to
inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating
costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree
than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily
change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are
beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the
monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our
consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include
commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate
risk in excess of the amounts recognized in our consolidated balance sheets.
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified
rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining
specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting
them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and
have recorded a liability related to such credit risk in our consolidated financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party.
In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required
to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the
contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our
policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in
loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.1 billion at December 31, 2013 and
outstanding standby letters of credit of $42.2 million at December 31, 2013.
In the normal course of business, FSC executes, settles and finances various securities transactions that may expose FSC to off-
balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such
transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC
and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued
underwriting and purchase commitments.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and
financial condition. Our significant accounting policies are presented in Note 1 to our consolidated financial statements, which are
included in this Annual Report. We have identified certain significant accounting policies which involve a higher degree of judgment
and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The
significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to
Allowance for Loan Losses, FDIC Indemnification Asset, Reserve for Losses and Loss Adjustment Expenses, Goodwill and
Identifiable Intangible Assets, Loan Indemnification Liability, Mortgage Servicing Rights and Acquisition Accounting.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. Loans are charged to the
allowance when the loss is confirmed or when a determination is made that a probable loss has occurred on a specific loan. Recoveries
are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to
determine whether the allowance for credit losses is appropriate to absorb losses in the existing portfolio. Based on these estimates, an
amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a
level determined to be appropriate to absorb losses. Management’s judgment regarding the appropriateness of the allowance for loan
79
losses involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the
existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan
portfolio by regulatory agencies; and management’s internal review of the loan portfolio. In determining the ability to collect certain
loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the
carrying value of these assets because of economic, operating or other conditions beyond our control. For additional discussion of
allowance for loan losses and provisions for loan losses, see the section entitled “Allowance for Loan Losses” earlier in this Item 7.
FDIC Indemnification Asset
We have elected to account for the FDIC Indemnification Asset in accordance with FASB ASC 805. The FDIC Indemnification Asset
is 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 we expect to collect from the FDIC will be accreted into
noninterest income within the consolidated statements of operations over the life of the FDIC Indemnification Asset. The FDIC
Indemnification Asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and
expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered
loans and covered OREO. Any increases in cash flow of the covered assets over those expected will reduce the FDIC Indemnification
Asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC Indemnification Asset. Any
amortization of changes in value is limited to the contractual terms of the loss-share agreements. Increases and decreases to the FDIC
Indemnification Asset are recorded as adjustments to noninterest income within the consolidated statements of operations over the life
of the loss-share agreements.
Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses represents our best estimate of our ultimate liability for losses and loss adjustment
expenses relating to events that occurred prior to the end of any given accounting period but have not been paid. Months and
potentially years may elapse between the occurrence of a loss covered by one of our insurance policies, the reporting of the loss and
the payment of the claim. We record a liability for estimates of losses that will be paid for claims that have been reported, which is
referred to as case reserves. As claims are not always reported when they occur, we estimate liabilities for claims that have occurred
but have not been reported, or IBNR.
Each of our insurance company subsidiaries establishes a reserve for all of its unpaid losses, including case reserves and IBNR
reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by estimating our ultimate liability for loss and
loss adjustment expense reserves first, and then reducing that amount by the amount of cumulative paid claims and by the amount of
our case reserves. The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and
LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior
management group considers many factors in determining the amount of reserves to record for financial statement purposes. These
factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the
sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the
consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the
insurance market. As experience develops or new information becomes known, we increase or decrease the level of our reserves in the
period in which changes to the estimates are determined. Accordingly, the actual losses and loss adjustment expenses may differ
materially from the estimates we have recorded. See “Insurance Losses and Loss Adjustment Expenses” earlier in this Item 7 for
additional discussion.
Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets were initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. In the event
that facts and circumstances indicate that the goodwill and other identifiable intangible assets may be impaired, an interim impairment
test would be required. Intangible assets with finite lives have been fully amortized over their useful lives. We perform required
annual impairment tests of our goodwill and other intangible assets as of October 1st for our reporting units.
The goodwill impairment test is a two-step process that requires us to make judgments in determining what assumptions to use in the
calculation. The first step of 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 our
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, a second step is performed to compute the
amount of the impairment, if any, by determining an “implied fair value” of goodwill. The determination of the “implied fair value” of
goodwill of a reporting unit requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding
carrying value.
80
Our 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 us, future impairment charges may become necessary that
could have a materially adverse impact on our results of operations and financial condition in the period in which the write-off occurs.
Loan Indemnification Liability
The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that the
loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower
representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the loans
from the investors or reimburses the investors’ losses (a “make-whole” payment). The mortgage origination segment has established
an indemnification liability for such probable losses based upon, among other things, the level of current unresolved repurchase
requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase
requests, and the severity of the estimated loss upon repurchase. Although we consider this reserve to be appropriate, there can be no
assurance that the reserve will prove to be appropriate overtime to cover ultimate 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 will be considered in the reserving process when known.
Mortgage Servicing Rights
The Company measures its residential mortgage servicing assets using the fair value method. Under the fair value method, the
mortgage servicing rights (“MSRs”) are carried in the balance sheet at fair value and the changes in fair value are reported in earnings
within other noninterest income in the period in which the change occurs. Retained MSRs are measured at fair value as of the date of
sale of the related mortgage loan. Subsequent fair value measurements are determined using a discounted cash flow model. In order to
determine the fair value of the MSRs, the present value of expected future cash flows is estimated. Assumptions used include market
discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.
The model assumptions and the MSRs fair value estimates are compared to observable trades of similar portfolios as well as to MSR
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 negatively impact the
recorded value of the MSRs. The value of the MSRs is also dependent upon the discount rate used in the model, which is based on
current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the
discount rate would reduce the value of the MSRs.
Acquisition Accounting
We account for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired
entity to the assets acquired, including identifiable intangibles, and liabilities assumed based on their estimated fair values at the date
of acquisition. Management applies various valuation methodologies to these acquired assets and assumed liabilities which often
involve a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples
of such items include loans, deposits, identifiable intangible assets and certain other assets and liabilities acquired or assumed in
business combinations. Management uses significant estimates and assumptions to value such items, including, among others,
projected cash flows, prepayment and default assumptions, discount rates, and realizable collateral values. The purchase date
valuations, which are considered preliminary and are subject to change for up to one year after the acquisition date, determine the
amount of goodwill or bargain purchase gain recognized in connection with the business combination. While we are in the process of
finalizing our purchase price allocation, significant changes are not anticipated. Certain assumptions and estimates must be updated
regularly in connection with the ongoing accounting for purchased loans. Valuation assumptions and estimates may also have to be
revisited in connection with periodic assessments of possible value impairment, including impairment of goodwill, intangible assets
and certain other long-lived assets. The use of different assumptions could produce significantly different valuation results, which
could have material positive or negative effects on the Company’s results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our
potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial
instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to
be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results
may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage
our ongoing market risk exposures.
81
At December 31, 2013, total notes payable outstanding on our consolidated balance sheet was $56.3 million, and was comprised
entirely of indebtedness subject to variable interest rates. If LIBOR and the prime rate were to increase by one eighth of one percent
(0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future consolidated
earnings or cash flows.
Banking Segment
The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-
earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our
earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and
investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or
mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest
income.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our
earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk
refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and
liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a
full range of maturities.
We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing
liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We
employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to
help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of
various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate
change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and
repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by
analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the
mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest
income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the
amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities
also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative
GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-
earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to
affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period
of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to
affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a
significant impact on earnings.
As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the Wall Street
Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset
sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one
year as shown in the following table (dollars in thousands).
Interest sensitive assets:
Loans ...................................
Securities .............................
Federal funds sold and
securities purchased
under agreements to
resell .................................
Other interest sensitive
3 Months or
Less
> 3 Months to
1 Year
> 1 Year to
3 Years
> 3 Years to
5 Years
> 5 Years
Total
December 31, 2013
$ 3,153,086 $
72,320
570,332 $
317,041
705,647 $
237,398
272,031 $
130,848
557,305 $
244,962
5,258,401
1,002,569
32,924
387,443
—
—
82
—
—
—
—
—
—
32,924
387,443
assets ................................
Total interest sensitive
assets .............................
Interest sensitive liabilities:
Interest bearing checking ......
Savings..................................
Time deposits ........................
Notes payable & other
borrowings ........................
Total interest sensitive
liabilities .......................
Interest sensitivity gap ..........
Cumulative interest
3 Months or
Less
> 3 Months to
1 Year
> 1 Year to
3 Years
> 3 Years to
5 Years
> 5 Years
Total
December 31, 2013
3,645,773
887,373
943,045
402,879
802,267
6,681,337
$ 2,291,218 $
357,325
767,295
244,849
— $
—
1,040,401
— $
—
350,703
— $
—
111,239
— $
—
35,636
2,291,218
357,325
2,305,274
499
1,421
762
5,413
252,944
3,660,687
$
(14,914) $
1,040,900
(153,527) $
352,124
590,921 $
112,001
290,878 $
41,049
761,218 $
5,206,761
1,474,576
sensitivity gap ...................
$
(14,914) $
(168,441) $
422,480 $
713,358 $ 1,474,576
Percentage of cumulative
gap to total interest
sensitive assets ..................
-0.22%
-2.52%
6.32%
10.68%
22.07%
The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase.
Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement
techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and
decrements of 1%, 2% and 3% to determine the effect on net interest income changes for the next twelve months. The banking
segment also measures the effects of changes in interest rates on market value of equity by discounting projected cash flows of
deposits and loans. Market value changes in the investment portfolio are estimated by discounting future cash flows and using
duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation
analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to
changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The
sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account
the effect of embedded options in the securities and loan portfolios as well as any off-balance-sheet derivatives.
The table below shows the estimated impact of increases of 1%, 2% and 3% and a decrease of 0.5% in interest rates on net interest
income and on economic value of equity for the banking segment at December 31, 2013 (dollars in thousands).
Change in
Interest Rates
(basis points)
+300 ..................
+200 ..................
+100 ..................
-50 .....................
$
$
$
$
Changes in
Net Interest Income
Changes in
Economic Value of Equity
Amount
Percent
Amount
Percent
3,732
(8,538)
(10,155)
3,979
1.41% $
-3.23% $
-3.84% $
1.51% $
(15,182)
(17,483)
(8,585)
(6,394)
-1.18%
-1.36%
-0.67%
-0.50%
The projected changes in net interest income and market value of equity to changes in interest rates at December 31, 2013 were in
compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and
changes in the mix of assets or liabilities.
The historically low level of interest rates, combined with the existence of rate floors that are in effect for a significant portion of the
loan portfolio, are projected to cause yields on our earning assets to rise more slowly than increases in market interest rates. As a
result, in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is
sufficient to allow our loan portfolio to reprice above applicable rate floors.
Mortgage Origination Segment
Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-
related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also
materially and adversely affect our volume of mortgage loan originations.
83
IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to
funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs
are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the
secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock
commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market.
Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is
approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments
to sell mortgage-backed securities to minimize the impact on earnings resulting from significant fluctuations in the fair value of
mortgage loans held for sale and IRLCs caused by changes in interest rates.
We have recently expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage
origination segment. As a result of our mortgage servicing business, we have a portfolio of MSRs. One of the principal risks
associated with MSRs is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a
result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of
the mortgage loans would be reduced. In the future, we may use various derivative financial instruments to provide a level of
protection against such interest rate risk. However, no hedging strategy can protect us completely, and hedging strategies may fail
because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result,
could actually increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and
correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSRs.
The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk,
but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include
guidelines on the amount of exposure to interest rate changes we are willing to accept.
Insurance Segment
Within our insurance segment, our exposures to market risk relate primarily to our investment portfolio, which is exposed primarily to
interest rate risk and credit risk. The fair value of our investment portfolio is directly impacted by changes in market interest rates;
generally, the fair value of fixed-income investments moves inversely with movements in market interest rates. Our fixed maturity
portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. This
portfolio composition allows flexibility in reacting to fluctuations of interest rates. The portfolios of our insurance company
subsidiaries are managed to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder
obligations. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer,
prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.
Financial Advisory Segment
Our financial advisory segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions,
which may include purchases and sales of securities, use of derivatives and securities lending activities.
Our financial advisory segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial
instruments and other interest earning assets including customer and correspondent margin loans and securities borrowing activities.
Our exposure to interest rate risk is also from our funding sources including customer and correspondent cash balances, bank
borrowings, repurchase agreements and securities lending activities. Interest rates on customer and correspondent balances and
securities produce a positive spread with rates generally fluctuating in parallel.
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions
and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans are indexed
and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.
Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.
Our financial advisory segment is engaged in various brokerage and trading activities that expose us to credit risk arising from
potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring
position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and
conducting business through central clearing organizations.
84
Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to
market daily and additional collateral is required as necessary.
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 hereof.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
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.
Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of such
period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to the Company’s management, including our Principal Executive Officer and Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes during the fiscal quarter ended December 31, 2013 in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 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, 2013. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework (1992). We have excluded from our evaluation the internal control over financial
reporting of the assets acquired and liabilities assumed of FNB on September 13, 2013. The total assets and total income before
85
income taxes of the excluded business represent $1.7 billion and $28.7 million, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2013. Based on our assessment, management concluded that, at
December 31, 2013, our internal control over financial reporting is effective.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information called for by this Item is contained in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders,
and is incorporated herein by reference.
Item 11. Executive Compensation.
The information called for by this Item is contained in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by this Item is contained in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders,
or in Item 5 of this Annual Report for the year ended December 31, 2013, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by this Item is contained in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders,
and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information called for by this Item is contained in our definitive Proxy Statement for our 2014 Annual Meeting of Stockholders,
and is incorporated herein by reference.
86
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed herewith as part of this Form 10-K.
PART IV
1.
Financial Statements.
Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) for Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for PrimeLending
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for First Southwest Company
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules.
The 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 following the signature page hereto.
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
87
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.
SIGNATURES
Date: March 3, 2014
HILLTOP HOLDINGS INC.
By: /s/ Jeremy B. Ford
Jeremy B. Ford
President and Chief Executive Officer
(Principal Executive Officer and duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity in which Signed
Date
/s/ Jeremy B. Ford
Jeremy B. Ford
/s/ Darren Parmenter
Darren Parmenter
/s/ Charlotte Jones Anderson
Charlotte Jones Anderson
/s/ Rhodes Bobbitt
Rhodes Bobbitt
/s/ Tracy A. Bolt
Tracy A. Bolt
/s/ W. Joris Brinkerhoff
W. Joris Brinkerhoff
/s/ Charles R. Cummings
Charles R. Cummings
/s/ Hill A. Feinberg
Hill A. Feinberg
/s/ Gerald J. Ford
Gerald J. Ford
/s/ J. Markham Green
J. Markham Green
Jess T. Hay
/s/ William T. Hill, Jr.
William T. Hill, Jr.
/s/ James R. Huffines
James R. Huffines
President, Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President — Finance
(Principal Financial and Accounting Officer)
Director
Director
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Director and Audit Committee Member
March 3, 2014
Director
March 3, 2014
Director and Chairman of Audit Committee
March 3, 2014
Director
Director
March 3, 2014
March 3, 2014
Director and Audit Committee Member
March 3, 2014
Director
Director
Director
Director
88
March 3, 2014
March 3, 2014
Signature
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
/s/ C. Clifton Robinson
C. Clifton Robinson
/s/ Kenneth D. Russell
Kenneth D. Russell
/s/ A. Haag Sherman
A. Haag Sherman
Robert Taylor, Jr.
/s/ Carl B. Webb
Carl B. Webb
/s/ Alan B. White
Alan B. White
Director
Director
Director
Director
Director
Director
Director
Director
Capacity in which Signed
Date
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
89
Exhibit
Number
Description of Exhibit
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4.1
4.4.2
4.4.3
4.4.4
Agreement and Plan of Merger, dated May 8, 2012, by and among Hilltop Holdings Inc., Meadow Corporation
and PlainsCapital Corporation (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on
May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
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).
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; and Articles Supplementary, dated November 29, 2012 relating to Non-Cumulative
Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc. (filed as Exhibit 3.1 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).
Second 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 March 16, 2009 (File No. 001-31987) and incorporated herein by
reference).
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).
Form of Certificate of Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc. (filed as
Exhibit 4.2 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).
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).
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 (successor by merger to Plains Capital
Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (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).
First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and between
PlainsCapital Corporation (successor by merger to Plains Capital 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).
Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by merger to Plains
Capital 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).
First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation
(successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as
90
4.4.5
4.4.6
4.4.7
4.4.8
4.5.1
4.5.2
4.5.3
4.5.4
4.5.5
4.6.1
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).
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).
Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital
Corporation, dated as of August 7, 2006, by PlainsCapital Corporation (successor by merger to Plains Capital
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).
Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by
merger to Plains Capital 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 4.7 to the
Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629)
and incorporated herein by reference).
First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital
Corporation (successor by merger to Plains Capital 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).
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 (successor by merger to Plains Capital
Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (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).
Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by merger to
Plains Capital 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).
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).
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of
March 26, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital 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).
Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by
merger to Plains Capital 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).
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 (successor by merger to Plains Capital
Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (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).
4.6.2
Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor by merger to
91
Plains Capital 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).
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).
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of
September 17, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital 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).
Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor
by merger to Plains Capital 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).
Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital
Corporation (successor by merger to Plains Capital Corporation), Wells Fargo Bank, N.A., as Property Trustee,
Wells Fargo Delaware Trust Company, as Delaware Trustee, and Alan B. White, DeWayne Pierce, and Jeff
Isom, as Administrative Trustees (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).
Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation
(successor by merger to Plains Capital 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).
First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital 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).
Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008,
by PlainsCapital Corporation (successor by merger to Plains Capital 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).
Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation (successor by
merger to Plains Capital 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).
First Amended and Restated Agreement of Limited Partnership of Affordable Residential Communities LP,
dated February 11, 2004 (filed as Exhibit 10.1.1 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).
Amendment to the First Amended and Restated Agreement of Limited Partnership of Affordable Residential
Communities LP, dated July 3, 2007 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on July 6, 2007 (File No. 001-31987) and incorporated herein by reference).
Affordable Residential Communities Inc. 2003 Equity Incentive Plan (filed as Exhibit 10.5 to the Registrant’s
Registration Statement on Form S-11 (File No. 333-109816) and incorporated herein by reference).
4.6.3
4.6.4
4.6.5
4.7.1
4.7.2
4.7.3
4.7.4
4.7.5
10.1.1
10.1.2
10.2.1†
10.2.2†
Form of Affordable Residential Communities Inc. 2003 Equity Incentive Plan Non-Qualified Stock Option
92
10.3
10.4†
10.5.1
10.5.2
10.5.3
10.5.4
10.6†
10.7.1†
10.7.2†
10.7.3†
10.7.4†
10.8†
Agreement (filed as Exhibit 10.2.3 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2010 (File No. 001-31987) and incorporated herein by reference).
Registration Rights Agreement, dated January 31, 2007, by and between Affordable Residential Communities
Inc. and C. Clifton Robinson. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
February 5, 2007 (File No. 001-31987) and incorporated herein by reference).
Compensation arrangement with Jeremy B. Ford (filed as Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
Funding Agreement, dated as of March 20, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak
Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on March 21, 2011 (File No. 001-31987) and incorporated
herein by reference).
Credit Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill
Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the
Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and
incorporated herein by reference).
Investor Rights Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc.,
Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 4.4 to
the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and
incorporated herein by reference).
Warrant to purchase up to 8,695,652 shares of SWS Group, Inc. common stock issued to Hilltop Holdings Inc.
on July 29, 2011 (filed as Exhibit 4.1 to the Current Report on Form 8-K filed by SWS Group, Inc. on
August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
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).
Employment Agreement, dated December 18, 2008, but effective as of December 31, 2008, by and among
First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation)
and Hill A. Feinberg (filed as Exhibit 10.6 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Amendment to Employment Agreement, dated as of March 2, 2009, by and among First Southwest
Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Hill A.
Feinberg (filed as Exhibit 10.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on
April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Waiver of Executive’s 2011 Bonus, dated as of March 7, 2012, by Hill A. Feinberg in favor of First Southwest
Holdings, LLC (filed as Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31,
2012 filed by PlainsCapital Corporation (File No. 000-53629) and incorporated herein by reference).
Second Amendment to Employment Agreement, dated as of September 12, 2012, by and among First
Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and
Hill A. Feinberg (filed as Exhibit 10.14.4 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).
Retention Agreement, dated May 8, 2012, but effective as of November 30, 2012, by and among Jerry L.
Schaffner, Hilltop Holdings Inc. and PlainsCapital Corporation (f/k/a Meadow Corporation) (filed as
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and
incorporated herein by reference).
10.9.1†
Employment Agreement, dated as of January 1, 2009, by and between James R. Huffines and PlainsCapital
93
10.9.2†
10.9.3†
10.9.4†
10.10.1†
10.10.2†
10.11†
10.12†
10.13
10.14
10.15†
10.16†
10.17†
Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.1 to the Current Report on
Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated
herein by reference).
First Amendment to Employment Agreement, dated as of March 2, 2009, by and between James R. Huffines
and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.2 to the
Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629)
and incorporated herein by reference).
Second Amendment to Employment Agreement, dated as of November 15, 2010, by and between James R.
Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as
Exhibit 10.3 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010
(File No. 000-53629) and incorporated herein by reference).
Third Amendment to Employment Agreement, dated as of September 12, 2012, by and between PlainsCapital
Corporation (successor by merger to PlainsCapital Corporation) and James R. Huffines (filed as
Exhibit 10.16.4 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).
Employment Agreement, dated as of April 1, 2010, by and between Todd Salmans and PlainsCapital
Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.21 to the Annual Report
on Form 10-K for the year ended December 31, 2010, filed by PlainsCapital Corporation (File No. 000-53629)
and incorporated herein by reference).
First Amendment to Employment Agreement, dated as of September 11, 2012, by and between PlainsCapital
Corporation (successor by merger to PlainsCapital Corporation) and Todd Salmans (filed as Exhibit 10.17.2 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).
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).
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).
Securities Purchase Agreement, dated as of September 27, 2011, by and between PlainsCapital Corporation
(successor by merger to PlainsCapital Corporation) and the Secretary of the Treasury (filed as Exhibit 10.1 to
the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-
53629) and incorporated herein by reference).
Repurchase Letter, dated as of September 27, 2011, by and between PlainsCapital Corporation (successor by
merger to PlainsCapital Corporation) and the United Stated Department of the Treasury (filed as Exhibit 10.2
to the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-
53629) and incorporated herein by reference).
Form of Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2013 filed on May 6, 2013 (File No. 001-31987) and incorporated
herein by reference).
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).
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).
94
10.18†
10.19†*
10.20†*
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
Compensation arrangement of Darren Parmenter (filed as Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
Sublease, dated December 1, 2012, by and between Hunter’s Glen/Ford, LTD and Hilltop Holdings Inc.
First Amendment to Sublease, dated February 28, 2014, by and between Hunter’s Glen/Ford, LTD and Hilltop
Holdings Inc.
List of subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP.
Consent of Ernst & Young LLP.
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
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.
95
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Hilltop Holdings Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) for Hilltop Holdings Inc. .........
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for PrimeLending ...................................
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for First Southwest Company ................
F-2
F-3
F-4
Audited Consolidated Financial Statements, Years Ended December 31, 2013, 2012 and 2011
Consolidated Balance Sheets ...................................................................................................................................................
Consolidated Statements of Operations ...................................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) ....................................................................................................
Consolidated Statements of Stockholders’ Equity ...................................................................................................................
Consolidated Statements of Cash Flows ..................................................................................................................................
Notes to Consolidated Financial Statements ............................................................................................................................
F-5
F-6
F-7
F-8
F-9
F-10
F-1
To The Board of Directors and Stockholders of Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements listed in the accompanying
index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Hilltop Holdings Inc. and its
subsidiaries (the “Company”) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these 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 on Internal Control over Financial Reporting appearing under Item
9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our integrated audits. We did not audit the financial statements of PrimeLending and First Southwest Company for
the year ended December 31, 2012, both wholly owned subsidiaries of the Company, which statements reflect total assets of
approximately $1.5 billion and $0.5 billion, respectively, of the related consolidated total as of December 31, 2012 and total net
income before tax of approximately $5.7 million and $1.6 million, respectively, of the related consolidated total for the year ended
December 31, 2012. The 2012 financial statements of PrimeLending and First Southwest Company were audited by other auditors
whose reports thereon have been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to
the amounts included for PrimeLending and First Southwest Company, is based solely on the reports of the other auditors. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. 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 and the reports of other auditors provide a reasonable basis for
our opinions.
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.
As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has
excluded the operations of First National Bank from its assessment of internal control over financial reporting as of December 31,
2013 because the Company acquired certain assets and assumed certain liabilities of First National Bank in a transaction consummated
on September 13, 2013. We have also excluded the operations acquired in the First National Bank transaction from our audit of
internal control over financial reporting. The First National Bank operations consist of total assets and total net income before income
taxes of approximately $1.7 billion and $28.7 million, respectively, of the related consolidated financial statement amounts as of and
for the year ended December 31, 2013.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 3, 2014
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
PrimeLending, a PlainsCapital Company
We have audited the consolidated financial statements of PrimeLending, a PlainsCapital Company (the Company), which comprise
the consolidated balance sheet as of December 31, 2012, and the related consolidated statement of income, stockholder’s equity, and
cash flows for the period from December 1, 2012 through December 31, 2012, and the related consolidated notes to the financial
statements (not presented separately herein).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with U.S.
generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that are free of material misstatement, whether due to fraud or
error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in
accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
PrimeLending, a PlainsCapital Company at December 31, 2012, and the results of its operations and its cash flows for the period from
December 1, 2012 through December 31, 2012 in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
March 15, 2013
F-3
Report of Independent Registered Public Accounting Firm
Board of Directors
First Southwest Company
We have audited the financial statements of First Southwest Company (the Company), which comprise the statement of financial
condition as of December 31, 2012, and the related statements of income, changes in stockholder’s equity, and cash flows for the
period from December 1, 2012 through December 31, 2012 that are filed pursuant to Rule 17a-5 under the Securities Exchange Act of
1934, and the related notes to the financial statements (not presented separately herein).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally
accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First
Southwest Company as of December 31, 2012, and the results of its operations and its cash flows for the period from December 1,
2012 through December 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
February 28, 2013
F-4
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Cash and due from banks ........................................................................................................
Federal funds sold and securities purchased under agreements to resell ................................
Securities: ...............................................................................................................................
Trading, at fair value ...........................................................................................................
Available for sale, at fair value (amortized cost of $1,256,862 and $978,502,
respectively) ....................................................................................................................
Loans held for sale ..................................................................................................................
Non-covered loans, net of unearned income ...........................................................................
Allowance for non-covered loan losses ..............................................................................
Non-covered loans, net .......................................................................................................
Covered loans, net of allowance of $1,061 .............................................................................
Broker-dealer and clearing organization receivables ..............................................................
Insurance premiums receivable ................................................................................................
Deferred policy acquisition costs .............................................................................................
Premises and equipment, net ...................................................................................................
FDIC indemnification asset ....................................................................................................
Covered other real estate owned .............................................................................................
Mortgage servicing rights .......................................................................................................
Other assets .............................................................................................................................
Goodwill .................................................................................................................................
Other intangible assets, net .....................................................................................................
Total assets ..............................................................................................................................
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing .............................................................................................................
Interest-bearing ...................................................................................................................
Total deposits ..........................................................................................................................
Broker-dealer and clearing organization payables ..................................................................
Reserve for losses and loss adjustment expenses .....................................................................
Unearned insurance premiums .................................................................................................
Short-term borrowings ............................................................................................................
Notes payable ..........................................................................................................................
Junior subordinated debentures ...............................................................................................
Other liabilities .......................................................................................................................
Total liabilities ........................................................................................................................
Commitments and contingencies (see Notes 18 and 19)
Stockholders' equity:
Hilltop stockholders' equity:
December 31,
2013
2012
$
713,099
32,924
$
722,039
4,421
58,846
90,113
1,203,143
1,261,989
1,089,039
3,514,646
(33,241)
3,481,405
1,005,308
119,317
25,597
20,991
198,468
188,291
142,833
20,149
281,084
251,808
70,921
8,903,223
409,334
6,312,685
6,722,019
129,678
27,468
88,422
342,087
56,327
67,012
158,288
7,591,301
$
$
990,953
1,081,066
1,401,507
3,152,396
(3,409)
3,148,987
—
145,564
24,615
19,812
111,381
—
—
2,080
293,885
253,770
77,738
7,286,865
323,367
4,377,094
4,700,461
187,990
34,012
82,598
728,250
141,539
67,012
198,453
6,140,315
$
$
Preferred stock, $0.01 par value, 10,000,000 shares authorized; Series B, liquidation
value per share of $1,000; 114,068 shares issued and outstanding .............................
114,068
114,068
Common stock, $0.01 par value, 100,000,000 shares authorized; 90,175,688 and
83,487,340 shares issued and outstanding, respectively .............................................
Additional paid-in capital .................................................................................................
Accumulated other comprehensive income (loss) ...........................................................
Accumulated deficit ........................................................................................................
Total Hilltop stockholders' equity .......................................................................................
Noncontrolling interest .......................................................................................................
Total stockholders' equity .......................................................................................................
Total liabilities and stockholders' equity .................................................................................
902
1,388,641
(34,863)
(157,607)
1,311,141
781
1,311,922
8,903,223
$
835
1,304,448
8,094
(282,949)
1,144,496
2,054
1,146,550
7,286,865
$
See accompanying notes.
F-5
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Interest income:
Loans, including fees ............................................................................
Securities:
Taxable..............................................................................................
Tax-exempt .......................................................................................
Federal funds sold and securities purchased under
agreements to resell ...........................................................................
Interest-bearing deposits with banks .....................................................
Other .....................................................................................................
Total interest income.................................................................................
Interest expense:
Deposits ................................................................................................
Short-term borrowings ..........................................................................
Notes payable ........................................................................................
Junior subordinated debentures .............................................................
Other .....................................................................................................
Total interest expense ...............................................................................
Net interest income ...................................................................................
Provision for loan losses ...........................................................................
Net interest income after provision for loan losses ...................................
Noninterest income:
Net realized gains on securities .............................................................
Net gains from sale of loans and other mortgage production income ...
Mortgage loan origination fees .............................................................
Net insurance premiums earned ............................................................
Investment and securities advisory fees and commissions ...................
Bargain purchase gain ...........................................................................
Other .....................................................................................................
Total noninterest income ...........................................................................
Noninterest expense:
Employees' compensation and benefits .................................................
Loss and loss adjustment expenses .......................................................
Policy acquisition and other underwriting expenses .............................
Occupancy and equipment, net .............................................................
Other .....................................................................................................
Total noninterest expense .........................................................................
Income (loss) before income taxes ...........................................................
Income tax expense (benefit) ....................................................................
Net income (loss) ......................................................................................
Less: Net income attributable to noncontrolling interest ..........................
Income (loss) attributable to Hilltop .........................................................
Dividends on preferred stock ....................................................................
Income (loss) applicable to Hilltop common stockholders .......................
Earnings (loss) per common share:
Basic .....................................................................................................
Diluted ..................................................................................................
Weighted average share information:
Basic .....................................................................................................
Diluted ..................................................................................................
2013
Year Ended December 31,
2012
2011
$
284,782
$
23,900
$
—
27,078
4,775
113
1,848
10,479
329,075
14,877
1,814
10,512
2,409
3,262
32,874
296,201
37,158
259,043
4,937
457,531
79,736
157,533
93,093
12,585
44,670
850,085
480,496
110,755
46,289
86,248
187,947
911,735
197,393
70,684
126,709
1,367
125,342
4,327
121,015
1.43
1.40
84,382
90,331
$
$
$
13,116
464
106
801
651
39,038
1,013
215
8,613
212
143
10,196
28,842
3,800
25,042
112
50,384
7,224
146,701
11,238
—
8,573
224,232
60,972
109,159
43,658
7,360
34,368
255,517
(6,243)
(1,145)
(5,098)
494
(5,592)
259
(5,851) $
(0.10) $
(0.10) $
58,754
58,754
$
$
$
11,049
—
—
—
—
11,049
—
—
8,985
—
—
8,985
2,064
—
2,064
817
—
—
134,048
—
—
6,785
141,650
7,743
96,734
40,196
788
9,793
155,254
(11,540)
(5,009)
(6,531)
—
(6,531)
—
(6,531)
(0.12)
(0.12)
56,499
56,499
See accompanying notes.
F-6
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss) .....................................................................................
Other comprehensive income (loss): ........................................................
Unrealized gains (losses) on securities available for sale, net of tax
of $(23,765), $(3,172) and $4,692, respectively ..............................
Other ....................................................................................................
Comprehensive income (loss) ..................................................................
Less: comprehensive income attributable to noncontrolling interest .......
2013
Year Ended December 31,
2012
2011
$
126,709
$
(5,098) $
(6,531)
(43,039)
82
83,752
1,367
(5,889)
—
(10,987)
494
8,713
—
2,182
—
2,182
Comprehensive income (loss) applicable to Hilltop ................................
$
82,385
$
(11,481) $
See accompanying notes.
F-7
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Total
Hilltop
Comprehensive Accumulated Stockholders’ Noncontrolling
Income (Loss)
Interest
Equity
Balance, December 31, 2010 ....................
Net loss ................................................
Other comprehensive income ..............
Stock-based compensation expense ....
Common stock issued to board
members .........................................
Balance, December 31, 2011 ....................
Net loss ................................................
Other comprehensive income ..............
Issuance of preferred stock ..................
Issuance of common stock ..................
Stock-based compensation expense ....
Common stock issued to board
members .........................................
Repurchase and retirement of
common stock ................................
Dividends on preferred stock ..............
Acquired noncontrolling interest .........
Cash distributions to noncontrolling
interest............................................
Balance, December 31, 2012 ....................
Net income ..........................................
Other comprehensive loss ...................
Issuance of common stock ..................
Stock-based compensation expense ....
Common stock issued to board
members .........................................
Issuance of restricted common
stock ...............................................
Dividends on preferred stock ..............
Cash distributions to
noncontrolling interest ...................
Balance, December 31, 2013 ....................
— $
—
—
—
—
— $
—
—
114
—
—
—
—
—
—
—
—
—
—
—
—
—
—
114,068
—
—
—
—
—
—
—
114 $
—
—
—
—
—
114,068
—
—
—
—
—
—
—
—
—
—
56,495 $
—
—
—
6
56,501 $
—
—
—
27,123
—
4
(141)
—
—
—
83,487 $
—
—
6,208
—
10
471
—
—
114 $
—
114,068
—
90,176 $
565 $
—
—
—
—
565 $
—
—
—
271
—
—
(1)
—
—
—
918,046 $
—
—
98
48
918,192 $
—
—
—
387,312
450
50
(1,297)
(259)
—
—
835 $ 1,304,448 $
—
—
62
—
—
5
—
—
—
—
86,705
1,671
149
(5)
(4,327)
—
5,270 $
—
8,713
—
Deficit
(270,826) $
(6,531)
—
—
—
13,983 $
—
(5,889)
—
—
—
—
(277,357) $
(5,592)
—
—
—
—
—
—
—
—
—
8,094 $
—
—
—
—
—
653,055 $
(6,531)
8,713
98
48
655,383 $
(5,592)
(5,889)
114,068
387,583
450
50
(1,298)
(259)
—
—
(282,949) $ 1,144,496 $
— 125,342
—
—
—
(42,957)
—
—
—
—
—
—
—
—
—
—
125,342
(42,957)
86,767
1,671
149
—
(4,327)
—
902 $ 1,388,641 $
(34,863)$
(157,607) $ 1,311,141 $
Total
Stockholders’
Equity
— $
—
—
—
—
— $
494
—
—
—
—
—
—
—
1,789
(229)
2,054 $
1,367
—
—
—
—
—
—
653,055
(6,531)
8,713
98
48
655,383
(5,098)
(5,889)
114,068
387,583
450
50
(1,298)
(259)
1,789
(229)
1,146,550
126,709
(42,957)
86,767
1,671
149
—
(4,327)
(2,640)
781 $
(2,640)
1,311,922
See accompanying notes.
F-8
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities
Net income (loss) .................................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities ..........................................................................................................................
Provision for loan losses ................................................................................................
Depreciation, amortization and accretion, net ...............................................................
Net realized gains on securities ......................................................................................
Bargain purchase gain ....................................................................................................
Deferred income taxes ....................................................................................................
Other, net ........................................................................................................................
Net change in trading securities .....................................................................................
Net change in broker-dealer and clearing organization
receivables .................................................................................................................
Net change in other assets ..............................................................................................
Net change in broker-dealer and clearing organization payables ..................................
Net change in loss and loss adjustment expense reserve ...............................................
Net change in unearned insurance premiums ................................................................
Net change in other liabilities ........................................................................................
Net gains from sale of loans ...........................................................................................
Loans originated for sale ................................................................................................
Proceeds from loans sold................................................................................................
Net cash provided by (used in) operating activities .................................................................
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity .............
Proceeds from sales, maturities and principal reductions of securities available for sale .
Purchases of securities available for sale ............................................................................
Net change in loans .............................................................................................................
Purchases of premises and equipment and other assets ......................................................
Proceeds from sales of premises and equipment and other real estate owned ...................
Net cash received for Federal Home Loan Bank and Federal Reserve Bank stock ...........
Net cash from FNB Transaction and PlainsCapital Merger ...............................................
Net cash provided by (used in) investing activities .................................................................
Financing Activities ................................................................................................................
Net change in deposits .........................................................................................................
Net change in short-term borrowings ..................................................................................
Proceeds from notes payable ...............................................................................................
Payments on notes payable .................................................................................................
Payments to repurchase common stock ..............................................................................
Dividends paid on preferred stock ......................................................................................
Net cash distributed to noncontrolling interest ...................................................................
Other, net .............................................................................................................................
Net cash provided by (used in) financing activities .................................................................
Net change in cash and cash equivalents .................................................................................
Cash and cash equivalents, beginning of year .........................................................................
Cash and cash equivalents, end of year ....................................................................................
Supplemental Disclosures of Cash Flow Information ........................................................
Cash paid for interest ...........................................................................................................
Cash paid for income taxes, net of refunds .........................................................................
Supplemental Schedule of Non-Cash Activities ..................................................................
Redemption of senior exchangeable notes for common stock ...........................................
Conversion of loans to other real estate owned ..................................................................
Preferred stock issued in acquisition ...................................................................................
Common stock issued in acquisition ...................................................................................
2013
Year Ended December 31,
2012
2011
$
126,709
$
(5,098)
$
(6,531)
37,158
(53,794)
(4,937)
(12,585)
15,829
6,249
31,267
21,219
7,465
(55,247)
(6,544)
5,824
(34,540)
(457,531)
(11,752,800)
12,522,963
396,705
—
381,890
(372,998)
(140,437)
(33,066)
21,233
4,600
362,695
223,917
(210,491)
(386,163)
2,000
(3,262)
—
(2,985)
(2,640)
2,482
(601,059)
19,563
726,460
746,023
31,805
73,802
83,950
25,639
—
—
$
$
$
$
$
$
$
3,800
(2,533)
(112)
—
(6,426)
612
12,900
43,309
(541)
(46,509)
(10,823)
1,937
9,025
(50,384)
(1,344,577)
1,510,639
115,219
—
77,445
(224,893)
10,673
(17,412)
1,377
—
165,679
12,869
207,997
(185,812)
—
(766)
(1,298)
—
(229)
(40)
19,852
147,940
578,520
726,460
10,371
(184)
—
—
114,068
387,583
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
1,714
(817)
—
(3,930)
546
—
—
12,237
—
(14,047)
7,847
(341)
—
—
—
(3,322)
7,336
13,846
(81,583)
—
(296)
—
—
—
(60,697)
—
—
—
(6,900)
—
—
—
—
(6,900)
(70,919)
649,439
578,520
8,780
(811)
—
—
—
—
See accompanying notes.
F-9
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”) was organized in July 1998 as a Maryland
corporation. Hilltop is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the
Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop acquired PlainsCapital Corporation pursuant through a plan of
merger whereby PlainsCapital Corporation merged with and into a wholly owned subsidiary (the “PlainsCapital Merger”), which
continued as the surviving entity under the name “PlainsCapital Corporation” (“PlainsCapital”).
PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of
financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending,
investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing,
fixed income sales, asset management, and correspondent clearing services. The operating results of Hilltop for the year ended
December 31, 2012 include the results from the operations acquired in the PlainsCapital Merger for the month ended December 31,
2012. Certain disclosures within the notes to consolidated financial statements are specific to financial products and services of
PlainsCapital and its subsidiaries and therefore include information at December 31, 2013 and 2012 and relating to the post-
acquisition year ended December 31, 2013 and one month period ended December 31, 2012.
Prior to the consummation of the PlainsCapital Merger, the Company’s primary operations were limited to providing fire and
homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United
States through the Company’s wholly owned property and casualty insurance holding company, National Lloyds Corporation
(“NLC”), formerly known as NLASCO, Inc.
On September 13, 2013 (the “Bank Closing Date”), PlainsCapital Bank (the “Bank”) assumed substantially all of the liabilities,
including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank (“FNB”) from
the Federal Deposit Insurance Corporation (the “FDIC”), as receiver, and reopened former FNB branches acquired from the FDIC
under the “PlainsCapital Bank” name (the “FNB Transaction”). Pursuant to the Purchase and Assumption Agreement (the “P&A
Agreement”), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain
covered loans and covered other real estate owned (“OREO”) that the Bank acquired, as further described in Note 2 to the
consolidated financial statements. Based on preliminary purchase date valuations, the fair value of the assets acquired was $2.2 billion,
including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-
covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits. FNB’s expansive branch network
allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo
and El Paso markets, among others.
Basis of Presentation
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, the amounts receivable under the loss-share agreements with the FDIC (“FDIC Indemnification Asset”),
reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability, and the potential impairment of assets
are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all
periods presented in these consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the
purchase date valuations for certain identifiable assets acquired and liabilities assumed in the FNB Transaction are considered
preliminary because management made significant estimates and exercised significant judgment in estimating fair values and
accounting associated with the real estate appraisal validation exercise due to the short time period between the Bank Closing Date
and December 31, 2013.
The presentation of the Company’s historical consolidated financial statements has been modified and certain items in the prior period
financial statements have been reclassified to conform to the current period presentation, which is more consistent with that of a
financial institution that provides an array of financial products and services.
F-10
Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of the Bank and
100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a
PlainsCapital Company (“PrimeLending”) and PCB-ARC, Inc. The Bank has a 100% membership interest in First Southwest
Holdings, LLC (“First Southwest”) and PlainsCapital Securities, LLC, as well as a 51% voting interest in PlainsCapital Insurance
Services, LLC.
Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company
(“NLIC”) and American Summit Insurance Company (“ASIC”).
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing
member of PrimeLending Ventures, LLC (“Ventures”).
The principal subsidiaries of First Southwest are First Southwest Company (“FSC”), a broker-dealer registered with the Securities and
Exchange Commission (the “SEC”) and the Financial Industry Regulatory Authority, and First Southwest Asset Management, Inc., a
registered investment advisor under the Investment Advisors Act of 1940.
The consolidated financial statements include the accounts of the above-named entities. All significant intercompany transactions and
balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly
owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).
PlainsCapital also owns 100% of the outstanding common stock of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which are not
included in the consolidated financial statements under the requirements of the Variable Interest Entities Subsections of the ASC,
because the primary beneficiaries of the Trusts are not within the consolidated group.
Accounting Change
Effective October 1, 2013, the Company changed its method of applying ASC Topic 350 such that the annual goodwill impairment
testing date was changed from December 31st to October 1st for its insurance reporting unit. This new testing date is preferable under
the circumstances in order to combine evaluation efforts to provide for a more consistent, efficient and effective entity-wide
impairment testing process and it allows the Company more time to accurately complete its impairment testing process in order to
incorporate the results in the annual consolidated financial statements. The Company has prospectively applied the change in the
annual goodwill impairment testing date from October 1, 2013.
Acquisition Accounting
Acquisitions are accounted for under the purchase 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.
PlainsCapital 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. Transfers between
categories from these reassessments are rare. Securities held for resale to facilitate principal transactions with customers, as well as
certain securities acquired in the PlainsCapital Merger, 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.
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, resultant prepayment risk, and other factors related to interest rate and resultant prepayment risk
changes. Securities available for sale are carried at fair value. Unrealized holding gains and losses on 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 consider any optionality that may be embedded in the security.
F-11
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 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 OTTI, management considers in developing its best
estimate of cash flows, among other things, (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 for no more than 30 days. Substantially all mortgage loans originated by PrimeLending are sold in
the secondary market, the majority with servicing released. Mortgage loans held for sale are carried at fair value under the provisions
of the Fair Value Option Subsections of the ASC (“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.
Loans
Originated Loans
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 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 as they become due according to the terms of the loan agreement, which is generally
when a loan is 90 days past due unless the loan 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.
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 energy, agribusiness, wholesale/retail trade, construction and real estate. PrimeLending originates loans to customers in
its offices, which are located throughout the United States. Substantially all mortgage loans originated by PrimeLending are sold in the
secondary market with servicing released, although PrimeLending does retain servicing in certain circumstances. FSC makes loans to
customers through margin transactions. FSC controls risk by requiring customers to maintain margin 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 margin loans are not included in the consolidated financial statements.
Acquired Loans
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. Acquired loans were 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, nonaccrual 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-12
Purchased credit impaired (“PCI”) loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI
loans acquired in the FNB Transaction are accounted for both in pools and on an individual loan basis. 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 common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for
applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk
characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type.
PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal and interest payments
will not 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 estimated 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 the accretable yield and is recognized in
interest income using an effective yield method over the remaining life of the loan or pool. 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 considered performing.
Allowance for Loan Losses
Originated Loans
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents
management’s best estimate of probable losses inherent in the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses inherent in the loan portfolio at the balance sheet date. The allowance
for loan losses includes allowance allocations calculated in accordance with 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 the Bank’s control, including the
performance of the Bank’s 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
impaired loans; (ii) general historical valuation allowances calculated based on historical loan loss experience for homogenous loans
with similar characteristics and trends; and (iii) valuation allowances to adjust general reserves based on recent economic conditions
and other qualitative risk factors both internal and external to the Bank.
Acquired Loans
Purchased loans acquired in a business combination are recorded at their estimated fair value on their purchase date with no carryover
of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any
required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described
above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount
for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If
less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for
the loan and once the discount is depleted, losses are applied against the allowance established for that loan.
For PCI loans, cash flows expected to be collected are recast at each reporting date 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 increase, any previously established allowance for loan losses is
reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the
loan or pool.
F-13
Assets Segregated for Regulatory Purposes
Under certain conditions, FSC 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”). Assets
segregated under the provisions of the Exchange Act are not available for general corporate purposes. At December 31, 2013, FSC
was not required to segregate cash and securities. FSC was required to segregate an aggregate of $19.0 million in cash and securities at
December 31, 2012, which is included in other assets within the consolidated balance sheets.
FSC was not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of introducing
broker-dealers at December 31, 2013 and 2012.
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 FSC customers or for the account of FSC. Securities-borrowed and securities-
loaned transactions are generally reported as collateralized financings except where letters of credit or other securities are used as
collateral. Securities-borrowed transactions require FSC to deposit cash, letters of credit, or other collateral with the lender. With
respect to securities loaned, FSC receives collateral in the form of cash or other assets in an amount generally in excess of the market
value of securities loaned. FSC monitors 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, 2013 and 2012, 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, primarily
consisting 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 loss adjustment
expenses, unamortized policy acquisition costs, and maintenance costs exceed related unearned insurance premiums and anticipated
investment income. At December 31, 2013 and 2012, 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 loss adjustment expenses (“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.
F-14
FDIC Indemnification Asset
The Company has elected to account for the FDIC Indemnification Asset in accordance with FASB ASC 805. The FDIC
Indemnification Asset is 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 Company expects to collect from the
FDIC will be accreted into noninterest income within the consolidated statements of operations over the life of the FDIC
Indemnification Asset. The FDIC Indemnification Asset is reviewed quarterly and adjusted for any changes in expected cash flows
based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the
same basis as the related covered loans and covered OREO. Any increases in cash flow of the covered assets over those expected will
reduce the FDIC Indemnification Asset and any decreases in cash flow of the covered assets under those expected will increase the
FDIC Indemnification Asset. Any amortization of changes in value is limited to the contractual term of the loss-share agreements.
Increases and decreases to the FDIC Indemnification Asset are recorded as adjustments to noninterest income within the consolidated
statements of operations over the life of the loss-share agreements.
Covered Other Real Estate Owned
Acquired OREO subject to FDIC loss-share agreements is referred to as “covered OREO” and reported separately in the consolidated
balance sheets. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan
collateral is 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 is recorded at its net realizable value. Any subsequent valuation adjustments due to declines in fair value of the
covered OREO will be charged to noninterest expense, and will be partially offset by noninterest income representing the
corresponding increase to the FDIC Indemnification Asset for loss reimbursements. Any recoveries of previous valuation decreases
will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to
the FDIC.
Other Real Estate Owned
Real estate acquired through foreclosure is included in other assets within the consolidated balance sheets and is carried at
management’s estimate of fair value less costs to sell. Any excess of recorded investment over fair value less cost to sell is charged
against the allowance for loan losses when property is initially transferred to OREO. Subsequent to the initial transfer to OREO,
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 in other noninterest expense within the consolidated statements of operations.
Debt Issuance Costs
The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized on a straight-line basis,
which approximates the effective interest method, over the repayment term of the loans. Debt issuance costs of $2.3 million, $0.2
million and $0.4 million in 2013, 2012 and 2011 were amortized and included in interest expense within the consolidated statements
of operations. In November 2013, the total remaining unamortized balance of $2.1 million was expensed as a result of the redemption
of all outstanding 7.5% Senior Exchangeable Notes due 2025 (“the Notes”), as further described in Note 13 to the consolidated
financial statements. In 2011, an additional $0.2 million of the unamortized balance was written down as a result of NLC purchasing
$6.9 million of the Notes in the open market.
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 annually, or whenever events or changes in circumstances indicate that the carrying amount should be assessed. The
Company performs required annual impairment tests of its goodwill and other intangible assets as of October 1st for each of its
reporting units. Prior to testing goodwill for impairment, the Company has the option to assess on a qualitative basis whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. If determined, based on its assessment of
qualitative factors that it is more likely than not that fair value of a reporting unit is less than its carrying amount, the Company will
proceed to test goodwill for impairment as a part of a two-step process. First, the Company determines the fair value of a reporting
unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment
loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase
price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
F-15
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 relate to core deposits, trade names, customer and agent relationships and
noncompete agreements. 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 annually, 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. If impaired, the
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. Fair value adjustments that
encompass market-driven valuation changes and the runoff in value that occurs from the passage of time are each separately reported.
Retained mortgage servicing rights (“MSR”) are measured at fair value as of the date of sale of the related mortgage loan. Subsequent
fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the
present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment
speeds, delinquency and foreclosure rates, and ancillary fee income.
The model assumptions and the MSR fair value estimates are compared to observable trades of similar portfolios as well as to MSR
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 negatively impact the
recorded value of the MSR. The value of the MSR is also dependent upon the discount rate used in the model, which is based on
current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the
discount rate would reduce the value of the MSR.
Derivative Financial Instruments
The Company’s hedging policies permit the use of various derivative financial instruments, including interest rate lock commitments
(“IRLCs”), forward commitments and interest rate swaps, to manage interest rate risk or to hedge specified assets and liabilities. The
IRLCs and forward commitments 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.
Reserve for Losses and Loss Adjustment Expenses
The liability for losses and LAE includes an amount determined from loss reports and individual cases and an amount, based on past
experience, for losses incurred but not reported. Such liabilities are necessarily 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 loss adjustment expenses 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.
F-16
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 $5.3 million, $0.4 million and $34 thousand during 2013,
2012 and 2011, 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.
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 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. The Company has not recorded any significant liabilities for uncertain tax positions.
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.
Cash Flow Reporting
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as the amount
included in the consolidated balance sheets caption “Cash and due from banks” and the portion of the amount in the caption “Federal
funds sold and securities purchased under agreements to resell” that represents federal funds sold. Cash equivalents have original
maturities of three months or less.
Basic and Diluted Net Income (Loss) 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. In May 2013, as discussed in Note 20 to the consolidated financial statements, Hilltop issued restricted stock awards which
qualify as participating securities.
Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common
stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net
earnings available to common shareholders by the weighted average number of common shares outstanding during the period,
excluding participating nonvested restricted shares.
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the
number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the
participating securities, were issued using the treasury stock method. For all periods presented, stock options and redemption of the
Notes are the only potentially dilutive non-participating instruments issued by Hilltop. Next, we determine and include 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
2. Acquisitions
FNB Transaction
On the Bank Closing Date, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially
all of the assets of FNB from the FDIC in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC
entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to
acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as “covered
loans” and “covered OREO”, respectively, and these assets are presented as separate line items in the Company’s consolidated balance
sheet. Collectively, covered loans and covered OREO are referred to as “covered assets”. Pursuant to the loss-share agreements, the
FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets pursuant to the loss-share
agreements: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and
including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-share
agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank
Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing
Date.
In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten
years following the Bank Closing Date if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized
losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.
The operations of FNB are included in the Company’s operating results beginning September 14, 2013. For the period from
September 14, 2014 through December 31, 2013, FNB’s operations include net interest income of $32.0 million, other revenues of
$20.4 million and net income of $18.5 million. Such operating results include a preliminary bargain purchase gain of $12.6 million,
before taxes of $4.5 million, and are not necessarily indicative of future operating results. FNB’s results of operations prior to the
Bank Closing Date are not included in the Company’s consolidated operating results.
Transaction-related expenses of $0.1 million associated with the FNB Transaction are included in noninterest expense within the
consolidated statement of operations for the year ended December 31, 2013. Such expenses were for professional services and other
incremental costs associated with the integration of FNB’s operations.
The FNB Transaction was accounted for using the purchase method of accounting and, accordingly, purchased assets, including
identifiable intangible assets and assumed liabilities, were recorded at their respective Bank Closing Date fair values using significant
estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. During the quarter ended December 31,
2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were
adjusted as a result of additional information obtained primarily related to the fair values of loans, covered OREO, FDIC
Indemnification Asset, premises and equipment and other intangible assets. Due to the short time period between the Bank Closing
Date and December 31, 2013, the real estate appraisal validation exercise remains outstanding and the Bank Closing Date valuations
related to covered OREO and FDIC Indemnification Asset are considered preliminary and could differ significantly when finalized.
The amounts are also subject to adjustments based upon final settlement with the FDIC. The terms of the P&A Agreement provide for
the FDIC to indemnify the Bank against claims with respect to liabilities and assets of FNB or any of its affiliates not assumed or
otherwise purchased by the Bank and with respect to certain other claims by third parties.
A summary of the net assets received from the FDIC in the FNB Transaction and the estimated fair value adjustments resulting in the
bargain purchase gain are presented below (in thousands).
Cost basis net assets on September 13, 2013 ..........................................
Cash payment received from the FDIC ...................................................
Fair value adjustments:
Securities .............................................................................................
Loans ...................................................................................................
Premises and equipment ......................................................................
Other real estate owned .......................................................................
FDIC indemnification asset .................................................................
Other intangible assets ........................................................................
Deposits ...............................................................................................
Other....................................................................................................
Bargain purchase gain .............................................................................
$
$
215,000
45,000
(3,341)
(343,068)
3,565
(79,273)
185,680
4,270
(8,282)
(6,966)
12,585
F-18
In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and
amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to
make a payment to the FDIC. In the FNB Transaction, cost basis net assets of $215.0 million and an initial cash payment received
from the FDIC of $45.0 million were transferred to the Bank. This initial cash payment from the FDIC is subject to adjustment and
settlement. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair
value of the liabilities assumed.
The FDIC bid form provided a list of properties (branches and support facilities) owned by FNB for sale at fixed prices. The Bank
purchased 44 properties owned by FNB in connection with its bid for an aggregate purchase price of $59.5 million. For those
properties owned by FNB that the Bank declined to purchase in its bid, the Bank had exclusive options to purchase those properties
following the Bank Closing Date. In connection with those options, the Bank purchased an additional seven properties owned by FNB,
for an aggregate purchase price of $4.9 million. The Bank also had an option to assume the leases of properties leased by FNB. The
Bank was required to purchase all data management equipment and, other certain special assets, furniture, fixtures and equipment, in
each case at an appraised value at any properties purchased or leased by the Bank. The Bank paid $10.3 million to the FDIC for
furniture, fixtures and data management equipment. The Bank is required to pay rent to the FDIC on properties owned or leased by
FNB and furniture and equipment at such properties until it surrenders such properties to the FDIC.
The resulting fair values of the identifiable assets acquired, and liabilities assumed, of FNB at September 13, 2013 are summarized in
the following table (in thousands).
Cash and due from banks .................................................................
Securities ..........................................................................................
Non-covered loans ...........................................................................
Covered loans ...................................................................................
Premises and equipment ...................................................................
FDIC indemnification asset..............................................................
Covered other real estate owned ......................................................
Other assets ......................................................................................
Other intangible assets .....................................................................
Total identifiable assets acquired .................................................
$
362,695
286,214
42,884
1,116,583
78,399
185,680
135,187
26,300
4,270
2,238,212
Deposits ...........................................................................................
Other liabilities .................................................................................
Total liabilities assumed ...............................................................
Net identifiable assets acquired/bargain purchase gain ....................
(2,211,740)
(13,887)
(2,225,627)
12,585
$
The Bank acquired loans both with and without evidence of credit quality deterioration since origination. Based on purchase date
valuations, the Bank’s portfolio of acquired loans had a fair value of $1.2 billion as of the Bank Closing Date, 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. The following table presents details on acquired loans at the Bank Closing Date (in thousands).
Loans, excluding
PCI Loans
PCI
Loans
Commercial and industrial .............................
Real estate.......................................................
Construction and land development ...............
Consumer .......................................................
Total ...........................................................
$
$
47,874
242,998
26,669
19,095
336,636
$
$
47,751
611,219
158,247
5,614
822,831
$
$
Total
Loans
95,625
854,217
184,916
24,709
1,159,467
The following table presents information about the acquired PCI loans at the Bank Closing Date (in thousands).
Contractually required principal and interest payments ...............................................
Nonaccretable difference ..............................................................................................
Cash flows expected to be collected .............................................................................
Accretable difference ....................................................................................................
Fair value of covered loans acquired with a deterioration of credit quality ..................
$
$
1,533,667
542,241
991,426
168,595
822,831
F-19
The following table presents information about the acquired loans without credit impairment at the Bank Closing Date (in thousands).
Contractually required principal and interest payments ...............................................
Contractual cash flows not expected to be collected ....................................................
Fair value at acquisition ................................................................................................
$
466,754
43,783
336,636
PlainsCapital Merger
After the close of business on November 30, 2012, Hilltop acquired PlainsCapital Corporation in a stock and cash transaction.
PlainsCapital Corporation merged with and into a wholly owned subsidiary, which continued as the surviving entity under the name
“PlainsCapital Corporation”. Based on Hilltop’s closing stock price on November 30, 2012, the total purchase price was $813.5
million, consisting of 27.1 million shares of common stock, $311.8 million in cash and the issuance of 114,068 shares of Hilltop Non-
Cumulative Perpetual Preferred Stock, Series B (the “Hilltop Series B Preferred Stock”) in exchange on a one-for-one basis for the
outstanding shares of PlainsCapital Non-Cumulative Perpetual Preferred Stock, Series C, all of which were held by the United States
Department of the Treasury (the “U.S. Treasury”). The fair value of assets acquired, excluding goodwill, totaled $6.5 billion,
including $3.2 billion of loans, $730.8 million of investment securities and $70.7 million of identifiable intangibles. The fair value of
the liabilities assumed was $5.9 billion, including $4.5 billion of deposits.
The PlainsCapital Merger was accounted for using the purchase method of accounting, and accordingly, purchased assets, including
identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components of
the consideration paid are shown in the following table (in thousands).
Fair value of consideration paid:
Common stock issued .................................................................................
Preferred stock issued .................................................................................
Cash ...........................................................................................................
Total consideration paid .................................................................................
$
$
387,584
114,068
311,805
813,457
The resulting fair values of the identifiable assets acquired, and liabilities assumed, of PlainsCapital at December 1, 2012 are
summarized in the following table (in thousands).
Cash and due from banks ...............................................................................
Federal funds sold and securities purchased agreements to resell ..................
Securities ........................................................................................................
Loans held for sale .........................................................................................
Loans, net .......................................................................................................
Broker-dealer and clearing organization receivables .....................................
Premises and equipment .................................................................................
Other intangible assets....................................................................................
Other assets ....................................................................................................
Total identifiable assets acquired ...............................................................
$
Deposits ..........................................................................................................
Broker-dealer and clearing organization payables .........................................
Short-term borrowings ...................................................................................
Notes payable .................................................................................................
Junior subordinated debentures ......................................................................
Other liabilities ...............................................................................................
Total liabilities assumed .............................................................................
Net identifiable assets acquired ......................................................................
Goodwill resulting from the acquisition .........................................................
Net assets acquired .........................................................................................
$
393,132
84,352
730,779
1,520,833
3,195,309
149,457
96,886
70,650
241,876
6,483,274
4,463,069
263,894
914,062
10,855
67,012
180,998
5,899,890
583,384
230,073
813,457
For further information regarding goodwill recorded in connection with the PlainsCapital Merger, refer to Note 9, Goodwill and Other
Intangible Assets.
F-20
Expenses of $6.6 million associated with the PlainsCapital Merger are included in noninterest expense within the consolidated
statement of operations for 2012. Such expenses were for professional services and other incremental costs associated with the
integration of PlainsCapital’s operations.
In connection with the PlainsCapital Merger, Hilltop acquired loans both with and without evidence of credit quality deterioration
since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Acquired
loans were segregated between those considered to be PCI loans and those without credit impairment at acquisition. The following
table presents details on acquired loans at the acquisition date (in thousands).
Loans, excluding
PCI Loans
PCI
Loans
Commercial and industrial ...........................
Real estate ....................................................
Construction and land development .............
Consumer .....................................................
Total ........................................................
$
$
1,684,706
1,077,295
232,313
28,131
3,022,445
$
$
74,911
63,866
34,008
79
172,864
$
$
Total
Loans
1,759,617
1,141,161
266,321
28,210
3,195,309
The following table presents information about the PCI loans at acquisition (in thousands).
Contractually required principal and interest payments ................
Nonaccretable difference ..............................................................
Cash flows expected to be collected .............................................
Accretable difference ....................................................................
Fair value of loans acquired with a deterioration of credit quality
$
$
252,818
61,527
191,291
18,427
172,864
The following table presents information about the acquired loans without credit impairment at acquisition (in thousands).
Contractually required principal and interest payments ................
Contractual cash flows not expected to be collected ....................
Fair value at acquisition ................................................................
$
3,498,554
92,526
3,022,445
Pro Forma Results of Operations
The purchase of assets and assumption of certain liabilities of FNB from the FDIC, as receiver, was significant at a level to require
disclosure of historical financial statements and related pro forma financial disclosure. An essential part of the transaction is the
federal financial assistance governed by the P&A Agreement with the FDIC, which is not reflective of the previous operations of
FNB. The nature and magnitude of the FNB Transaction, coupled with the federal assistance, substantially reduces the relevance of
historical financial information of FNB when considering the assessment of the historical financial information relative to future
operations. Because the Company believes that the continuity of FNB’s historical operations is substantially lacking after the FNB
Transaction and pro forma information is not reasonably available, the Company has omitted certain historical financial information
and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K,
Financial Statements of Acquired Troubled Financial Institutions (“SAB 1:K”), and a request for relief granted by the SEC. SAB 1:K
provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a
registrant engages in an acquisition of a significant amount of assets of a troubled financial institution that involves pervasive federal
assistance and audited financial statements of the troubled financial institution are not reasonably available. Therefore, no additional
historical pro forma information regarding FNB is provided below.
The results of operations acquired in the PlainsCapital Merger have been included in the Company’s consolidated financial results
since December 1, 2012. The following table discloses the impact of PlainsCapital (excluding the impact of acquisition-related merger
and restructuring charges discussed below) since the acquisition date through December 31, 2012.
F-21
The table also presents pro forma results had the PlainsCapital Merger taken place on January 1, 2011 (in thousands), and includes the
estimated impact of purchase accounting adjustments. The purchase accounting adjustments reflect the impact of recording the
acquired loans at fair value, including the estimated accretion of the purchase discount on the loan portfolio. Accretion estimates were
based on the acquisition date purchase discount on the loan portfolio, as it was not practicable to determine the amount of discount
that would have been recorded based on economic conditions that existed on January 1, 2011. The pro forma results do not include
any potential operating cost savings as a result of the PlainsCapital Merger. Further, certain costs associated with any restructuring or
integration activities are also not reflected in the pro forma results. Pro forma results include any acquisition-related merger and
restructuring charges incurred during the period. The pro forma results are not indicative of what would have occurred had the
PlainsCapital Merger taken place on the indicated date.
PlainsCapital
Acquisition Date
through
December 31, 2012
Pro Forma Combined
Twelve Months Ended
December 31,
2012
2011
Net interest income .....................
Other revenues ............................
Net income ..................................
$
$
24,029
70,085
8,361
$
221,635
901,347
75,138
225,436
616,582
63,067
3. Fair Value Measurements
Fair Value Measurements and Disclosures
The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the “Fair
Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions
upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair
value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.
The Fair Value Topic creates a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the
assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.
•
•
•
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at
the measurement date.
Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, prepayment speeds,
default rates, credit risks, loss severities, etc.), and inputs that are derived from or corroborated by market data, among others.
Level 3 Inputs: Unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants
would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques,
among others.
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale at fair value and MSR, and
certain time deposits at the Bank under the provisions of the Fair Value Option. The Company elected to apply the provisions of the
Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company determines the
fair value of the financial instruments accounted for under the provisions of the Fair Value Option in compliance with the provisions
of the Fair Value Topic of the ASC discussed above.
At December 31, 2013, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value
Option was $1.09 billion, and the unpaid principal balance of those loans was $1.07 billion. At December 31, 2012, the aggregate fair
value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.40 billion, and the unpaid
principal balance of those loans was $1.36 billion. The interest component of fair value is reported as interest income on loans in the
accompanying consolidated statements of operations.
F-22
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, data
from independent pricing services and rates paid in the brokered certificate of deposit market.
Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable estimate of
fair value.
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. For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs
based on observable market transactions. Regarding the note receivable and warrants, the determination of fair value uses Level 3
inputs such as internal or external fund manager valuations based on unobservable inputs including recent filings, operating results,
balance sheet stability, growth and other business and market sector fundamentals.
Trading Securities — Trading securities are reported at fair value using either Level 1 or Level 2 inputs in the same manner as
discussed previously for securities available for sale.
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. Mortgage loans that are non-performing, including monitored loans, are reported at fair value using Level 3 inputs. These loans
were previously valued using Level 2 inputs. However, refinements made during 2013 to the fair value inputs for these loans resulted
in the use of significant unobservable inputs.
Deposits — As discussed previously, certain time deposits are reported at fair value by virtue of an election under the provisions of
Fair Value Option. Fair values are determined using Level 2 inputs that consist of observable rates paid on instruments of the same
tenor in the brokered certificate of deposit market.
Derivatives — Derivatives are reported at fair value using either Level 2 or Level 3 inputs. PlainsCapital uses dealer quotes to
determine the fair value of interest rate swaps used to hedge time deposits. PrimeLending and FSC 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 FSC issues 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. FSC determines the value of the underlying mortgage loan from prices of comparable securities used to
value forward sale commitments. Additionally, First Southwest entered into a derivative option agreement (“Fee Award Option”).
Mortgage servicing asset — The mortgage servicing asset is reported at fair value using Level 3 inputs. Fair value is determined by
projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing asset
is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified
servicing fees, servicing costs and underlying portfolio characteristics.
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in
thousands).
December 31, 2013
Cash and cash equivalents .........................................
Trading securities .......................................................
Available for sale securities .......................................
Loans held for sale .....................................................
Derivative assets ........................................................
Mortgage servicing asset ............................................
Trading liabilities .......................................................
Derivative liabilities ...................................................
$
$
Level 1
Inputs
746,023
33
22,079
—
—
—
—
—
F-23
$
Level 2
Inputs
—
58,813
1,121,011
1,061,310
23,564
—
46
139
Level 3
Inputs
Total
Fair Value
$
—
—
60,053
27,729
—
20,149
—
5,600
746,023
58,846
1,203,143
1,089,039
23,564
20,149
46
5,739
December 31, 2012
Cash and cash equivalents .........................................
Trading securities .......................................................
Available for sale securities .......................................
Loans held for sale .....................................................
Derivative assets ........................................................
Mortgage servicing asset ............................................
Time deposits .............................................................
Trading liabilities .......................................................
Derivative liabilities ...................................................
$
$
Level 1
Inputs
$
726,460
—
20,428
—
—
—
—
—
—
Level 2
Inputs
—
90,113
914,248
1,400,737
15,697
—
1,073
3,164
1,080
Level 3
Inputs
Total
Fair Value
—
—
56,277
—
—
2,080
—
—
4,490
726,460
90,113
990,953
1,400,737
15,697
2,080
1,073
3,164
5,570
The following table includes a rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).
Balance at
Beginning of
Period
Purchases
Sales
Transfers into
Level 3
Included in
Net Income (Loss)
Included in Other
Comprehensive
Income (Loss)
Balance at
End of Period
Total Gains or Losses
(Realized or Unrealized)
Year ended December 31, 2013
Available for sale securities .....
Loans held for sale ...................
Mortgage servicing asset ..........
Derivative liabilities .................
Total ........................................
$
$
Year ended December 31, 2012
Available for sale securities .....
Mortgage servicing asset ..........
Derivative liabilities .................
Total ........................................
$
$
56,277 $
—
2,080
(4,490)
53,867 $ 13,886 $
— $
—
13,886
—
60,377 $
—
—
60,377 $
— $
1,890
(4,455)
(2,565) $
— $
—
—
—
— $
— $
—
—
— $
Year ended December 31, 2011
Available for sale securities .....
Total ........................................
$
$
— $ 50,000 $
— $ 50,000 $
— $
— $
— $
27,729
—
—
27,729 $
— $
—
—
— $
— $
— $
2,166 $
—
4,183
(1,110)
5,239 $
1,867 $
190
(35)
2,022 $
1,610 $
—
—
—
1,610 $
(5,967) $
—
—
(5,967) $
60,053
27,729
20,149
(5,600)
102,331
56,277
2,080
(4,490)
53,867
709 $
709 $
9,668 $
9,668 $
60,377
60,377
All net unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. The unrealized
gains (losses) relate to financial instruments still held at December 31, 2013. The available for sale securities noted in the table above
reflect Hilltop’s note receivable and warrant to purchase common stock of SWS Group, Inc. (“SWS”) as discussed in Note 4 to the
consolidated financial statements.
Hilltop’s note receivable is valued using a cash flow model that estimates yield based on comparable securities in the market. The
interest rate used to discount cash flows is the most significant unobservable input. An increase or decrease in the discount rate would
result in a corresponding decrease or increase, respectively, in the fair value measurement of the note receivable.
The warrant is valued utilizing a binomial model. The underlying SWS common stock price and its related volatility, an unobservable
input, are the most significant inputs into the model, and, therefore, decreases or increases to the SWS common stock price would
result in a significant change in the fair value measurement of the warrant.
Loans held for sale, including monitored mortgage loans, are valued using commitments on hand from investors or prevailing market
prices.
The mortgage servicing asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value.
The fair value of the mortgage servicing asset is impacted by a variety of factors, including prepayment assumptions, discount rates,
delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics.
Derivative liabilities in the tables above include a Fee Award Option valued using discounted cash flows and probability of exercise.
F-24
The Company had no transfers between Levels 1 and 2 during the periods presented.
The following table presents the changes in fair value for instruments that are reported at fair value under the Fair Value Option (in
thousands).
Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option
Net Gains
(Losses) from
Sale of Loans
Year Ended December 31, 2013
Other
Total
Noninterest
Income
Changes in
Fair Value
Net Gains
(Losses) from
Sale of Loans
Year Ended December 31, 2012
Other
Total
Noninterest
Income
Changes in
Fair Value
Loans held for sale ..............
Mortgage servicing asset .....
Time deposits ......................
$
(19,353) $
18,069
—
— $
—
12
(19,353) $
18,069
12
(3,297) $
190
—
— $
—
7
(3,297)
190
7
The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all
of the assets and liabilities purchased in the PlainsCapital Merger was determined at the acquisition date, while fair value of all assets
acquired and liabilities assumed in the FNB Transaction was determined at the Bank Closing Date. In addition, facts and
circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-
recurring basis include the items discussed below.
Impaired Loans — The Company reports impaired loans based on the underlying fair value of the collateral through specific
allowances within the allowance for loan losses. The Company acquired PCI loans with a fair value of $172.9 million and $822.8
million upon completion of the PlainsCapital Merger and the FNB Transaction, respectively. Substantially all PCI loans acquired in
the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs,
including estimates of expected cash flows that incorporated assumptions regarding default rates, loss severity rates assuming default,
prepayment speeds and estimated collateral values. At December 31, 2013, non-covered PCI loans with a carrying amount of $100.4
million had been reduced by specific allowances within the allowance for non-covered loan losses of $3.1 million, resulting in a
reported value of $97.3 million that approximates fair value. At December 31, 2013, covered PCI loans with a carrying amount of
$729.2 million had been reduced by specific allowances within the allowance for covered loan losses of $0.9 million, resulting in a
reported value of $728.3 million.
Other Real Estate Owned — The Company reports OREO at fair value less estimated cost to sell. Any excess of recorded
investment over fair value, less cost to sell, is charged against the allowance for loan losses when property is initially transferred to
OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company
determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified
as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The
Company considers a number of factors in determining the extent to which specific fair value measurements utilize unobservable
inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent
market price or appraised value, and current market conditions. In the FNB Transaction, the Bank acquired OREO of $135.2 million,
all of which is covered by an FDIC loss-share agreement. At December 31, 2013, the estimated fair value of covered OREO was
$142.8 million, and the underlying fair value measurements utilize Level 3 inputs. The fair value of non-covered OREO at
December 31, 2013 and 2012 was $4.8 million and $11.1 million, respectively, and is included in other assets within the consolidated
balance sheets. During the reported periods, all fair value measurements for non-covered OREO utilized Level 2 inputs.
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:
F-25
Loans — The fair value of non-covered and covered loans is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Broker-Dealer and Clearing Organization Receivables — The carrying amount approximates their fair value.
FDIC Indemnification Asset — The fair value of the FDIC Indemnification Asset is based on Level 3 inputs, including the
discounted value of expected future cash flows under the loss-share agreements. The discount rate contemplates the credit worthiness
of the FDIC as counterparty to this asset, and considers an incremental discount rate risk premium reflective of the inherent
uncertainty associated with the timing of the cash flows.
Deposit Liabilities — 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.
Broker-Dealer and Clearing Organization Payables — The carrying amount approximates their fair value.
Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements 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.
The following table presents the carrying values and estimated fair values of financial instruments (in thousands).
December 31, 2013
Financial assets:
Non-covered loans, net .................................
Covered loans, net .........................................
Broker-dealer and clearing organization
receivables ................................................
FDIC indemnification asset ..........................
Other assets ...................................................
Financial liabilities:
Deposits ........................................................
Broker-dealer and clearing organization
payables ....................................................
Short-term borrowings ..................................
Debt ...............................................................
Other liabilities .............................................
December 31, 2012
Financial assets:
Non-covered loans, net .................................
Broker-dealer and clearing organization
receivables ................................................
Other assets ...................................................
Financial liabilities:
Deposits ........................................................
Broker-dealer and clearing organization
payables ....................................................
Short-term borrowings ..................................
Debt ...............................................................
Other liabilities .............................................
Carrying
Amount
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Estimated Fair Value
$ 3,481,405
1,005,308
$
119,317
188,291
66,055
6,722,019
129,678
342,087
123,339
3,362
—
—
—
—
—
—
—
—
—
—
$
281,712
—
$ 3,119,319
997,371
$ 3,401,031
997,371
119,317
—
43,946
—
188,291
22,109
119,317
188,291
66,055
6,722,909
129,678
342,087
114,671
3,362
—
—
—
—
—
6,722,909
129,678
342,087
114,671
3,362
Carrying
Amount
Level 1
Inputs
Estimated Fair Value
Level 2
Inputs
Level 3
Inputs
Total
$ 3,148,987
$
—
$
—
$ 3,148,987
$ 3,148,987
—
—
—
—
—
—
—
145,564
59,094
4,698,848
187,990
728,250
217,092
4,400
—
—
—
—
—
—
—
145,564
59,094
4,698,848
187,990
728,250
217,092
4,400
145,564
59,094
4,700,461
187,990
728,250
208,551
4,400
F-26
The deferred income amounts arising from unrecognized financial instruments are not significant. These financial instruments also
have contractual interest rates at or above current market rates. Therefore, no fair value disclosure is provided for these items.
4. Securities
The amortized cost and fair value of available for sale securities are summarized as follows (in thousands).
December 31, 2013
U.S. Treasury securities .......................
U.S. government agencies:
Bonds ...............................................
Residential mortgage-backed
securities ......................................
Collateralized mortgage
obligations ...................................
Corporate debt securities .....................
States and political subdivisions ..........
Commercial mortgage-backed
securities ..........................................
Equity securities ..................................
Note receivable ....................................
Warrant ................................................
Totals ...................................................
December 31, 2012
U.S. Treasury securities .......................
U.S. government agencies:
Bonds ...............................................
Residential mortgage-backed
securities ......................................
Collateralized mortgage
obligations ...................................
Corporate debt securities .....................
States and political subdivisions ..........
Commercial mortgage-backed
securities ..........................................
Equity securities ..................................
Note receivable ....................................
Warrant ................................................
Totals ...................................................
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
43,684
$
82
$
(238) $
43,528
717,909
59,936
124,502
72,376
162,955
691
20,067
42,674
12,068
1,256,862
$
550
735
349
4,610
388
69
2,012
5,235
76
14,106
(55,727)
662,732
(584)
60,087
(4,390)
(378)
(6,508)
120,461
76,608
156,835
—
—
—
—
(67,825) $
760
22,079
47,909
12,144
1,203,143
$
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
7,046
$
141
$
(2) $
7,185
524,888
18,473
97,812
79,716
177,701
1,001
19,289
40,508
12,068
978,502
$
1,663
490
191
7,461
196
72
1,139
3,652
49
15,054
$
(314)
526,237
(70)
18,893
(79)
—
(2,138)
—
—
—
—
(2,603) $
97,924
87,177
175,759
1,073
20,428
44,160
12,117
990,953
$
$
$
Available for sale equity securities includes 1,475,387 shares of SWS common stock, a $50.0 million aggregate principal amount note
issued by SWS and a warrant to purchase 8,695,652 shares of SWS common stock. SWS issued the note in July 2011 under a credit
agreement pursuant to a senior unsecured loan from Hilltop. The note bears interest at a rate of 8.0% per annum, is prepayable by
SWS subject to certain conditions after three years, and has a maturity of five years. The warrant provides for the purchase of
8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-dilution adjustments. If the warrant was
fully exercised, Hilltop would beneficially own 24.4% of SWS.
F-27
Information regarding available for sale securities that were in an unrealized loss position is shown in the following table (dollars in
thousands).
December 31, 2013
December 31, 2012
Number of
Securities
Fair Value
Losses
Unrealized
Number of
Securities
Fair Value
Losses
Unrealized
U.S. treasury securities:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve months
or longer ..................................
U.S. government agencies:
Bonds:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve
months or longer .....................
Residential mortgage-backed
securities:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve
months or longer .....................
Collateralized mortgage obligations:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve
months or longer .....................
Corporate debt securities:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve
months or longer .....................
States and political subdivisions:
Unrealized loss for less than
Unrealized loss for twelve
months or longer .....................
Total available for sale:
Unrealized loss for less than
twelve months .........................
Unrealized loss for twelve
months or longer .....................
—
6
35
5
40
2
3
5
7
2
9
7
—
7
6 $
12,748 $
—
12,748
238
—
238
526,817
45,274
90,931
617,748
10,454
55,728
2,194
9,309
11,503
84,054
4,995
89,049
10,754
—
10,754
54
529
583
4,320
70
4,390
378
—
378
6,508
—
6,508
2 $
2,427 $
—
2
14
—
14
7
—
7
8
—
8
—
—
—
—
2,427
236,305
—
236,305
12,279
—
12,279
38,887
—
38,887
—
—
—
225
156,664
—
225
—
156,664
2
—
2
314
—
314
70
—
70
79
—
79
—
—
—
2,138
—
2,138
2,603
—
2,603
twelve months .........................
196
127,127
—
196
—
127,127
253
763,694
56,772
256
446,562
10
263 $
105,235
868,929 $
11,053
67,825
—
—
256 $ 446,562 $
During 2013, 2012 and 2011, the Company did not record any other-than-temporary impairments. While all of the investments are
monitored for potential other-than-temporary impairment, the Company’s analysis and experience indicate that these available for sale
investments generally do not present a great risk of other-than-temporary-impairment, as fair value should recover over time. Factors
considered in the Company’s analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized
loss position, credit worthiness, and forecasted performance of the investee. While some of the securities held in the investment
portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not believed
to be significant enough to warrant other-than-temporary impairment of the securities. The Company does not intend, nor is it likely
that the Company will be required, to sell these securities before the recovery of the cost basis. Therefore, management does not
believe any other-than-temporary impairments exist at December 31, 2013.
F-28
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations
with or without penalties. The amortized cost and fair value of securities, excluding trading and available for sale equity securities and
the available for sale warrant, at December 31, 2013 are shown by contractual maturity below (in thousands).
Due in one year or less ..................................................................
Due after one year through five years............................................
Due after five years through ten years ...........................................
Due after ten years .........................................................................
Residential mortgage-backed securities ........................................
Collateralized mortgage obligations ..............................................
Commercial mortgage-backed securities .......................................
Amortized
Cost
Fair Value
125,804
115,950
70,173
727,671
1,039,598
59,936
124,502
691
1,224,727
$
$
125,881
125,245
70,280
666,206
987,612
60,087
120,461
760
1,168,920
$
$
The Company realized net losses from its trading securities portfolio of $2.8 million and $0.7 million during the year ended
December 31, 2013 and the month of December 31, 2012, respectively, which are recorded as a component of other noninterest
income within the consolidated statements of operations.
Securities with a carrying amount of $1.0 billion and $635.2 million (with a fair value of $938.1 million and $633.4 million) at
December 31, 2013 and 2012, respectively, were pledged to secure public and trust deposits, federal funds purchased and securities
sold under agreements to repurchase, and for other purposes as required or permitted by law.
Mortgage-backed securities and collateralized mortgage obligations consist principally of Government National Mortgage Association
(“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-
through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA
and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally
guaranteed by the full faith and credit of the United States.
At December 31, 2013 and 2012, NLC had investments on deposit in custody for various state insurance departments with carrying
values of $9.4 million and $9.3 million, respectively.
5. Non-Covered Loans and Allowance for Non-Covered Loan Losses
Non-covered loans refer to loans not covered by the FDIC loss-share agreements. The non-covered loan portfolio at December 31,
2013 includes loans acquired as a part of the FNB Transaction totaling $53.4 million, of which $7.2 million are categorized as non-
covered PCI loans. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by
portfolio segment are as follows (in thousands).
Commercial and industrial ........................................................
Real estate..................................................................................
Construction and land development ..........................................
Consumer ..................................................................................
Allowance for non-covered loan losses .....................................
Total non-covered loans, net of allowance ................................
December 31,
2013
1,637,266
1,457,253
364,551
55,576
3,514,646
(33,241)
3,481,405
$
$
2012
1,660,293
1,184,914
280,483
26,706
3,152,396
(3,409)
3,148,987
$
$
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.
F-29
Underwriting procedures address financial components based on the size or complexity of the credit. The financial components
include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance
sheet and statement of operations ratios. Collateral analysis includes a complete description of the collateral, as well as determining
values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information relevant to the
collateral being pledged. Guarantor analysis includes liquidity and cash flow analysis based on the significance the guarantors are
expected to serve as secondary repayment sources. The Bank’s underwriting standards are governed by adherence to its loan policy.
The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction
and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are
explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided.
The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that potentially
impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness
of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk
identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management
and the Bank’s Board of Directors.
In connection with the PlainsCapital Merger and the FNB Transaction, the Company acquired non-covered loans both with and
without evidence of credit quality deterioration since origination. The following table presents the carrying values and the outstanding
balances of the non-covered PCI loans (in thousands).
Carrying amount ........................................................................
Outstanding balance ..................................................................
$
100,392
141,983
$
166,780
222,674
December 31,
2013
2012
Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).
Balance, beginning of period .........................................................
Additions ...................................................................................
Increases in expected cash flows ...............................................
Disposals of loans ......................................................................
Accretion ...................................................................................
Balance, end of period ...................................................................
$
Year Ended
December 31, 2013
17,553
622
18,793
(3,692)
(15,675)
17,601
$
$
Month Ended
December 31, 2012
18,427
—
—
(22)
(852)
17,553
$
Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments,
which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered
impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans.
Non-covered PCI loans are summarized by class in the following tables (in thousands). In addition to the non-covered PCI loans, there
were $4.1 million of additional non-covered impaired loans at December 31, 2013. There were no impaired loans at December 31,
2012 other than PCI loans.
December 31, 2013
Commercial and industrial:
Unpaid
Contractual
Recorded
Investment with
Principal Balance No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Related
Allowance
Secured ..............................................
Unsecured ..........................................
$
60,309 $
11,772
19,280 $
240
16,092 $
1,204
35,372 $
1,444
Real estate:
Secured by commercial properties .....
Secured by residential properties .......
Construction and land development:
Residential construction loans ...........
Commercial construction loans and
land development ...........................
Consumer ...............................................
49,306
5,013
33
48,515
7,946
182,894 $
$
20,185
1,347
—
15,225
4,509
60,786 $
16,070
1,648
—
36,255
2,995
—
4,592
—
39,606 $
19,817
4,509
100,392 $
2,705
15
339
39
—
39
—
3,137
F-30
December 31, 2012
Commercial and industrial:
Unpaid
Contractual
Recorded
Investment with
Principal Balance No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Secured ..............................................
Unsecured ..........................................
$
102,642 $
17,133
67,967 $
3,419
Real estate:
Secured by commercial properties .....
Secured by residential properties .......
Construction and land development:
Residential construction loans ...........
Commercial construction loans and
land development ...........................
Consumer ...............................................
70,284
10,164
1,137
60,425
92
55,519
6,728
708
32,362
77
$
261,877 $
166,780 $
— $
—
—
—
—
67,967
3,419
55,519
6,728
708
—
—
— $
32,362
77
166,780
Average investment in non-covered PCI loans for the year ended December 31, 2013 is summarized by class in the following table (in
thousands).
Commercial and industrial:
Secured ...........................................................................
Unsecured ......................................................................
$
Real estate:
Secured by commercial properties .................................
Secured by residential properties ...................................
Construction and land development:
Residential construction loans ........................................
Commercial construction loans and
land development .......................................................
Consumer ...........................................................................
$
51,670
2,432
45,887
4,862
354
26,090
2,293
133,588
Non-covered non-accrual loans at December 31, 2013, excluding those classified as held for sale, are summarized by class in the
following table (in thousands).
Commercial and industrial:
Secured ...........................................................................
Unsecured ......................................................................
$
Real estate:
Secured by commercial properties .................................
Secured by residential properties ...................................
Construction and land development:
Residential construction loans ........................................
Commercial construction loans and
land development .......................................................
Consumer ...........................................................................
$
15,430
1,300
2,638
398
—
112
—
19,878
At December 31, 2013, non-covered non-accrual loans included non-covered PCI loans of $15.8 million for which discount accretion
has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably
estimated. All non-covered PCI loans at December 31, 2012 were considered to be performing due to the application of the accretion
method. In addition to the non-covered non-accrual loans in the table above, $3.5 million and $1.8 million of real estate loans secured
by residential properties and classified as held for sale were in non-accrual status at December 31, 2013 and 2012, respectively.
Interest income recorded on accruing impaired loans was $17.7 million and $0.9 million for the year ended December 31, 2013 and
the month ended December 31, 2012, respectively. Interest income recorded on non-accrual loans in 2013 and 2012 was nominal.
F-31
The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and that the debtor
is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can
be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules.
The Bank also reconfigures a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad”
loan which is charged off and a “good” loan or loans the terms of which comply with the Bank’s customary underwriting policies. The
debt charged off on the “bad” loan is not forgiven to the debtor.
Information regarding TDRs granted is shown in the following table (in thousands). All TDRs granted relate to non-covered PCI
loans. There were no TDRs granted during the month ended December 31, 2012. At December 31, 2013, the Bank had $0.5 million in
unadvanced commitments to borrowers whose loans have been restructured in TDRs.
Year ended December 31, 2013
Commercial and industrial:
Secured ..................................................................
Unsecured ..............................................................
$
Real estate:
Secured by commercial properties .........................
Secured by residential properties ...........................
Construction and land development:
Residential construction loans ...............................
Commercial construction loans and land
development .......................................................
Consumer ...................................................................
$
Recorded Investment in Loans Modified by
A/B Note
Interest Rate
Adjustment
Payment Term
Extension
Total
Modification
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
$
10,390
—
$
10,390
—
279
777
—
—
—
11,446
$
$
279
777
—
—
—
11,446
An analysis of the aging of the Bank’s non-covered loan portfolio is shown in the following tables (in thousands).
December 31, 2013
Commercial and industrial:
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
30-59 Days
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
Past Due
90 Days or More
Secured ..................................
Unsecured ..............................
$
2,171 $
333
277 $
9
1,354 $
60
3,802 $ 1,492,793 $
35,372 $ 1,531,967 $
402
103,453
1,444
105,299
Real estate:
Secured by commercial
properties .........................
Secured by residential
properties .........................
Construction and land development:
Residential construction loans
.........................................
Commercial construction
loans and
land development .............
Consumer ....................................
$
192
1,045
415
—
36
—
132
203
—
324
1,011,085
36,255
1,047,664
1,284
405,310
2,995
409,589
415
64,664
—
65,079
41
201
4,398 $
881
60
1,263 $
112
—
1,861 $
1,034
261
278,621
50,806
19,817
4,509
299,472
55,576
7,522 $ 3,406,732 $
100,392 $ 3,514,646 $
272
59
—
203
—
—
—
534
December 31, 2012
Commercial and industrial:
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
30-59 Days
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
Past Due
90 Days or More
Secured ..................................
Unsecured ..............................
$
7,844 $
3
348 $
—
2,131 $
—
10,323 $ 1,473,242 $
67,967 $ 1,551,532 $
3
105,339
3,419
108,761
2,000
—
Real estate:
Secured by commercial
properties .........................
Secured by residential
properties .........................
Construction and land development:
Residential construction loans
.........................................
Commercial construction
loans and land
development .....................
Consumer ....................................
$
714
755
—
—
101
—
—
—
—
63
84
9,463 $
—
—
449 $
—
—
2,131 $
714
856
—
63
84
868,070
55,519
924,303
253,027
6,728
260,611
47,461
708
48,169
199,889
26,545
32,362
77
232,314
26,706
12,043 $ 2,973,573 $
166,780 $ 3,152,396 $
—
—
—
—
—
2,000
F-32
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii)
classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets.
The Bank utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an
assessment of the borrower’s management, collateral position, financial capacity, and economic factors. The general characteristics of
the various risk grades are described below.
Pass — “Pass” loans present a range of acceptable risks to the Bank. Loans that would be considered virtually risk-free are rated Pass
— low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated
Pass — normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to
the Bank are rated Pass — high risk.
Special Mention — “Special Mention” loans have potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken the Bank’s
credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to
require adverse classification.
Substandard — “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or the
collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many
substandard loans are considered impaired.
PCI — “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required
principal payments would not be collected.
The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in
thousands).
December 31, 2013
Commercial and industrial:
Pass
Special Mention
Substandard
PCI
Total
Secured ....................................................
Unsecured ................................................
$ 1,450,734
103,674
$
16,840
12
$
29,021
169
$
35,372
1,444
$ 1,531,967
105,299
36,255
2,995
1,047,664
409,589
—
65,079
19,817
4,509
100,392
299,472
55,576
$ 3,514,646
PCI
Total
67,967
3,419
$ 1,551,532
108,761
55,519
6,728
924,303
260,611
708
48,169
$
$
Real estate:
Secured by commercial properties ...........
Secured by residential properties .............
Construction and land development:
Residential construction loans .................
Commercial construction loans and
land development .................................
Consumer .....................................................
December 31, 2012
Commercial and industrial:
1,005,578
401,110
65,079
4,436
—
—
275,808
51,052
$ 3,353,035
$
3,384
1
24,673
$
1,395
5,484
—
463
14
36,546
Pass
Special Mention
Substandard
Secured ....................................................
Unsecured ................................................
$ 1,476,420
105,142
$
2,515
200
$
4,630
—
Real estate:
Secured by commercial properties ...........
Secured by residential properties .............
Construction and land development:
Residential construction loans .................
Commercial construction loans and
land development .................................
Consumer .....................................................
868,784
253,883
47,461
—
—
—
—
—
—
199,952
26,629
$ 2,978,271
$
—
—
2,715
$
—
—
4,630
$
32,362
77
166,780
232,314
26,706
$ 3,152,396
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents
management’s best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for
determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company’s board of directors
and the Loan Review Committee of the Bank’s board of directors.
F-33
It is management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the
allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated
credit losses are the probable current amount of loans that the Company will be unable to collect given facts and circumstances as of
the evaluation date. When management determines that a loan or portion thereof is uncollectible, the loan, or portion thereof, is
charged off against the allowance for loan losses. Any subsequent recovery of charged-off loans is added back to the allowance for
loan losses. Commencing with the PlainsCapital Merger on November 30, 2012, the Bank’s loan portfolio is designated into two
populations: acquired loans and originated loans. The allowance for loan losses is calculated separately for the acquired and originated
loans.
Originated Loans
The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and
Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables
Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three
impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the
loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan 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 experience by loan portfolio segment adjusted for
changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss
experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon
which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental
factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience,
including but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and
business conditions and developments that affect the collectability of the portfolio; the condition of various market segments; changes
in the nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume
and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations
of credit and changes in the level of such concentrations.
The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that
timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the
appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed,
typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified,
(iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a
problem.
Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually
reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of
loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic
conditions. At December 31, 2013 and 2012, there were no material delinquencies in these types of loans.
Acquired Loans
Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the
related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any
required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described
above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount
for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If
less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for
the loan and once the discount is depleted, losses are applied against the allowance established for that loan.
PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB
Transaction are accounted for both in pools and at the individual loan level. Cash flows expected to be collected are recast quarterly
for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default
rates, loss severity given default and prepayment speed assumptions, similar 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 which will be taken into income over the remaining life of the loan.
F-34
The allowance is subject to regulatory examinations and determinations as to appropriateness, which may take into account such
factors as the methodology used to calculate the allowance and the size of the allowance.
Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).
Year ended December 31, 2013
Balance, beginning of period ...............
Provision charged to operations ...........
Loans charged off ................................
Recoveries on charged off loans ..........
Balance, end of period .........................
Month ended December 31, 2012
Balance, beginning of period ...............
Provision charged to operations ...........
Loans charged off ................................
Recoveries on charged off loans ..........
Balance, end of period .........................
Commercial and
Industrial
Real Estate
$
$
1,845
20,940
(9,359)
3,439
16,865
Commercial and
Industrial
$
$
—
2,236
(391)
—
1,845
$
$
$
$
977
7,281
(209)
282
8,331
Real Estate
—
977
—
—
977
$
Construction and
Land Development
582
7,634
(524)
265
7,957
$
$
Construction and
Land Development
—
582
—
—
582
$
Consumer
Total
$
$
$
$
5
238
(216)
61
88
Consumer
—
5
—
—
5
$
$
$
$
3,409
36,093
(10,308)
4,047
33,241
Total
—
3,800
(391)
—
3,409
The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
December 31, 2013
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment .......................................
$
2,273
$
373
$
112
$
—
$
2,758
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
December 31, 2012
Loans individually evaluated for
1,598,177
36,816
1,637,266
1,417,630
39,250
$ 1,457,253
$
$
344,622
19,817
364,551
$
51,067
4,509
55,576
3,411,496
100,392
$ 3,514,646
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment .......................................
$
—
$
—
$
—
$
—
$
—
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
1,588,907
71,386
1,660,293
1,122,667
62,247
$ 1,184,914
$
$
247,413
33,070
280,483
$
26,629
77
26,706
2,985,616
166,780
$ 3,152,396
The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2013
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment .......................................
$
421
$
—
$
—
$
—
$
421
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
December 31, 2012
Loans individually evaluated for
13,724
2,720
16,865
$
7,953
378
8,331
$
$
7,918
39
7,957
$
88
—
88
$
29,683
3,137
33,241
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment .......................................
$
—
$
—
$
—
$
—
$
—
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
1,845
—
1,845
$
977
—
977
$
$
582
—
582
$
5
—
5
$
3,409
—
3,409
F-35
6. Covered Assets and Indemnification Asset
As discussed in Note 2 to the consolidated financial statements, the Bank assumed substantially all of the liabilities, including all of
the deposits, and acquired substantially all of the assets of FNB in an FDIC-assisted transaction on September 13, 2013. As part of the
loss-share agreements entered into by the Bank with the FDIC in connection therewith, the Bank and the FDIC agreed to share the
losses on loans and OREO covered under the agreements. The asset arising from the loss-share agreements, which we refer to as the
“FDIC Indemnification Asset,” is measured separately from the covered loan portfolio because the agreements are not contractually
embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.
In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC, approximately ten
years following the Bank Closing Date, if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized
losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.
Covered Loans and Allowance for Covered Loan Losses
Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and
reported separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may
be received from the FDIC.
Based on purchase date valuations, the Bank’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank
Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were preliminarily segregated between
those considered to be PCI loans and those without credit impairment at acquisition.
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since
origination. The Company’s accounting policies for acquired covered loans, including covered PCI loans, are consistent with that of
acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its
PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two
layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for
applying the subsequent recognition and measurement provisions for income accretion and impairment testing.
The following table presents the carrying value of the covered loans summarized by portfolio segment at December 31, 2013 (in
thousands).
Commercial and industrial ....................
Real estate .............................................
Construction and land development ......
Consumer ..............................................
Total covered loans ...............................
Allowance for covered loans ................
Total covered loans, net of allowance ...
$
$
66,943
787,982
151,444
—
1,006,369
(1,061)
1,005,308
The following table presents the carrying value and the outstanding balance of the covered PCI loans at December 31, 2013 (in
thousands).
Carrying amount ...................................
Outstanding balance ..............................
$
729,156
1,022,514
Changes in the accretable yield for the covered PCI loans for the period from September 14, 2013 through December 31, 2013 were as
follows (in thousands).
Balance, beginning of year .............................................................................
Additions ....................................................................................................
Reclassifications from nonaccretable difference ........................................
Disposals of loans .......................................................................................
Accretion ....................................................................................................
Balance, end of year .......................................................................................
$
$
—
167,974
3,492
4,407
(19,325)
156,548
F-36
Covered PCI loans at December 31, 2013 are summarized by class in the following table (in thousands). In addition to the covered
PCI loans, there were $0.9 million of additional covered impaired loans at December 31, 2013.
Unpaid
Contractual
Principal Balance
Recorded
Investment with
No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Related
Allowance
Commercial and industrial:
Secured .........................................
Unsecured .....................................
$
43,867
16,280
$
28,520
9,008
$
$
—
882
28,520
9,890
$
Real estate:
Secured by commercial
properties .................................
528,785
365,306
Secured by residential
properties ..................................
288,859
199,372
Construction and land
development:
Residential construction
loans .........................................
8,341
4,705
Commercial construction
loans and land development ......
Consumer ..........................................
183,117
—
1,069,249
$
121,363
—
728,274
$
$
—
—
—
—
—
882
365,306
199,372
4,705
121,363
—
729,156
$
$
—
882
—
—
—
—
—
882
Average investment in covered PCI loans for the year ended December 31, 2013 is summarized by class in the following table (in
thousands).
Commercial and industrial:
Secured .......................................................................................................
Unsecured ...................................................................................................
$
Real estate:
Secured by commercial properties .............................................................
Secured by residential properties ................................................................
Construction and land development:
Residential construction loans ....................................................................
Commercial construction loans and land development ..............................
Consumer .......................................................................................................
$
14,260
4,945
182,653
99,686
2,353
60,682
—
364,579
Covered non-accrual loans at December 31, 2013, excluding those classified as held for sale, are summarized by class in the following
table (in thousands).
Commercial and industrial:
Secured .......................................................................................................
Unsecured ...................................................................................................
$
Real estate:
Secured by commercial properties .............................................................
Secured by residential properties ................................................................
Construction and land development:
Residential construction loans ....................................................................
Commercial construction loans and land development ..............................
Consumer .......................................................................................................
$
91
882
40
209
575
—
—
1,797
Interest income recorded on non-accrual covered loans during 2013 was nominal. All covered PCI loans are considered to be
performing due to the application of the accretion method. Additionally, no acquired covered performing loans have been modified in
a TDR.
An analysis of the aging of the Bank’s covered loan portfolio at December 31, 2013 is shown in the following table (in thousands).
F-37
Commercial and
industrial:
Secured .......................
Unsecured ...................
Real estate:
Secured by
commercial
properties ..............
Secured by
residential
properties .............
Construction and land
development:
Residential
construction loans .
Commercial
construction
loans and land
development ..........
Consumer .........................
Loans Past Due
30-59 Days
Loans Past Due
60-89 Days
Loans Past Due
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
Past Due
90 Days or More
$
3,904
10
$
$
10
259
$
81
—
3,995
269
$
20,918
3,351
$
28,520
9,890
$
53,433
13,510
$
999
1,679
1,861
—
678
—
40
209
1,039
53,104
365,306
419,449
2,566
166,595
199,372
368,533
576
2,437
5,026
4,705
12,168
244
—
8,697
$
$
20
—
967
$
—
—
906
$
264
—
10,570
$
17,649
—
266,643
$
121,363
—
729,156
139,276
—
$ 1,006,369
$
—
—
—
—
—
—
—
—
The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk
grading matrix used for non-covered loans, as described in Note 5 to the consolidated financial statements. The following table
presents the internal risk grades of covered loans in the portfolio at December 31, 2013 by class (in thousands).
Commercial and industrial:
Secured ......................................................
Unsecured ..................................................
$
24,152
3,040
$
$
—
—
$
761
580
28,520
9,890
$
53,433
13,510
Pass
Special Mention
Substandard
PCI
Total
Real estate:
Secured by commercial properties .............
Secured by residential properties ...............
Construction and land development:
Residential construction loans ...................
Commercial construction loans and
land development ...................................
Consumer .......................................................
48,667
166,115
6,087
17,806
—
265,867
$
$
3,310
—
—
—
—
3,310
$
2,166
3,046
1,376
107
—
8,036
365,306
199,372
419,449
368,533
4,705
12,168
121,363
—
729,156
139,276
—
$ 1,006,369
$
The Bank’s impairment methodology for the covered loans is consistent with that of non-covered loans as discussed in Note 5 to the
consolidated financial statements. To the extent there is experienced or projected credit deterioration on the acquired covered loan
pools subsequent to amounts estimated at the previous quarterly recast date, this deterioration will be measured, and a provision for
credit losses will be charged to earnings. Additionally, provision for credit losses will be recorded on advances on covered loans
subsequent to the acquisition date in a manner consistent with the allowance for non-covered loan losses. These provisions will be
partially offset by an increase to the FDIC Indemnification Asset in an amount equal to the FDIC’s loss sharing percentage under the
loss-share agreements, which is recognized in noninterest income within the consolidated statement of operations.
Changes in the allowance for covered loan losses for the period from September 14, 2013 through December 31, 2013, distributed by
portfolio segment, are shown below (in thousands).
Commercial and
Industrial
Real Estate
Balance, September 14, 2013 ...............
Provision charged to operations ...........
Loans charged off ................................
Recoveries on charged off loans ..........
Balance, end of period .........................
$
$
—
1,057
(4)
—
1,053
$
$
—
8
—
—
8
F-38
$
Construction and
Land Development
—
—
—
—
—
$
Consumer
Total
$
$
—
—
—
—
—
$
$
—
1,065
(4)
—
1,061
At December 31, 2013, the covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below
(in thousands).
Loans individually evaluated for
impairment .......................................
$
—
$
—
$
—
$
—
$
—
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
28,533
38,410
66,943
$
223,304
564,678
787,982
$
25,376
126,068
151,444
$
—
—
—
277,213
729,156
$ 1,006,369
$
At December 31, 2013, the allowance for covered loan losses was distributed by portfolio segment and impairment methodology as
shown below (in thousands).
Loans individually evaluated for
impairment .......................................
$
—
$
—
$
—
$
—
$
—
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
Loans collectively evaluated for
impairment .......................................
PCI Loans ...........................................
Covered Other Real Estate Owned
171
882
1,053
$
8
—
8
$
$
—
—
—
$
—
—
—
$
179
882
1,061
A summary of the activity in covered OREO for the period from September 14, 2013 through December 31, 2013 is as follows (in
thousands).
Balance, September 14, 2013 .........................................................................
Additions to covered OREO ...........................................................................
Dispositions of covered OREO ......................................................................
Valuation adjustments in the period ...............................................................
Balance, end of period ....................................................................................
$
$
135,187
19,185
(11,539)
—
142,833
FDIC Indemnification Asset
A summary of the activity in the FDIC Indemnification Asset for the period from September 14, 2013 through December 31, 2013 is
as follows (in thousands).
Balance, September 14, 2013 .............................................
FDIC Indemnification Asset accretion (amortization) .......
Transfers to due from FDIC and other ...............................
Balance, end of period .......................................................
$
$
185,680
1,699
912
188,291
7. Cash and Due from Banks
Cash and due from banks consisted of the following (in thousands).
Cash on hand ...................................................................
Clearings and collection items ........................................
Deposits at Federal Reserve Bank ...................................
Deposits at Federal Home Loan Bank .............................
Deposits in FDIC-insured institutions .............................
December 31,
2013
2012
59,451
64,193
364,709
1,500
223,246
713,099
$
$
20,201
95,424
312,667
1,499
292,248
722,039
$
$
F-39
The amounts above include interest-bearing deposits of $565.3 million and $581.2 million at December 31, 2013 and 2012,
respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at December 31, 2013.
8. Premises and Equipment
The components of premises and equipment are summarized as follows (in thousands).
Land and premises ......................................................................
Furniture and equipment .............................................................
Less accumulated depreciation and amortization ........................
December 31,
2013
2012
121,211
105,406
226,617
(28,149)
198,468
$
$
48,902
66,182
115,084
(3,703)
111,381
$
$
The amounts shown above include assets recorded under capital leases of $7.1 million and $7.7 million, net of accumulated
amortization of $0.6 million and $0.1 million at December 31, 2013 and 2012, respectively.
Occupancy expense was reduced by rental income of $1.8 million and $0.1 million in 2013 and 2012, respectively. Depreciation and
amortization expense on premises and equipment, which includes amortization of capital leases, amounted to $24.8 million, $1.9
million and $1.7 million in 2013, 2012 and 2011, respectively.
9. Goodwill and Other Intangible Assets
The carrying amount of goodwill was $251.8 million and $253.8 million at December 31, 2013 and 2012, respectively. As discussed
in Note 2 to the consolidated financial statements, the Company initially recorded $230.1 million of goodwill in connection with the
PlainsCapital Merger, and used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed.
The amount of goodwill recorded in connection with the PlainsCapital Merger is not deductible for tax purposes. During the three
months ended March 31, 2013, the Company reduced goodwill related to the PlainsCapital Merger by $2.0 million for a purchase
accounting adjustment related to the valuation of a capital lease obligation. The Company made no further adjustments to its purchase
price allocation.
Other intangible assets of $70.9 million and $77.7 million at December 31, 2013 and 2012, 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 tests goodwill and other intangible assets having an indefinite useful life for impairment on an annual basis, or more
often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the reporting unit
level, 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 Company performs required annual impairment tests of its goodwill and other intangible assets as of October 1st for each of its
reporting units.
The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each
reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its
carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of
potential impairment and the second step is performed to measure the amount of impairment. The Company has estimated fair values
of reporting units based on both a market and income approach using historic, normalized actual and forecast results.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated
impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business
combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the
aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being
acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the
reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of
the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill
assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is
not permitted.
At October 1, 2013, the Company determined that the estimated fair value of each of its reporting units exceeded its carrying value
and therefore the second step as described above was not performed. Based on this evaluation, the Company concluded that the
goodwill and other identifiable intangible assets were fully realizable at December 31, 2013.
F-40
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).
December 31, 2013
Core deposits...............................................................................
Trademarks and trade names ......................................................
Noncompete agreements .............................................................
Customer contracts and relationships .........................................
Agent relationships .....................................................................
December 31, 2012
Core deposits...............................................................................
Trademarks and trade names ......................................................
Noncompete agreements .............................................................
Customer contracts and relationships .........................................
Agent relationships .....................................................................
Technology .................................................................................
Estimated
Useful Life
(Years)
7-12
10-20
4-6
8-12
13
Estimated
Useful Life
(Years)
10-12
10-20
4-6
8-12
13
5
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
38,770
20,000
11,650
14,100
3,600
88,120
$
$
(6,159) $
(2,589)
(2,492)
(6,210)
(2,749)
(20,199) $
32,611
17,411
9,158
7,890
851
67,921
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
34,500
20,000
11,650
14,100
3,600
1,500
85,350
$
$
(452) $
(1,487)
(192)
(4,515)
(2,466)
(1,500)
(10,612) $
34,048
18,513
11,458
9,585
1,134
—
74,738
$
$
$
$
Amortization expense related to intangible assets during 2013, 2012 and 2011 was $11.1 million, $2.0 million and $1.5 million,
respectively.
The estimated aggregate future amortization expense for intangible assets at December 31, 2013 is as follows (in thousands).
2014 ............................................................
2015 ............................................................
2016 ............................................................
2017 ............................................................
2018 ............................................................
Thereafter ...................................................
$
$
11,138
10,300
9,372
7,546
6,607
22,958
67,921
10. Mortgage Servicing Rights
The following table presents the change in fair value of the Company’s MSR (dollars in thousands).
Balance, beginning of period .......................................................................
Additions .................................................................................................
Sales .........................................................................................................
Changes in fair value:
Due to changes in model inputs or assumptions (1) .............................
Due to customer payments ...................................................................
Balance, end of period .................................................................................
Mortgage loans serviced for others ..............................................................
MSR as a percentage of serviced mortgage loans .......................................
$
Year Ended
December 31, 2013
2,080
13,886
—
$
Month Ended
December 31, 2012
—
2,204
—
4,782
(599)
20,149
$
(51)
(73)
2,080
1,965,883
$
352,753
1.02%
0.59%
$
$
(1) Principally represents changes in discount rates and prepayment speed assumptions, which are primarily affected by
changes in interest rates.
F-41
The key assumptions used in measuring the fair value of the Company’s MSR were as follows.
Weighted average constant prepayment rate ...............................................
Weighted average discount rate ...................................................................
Weighted average life (in years) ..................................................................
9.72%
12.37%
7.6
15.71%
20.67%
5.7
Year Ended
December 31, 2013
Month Ended
December 31, 2012
A sensitivity analysis of the fair value of the Company’s MSR to certain key assumptions is presented in the following table (in
thousands).
Constant prepayment rate:
Impact of 10% adverse change ................................................................
Impact of 20% adverse change ................................................................
$
(601) $
(1,170)
Discount rate:
Impact of 100 basis point adverse change ...............................................
Impact of 200 basis point adverse change ...............................................
(631)
(1,236)
(80)
(155)
(34)
(66)
December 31,
2013
2012
The sensitivity analysis presents the hypothetical effect on fair value of the MSR. 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 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.
During the year ended December 31, 2013 and the month ended December 31, 2012, contractually specified servicing fees, late fees
and ancillary fees earned of $3.2 million and $0.4 million, respectively, were included in other noninterest income within the
consolidated statements of operations.
11. Deposits
Deposits are summarized as follows (in thousands).
Noninterest-bearing demand ...........................................
Interest-bearing:
NOW accounts ............................................................
Money market .............................................................
Brokered - money market ............................................
Demand .......................................................................
Savings ........................................................................
Time ............................................................................
Brokered - time ............................................................
December 31,
2013
2012
$
409,334
$
323,367
202,910
3,122,780
276,760
47,636
357,325
2,110,947
194,327
6,722,019
$
106,562
2,357,109
263,193
75,308
180,367
1,175,432
219,123
4,700,461
$
The significant increase in deposits at December 31, 2013 as compared to December 31, 2012 is primarily due to the inclusion of $2.2
billion of deposits assumed as a part of the FNB Transaction.
At December 31, 2013, the scheduled maturities of interest-bearing time deposits are as follows (in thousands).
2014 ....................................................................
2015 ....................................................................
2016 ....................................................................
2017 ....................................................................
2018 and thereafter .............................................
$
$
1,690,804
333,193
122,654
122,988
35,635
2,305,274
F-42
12. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
Federal funds purchased .............................................................................
Securities sold under agreements to repurchase ..........................................
Federal Home Loan Bank notes ..................................................................
Short-term bank loans ..................................................................................
December 31,
2013
2012
137,225
107,462
—
97,400
342,087
$
$
269,625
85,725
250,000
122,900
728,250
$
$
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other
short-term basis. The Bank and FSC execute transactions to sell securities under agreements to repurchase with both customers and
broker-dealers. Securities involved in these transactions are held by the Bank, FSC or the dealer.
Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following table
(dollars in thousands).
Year Ended
Month Ended
Average balance during the period .......................................
Average interest rate during the period ................................
Maximum month-end balance during the period ..................
Average interest rate at end of period ...................................
Securities underlying the agreements at end of period .........
Carrying value ..................................................................
Estimated fair value ..........................................................
$
$
$
$
December 31, 2013
281,067
December 31, 2012
277,470
$
0.19%
415,730
$
0.25%
355,350
December 31,
2013
2012
0.16%
0.22%
144,991
138,719
$
$
122,153
122,435
Federal Home Loan Bank (“FHLB”) notes mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock,
nonspecified real estate loans and certain specific commercial real estate loans. At December 31, 2013, the Bank had available
collateral of $1.7 billion, substantially all of which was blanket collateral. Other information regarding FHLB notes is shown in the
following tables (dollars in thousands).
Average balance during the period .......................................
Average interest rate during the period ................................
Maximum month-end balance during the period ..................
$
$
Year Ended
December 31, 2013
106,415
Month Ended
December 31, 2012
301,613
$
0.13%
0.14%
525,000
$
250,000
December 31,
2013
2012
Average interest rate at end of period ...................................
—
0.07%
FSC uses short-term bank loans periodically to finance securities owned, customers’ margin accounts and underwriting activities.
Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at December 31,
2013 and 2012 was 1.15% and 1.16%, respectively.
F-43
13. Notes Payable
Notes payable consisted of the following (in thousands).
Senior exchangeable notes due 2025, 7.50% per annum ...........................................
NLIC note payable due May 2033, three-month LIBOR plus 4.10% (4.35% at
$
December 31, 2013) with interest payable quarterly .............................................
NLIC note payable due September 2033, three-month LIBOR plus 4.05% (4.30% at
December 31, 2013) with interest payable quarterly .............................................
ASIC note payable due April 2034, three-month LIBOR plus 4.05% (4.30% at
December 31, 2013) with interest payable quarterly .............................................
First Southwest nonrecourse notes, due January 2035 with interest payable quarterly
...............................................................................................................................
Insurance company note payable due March 2035, three-month LIBOR plus 3.40%
(3.65% at December 31, 2013) with interest payable quarterly .............................
Insurance company line of credit due September 2014, 3.25% plus a calculated index
rate (4.00% at December 31, 2013) with interest payable quarterly ......................
December 31,
2013
2012
—
$
83,950
10,000
10,000
7,500
6,827
20,000
10,000
10,000
7,500
10,089
20,000
$
2,000
56,327
$
—
141,539
Senior Exchangeable Notes Due 2025
In August 2005, HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop (“OP”), entered into an Indenture under which
OP issued $96.6 million aggregate principal amount of 7.5% Senior Exchangeable Notes due 2025, or the Notes, to qualified
institutional buyers in a private transaction. On October 15, 2013, OP called for redemption all outstanding Notes on November 14,
2013 (the “Redemption Date”). The outstanding Notes at October 15, 2013 of $90.9 million, including $6.9 million aggregate
principal amount held by the Company’s insurance company subsidiaries, were redeemed at a redemption price equal to the principal
amount of the Notes, plus accrued and unpaid interest up to, but excluding, the Redemption Date. At any time prior to the Redemption
Date, holders of the Notes could exchange the Notes for shares of Hilltop common stock at the rate of 73.94998 shares per $1,000
principal amount of the Notes (or approximately $13.52 per share). In lieu of delivery of Hilltop common stock upon the exercise by a
holder of its exchange right, OP could elect to pay such holder of the Notes an amount in cash (or a combination of Hilltop common
stock and cash) in respect of all or a portion of such holder’s Notes equal to the closing price of Hilltop’s common stock for the five
consecutive trading days commencing on and including the third business day following the exercise of such exchange right. As of the
closing of the redemption, the Notes held by third party investors were exchanged for 6,208,005 shares of Hilltop common stock and
an aggregate cash payment of $11.1 million was made in exchange for the Notes held by the Company’s insurance company
subsidiaries.
The Notes were senior unsecured obligations of OP and were exchangeable, at the option of the holders, into shares of Hilltop
common stock at an initial exchange rate of 69.8812 shares per $1,000 principal amount of the Notes (equal to an initial exchange
price of approximately $14.31 per share), subject to adjustment and, in the event of specified corporate transactions involving Hilltop
or OP, an additional make-whole premium. Upon exchange, OP had the option to deliver, in lieu of shares of common stock, cash or a
combination of cash and shares of common stock. The Notes were treated as a combined instrument at the date of issuance and not
bifurcated to separately account for any embedded derivative instruments principally because, in accordance with ASC 815,
Derivatives and Hedging, (i) the conversion feature is indexed to Hilltop’s common stock and would be classified in stockholders’
equity if it were a freestanding derivative and (ii) the put and call option features were clearly and closely related to the Notes at fixed
conversion amounts.
According to the terms of the Notes, their initial exchange rate was adjustable for certain events, including the issuance to all holders
of Hilltop common stock of rights entitling them to purchase Hilltop common stock at less than their current market
price. Accordingly, as a result of a rights offering in January 2007, in which all holders of Hilltop common stock were offered the
right to purchase shares at $8.00 per share, the initial exchange rate of the Notes was adjusted to 73.94998 shares per $1,000 principal
amount of the Notes (equal to an exchange rate of $13.52 per share).
In November 2011, Hilltop’s insurance company subsidiaries purchased $6.9 million, par value, of the Notes in open market
transactions at an average cost of 107.26% of par.
On October 15, 2013, Hilltop entered into a First Supplemental Indenture pursuant to which Hilltop guaranteed the obligations of OP
under the Indenture.
F-44
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.
The NLIC, ASIC and Insurance Company 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, 2013.
NLC has entered into an indenture relating to the NLIC, ASIC and Insurance Company 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 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.
First Southwest Nonrecourse Notes
In 2005, First Southwest participated in a monetization of future cash flows totaling $95.3 million from several tobacco companies
owed to a law firm under a settlement agreement (“Fee Award”). In connection with the transaction, a special purpose entity that is
consolidated with First Southwest issued $30.3 million of nonrecourse notes to finance the purchase of the Fee Award, to establish a
reserve account and to fund issuance costs. Cash flows from the settlement are the sole source of payment for the notes. The notes
carry an interest rate of 8.58% that can increase to 10.08% under certain credit conditions.
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 $5.0
million and is collateralized by substantially all of NLC’s assets. The line of credit bears interest equal to 3.25% plus a calculated
index rate (4.00% at December 31, 2013), which is due quarterly. This line is scheduled to mature in September 2014.
Principal Maturities
At December 31, 2013, notes payable outstanding of $56.3 million includes scheduled maturities of $2.0 million during 2014 and
$54.3 million during 2033 and thereafter.
14. Junior Subordinated Debentures and Trust Preferred Securities
PlainsCapital 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
PlainsCapital (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 PlainsCapital; however, PlainsCapital is not the primary
beneficiary of the Trusts. Accordingly, the Trusts are not included in PlainsCapital’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 PlainsCapital. Information regarding the PlainsCapital Debentures is shown
in the following table (in thousands).
Investor
PCC Statutory Trust I .......................................
PCC Statutory Trust II ......................................
PCC Statutory Trust III ....................................
PCC Statutory Trust IV ....................................
Issue Date
Amount
July 31, 2001
March 26, 2003
September 17, 2003
February 22, 2008
$
$
$
$
18,042
18,042
15,464
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, 2013 was 3.47%. The term, rate and
other features of the preferred securities are the same as the Debentures. PlainsCapital’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.
F-45
15. Income Taxes
The significant components of the income tax provision (benefit) are as follows (in thousands).
Current:
Federal ....................................................................................
State ........................................................................................
Deferred:
Federal ....................................................................................
State ........................................................................................
2013
Year Ended December 31,
2012
2011
$
$
51,441
3,414
54,855
14,573
1,256
15,829
70,684
$
$
$
4,346
935
5,281
(5,649)
(777)
(6,426)
(1,145) $
(966)
—
(966)
(4,043)
—
(4,043)
(5,009)
The income tax provision (benefit) differs from the amount that would be computed by applying the statutory Federal income tax rate
of 35% to income (loss) before income taxes as a result of the following (in thousands).
Computed tax at federal statutory rate ..........................
Tax effect of:
Life insurance ...........................................................
Tax-exempt income, net ...........................................
State income taxes ....................................................
Nondeductible expenses ...........................................
Minority interest .......................................................
Nondeductible transaction costs ...............................
Prior year return to provision adjustment .................
Other .........................................................................
2013
Year Ended December 31,
2012
2011
$
69,088
$
(2,185) $
(4,039)
(114)
(2,042)
3,035
2,363
(479)
—
(1,141)
(26)
70,684
$
(18)
(151)
103
352
(174)
1,151
(150)
(73)
(1,145) $
—
—
—
(970)
—
—
—
—
(5,009)
$
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 sheet are as follows (in thousands).
Deferred tax assets:
$
Net operating loss carryforward ..................................
Covered loans ..............................................................
Purchase accounting adjustment - loans ......................
Allowance for loan losses ............................................
Compensation and benefits .........................................
Indemnification agreements ........................................
Foreclosed property .....................................................
Net unrealized change in securities .............................
Other ...........................................................................
Deferred tax liabilities:
Premises and equipment ..............................................
FDIC Indemnification Asset .......................................
Intangible assets ..........................................................
Derivatives ..................................................................
Net unrealized change in securities .............................
Loan servicing .............................................................
Other ............................................................................
Net deferred tax asset ......................................................
$
F-46
December 31,
2013
2012
15,919
47,770
27,997
12,383
16,946
8,308
13,589
19,428
16,216
178,556
13,269
67,841
22,708
9,428
—
7,480
17,972
138,698
39,858
$
$
16,377
—
50,752
1,235
15,246
8,242
3,701
—
12,916
108,469
10,109
—
30,068
12,213
4,337
774
17,935
75,436
33,033
At December 31, 2013 and 2012, the Company had net operating loss carryforwards for Federal income tax purposes of $45.5 million
and $46.8 million, respectively. The net operating loss carryforwards are subject to separate return limitations on their usage. These
net operating loss carry-forwards expire in 2023 and later years. The net operating loss carry-forwards for alternative minimum
Federal income taxes generally are limited to offsetting 90% of the alternative minimum taxable earnings for a taxable year. The
Company expects to realize its current deferred tax assets, including these net operating loss carryforwards, through the
implementation of certain tax planning strategies surrounding the PlainsCapital Merger, core earnings, and reversal of timing
differences. Therefore, the Company has no valuation allowance on its deferred tax assets at December 31, 2013 or 2012.
GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position taken, or
expected to be taken in a tax return, and the benefit recognized for accounting purposes. There were no uncertain tax positions at
December 31, 2013 and 2012. The Company does not anticipate any significant liabilities for uncertain tax positions to arise in the
next twelve months.
The Company files income tax returns in U.S. federal and several U.S. state jurisdictions. The Company is subject to tax audits in
numerous jurisdictions in the U.S. until the applicable statute of limitations expires. Excluding those entities acquired as a part of the
PlainsCapital Merger, the Company has been examined by U.S. tax authorities for U.S. federal income tax years prior to 2010, and is
under no federal or state tax audits at December 31, 2013. PlainsCapital has been examined by U.S. tax authorities for U.S. federal
income tax years prior to 2010, and is under no federal or state tax audits at December 31, 2013.
For the majority of tax jurisdictions, the Company is no longer subject to federal, state or local income tax examinations by tax
authorities for years prior to 2010.
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 to the plan based on entity-
specific factors including the level of normal operating earnings and the amount of eligible employees’ contributions and salaries. The
amount charged to operating expense for this matching contribution totaled $6.2 million, $0.7 million and $0.2 million during 2013,
2012 and 2011, respectively.
In connection with the PlainsCapital Merger, PlainsCapital is in the process of terminating its employee stock ownership plan
(“ESOP”) and distributing the assets held by the ESOP (consisting of cash and shares of Hilltop common stock) to ESOP participants.
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 of PlainsCapital.
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, 2013 and 2012, the carrying value of the policies included in other assets was
$24.5 million and $24.1 million, respectively. For the year ended December 31, 2013 and the month ended December 31, 2012, the
Bank recorded income of $0.4 million and $0.1 million, respectively, related to the policies that was reported in other noninterest
income within the consolidated statement of operations.
17. Related Party Transactions
Pursuant to a Management Services Agreement, as amended, Diamond A Administration Company LLC, or Diamond A, an affiliate
of Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 17.2% of Hilltop common stock at
December 31, 2013, provided certain management services to the Company, including, among others, financial and acquisition
evaluation, and office space to Hilltop. The services and office space were provided at a cost of $91,500 per month, plus reasonable
out-of-pocket expenses. The services provided under this agreement include those of Hilltop directors, including Gerald J. Ford,
Kenneth Russell and Carl B. Webb. Prior to Jeremy Ford assuming the role of Chief Executive Officer of Hilltop, he provided services
to Hilltop under the Management Services Agreement. Hilltop also agreed to indemnify and hold harmless Diamond A for its
performance or provision of these services, except for gross negligence and willful misconduct. Further, Diamond A’s maximum
aggregate liability for damages under this agreement is limited to the amounts paid to Diamond A under this agreement during twelve
months prior to that cause of action. In connection with the PlainsCapital Merger on November 30, 2012, the Management Services
Agreement was terminated. However, pursuant to a Sublease Agreement, Diamond A currently provides office space to Hilltop at a
cost of $21,478 per month. This Sublease Agreement continues in effect until July 31, 2018 or such earlier date that the base lease
expires.
F-47
Jeremy B. Ford, a director and the 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 17.2% of the outstanding Hilltop common stock at
December 31, 2013. He also is a director and the Secretary of Diamond A Administration Company, LLC, which has provided
management services and office space to Hilltop as described the preceding paragraph. Diamond A Administration Company, LLC 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 $8.0 million and $23.2 million at December 31, 2013 and 2012, 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 2013,
total principal additions were $6.8 million and total principal payments were $8.7 million and reductions due to changes in status as a
related party were $13.3 million.
At December 31, 2013 and 2012, the Bank held deposits of related parties of $154.0 million and $173.5 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 $7.5 million.
The Bank purchases loans from a company for which a related party serves as a director, president and chief executive officer. At both
December 31, 2013 and 2012, the outstanding balance of the purchased loans was $6.0 million. The loans were purchased with
recourse to the company in the ordinary course of business and the related party had no direct financial interest in the transactions.
PlainsCapital Equity, LLC is a limited partner in certain limited partnerships that have received loans from the Bank. The Bank made
those loans in the normal course of business, using underwriting standards and offering terms that are substantially the same as those
used or offered to non-affiliated borrowers. At December 31, 2013 and 2012, the Bank had outstanding loans of $3.0 million and $4.2
million, respectively, in which PlainsCapital Equity, LLC had a limited partnership interest. The investment of PlainsCapital Equity,
LLC in these limited partnerships was $3.7 million at both December 31, 2013 and 2012.
18. Commitments and Contingencies
The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $7.5 million
and $16.0 million at December 31, 2013 and 2012, respectively.
Legal Matters
The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and
proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently
available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered
probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as
circumstances change. Some of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance
coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, the Company does not take
into account the availability of insurance coverage. When it is practicable, the Company estimates loss contingencies for possible
litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such possible losses, and
when it estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, the Company is required to make a
disclosure of the aggregate estimation. However, as available information changes, the matters for which the Company is able to
estimate, as well as the estimates themselves will be adjusted, accordingly.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors
include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain
damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including
novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or not or discovery is not complete;
meaningful settlement discussions have not commenced; and whether the claim involves a class action and if so, how the class is
defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some
or all of the pending and threatened litigation and claims asserted against the Company. The aggregated estimated amount provided
above therefore may not include an estimate for every such matter.
F-48
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 its business, 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 those 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 has received a subpoena from the Office of Inspector General of the U. S.
Department of Housing and Urban Development regarding mortgage-related practices, including those relating to origination practices
for loans insured by the Federal Housing Administration. PrimeLending is cooperating with this Inquiry.
While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of
the opinion that the outcome of pending and threatened litigation and Inquiries will not have a material effect on the Company’s
business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future
developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the
Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of
occurrence.
Other Contingencies
The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that each
loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower
representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the
affected loan from the investor or reimburses the investor’s losses. The mortgage origination segment has established an
indemnification liability reserve for such probable losses.
Generally, the mortgage origination segment first becomes aware that an investor believes a loss has been incurred on a sold loan
when it receives a written request from the investor to repurchase the loan or reimburse the investor’s losses. Upon completing its
review of the investor’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its
obligation to the investor is both probable and reasonably estimable.
An additional reserve has been established for probable investor losses that may have been incurred, but not yet reported to the
mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve
include, but are not limited to, the total volume of loans sold exclusive of specific investor requests, actual investor claim settlements
and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully
curing defects identified in investor claim requests. While the mortgage origination segment’s sales contracts typically include
borrower early payment default repurchase provisions, these provisions have not been a primary driver of investor claims to date, and
therefore, are not a primary factor considered in the calculation of this reserve.
At December 31, 2013 and 2012, the mortgage origination segment’s indemnification liability reserve totaled $21.1 million and $19.0
million, respectively. The provision for indemnification losses was $3.5 million and $0.4 million during the year ended December 31,
2013 and the month ended December 31, 2012, respectively.
The following tables provide for a roll-forward of claims activity for loans put-back to the mortgage origination segment based upon
an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in
thousands).
Representation and Warranty Specific Claims
Activity - Origination Loan Balance
Year Ended
Month Ended
December 31, 2013
Balance, beginning of period .................................
Claims made ......................................................
Claims resolved with no payment .....................
Repurchases .......................................................
Indemnification payments .................................
Balance, end of period ...........................................
$
$
39,693
40,001
(17,746)
(6,255)
(3,781)
51,912
F-49
$
December 31, 2012
35,217
6,463
(1,565)
(422)
—
39,693
$
Balance, beginning of period .....................................
Additions for new sales .........................................
Repurchases ...........................................................
Early payment defaults ..........................................
Indemnification payments .....................................
Change in estimate ................................................
Balance, end of period ...............................................
$
$
Indemnification Liability Reserve Activity
Year Ended
Month Ended
December 31, 2013
18,964 $
3,539
(251)
(528)
(1,003)
400
21,121 $
December 31, 2012
18,544
420
(31)
(51)
—
82
18,964
Reserve for Indemnification Liability:
Specific claims ......................................................
Incurred but not reported claims ............................
Total ......................................................................
$
$
12,179
8,942
21,121
Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over
time to address incurred losses, due to unanticipated adverse changes in the economy and historical loss patterns, discrete events
adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is
considered in the reserving process when probable and estimable.
In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2
billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse
the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred;
(ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of
$365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share
agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank
Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing
Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC,
approximately ten years following the Bank Closing Date, if the FDIC’s initial estimate of losses on covered assets is greater than the
actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.
As 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 of PlainsCapital, 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, PlainsCapital and its subsidiaries maintain employment contracts with certain executive
officers and severance agreements with certain other senior officers that provide severance pay benefits in the event of a “change in
control” as defined in these agreements. Each of these agreements will expire on the second anniversary following the effective date
of the PlainsCapital Merger. Given that the PlainsCapital Merger constitutes a “change in control” of PlainsCapital, severance pay
benefits will be payable if an officer subject to one of these employment or severance agreements is terminated without cause prior to
the second anniversary of the effective date of the PlainsCapital Merger. Prior to expiration of these agreements, similar severance pay
benefits will be payable in the event of termination of such officer without “cause” following a change in control of Hilltop.
Hilltop and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under noncancelable operating
leases with remaining terms, including renewal options, of 1 to 15 years and under capital leases with remaining terms of 11 to 15
years. Rental expense under the operating leases was $29.2 million, $2.9 million and $0.5 million in 2013, 2012 and 2011,
respectively. Future minimum lease payments under these agreements follow (in thousands).
Operating Leases
Capital Leases
2014 .................................................................................
2015 .................................................................................
2016 .................................................................................
2017 .................................................................................
2018 .................................................................................
Thereafter ........................................................................
Total minimum lease payments .......................................
Amount representing interest ..........................................
Present value of minimum lease payments ......................
$
$
25,541
22,815
16,496
12,019
11,222
30,041
118,134
$
$
1,080
1,090
1,103
1,129
1,167
9,514
15,083
(6,824)
8,259
F-50
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 $1.1 billion at December 31, 2013 and
outstanding standby letters of credit of $41.7 million at December 31, 2013.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit evaluation
of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit
accounts, inventory, and property, plant and equipment.
In the normal course of business, FSC executes, settles, and finances various securities transactions that may expose FSC to off-
balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such
transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC
and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued
underwriting and purchase commitments.
20. Stock-Based Compensation
Pursuant to the Hilltop Holdings 2012 Equity Incentive Plan (the “2012 Plan”), the Company may grant nonqualified stock options,
stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to
employees of the Company, its subsidiaries and outside directors of the Company. Upon the approval by stockholders and
effectiveness of the 2012 Plan in September 2012, no additional awards were permissible under the 2003 Equity Incentive Plan (the
“2003 Plan”). In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan.
At December 31, 2013, 3,519,657 shares of common stock remain available for issuance pursuant to the 2012 Plan.
During 2013, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees
a total of 471,000 restricted shares of common stock (“Restricted Stock Awards”) pursuant to the 2012 Plan. These Restricted Stock
Awards are subject to service conditions set forth in the grant agreements with associated costs recognized on a straight-line basis over
the respective vesting periods. The weighted average grant date fair value related to these Restricted Stock Awards was $13.32 per
share. At December 31, 2013, unrecognized compensation expense related to these Restricted Stock Awards was $4.9 million, which
will be amortized through September 2016. These Restricted Stock Awards provide for accelerated vesting under certain conditions.
During 2013, 2012 and 2011, Hilltop granted 9,343, 5,183 and 5,418 common shares, respectively, to independent members of the
Company’s Board of Directors for service rendered to the Company during the respective periods.
Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000
shares of the Company’s common stock (the “Stock Option Awards”) at an exercise price of $7.70 per share were outstanding at
December 31, 2013. These Stock Option Awards vest in five equal installments beginning on the grant date, with the remainder
vesting on each grant date anniversary through 2015. Compensation expense related to these Stock Option Awards was $0.9 million.
At December 31, 2013, unrecognized compensation expense related to these Stock Option Awards was $0.2 million, which will be
amortized on a straight-line basis through October 2015. Additionally, these Stock Option Awards expire on November 2, 2016. The
fair value for these Stock Option Awards granted was estimated using the Black-Scholes option pricing model with an expected
volatility of 25%, a risk-free interest rate of 0.96%, a dividend yield rate of zero, a five-year expected life of the options and a
forfeiture rate of 15%.
F-51
Compensation expense related to the plans was $1.7 million, $0.5 million and $0.1 million for the years ended December 31, 2013,
2012 and 2011, respectively.
21. Regulatory Matters
Bank
The Bank and Hilltop are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators
that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require us to meet
specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and
ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and
minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). The Tier 1 Capital (to average assets) ratio
at December 31, 2012 was calculated using the average assets for the month of December 2012.
During September 2013, Hilltop and PlainsCapital contributed capital of $35.0 million and $25.0 million, respectively, to the Bank to
provide additional capital in connection with the FNB Transaction.
The following table shows the Bank’s and Hilltop’s consolidated actual capital amounts and ratios compared to the regulatory
minimum capital requirements and the Bank’s regulatory minimum capital requirements needed to qualify as a “well-capitalized”
institution (dollars in thousands), without giving effect to the final Basel III capital rules adopted by the Federal Reserve Board on
July 2, 2013.
December 31, 2013
Tier 1 capital (to average
assets):
Bank ...................................
Hilltop ................................
Tier 1 capital (to risk-
weighted assets):
Bank ...................................
Hilltop ................................
Total capital (to risk-
weighted assets):
Bank ...................................
Hilltop ................................
December 31, 2012
Tier 1 capital (to average
assets):
Bank ...................................
Hilltop ................................
Tier 1 capital (to risk-weighted
assets):
Bank ...................................
Hilltop ................................
Total capital (to risk-
weighted assets):
Bank ...................................
Hilltop ................................
Actual
Minimum Capital
Requirements
Amount
Ratio
Amount
Ratio
To Be Well Capitalized
Minimum Capital
Requirements
Amount
Ratio
$ 762,364
1,112,424
9.29% $ 328,275
347,480
12.81%
4% $ 410,344
N/A
4%
5%
N/A
762,364
1,112,424
13.38%
18.53%
227,984
240,159
4%
4%
341,976
N/A
6%
N/A
797,771
1,148,736
14.00%
19.13%
455,968
480,318
8%
8%
569,960
N/A
10%
N/A
$ 542,307
871,379
8.84% $ 245,495
266,514
13.08%
4% $ 306,869
N/A
4%
5%
N/A
542,307
871,379
11.83%
17.72%
183,308
196,670
4%
4%
274,961
N/A
6%
N/A
546,598
875,670
11.93%
17.81%
366,615
393,340
8%
8%
458,269
N/A
10%
N/A
F-52
To be considered “adequately capitalized” (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1
capital to total average assets and Tier 1 capital to risk-weighted assets ratios of 4%, and a total capital to risk-weighted assets ratio of
8%. Based on the actual capital amounts and ratios shown in the previous table, the Bank’s ratios place it in the “well capitalized” (as
defined) capital category under regulatory requirements.
A reconciliation of equity capital to Tier 1 and total capital (as defined) is as follows (in thousands).
Total equity capital .........................................
Add:
Minority interests ........................................
Trust preferred securities ............................
Net unrealized holding losses on
securities available for sale and held
in trust .....................................................
Deduct:
Goodwill and other disallowed
intangible assets ......................................
Other ...........................................................
Tier 1 capital (as defined) ...............................
Add: Allowable Tier 2 capital ........................
Allowance for loan losses ...........................
Net unrealized holding losses on equity
securities ................................................
Total capital (as defined) ................................
December 31, 2013
December 31, 2012
Bank
985,519
Hilltop
$ 1,311,141
$
Bank
831,677
Hilltop
$ 1,144,496
$
781
—
781
65,000
2,054
—
2,054
65,000
42,901
34,863
1,125
(8,094)
(264,822)
(2,015)
762,364
(297,174)
(2,187)
1,112,424
(292,341)
(208)
542,307
(331,508)
(569)
871,379
35,407
35,407
4,291
4,291
—
797,771
905
$ 1,148,736
$
—
546,598
$
—
875,670
$
Management continues to evaluate the final Basel III capital rules and their impact, which would apply to reporting periods beginning
after January 1, 2015.
Financial Advisory
Pursuant to the net capital requirements of the Exchange Act, FSC has elected to determine its net capital requirements using the
alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the
Exchange Act, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the
Exchange Act. At December 31, 2013, FSC had net capital of $74.3 million (the minimum net capital requirement was $3.4 million),
net capital maintained by FSC was 43% of aggregate debits, and net capital in excess of the minimum requirement was $70.8 million.
Mortgage Origination
As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the United States Department
of Housing and Urban Development (“HUD”) and the Government National Mortgage Association (“GNMA”). On an annual basis,
PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending’s compliance with its minimum
net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of December 31, 2013,
PrimeLending’s net worth exceeded the amounts required by both HUD and GNMA.
Insurance
The statutory financial statements of the Company’s insurance subsidiaries, which are domiciled in the State of Texas, are presented
on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has adopted the National
Association of Insurance Commissioners’ (“NAIC”) statutory accounting practices as the basis of its statutory accounting practices
with certain differences that are not significant to the insurance company subsidiaries’ statutory equity.
F-53
A summary of statutory capital and surplus and statutory net income (loss) of each insurance subsidiary is as follows (in thousands).
Capital and surplus:
National Lloyds Insurance Company ...........
American Summit Insurance Company ........
$
98,602
26,452
$
94,558
25,761
December 31,
2013
2012
Statutory net income (loss):
National Lloyds Insurance Company .........
American Summit Insurance Company ......
$
3,583
521
$
(3,858) $
972
(133)
(541)
2013
Year Ended December 31,
2012
2011
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, 2013, 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, 2013, 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, 2013, $148.7 million of its earnings was available for dividend declaration without prior regulatory approval.
At December 31, 2013, the maximum aggregate dividend that may be paid to NLC from its insurance company subsidiaries in 2014
without regulatory approval is approximately $12.5 million.
Hilltop Series B Preferred Stock
On November 29, 2012, Hilltop filed with the State Department of Assessments and Taxation of the State of Maryland articles
supplementary for the Hilltop Series B Preferred Stock, setting forth its terms. Holders of the Hilltop Series B Preferred Stock are
entitled to noncumulative cash dividends at a fluctuating dividend rate based on Hilltop’s level of qualified small business lending.
The Hilltop Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to Hilltop’s common stock with
respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.
As discussed in Note 2, and as a result of the PlainsCapital Merger, each outstanding share of PlainsCapital Non-Cumulative Perpetual
Preferred Stock, Series C, all of which were held by the U.S. Treasury, was converted into one share of Hilltop Series B Preferred
Stock.
The terms of the Hilltop Series B Preferred Stock restrict Hilltop’s ability to pay dividends on, make distributions with respect to, or
redeem, purchase or acquire, or make a liquidation payment on its common stock and other Hilltop capital stock ranking junior to the
Hilltop Series B Preferred Stock, and on other preferred stock and other stock ranking on a parity with the Hilltop Series B Preferred
Stock, in the event that Hilltop does not declare dividends on the Hilltop Series B Preferred Stock during any dividend period.
The terms of the Hilltop Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The
dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of
“qualified small business lending” (“QSBL”) by the Bank.
The shares of Hilltop Series B Preferred Stock are senior to shares of the Company’s common stock with respect to dividends and
liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At December 31, 2013 and 2012, $114.1 million of
Hilltop Series B Preferred Stock was outstanding.
F-54
The dividend rate on the Hilltop Series B Preferred Stock was 4.706% at December 31, 2013. From January 1, 2014 until March 26,
2016, the dividend rate is fixed at 5.0% based upon our level of QSBL at September 30, 2013. Beginning March 27, 2016, the
dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.
As long as shares of Hilltop Series B Preferred Stock remain outstanding, Hilltop may not pay dividends to its common stockholders
(nor may Hilltop repurchase or redeem any shares of its common stock) during any quarter in which the Company fails to declare and
pay dividends on the Hilltop Series B Preferred Stock and for the next three quarters following such failure. In addition, under the
terms of the Hilltop Series B Preferred Stock, Hilltop may only declare and pay dividends on its common stock (or repurchase shares
of Hilltop common stock), if, after payment of such dividend, the dollar amount of Hilltop’s Tier 1 capital would be at least ninety
percent (90%) of Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Hilltop Series B Preferred
Stock.
The Company may redeem the Hilltop Series B Preferred Stock at any time at its option, at a redemption price of 100% of the
liquidation amount plus accrued but unpaid dividends, subject to the approval of the Company’s federal banking regulator.
23. Other Noninterest Income and Expense
The following tables show the components of other noninterest income and expense (in thousands).
Other noninterest income:
Revenue from check and
stored value cards ...................................
Net loss from trading securities portfolio ...
Change in fair value of FSC derivatives .....
Trust fees ....................................................
Service charges on depositor accounts .......
Commission and insurance agency
income ....................................................
Direct bill fees and insurance
service fee income ..................................
Other ...........................................................
Other noninterest expense:
Marketing ...................................................
Data processing ..........................................
Printing, stationery and supplies .................
Funding fees ...............................................
Unreimbursed loan closing costs ................
Amortization of intangible assets ...............
Acquisition costs ........................................
Management fees ........................................
Accounting fees ..........................................
Other professional services .........................
Other ...........................................................
2013
Year Ended December 31,
2012
2011
$
$
$
$
4,250
(2,773)
11,427
5,050
11,376
2,765
4,613
7,962
44,670
17,257
17,922
4,583
4,403
30,095
11,087
117
—
5,455
37,806
59,222
187,947
$
$
$
$
$
275
(646)
238
411
724
2,159
4,109
1,303
8,573
2,245
4,033
4,033
735
5,944
1,986
6,570
1,025
2,269
5,004
524
34,368
$
$
$
—
—
—
—
—
2,645
4,140
—
6,785
—
434
—
—
—
1,525
2,603
1,098
852
412
2,869
9,793
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 modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do
not adversely affect the net interest margin. PrimeLending has interest rate risk relative to IRLCs and its inventory of mortgage loans
held for sale. PrimeLending is exposed to such rate risk from the time an IRLC is made to an applicant to the time the related
mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities
(“MBSs”). FSC uses 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.
F-55
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 produced a net gain of $8.2 million for the year ended December 31,
2013 and a net loss of $5.9 million the month ended December 31, 2012, which were recorded as a component of net gains from sale
of loans and other mortgage production income. 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 changes in market interest rates. Changes in market interest rates also
conversely affect the value of PrimeLending’s mortgage loans held for sale, 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 is discussed in Note 3 to the
consolidated financial statements. The fair values of FSC’s derivative instruments are recorded in other assets or other liabilities, as
appropriate, and changes in the fair values of FSC’s derivatives produced net gains of $11.4 million and $0.2 million for the year
ended December 31, 2013 and the month ended December 31, 2012, respectively, which were recorded as a component of other
noninterest income.
Derivative positions are presented in the following table (in thousands).
December 31, 2013
December 31, 2012
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
Derivative instruments:
IRLCs ......................................................
Commitments to purchase MBSs ............
Interest rate swaps ...................................
Commitments to sell MBSs ....................
Fee Award Option ....................................
$
$
602,467
236,305
—
1,645,332
20,432
$
12,151
(109)
—
11,383
(5,600)
$
968,083
165,128
1,969
1,586,930
20,432
15,150
466
25
(1,025)
(4,490)
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 sheet and/or subject to master netting arrangements or similar agreements. The following
tables present the assets and liabilities subject to an enforceable master netting arrangement, repurchase agreements, or similar
agreements with offsetting rights (in thousands).
Net Amounts
Gross Amounts Not Offset in
the Balance Sheet
Gross Amounts Gross Amounts
of Recognized Offset in the
Balance Sheet
Assets
of Assets
Presented in the
Balance Sheet
Cash
Financial
Instruments
Collateral
Pledged
Net
Amount
December 31,2013
Securities borrowed:
Institutional counterparties ...
$
107,365 $
— $
107,365 $
(107,365) $
— $
—
Forward MBS sale derivatives:
Institutional counterparties ...
December 31,2012
Securities Borrowed:
Institutional counterparties ...
$
$
$
11,489
118,854 $
(76)
(76) $
11,413
118,778 $
—
(107,365) $
(286)
(286) $
11,127
11,127
103,936 $
103,936 $
— $
— $
103,936 $
103,936 $
(103,936) $
(103,936) $
— $
— $
—
—
F-56
Gross Amounts Gross Amounts
of Recognized Offset in the
Balance Sheet
Liabities
Net Amounts
of Liabilities
Presented in the
Balance Sheet
the Balance Sheet
Cash
Financial
Instruments
Collateral
Pledged
Net
Amount
Gross Amounts Not Offset in
December 31,2013
Securities Loaned:
Institutional counterparties ...
$
74,913 $
— $
74,913 $
(74,913) $
— $
Repurchase Agreements:
Customer counterparties .......
107,462
—
107,462
(107,462)
—
Forward MBS Sale Derivatives:
Institutional counterparties ...
December 31,2012
Securities Loaned:
$
30
182,405 $
—
— $
30
182,405 $
—
(182,375) $
(17)
(17) $
Institutional counterparties ...
$
115,102 $
— $
115,102 $
(115,102) $
— $
Repurchase Agreements:
Customer counterparties .......
85,726
—
85,726
(85,726)
—
—
—
13
13
—
—
Forward MBS Sale Derivatives:
Institutional counterparties ...
$
2,000
202,828 $
(975)
(975) $
1,025
201,853 $
—
(200,828) $
(249)
(249) $
776
776
26. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
Receivables:
Securities borrowed .........................
Securities failed to deliver ...............
Clearing organizations ....................
Due from dealers .............................
Payables:
Securities loaned .............................
Correspondents ...............................
Securities failed to receive ..............
Clearing organizations ....................
December 31,
2013
2012
107,365
7,160
4,698
94
119,317
74,913
44,852
5,523
4,390
129,678
$
$
$
$
103,936
33,045
8,543
40
145,564
115,102
41,414
31,474
—
187,990
$
$
$
$
27. Deferred Policy Acquisition Cost
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).
Balance, beginning of year ........................
Acquisition expenses capitalized ...........
Amortization charged to income ...........
Balance, end of year ..................................
$
$
19,812
41,771
(40,592)
20,991
$
$
19,182
39,387
(38,757)
19,812
Year Ended December 31,
2012
2013
Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated statements of
operations.
F-57
28. Reserves for Unpaid Losses and Loss Adjustment Expenses
Information regarding the reserve for unpaid losses and LAE are as follows (in thousands).
2013
Year Ended December 31,
2012
2011
Balance, beginning of year ...............
Less reinsurance recoverables ......
Net balance, beginning of year .........
$
$
34,012
(10,385)
23,627
$
44,835
(25,083)
19,752
58,882
(43,773)
15,109
Incurred related to:
Current year ..........................
Prior years ............................
Total incurred ...........................
Payments related to:
Current year ..........................
Prior years ............................
Total payments .........................
110,096
659
110,755
(96,284)
(15,138)
(111,422)
109,328
(169)
109,159
(90,743)
(14,541)
(105,284)
Net balance, end of year ...................
Plus reinsurance recoverables.......
Balance, end of year .........................
$
22,960
4,508
27,468
$
23,627
10,385
34,012
$
97,742
(1,008)
96,734
(83,266)
(8,825)
(92,091)
19,752
25,083
44,835
The decrease in reserves at December 31, 2013 as compared to December 31, 2012 of $6.5 million is primarily due recovery of
reinsurance recoverables outstanding at December 31, 2012 and increased loss payments. The decrease in reserves at December 31,
2012 as compared to December 31, 2011 of $10.8 million is primarily due to the significant subsequent payment and recovery of those
reinsurance recoverables outstanding at December 31, 2011.
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, 2013, reinsurance receivables have a carrying value of $5.2 million, which is
included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at December 31,
2013, based on NLC’s quality requirements.
Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2013 are listed
below (in thousands).
Federal Emergency Management Agency ........
General Reinsurance .........................................
Lloyd’s Syndicate # 2001 ..................................
Hannover Rueckversicherung ...........................
R+V Versicherung AG ......................................
Balances
Due From
Reinsurers
3,875
1,119
409
295
360
6,058
$
$
A.M. Best
Rating
N/A
A++
A+
A+
N/A
F-58
The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).
2013
Year Ended December 31,
2012
2011
Written
Earned
Written
Earned
Written
Earned
Premiums from direct business ....
Reinsurance assumed ...................
Reinsurance ceded .......................
Net premiums ...........................
$
$
173,982 $
7,987
(18,528)
163,441 $
168,942 $
7,202
(18,611)
157,533 $
163,780 $
6,422
(19,751)
150,451 $
162,383 $
5,882
(21,564)
146,701 $
155,054 $
5,388
(18,705)
141,737 $
147,419
5,176
(18,547)
134,048
The effects of reinsurance on incurred losses are as follows (in thousands).
Loss and LAE incurred .....................
Reinsurance recoverables .................
Net loss and LAE incurred ...........
$
$
117,089
(6,334)
110,755
$
$
115,347
(6,188)
109,159
$
$
92,655
4,079
96,734
2013
Year Ended December 31,
2012
2011
Multi-line excess of loss coverage
In addition to the catastrophe reinsurance noted below, both NLIC and ASIC participate in an excess of loss program with General
Reinsurance Corporation. The General Reinsurance Corporation program is limited to each risk with respect to property and liability
in the amount of $700,000 for each of NLIC and ASIC. Each of NLIC and ASIC retain $300,000 in this program. Effective January 1,
2014, the program limited each risk for property and liability in the amount of $500,000 for each of NLIC and ASIC, with the
retention increasing to $500,000.
Catastrophic coverage
NLC’s liabilities for losses and loss adjustment expenses include liabilities for reported losses, liabilities for incurred but not reported,
or IBNR, losses and liabilities for loss adjustment expenses, or 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.
At December 31, 2013, NLC has 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 maintains an underlying layer of coverage, providing $6.5 million in excess of its
$1.5 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of four layers of
protection: $17 million in excess of $8 million retention; $25 million in excess of $25 million loss; $50 million in excess of $50
million loss and $40 million ($70 million through June 30, 2013) in excess of $100 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, 2013, total retention for
any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.
Effective July 1, 2013, NLC renewed its catastrophic reinsurance contract for its third and fourth layers of reinsurance for a two year
period. In the contract renewal, the coverage provided by the fourth layer changed to reflect the reduction of exposure in Texas
primarily as a result of NLIC exiting the Texas coast and reducing its exposure in Harris County, Texas. The coverage provides $40
million in excess of $100 million loss, resulting in catastrophic excess of loss reinsurance coverage up to $140 million.
Effective January 1, 2014, NLC renewed its reinsurance contract for its first and second layers of reinsurance for an eighteen month
period. The projected premiums on these treaties for NLIC and ASIC are $2.7 million and $1.6 million, respectively, in 2014.
Additionally, NLC purchased an underlying excess of loss contract that provides $10 million aggregate coverage for sub-catastrophic
events. The contract has a 66% subscription level, with a projected premium of $2.4 million in 2014.
During 2013, NLC experienced two significant catastrophes that resulted in losses in excess of retention at NLIC, as compared to one
significant catastrophe during 2012 and none during 2011. NLC did not experience any significant catastrophe that resulted in losses
in excess of retention at ASIC during 2013, 2012 or 2011. The two tornado, hail and wind storms that exceeded retention in 2013 had
F-59
incurred losses of $18.3 million. The Texas hail storm that exceeded retention in 2012 had incurred losses of $8.3 million. Gross
losses from other prior year catastrophic events, including Hurricanes Ike and Dolly, was $0.8 million, as compared to favorable
development of $7.0 million in 2011. These losses have no effect on net loss and LAE incurred because the catastrophic events
exceeded retention levels and are fully recoverable. The primary financial effect beyond the reinsurance retention is additional
reinstatement premium payable to the affected reinsurers. Reinstatement premiums during 2013, 2012 and 2011 of $0.3 million, $0.5
million and $0.1 million, respectively, are recorded as ceded premiums.
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 President and Chief Executive Officer of the Company and the Chief
Executive Officer of PlainsCapital. During the fourth quarter of 2013, we began presenting certain amounts previously allocated to the
four reportable business segments within Corporate to better reflect our internal organizational structure. This change had no impact
on the Company’s consolidated results of operations. The Company’s historical segment disclosures have been revised to conform to
the current presentation.
The banking segment includes the operations of the Bank, which, since September 14, 2013, includes the operations acquired in the
FNB Transaction. The mortgage origination segment is comprised of PrimeLending. The insurance segment is composed of NLC. The
financial advisory segment is composed of First Southwest.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing
and investing activities, and management and administrative services to support the overall operations of the Company including, but
not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business
segments.
Balance sheet amounts for remaining subsidiaries not discussed previously and the elimination of intercompany transactions are
included in “All Other and Eliminations.” The following tables present certain information about reportable segment revenues,
operating results, goodwill and assets (in thousands).
Year Ended December 31, 2013
Net interest income (expense) ..
Provision for loan losses ...........
Noninterest income ...................
Noninterest expense ..................
Income (loss) before
$
Banking
Mortgage
Origination
Insurance
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
Consolidated
$
293,254
37,140
71,045
155,102
(37,840) $
—
537,497
472,284
$
7,442
—
166,163
166,006
$
12,064
18
102,714
112,360
(1,597 ) $
—
—
10,439
$
22,878
—
(27,334)
(4,456)
296,201
37,158
850,085
911,735
income taxes ..................
$
172,057
$
27,373 $
7,599
$
2,400
$
(12,036 ) $
—
$
197,393
Year Ended December 31, 2012
Net interest income (expense) ..
Provision for loan losses ...........
Noninterest income ...................
Noninterest expense ..................
Income (loss) before
$
Banking
Mortgage
Origination
Insurance
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
Consolidated
$
24,885
3,670
4,601
16,130
(4,987) $
—
57,618
50,296
$
4,730
—
154,147
163,585
$
1,191
130
10,909
11,078
39 $
—
—
14,487
$
2,984
—
(3,043)
(59)
28,842
3,800
224,232
255,517
income taxes ..................
$
9,686
$
2,335 $
(4,708) $
892
$
(14,448) $
—
$
(6,243)
Year Ended December 31, 2011
Net interest income (expense) ..
Provision for loan losses ...........
Noninterest income ...................
Noninterest expense ..................
Income (loss) before
Banking
$
$
—
—
—
—
income taxes ..................
$
—
$
Mortgage
Origination
Insurance
Financial
Advisory
Corporate
All Other and
Eliminations
Hilltop
Consolidated
— $
—
—
—
— $
$
4,915
—
141,650
146,386
$
—
—
—
—
(2,851 ) $
—
—
8,868
$
—
—
—
—
2,064
—
141,650
155,254
179
$
—
$
(11,719 ) $
—
$
(11,540)
December 31, 2013
Goodwill ...................................
$
207,741
$
13,071 $
23,988
$
7,008
$
— $
—
$
251,808
Total assets ................................
$
7,980,618
$
1,249,091 $
308,160
$
520,412
$
1,316,398 $
(2,471,456) $
8,903,223
December 31, 2012
Goodwill ...................................
$
209,703
$
13,071 $
23,988
$
7,008
$
— $
—
$
253,770
Total assets ................................
$
6,195,775
$
1,548,384 $
305,699
$
592,017
$
1,241,125 $
(2,596,135) $
7,286,865
F-60
31. Earnings (Loss) per Common Share
The following table presents the computation of basic and diluted earnings (loss) per common share (in thousands, except per share
data).
Basic earnings (loss) per share:
Income (loss) applicable to Hilltop common stockholders ....
Less: income applicable to participating shares .....................
Net earnings (loss) available to Hilltop
common stockholders ........................................................
Weighted average shares outstanding - basic ........................
Basic earnings (loss) per common share ................................
Diluted earnings (loss) per share:
Income (loss) applicable to Hilltop common stockholders ....
Add: interest expense on senior exchangeable notes (net
of tax) .................................................................................
Net earnings (loss) available to Hilltop
$
$
$
$
2013
Year Ended December 31,
2012
2011
121,015
(672)
$
(5,851) $
—
(6,531)
—
120,343
$
(5,851) $
(6,531)
84,382
58,754
56,499
1.43
$
(0.10) $
(0.12)
121,015
$
(5,851) $
(6,531)
5,059
—
—
common stockholders ........................................................
$
126,074
$
(5,851) $
(6,531)
Weighted average shares outstanding - basic ........................
Effect of potentially dilutive securities ..................................
Weighted average shares outstanding - diluted .....................
84,382
5,949
90,331
58,754
—
58,754
56,499
—
56,499
Diluted earnings (loss) per common share.............................
$
1.40
$
(0.10) $
(0.12)
For each of the years ended December 31, 2012 and 2011, the computation of diluted loss per common share did not include
6,208,000 equivalent shares of the Notes as the equivalent exchange rate per share was in excess of the average stock prices for the
noted periods. Additionally, options to purchase 688,000 and 199,000 weighted average outstanding shares, respectively, of Hilltop’s
common stock were not included in the computation of diluted loss per common share for the years ended December 31, 2012 and
2011, as their inclusion would have been anti-dilutive.
32. Condensed Financial Statements of Parent
Condensed financial statements of Hilltop (parent only) follow (in thousands). Investments in subsidiaries are determined using the
equity method of accounting.
Condensed Statements of Operations
2013
Year Ended December 31,
2012
2011
Investment income ......................................................
Interest expense ...........................................................
General and administrative expense ............................
Loss before income taxes, equity in undistributed
earnings of subsidiaries and preferred
stock activity ............................................................
Income tax expense (benefit) .......................................
Equity in undistributed earnings of subsidiaries ..........
Net income (loss) .........................................................
$
$
6,635
8,232
10,439
(12,036)
(4,680)
134,065
126,709
$
$
$
7,035
6,996
14,488
4,284
7,135
8,868
(14,449)
(3,313)
6,038
(5,098) $
(11,719)
(5,138)
50
(6,531)
F-61
Condensed Statements of Comprehensive Income (Loss)
Net income (loss) .........................................................
Other comprehensive income (loss), net of tax ...........
Comprehensive income (loss) .....................................
$
$
Condensed Balance Sheets
2013
126,709
(43,418)
83,291
Year Ended December 31,
2012
$
$
(5,098) $
(4,900)
(9,998) $
2011
(6,531)
8,581
2,050
2013
December 31,
2012
2011
Assets ..........................................................................
Cash and cash equivalents ......................................
Securities, available for sale ...................................
Investment in subsidiaries ......................................
Other assets .............................................................
Total assets .........................................................
$
163,856
69,023
1,069,226
14,293
$ 1,316,398
$
204,754
64,082
944,546
27,743
$ 1,241,125
Liabilities and Stockholders’ Equity ........................
Accounts payable and accrued expenses ................
Notes payable .........................................................
Stockholders’ equity ...............................................
Total liabilities and stockholders’ equity ............
$
5,257
—
1,311,141
$ 1,316,398
$
5,779
90,850
1,144,496
$ 1,241,125
$
$
$
$
533,374
70,513
126,017
24,884
754,788
8,555
90,850
655,383
754,788
Condensed Statements of Cash Flows
Operating Activities...................................................
Net income (loss) .........................................................
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries ......
Deferred income taxes .............................................
Loss on redemption of senior
exchangeable notes ..............................................
Other, net .................................................................
Net cash provided by (used in) operating activities .....
Investing Activities ....................................................
Capital contribution .................................................
Cash paid for acquisition .........................................
Purchases of securities available for sale .................
Net cash used in investing activities ............................
Financing Activities ...................................................
Payments to repurchase common stock ...................
Redemption of senior exchangeable notes ..............
Dividends paid on preferred stock ...........................
Other, net .................................................................
Net cash used in financing activities ..........................
2013
Year Ended December 31,
2012
2011
$
126,709
$
(5,098) $
(6,531)
(134,065)
8,850
3,733
132
5,359
(35,000)
—
—
(35,000)
—
(11,088)
(2,985)
2,816
(11,257)
(6,038)
(1,011)
—
(3,370)
(15,517)
—
(311,805)
—
(311,805)
(1,298)
—
—
—
(1,298)
(50)
(3,756)
—
(204)
(10,541)
—
—
(57,489)
(57,489)
—
—
—
—
—
Net change in cash and cash equivalents .....................
Cash and cash equivalents, beginning of year .............
Cash and cash equivalents, end of year .......................
(40,898)
204,754
163,856
$
(328,620)
533,374
204,754
$
(68,030)
601,404
533,374
$
During September 2013, Hilltop contributed capital of $35.0 million to the Bank to provide additional capital in connection with the
FNB Transaction.
F-62
33. Recently Issued Accounting Standards
In July 2013, the FASB issued ASU No. 2013-11 to require an entity to present an unrecognized tax benefit, or portion thereof, in the
financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a
liability and should not be combined with deferred tax assets. The amendment is effective for the Company on January 1, 2014 and is
to be applied prospectively to all unrecognized tax benefits that exist at the balance sheet date, although retrospective adoption is
permitted. Adoption of the amendment is not expected to have a significant effect on the Company’s consolidated financial
statements.
In February 2013, the FASB issued an amendment to the Comprehensive Income Topic to improve the reporting of reclassifications
out of comprehensive income (loss). The amendments require entities to present, either parenthetically on the face of the financial
statements or in a single footnote, the effect of significant reclassifications out of each component of accumulated other
comprehensive income (loss) by the respective line items of net income (loss) affected by the reclassification. The amendment became
effective for the Company on January 1, 2013, and its adoption did not have any effect on the Company’s consolidated financial
statements as the Company had no such reclassifications during the periods presented.
In October 2012, the FASB issued ASU No. 2012-06 to clarify that when an entity recognizes an indemnification asset as a result of a
government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the
indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the
reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the
change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the
indemnification agreement. The amendment became effective for the Company on January 1, 2013, which was prior to the FNB
Transaction, and its adoption did not have a material impact on the Company’s consolidated financial statements.
In December 2011, the FASB amended the Balance Sheet Topic of the ASC to require enhanced disclosures about the nature and
effect or potential effect of an entity’s rights of setoff associated with its financial and derivative instruments. In January 2013, the
FASB issued an update to the amendments, which narrowed the scope of the financial instruments for which the enhanced disclosures
are applicable. The amendments became effective for the Company on January 1, 2013, and its adoption did not have a significant
effect on the Company’s financial position, results of operations or cash flows. See Note 25 to the consolidated financial statements
for the disclosures required by this Topic.
34. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information is summarized as follows (in thousands, except per share data).
Interest income ..........................................
Interest expense .........................................
Net interest income ....................................
Provision for loan losses ............................
Noninterest income ....................................
Noninterest expense ...................................
Income before income taxes ......................
Income tax provision .................................
Net income .................................................
Less: Net income attributable to
noncontrolling interest ...........................
Income attributable to Hilltop ....................
Dividends on preferred stock .....................
Income applicable to Hilltop common
Year Ended December 31, 2013
Fourth
Quarter
Third
Quarter
(revised)
$
98,601
10,002
88,599
2,206
182,479
219,752
49,120
18,090
31,030
$
79,702
7,786
71,916
10,658
215,095
216,592
59,761
20,115
39,646
Second
Quarter
First
Quarter
Full
Year
$
76,168
7,743
68,425
11,289
239,233
260,400
35,969
13,309
22,660
$ 74,604
7,343
67,261
13,005
213,278
214,991
52,543
19,170
33,373
$ 329,075
32,874
296,201
37,158
850,085
911,735
197,393
70,684
126,709
$
160
30,870
1,342
$
339
39,307
1,133
$
568
22,092
1,149
300
$ 33,073
703
1,367
$ 125,342
4,327
stockholders ...........................................
$
29,528
$
38,174
$
20,943
$ 32,370
$ 121,015
F-63
Year Ended December 31, 2013
Fourth
Quarter
Third
Quarter
(revised)
Second
Quarter
First
Quarter
Full
Year
Earnings per common share:
Basic ......................................................
Diluted ..................................................
$
$
0.34
0.34
$
$
0.45
0.43
$
$
0.25
0.24
$
$
0.39
0.39
Year Ended December 31, 2012
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income ..........................................
Interest expense .........................................
Net interest income ....................................
Provision for loan losses ............................
Noninterest income ....................................
Noninterest expense ...................................
Income (loss) before income taxes ............
Income tax provision (benefit) ...................
Net income (loss) .......................................
Less: Net income attributable to
noncontrolling interest ...........................
Income (loss) attributable to Hilltop ..........
Dividends on preferred stock .....................
Income (loss) applicable to Hilltop
common stockholders ............................
Earnings (loss) per common share:
Basic ......................................................
Diluted ..................................................
$
$
$
$
$
28,954
3,786
25,168
3,800
109,691
115,934
15,125
5,809
9,316
$
$
3,379
2,140
1,239
—
39,591
46,792
(5,962)
(1,914)
(4,048)
$
3,349
2,131
1,218
—
38,063
55,233
(15,952)
(5,243)
(10,709)
3,356
2,139
1,217
—
36,887
37,558
546
203
343
494
8,822
259
—
—
$
(4,048) $ (10,709) $
—
—
—
343
—
$
494
(5,592)
259
8,563
$
(4,048) $ (10,709) $
343
$
(5,851)
0.13
0.13
$
$
(0.07) $
(0.07) $
(0.19) $
(0.19) $
0.01
0.01
$
$
(0.10)
(0.10)
$
$
$
1.43
1.40
Full
Year
39,038
10,196
28,842
3,800
224,232
255,517
(6,243)
(1,145)
(5,098)
Management made significant estimates and exercised significant judgment in estimating fair values and accounting associated with
the FNB Transaction during the third quarter of 2013 due to the short time period between the Bank Closing Date and September 30,
2013. The Bank Closing Date valuations related to loans, FDIC Indemnification Asset, covered OREO, other intangible assets,
assumed liabilities and taxes were considered preliminary at September 30, 2013. The operations of FNB were included in the
Company’s operating results beginning September 14, 2013 and such operations included a preliminary pre-tax bargain purchase gain
of $3.3 million as disclosed in the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 8, 2013. During the
quarter ended December 31, 2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the
Bank Closing Date were adjusted as a result of additional information obtained primarily related to the fair values of loans, covered
OREO, FDIC Indemnification Asset, premises and equipment and other intangible assets. These adjustments resulted in an increase in
the preliminary bargain purchase gain associated with the FNB Transaction to $12.6 million, before taxes of $4.5 million. This change
is reflected in the above table within noninterest income during the third quarter of the year ended December 31, 2013. In the
aggregate, the adjustments to the preliminary bargain purchase gain and revisions to the accretion of discount on loans and other items
increased net income for the quarter ended September 30, 2013 by $6.3 million as compared to amounts previously reported in the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. As discussed in Note 2 to the consolidated
financial statements, due to the short time period between the Bank Closing Date and December 31, 2013, the real estate appraisal
validation exercise remains outstanding and the Bank Closing Date valuations related to covered OREO and FDIC Indemnification
Asset are considered preliminary and could differ significantly when finalized.
As discussed in Note 2 to the consolidated financial statements, the operating results of Hilltop for the fourth quarter ended
December 31, 2012 include the results from the operations acquired in the PlainsCapital Merger for the month ended December 31,
2012. PlainsCapital contributed $8.4 million of net earnings during the fourth quarter of 2012.
35. Subsequent Event
On January 9, 2014, the Company delivered to the President and Chief Executive Officer of SWS a letter in which the Company
proposed to acquire all of the outstanding shares of SWS common stock that it does not already own for $7.00 per share in 50% cash
and 50% Company common stock. The cash portion of the offer would be funded through available cash. There is no assurance that
the Company will enter into a merger agreement with SWS or that any transaction will be consummated.
F-64
STOCK PERFORMANCE GRAPH
Our common stock is listed on the New York Stock Exchange under the symbol “HTH.” The
following graph assumes $100 invested on December 31, 2008, and compares (a) the yearly percentage
change in the cumulative total stockholder return on our common stock (as measured by dividing (i) the
sum of (A) the cumulative amount of dividends, assuming dividend reinvestment, during the period
commencing on the first day of trading, and ending on December 31, 2013, and (B) the difference
between our share price at the end and the beginning of the periods presented by (ii) the share price at the
beginning of the periods presented) with (b) the Standard & Poor’s 500 Index, or S&P, and (c) the Russell
2000 Index, or Russell 2000.
Hilltop Holdings Inc. Total Return Comparison
n
r
u
t
e
R
d
e
x
e
d
n
I
250.00
225.00
200.00
175.00
150.00
125.00
100.00
100.00
75.00
50.00
Dec-08
Dec-09
Hilltop Holdings Inc.
S&P 500
Russell 2000
12/31/2008
100.00
100.00
100.00
12/31/2009
119.51
126.46
127.17
Dec-10
12/31/2010
101.85
145.51
161.32
Dec-11
12/30/2011
86.76
148.59
154.59
Dec-12
Dec-13
12/31/2012
139.01
172.37
179.86
12/31/2013
237.47
228.19
249.69
CORPORATE INFORMATION
Corporate Headquarters
Board of Directors
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Telephone: (214) 855-2177
Facsimile: (214) 855-2173
www.hilltop-holdings.com
Transfer Agent and Registrar
American Stock Transfer & Trust Company
New York, New York
Toll free: (800) 937-5449
Telephone: (718) 921-8124
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Dallas, Texas
Stock Symbol
Common Stock: HTH
New York Stock Exchange
Available Information
Hilltop Holdings Inc. makes available, free of charge,
its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press
releases, the Code of Business Conduct and Ethics
and other company information. Such information
will be furnished upon written request to:
Hilltop Holdings Inc.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Attn: Investor Relations
This information also is available on our website,
www.hilltop-holdings.com. Reports we file with the
Securities and Exchange Commission also are
available at wwww.sec.gov.
Gerald J. Ford – Chairman
Alan B. White – Vice Chairman
Charlotte Jones Anderson
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Hill A. Feinberg
Jeremy B. Ford
J. Markham Green
Jess T. Hay
William T. Hill, Jr.
James R. Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
C. Clifton Robinson
Kenneth D. Russell
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Executive Officers
Jeremy B. Ford
President and Chief Executive Officer
Darren Parmenter
Executive Vice President – Principal Financial
Officer
Corey G. Prestidge
Executive Vice President, General Counsel and
Secretary
Alan B. White
Chief Executive Officer of PlainsCapital Corporation
James R. Huffines
Chief Operating Officer of PlainsCapital
Corporation
John A. Martin
Chief Financial Officer of PlainsCapital Corporation
Jerry L. Schaffner
Chief Executive Officer of PlainsCapital Bank
Todd L. Salmans
Chief Executive Officer of PrimeLending
Hill A. Feinberg
Chief Executive Officer of First Southwest
[THIS PAGE INTENTIONALLY LEFT BLANK]
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Telephone: (214) 855-2177
Facsimile: (214) 855-2173