2014 Annual Report,
Notice of 2015 Annual Meeting &
Proxy Statement
To Our Stockholders, Customers and Employees:
2014 was a momentous year for Hilltop. Each of our four operating subsidiaries performed well and
together produced $106 million of net income for Hilltop’s common shareholders, representing an ROAE
of 8.0% for 2014. Hilltop’s book value per share increased from $13.27 at December 31, 2013 to $14.93
at December 31, 2014.
Early in 2014 we announced the acquisition of SWS Group, representing another step towards our stated
goal of building a premier Texas-based bank and prominent diversified financial services company. The
transaction closed January 1, 2015 and was immediately accretive to tangible book value. Simultaneous
with the closing, we formed a new entity called Hilltop Securities Holdings that serves as the parent to
both SWS’s broker-dealer subsidiary and First Southwest, our legacy broker-dealer. We are working
diligently to merge the two firms to create one of the largest and most dominant broker-dealers in the
Southwest. The combined business will be led by Hill Feinberg as Chief Executive Officer and Bob
Peterson as President and Chief Operating Officer.
At January 1, 2015, Hilltop had $12.4 billion of assets, $1.7 billion of equity, and approximately 5,300
employees. Since 2011, Hilltop has grown from $925 million to $12.4 billion in assets primarily through
the acquisitions of PlainsCapital Corporation, First National Bank of Edinburg, and most recently SWS.
Furthermore, Hilltop recently issued $150 million of 5% senior notes due 2025 with an investment grade
rating from Fitch. Proceeds from the issuance will be used to redeem all of Hilltop’s outstanding Non-
Cumulative Perpetual Preferred Stock, Series B and the remainder for general corporate purposes. These
steps represent the completion of an important phase for our company, and we now look forward to
leveraging Hilltop’s established platform for future M&A transactions and prudent organic growth.
Operating Subsidiaries:
(cid:190) PlainsCapital Bank offers commercial banking, personal banking and wealth management
products and services throughout Texas. During 2014, the legacy bank grew loans and expanded
its branch network while profitably working out problem assets and divesting noncore branches
acquired from the FNB Transaction in 2013. For 2014, the bank reported a net interest margin of
5.00% and pre-tax income of $139 million. Excluding the addition of SWS’s bank subsidiary,
PlainsCapital Bank had $8.0 billion of assets, $6.4 billion of deposits, and 78 branches at year end
and remained the fifth largest Texas-based bank based on deposits. Immediately following the
close of the SWS transaction, SWS’s banking subsidiary merged into PlainsCapital Bank and
brought four new branches, strong core funding, and key personnel. We will continue to
emphasize our community banking model and robust credit culture as we grow the bank both
organically and through M&A.
(cid:190) PrimeLending was the 2nd largest purchase originator in Texas and the 6th largest nationwide in
2014. During the year, PrimeLending originated $10.3 billion in mortgage loans through 260
locations in 42 states. PrimeLending outperformed the broader mortgage origination industry in
2014, as evidenced by its increase in market share from 0.68% in 2013 to 0.96% in 2014. While
refinance volume remained subdued, PrimeLending’s strong retail franchise helped maintain
purchase volume. Mortgage originations are expected to increase slightly in 2015, and
PrimeLending is well-positioned to benefit from this positive trend.
(cid:190) 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. During the year, First
Southwest produced $6.9 million in pre-tax income. Low interest rates and an improving
economy led to an increase in debt offerings by public finance clients, resulting in higher fees.
We expect the merger of First Southwest with SWS to be complete after systems integration and
regulatory approvals.
(cid:190) National Lloyds is a niche property & casualty underwriter offering primarily fire and limited
homeowners insurance for low value dwellings and manufactured homes in Texas and other
southern states. National Lloyds had its best year ever in 2014. Growth in earned premium, more
efficient reinsurance, and a decline in the severity of weather events contributed to pre-tax
income of $25.7 million for the year. Additionally, National Lloyds’ new CEO, Bob Otis, is
reinvigorating the company by executing operational initiatives.
As an institution now above the $10 billion asset threshold, we will be subject to increased regulatory
oversight across our entire franchise. To accommodate, we have invested heavily in our risk management,
compliance, and regulatory functions, including hiring professionals, instituting new policies, and
strengthening compliance procedures company-wide. Hilltop is committed to maintaining positive
relationships with our regulators and will continue to prioritize strong risk and capital management within
our culture.
Acquiring financial institutions is a core strength of Hilltop. We will continue to maintain a highly
disciplined approach in our pursuit of acquisitions in Texas that build on our core banking franchise.
Following the SWS acquisition and the senior notes issuance, we still have ample 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.
Lastly, I would like to thank our employees, including new employees from SWS, for their dedicated
service to our company. Additionally, we would like to thank 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.
April 30, 2015
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 2015 ANNUAL MEETING
AND PROXY STATEMENT
April 30, 2015
You are cordially invited to attend our 2015 Annual Meeting of Stockholders at 10:00 a.m., Dallas, Texas, local
time, on June 12, 2015. 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 shar es ar e held in a br oker age account, your br oker no longer has discr etion to vote on
your behalf with r espect to electing dir ector s or cer tain other non-r outine matter s. Accor dingly, you must
pr ovide specific voting instr uctions to your br oker in or der 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 2015 Annual Meeting of Stockholders and annual report for the year ended December 31, 2014 were
first provided to all stockholders of record on or about May 1, 2015.
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 J UNE 12, 2015.
Our proxy statement and our annual report for the fiscal year ended December 31, 2014 are both available at
www.proxyvote.com
Notice of 2015 Annual Meeting of Stockholder s
To Be Held on J une 12, 2015
WHEN:
WHERE:
Friday, June 12, 2015, 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 2016 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 2015; 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 21, 2015.
ANNUAL REPORT:
Our 2014 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, 2014, 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 ver y impor tant. Please r ead the pr oxy statement and voting instr uctions on the enclosed pr oxy
car d. Then, whether or not you plan to attend the annual meeting in per son, and no matter how many shar es
you own, please vote by Inter net, telephone or by mar king, signing, dating and pr omptly r etur ning the
enclosed pr oxy car d in the enclosed envelope, which r equir es 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 dir ections to be able to attend the meeting and vote in per son.
By Order of the Board of Directors,
Corey G. Prestidge
Executive Vice President,
General Counsel & Secretary
April 30, 2015
Dallas, Texas
PROXY STATEMENT
TABLE OF CONTENTS
Page
GENERAL INFORMATION ................................................................................................................................................ 1
PROPOSAL ONE – ELECTION OF DIRECTORS ................................................................................................................... 5
General ...................................................................................................................................................................... 5
Nominees for Election as Directors ........................................................................................................................... 5
Director Independence ............................................................................................................................................ 11
Meeting Attendance ................................................................................................................................................ 12
Vote Necessary to Elect Directors ........................................................................................................................... 12
Director Compensation............................................................................................................................................ 12
Board Committees ................................................................................................................................................... 14
Corporate Governance ............................................................................................................................................. 17
Director Nomination Procedures ............................................................................................................................. 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................................................... 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 ................................................................................... 51
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ................................................................................ 51
PROPOSAL TWO – ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION ........................................................... 53
PROPOSAL THREE - RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................................... 53
Vote Necessary to Ratify the Appointment ............................................................................................................. 53
Report of the Audit Committee ............................................................................................................................... 53
Independent Auditor’s Fees ..................................................................................................................................... 54
STOCKHOLDER PROPOSALS FOR 2016 .......................................................................................................................... 55
OTHER MATTERS ......................................................................................................................................................... 55
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS ................................................................................................... 56
ANNUAL REPORT ......................................................................................................................................................... 56
QUESTIONS ................................................................................................................................................................... 56
i
HILLTOP HOLDINGS INC.
200 Crescent Court, Suite 1330
Dallas, Texas 75201
PROXY STATEMENT
2015 Annual Meeting of Stockholder s
To be Held on J une 12, 2015
GENERAL INFORMATION
The Notice of Internet Availability of Proxy Materials or this Proxy Statement and the accompanying proxy card,
Notice of 2015 Annual Meeting of Stockholders and Annual Report on Form 10-K for the year ended December 31,
2014 were first provided to all stockholders of record on or about May 1, 2015.
Unless the context otherwise indicates, 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 “Hilltop Securities” refer to Hilltop Securities
Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Southwest Securities” refer to Southwest
Securities, Inc. (a wholly owned subsidiary of Hilltop Securities), references to “SWS Financial” refer to SWS
Financial Services, Inc. (a wholly owned subsidiary of Hilltop Securities), references to the “Bank” refer to
PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First National Bank,
references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of Hilltop
Securities) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, LLC (a wholly
owned subsidiary of First Southwest), references to “PrimeLending” refer to PrimeLending, a PlainsCapital
Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, and references to “NLC” refer to
National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.
Why am I r eceiving these pr oxy mater ials?
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 2015 Annual Meeting of Stockholders, or the Annual Meeting, which
will take place at 10:00 a.m. (Dallas, Texas time) on Friday, June 12, 2015, 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 r eceive a one-page notice in the mail r egar ding the Inter net availability of pr oxy mater ials instead
of pr inted pr oxy mater ials?
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 1, 2015, 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 electr onic access to the pr oxy mater ials?
The Notice provides you with instructions regarding how to:
(cid:2) view our proxy materials for the Annual Meeting on the Internet;
(cid:2) vote your shares after you have viewed our proxy materials;
(cid:2)
register to attend the meeting in-person;
1
(cid:2)
(cid:2)
request a printed copy of the proxy materials; and
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:2) Elect 21 directors to serve on our Board of Directors until the 2016 annual meeting of stockholders and
until their successors are duly elected and qualified;
(cid:2) Conduct an advisory vote to approve executive compensation;
(cid:2) Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for 2015; and
(cid:2) Transact any other business that may properly come before the Annual Meeting and any adjournments or
postponements of the Annual Meeting.
What are the Board of Directors’ recommendations?
The Board of Directors recommends that you vote your shares:
(cid:2) FOR each of our director candidates;
(cid:2) FOR the approval, on an advisory basis, of the compensation of our named executive officers; and
(cid:2) FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for 2015.
Who is entitled to vote?
Holders of record of our common stock at the close of business on April 21, 2015, 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 21, 2015.
How do I vote?
If you are a stockholder of record, there are four ways to vote:
(cid:2) 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:2) 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:2) 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:2) 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.
If you are the beneficial owner of shares 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 to approve executive
2
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 pr oxies wor k?
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 2015.
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 2015.
If you are the beneficial owner of shares held by a broker or other nominee, also referred to as held in “street name,”
and you do not provide such broker or nominee 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 those shares voted. To be sure that all of your shares are voted, we
encourage you to respond to each request you receive.
Which matter s ar e consider ed “routine” or “non-routine”?
The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for 2015 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 may be broker non-votes on
all matters other than the ratification of the appointment of PricewaterhouseCoopers LLP.
Can I change my vote or r evoke my pr oxy 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 56.
Will my shar es be voted if I don’t sign a pr oxy?
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.
What constitutes a quor um?
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,
3
either in person or by proxy. Any shares that we hold for our own benefit may not be voted and are not counted in
the total number of outstanding shares eligible to be voted. Both abstentions and broker non-votes (described
below) are counted as present for purposes of determining the presence of a quorum. On April 21, 2015, we had
100,289,492 shares of common stock outstanding and entitled to vote at the Annual Meeting.
How many votes ar e needed for appr oval?
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 2015
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 may reconsider its selection of
PricewaterhouseCoopers LLP. 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 pr oxy 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 per son?
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 21, 2015 (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 that you intend to do so 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 nominee 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 56. 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
Gener al
At the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has
nominated the director candidates named under “—Nominees for Election as Directors” 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 2015 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.
Nominees for Election as Dir ector s
Char lotte J ones Ander son
Age 48
Rhodes R. Bobbitt
Age 69
Tr acy A. Bolt
Age 51
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
and Chief Brand Officer 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. Since 2012, she has served as Chairman of the NFL
Foundation and in 2014 she was appointed by the NFL commissioner to be a member
of the NFL Personal Conduct Committee. Ms. Anderson is actively involved with a
number of charitable and philanthropic organizations, including The Boys and Girls
Clubs of America, the Salvation Army, The Rise School, the Southwest Medical
Foundation, the Dallas Symphony, The Dallas Center for Performing Arts Foundation,
the Shelton School, TACA, and Make-a-Wish North Texas 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 served as a
partner and a member of the firm’s leadership committees until its sale in June 2014.
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.
5
W. J or is Br inker hoff
Age 63
J . Taylor Cr andall
Age 61
Char les R. Cummings
Age 78
Hill A. Feinber g
Age 68
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.
Mr. Crandall was appointed a director of Hilltop effective April 13, 2015. Mr. Crandall
is a founding Managing Partner of Oak Hill Capital Management, LLC (“OHCM”) and
has served OHCM (or its predecessors) since 1986. He has senior responsibility for
originating, structuring and managing investments for OHCM’s Media and Telecom
and Technology industry groups. Mr. Crandall has also served as Chief Operating
Officer of Keystone, Inc., the primary investment vehicle for Robert M. Bass. Prior to
joining OHCM, Mr. Crandall was a Vice President with the First National Bank of
Boston. Mr. Crandall serves on the board of directors of Intermedia.net, Inc., Wave
Division Holdings, LLC, Dave & Buster’s, Inc., Omada International, Pulsant Limited,
Berlin Packaging LLC and Powdr Corporation. Mr. Crandall is the secretary-treasurer
of the Anne T. and Robert M. Bass Foundation, the trustee of the Lucile Packard
Foundation for Children’s Health and currently serves on the boards of trustees of The
Park City Foundation and the U.S. Ski and Snowboard Team Foundation.
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.
6
Ger ald J . For d
Age 70
J er emy B. For d
Age 40
J . Mar kham Gr een
Age 71
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 40 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. and Scientific Games Corporation. Mr. Ford
previously served as Chairman of Pacific Capital Bancorp and a director of First
Acceptance Corporation and McMoRan Exploration Co. 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.
Mr. Jeremy B. Ford has served as President, Chief Executive Officer and a director of
Hilltop since March 2010. Mr. Jeremy B. Ford has worked in the financial services
industry for over 15 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. 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.
7
William T. Hill, J r .
Age 72
J ames R. Huffines
Age 64
Lee Lewis
Age 63
Andr ew J . Littlefair
Age 54
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 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 is a member of the American General Contractors Association, West Texas
Chapter, Chancellors Council for the Texas Tech University System, and 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.
8
W. Rober t Nichols, III
Age 70
C. Clifton Robinson
Age 77
Kenneth D. Russell
Age 66
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 New 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.
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. 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. He also
serves as a director of First Acceptance Corporation.
9
A. Haag Sher man
Age 49
Rober t C. Taylor , J r .
Age 67
Car l B. Webb
Age 65
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 is the Chief Executive Officer and Chief
Investment Officer of Tectonic Advisors LLC a registered investment advisor, and is a
private investor and co-owner of an energy services company. In addition, Mr.
Sherman serves on the boards of directors of the following public companies: Miller
Energy Resources and ZaZa Energy Corp. Prior thereto, Mr. Sherman co-founded and
served in various executive positions (including Chief Executive Officer and Chief
Investment Officer) of Salient Partners, LP, a Houston-based investment firm. In
addition, he previously served as an executive officer and partner of The Redstone
Companies where he, among other things, managed a private equity portfolio. Mr.
Sherman currently serves as an adjunct professor of law at The University of Texas
School of Law. Mr. Sherman previously practiced corporate law at Akin, Gump,
Strauss, Hauer & Feld, LLP and was an auditor at Price Waterhouse, a public
accounting firm. Mr. Sherman is an attorney and certified public accountant.
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. 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. and Plum
Creek Timber Company.
10
Alan B. White
Age 66
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’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.
Dir ector Independence
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, J. Taylor Crandall, Charles R.
Cummings, J. Markham Green, William T. Hill, Jr., Andrew J. Littlefair, W. Robert Nichols, III, A. Haag Sherman
and Robert C. Taylor, Jr. Jess T. Hay, who served on our Board of Directors until his death in April 2015, was
affirmatively determined to be independent. 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 or any member of his or her immediate family and the Company. The Board of
Directors considered that three directors it determined to be independent— Ms. Anderson and Messrs. Bolt and
Taylor—have, or a member of their respective immediate families 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, in each case 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 the
outstanding shares of common stock of Clean Energy Fuels Corp. at April 7, 2015. From late 2011 through March
31, 2015, the Bank purchased, in a series of transactions, an aggregate of approximately $16.3 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 J.
Ford, Jeremy B. Ford, James R. Huffines, Lee Lewis, Clifton Robinson, Kenneth D. Russell, Carl B. Webb and Alan
B. White, also will be “independent” directors, as defined by the NYSE.
11
Meeting Attendance
Our Board of Directors met seven times during 2014. 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 during 2014. 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 J. Ford, Jeremy
B. Ford, Alan B. White, James R. Huffines, Hill A. Feinberg, Kenneth W. Russell and Robert Nichols attended the
2014 annual meeting of stockholders.
Vote Necessar y to Elect Dir ector s
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 NYSE 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.
Dir ector 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:2)
(cid:2)
$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:2) Audit Committee—$65,000 annual fee for the chairperson of the committee;
(cid:2) Nominating and Corporate Governance Committee—$10,000 annual fee for the chairperson of the
committee;
(cid:2) Compensation Committee—$10,000 annual fee for the chairperson of the committee;
(cid:2)
Investment Committee—$25,000 annual fee for the chairperson of the committee;
(cid:2) Merger and Acquisition Committee— $10,000 annual fee for the chairperson of the committee; and
(cid:2)
$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:2)
(cid:2)
(cid:2)
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
12
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.
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.
2014 Director Compensation
Name
Charlotte Jones Anderson
Rhodes R. Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
Jess T. Hay (2)
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
Alan B. White
Dir ector Compensation Table for 2014 (1)
Fees ear ned or
paid in cash
Stock awar ds
Total
($)
($)
($)
29,938
-
68,937
-
-
-
-
-
-
-
-
-
-
27,943
-
-
-
-
29,450
50,961
-
60,000
91,000
69,000
58,000
131,000
-
53,000
-
69,000
62,000
66,000
-
53,000
56,000
70,000
53,000
55,000
73,000
59,000
51,000
-
30,062
91,000
63
58,000
131,000
-
53,000
-
69,000
62,000
66,000
-
53,000
28,057
70,000
53,000
55,000
73,000
29,550
39
-
13
(1) Fees earned for services performed in 2014 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.
(2) Mr. Hay passed away on April 13, 2015.
As described above, the 2014 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 2014:
Name of Dir ector
Charlotte Jones Anderson
Tracy A. Bolt
Andrew J. Littlefair
Robert C. Taylor, Jr.
Carl B. Webb
Number of Shar es
1,407
3,253
1,317
1,386
2,398
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 2014:
Name of Dir ector
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
Number of Shar es
3,030
7,079
1,562
9,943
5,379
2,893
3,872
2,983
3,009
37,478
For further information about the stockholdings of these directors and our management, see “Security Ownership of
Certain Beneficial Owners and Management” commencing on page 23 of this Proxy Statement.
Boar d Committees
General
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, Risk
Committee and the Nominating and Corporate Governance Committee. A more detailed description of these
14
committees is set forth below. Our Board of Directors may, from time to time, establish certain other committees to
facilitate our management. Current copies of the charters for each of the foregoing committees, 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 56.
Committee Membership
The following table shows the current membership of, and the 2014 fiscal meeting information for, each of the
committees of the Board of Directors.
Name
Audit Committee
Compensation
Committee
Nominating and
Cor por ate Gover nance Committee
Investment
Committee
Mer ger and
Acquisition Committee (1)
Executive
Committee
Risk
Committee
Charlotte Jones Anderson*
Rhodes Bobbit*
Tracy A. Bolt*
W. Joris Brinkerhoff*
J. Taylor Crandall*
Charles R. Cummings*
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green*
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 2014
(cid:3)
(cid:2)
Chairman
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Chairman
10
6
(cid:2)
(cid:2)
(cid:2)
Chairman
(cid:2)
4
Chairman
(cid:2)
(cid:2)
(cid:2)
4
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
3
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Chairman
3
(cid:2)
Chairman
6
* Denotes independent director.
(1) With the recent passing of Mr. Hay, a new chairman of the Merger and Acquisition Committee has not yet been appointed.
Audit Committee
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 53. Mr. Cummings has been designated as
Chairman, and Messrs. Green and Bolt are members, 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.
15
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.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee’s purpose is as follows:
(cid:2)
Identify, screen and recommend to our Board of Directors individuals qualified to serve as members,
and on committees, of the Board of Directors;
(cid:2) Advise our Board of Directors with respect to the composition, procedures and committees of the
Board of Directors;
(cid:2) Advise our Board of Directors with respect to the corporate governance principles applicable to the
Company; and
(cid:2) 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.
Risk Committee
The purpose of the Risk Committee is to provide assistance to the Board of Directors in its oversight of:
(cid:2) The Company’s risk governance structure;
(cid:2) The Company’s risk tolerance;
(cid:2) The Company’s risk management and risk assessment guidelines and policies regarding market, credit,
operation, liquidity, funding, reputational, regulatory, and such other risks as necessary;
(cid:2) The Company’s capital and liquidity and funding; and
(cid:2) The performance of the Company’s Chief Risk Officer.
The duties assigned to the Risk Committee are meant to ensure that there is an effective system reasonably designed
to evaluate and control risk throughout the Company.
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.
16
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.
Cor por ate Gover nance
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 56.
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 and the Risk Committee of the Board of Directors oversee 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 and the
Risk Committee are actively involved in establishing and refining our business strategy, including assessing
management’s appetite for risk and determining the appropriate level of overall risk for the Company. The
Company conducts continual assessments through the Chief Risk Officer who is overseen by the Risk Committee.
While the Board of Directors has the ultimate oversight responsibility for the risk management process, various
committees of the Board of Directors outside of the Risk Committee 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 a 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
17
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
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
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. Crandall has significant experience in finance and management and board
governance, including his experience serving on the Boards of Directors of
several public and private companies.
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.
Mr. Feinberg has extensive knowledge and experience concerning the
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 40 years. His extensive banking industry
experience and educational background provide him with significant
knowledge in dealing with financial 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, PlainsCapital,
substantially all of the assets of FNB, and SWS Group, Inc. (“SWS”). His
extensive knowledge of our operations makes him a valuable member of our
Board of Directors.
J. Markham Green
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.
18
William T. Hill, Jr.
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,
which has given him invaluable experience in corporate governance matters.
James R. Huffines
Mr. Huffines’ significant banking and managerial experience provide unique
insights and experience to our Board of Directors.
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
Through his service on our Board of Directors and 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.
Mr. Robinson possesses particular knowledge and experience in the insurance
industry, as we purchased NLC 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 service on our Board of Directors and 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
19
once per fiscal year, and the independent directors select the independent director to preside over each executive
session.
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-
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 56. 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 at the same website address provided above.
Dir ector Nomination Pr ocedur es
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
20
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 55 under “Stockholder Proposals for 2016,” 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:2)
(cid:2)
(cid:2)
(cid:2)
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:2) 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
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);
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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 56); and
21
(cid:2)
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.
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 30 days prior to, or delayed by more than
30 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 10th 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.
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 Annual Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pr incipal Stockholder s
The following table sets forth information regarding our common stock beneficially owned on April 21, 2015
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 Addr esss of Beneficial Owner
Amount and Natur e of
Beneficial Owner ship
Per cent of
Class (a)
Gerald J. Ford (b)
200 Crescent Court, Suite 1350
Dallas, Texas 75201
15,553,745
15.5
%
(a) Based on 100,289,492 shares of common stock outstanding on April 21, 2015. Shares issuable under instruments to purchase our common
stock that are exercisable within 60 days of April 21, 2015 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.
22
Secur ity Owner ship of Management
The following table sets forth information regarding the number of shares of our common stock beneficially
owned on April 21, 2015, by:
(cid:2)
(cid:2)
(cid:2)
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
Common Stock
Amount and Natur e of
Beneficial Owner ship
Per cent of
Class (a)
Charlotte Jones Anderson
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
200 Crescent Court, Suite 1350
Dallas, Texas 75201
Jeremy B. Ford
J. Markham Green
William T. Hill, Jr.
James R. Huffines
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
Darren Parmenter
C. Clifton Robinson
Kenneth D. Russell
Todd L. Salmans
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
6,169
126,059
10,728
25,228
-
37,476
1,364,052
15,553,745
517,438
119,152
48,350
364,730
656,199
14,622
41,000
5,361
1,235,024
-
25,000
14,422
31,661
106,784
1,907,922
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
*
*
*
*
*
*
1.4%
15.5%
*
*
*
*
*
*
*
*
1.2%
*
*
*
*
*
1.9%
All Directors and Executive Officers,
as a group (26 persons)
22,514,962
(n)
22.3%
*
Represents less than 1% of the outstanding shares of such class.
(a) Based on 100,289,492 shares of common stock outstanding on April 21, 2015. Shares issuable under instruments to purchase our common
stock that are exercisable within 60 days of April 21, 2015 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.
23
(d)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Includes 62,100 shares of common stock held in an IRA account for the benefit of Mr. Bobbitt.
(b)
(c) Excludes 1,488 shares held by Oak Hill Capital Management LLC, 69,014 shares held by Oak Hill Capital Management Partners III, L.P.
and 2,101,418 shares held by Oak Hill Capital Partners III, L.P.
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 21,747 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of
April 21, 2015.
(e) 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.
Jeremy Ford is a beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, LP (see footnote (e)). Includes
(a) 400,000 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) 100,000 shares of common stock acquirable upon the exercise of a stock option that will not vest within 60 days of April 21, 2015,
(y) 61,400 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 21, 2015
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 (a) 47,000 shares of common stock held by the James Huffines 1994 Trust for the benefit of Mr. Huffines, (b) 12,028 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 39,379 shares of
common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 21, 2015.
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 16,408 shares of common stock deliverable upon the vesting of restricted stock units that
will not vest within 60 days of April 21, 2015.
Includes 25,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Salmans can vote such restricted shares but may not
dispose of them until they have vested. Excludes 32,816 shares of common stock deliverable upon the vesting of restricted stock units that
will not vest within 60 days of April 21, 2015.
(m) Includes (a) 9,785 shares of common stock held directly by Mr. White’s wife, (b) 453 shares of common stock held in a self-directed
individual retirement 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) 1,566,458 shares of common stock held by Maedgen & White, Ltd., and (g) 95,844 shares
of common stock held in a self-directed individual retirement account of Mr. White. 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 65,631 shares of common stock deliverable upon the vesting of restricted stock units that will not vest
within 60 days of April 21, 2015.
(n) Represents 26 persons and includes (a) 480,000 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) 120,000 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 21, 2015 and (y) 317,545 shares of common stock
deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 21, 2015.
24
Executive Officer s
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
68
40
64
67
52
41
66
57
66
Chairman and 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 PlainsCapital Bank
Chairman and Chief Executive Officer of PlainsCapital
Officer
Since
2012
2010
2012
2012
2007
2008
2012
2012
2012
Business Experience of Executive Officers
Information concerning the business experience of Messrs. Hill A. Feinberg, Jeremy B. Ford, James R. Huffines
and Alan B. White is set forth above under “Proposal One – Election of Directors – Nominees for Election as
Directors” beginning on page 5.
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 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 and various other subsidiaries, and previously served as a director of
PlainsCapital from 1993 until March 2009. Mr. Schaffner joined PlainsCapital in 1988 as part of its original
management group.
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 and qualifies or, if earlier,
until his 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 under “Proposal One – Election of Directors – Nominees for Election as Directors”
commencing on page 5, (a) there are no familial relationships among any of our current directors or executive
officers and (b) 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 executive
officers is fair, reasonable, competitive, performance-based and aligned with stockholder interests.
Executive Summary
Year 2014 represented another strong and exciting year for our Company and compensation programs. We have
recently grown into a diversified financial holding company through our acquisitions of PlainsCapital Corporation in
2012, FNB in 2013 and SWS in 2015. 2014 was the first year under the more robust compensation program
developed for our growing organization in the prior year, which focuses on defined performance objectives. The
Committee continues to evaluate the compensation program to ensure it achieves the intended results, including pay-
for-performance.
2014 Highlights
(cid:2) We generated $105.9 million in income to common stockholders, or $1.17 per diluted share. Return on
average equity (ROAE) was 8.01% and return on average assets (ROAA) was 1.26% for 2014.
(cid:2) Asset quality remained strong compared to peers with non-performing assets as a percentage of total assets
of 0.25%, excluding covered loans and covered other real estate owned.
(cid:2) Hilltop capital ratios remained strong with a Tier 1 Leverage Ratio at 14.17% and a Total Capital Ratio of
19.69% at December 31, 2014.
26
(cid:2) NLC recorded its best annual operating results since its founding.
(cid:2) We entered into a merger agreement with SWS Group, Inc. to acquire the remaining interests not owned by
us. This transaction was consummated on January 1, 2015.
All of this contributed to an increase in our book value per share from $13.27 at December 31, 2013 to $14.93 at
December 31, 2014. Additional detail regarding our results and achievements can be found in our Annual Report
on Form 10-K for the year ended December 31, 2014. Furthermore, we believe that we are well positioned to
continue positive growth momentum into 2015 and beyond.
Enhanced Compensation Program
Year 2014 represented the first year under the comprehensive compensation program that was under development in
2013 following our acquisition of PlainsCapital Corporation. In that regard, the Committee refined scorecards, as
described in more detail below, for each executive under the annual cash incentive compensation program to
enhance its objective to align pay and performance. The Committee also awarded long-term incentive compensation
in the form of restricted stock units that includes a combination of performance-based and time-based award.
Accordingly, half of the equity awards granted to executive officers are subject to performance-based vesting
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 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:2) 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:2) 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 and the 2012
Equity Incentive Plan, represents a significant portion of the named executive officer’s total compensation.
An 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:2) Management’s interests should be aligned with those of our stockholders. Our long-term incentive
compensation was delivered in the form of restricted stock units in 2014 to support our goals for ownership
and retention. Half of the restricted stock units awarded vest upon achievement of predefined performance
goals. The value of these awards ultimately depends upon our relative total stockholder return and our
cumulative earnings per share over a three-year period. In 2014, we also implemented stock ownership
guidelines applicable to our Section 16 officers, including our named executive officers, and directors.
(cid:2) 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.
(cid:2) Our compensation program should be balanced and mitigate risk taking. We have a balanced approach to
total compensation that includes a mix of base/fixed pay and variable performance-based pay, a proportion
27
of cash and equity and a proportion of short- and long-term incentive compensation that we believe
effectively aligns our pay with performance while discouraging inappropriate risk taking.
CEO Target Pay Mix
Average NEOs Target Pay Mix
RSUs
20%
Performance
RSUs
20%
RSUs
11%
Salary
35%
Performance
RSUs
11%
Salary
42%
Annual
Incentive
25%
Annual
Incentive
36%
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, in part based upon the
compensation they were paid by PlainsCapital Corporation prior to the acquisition. Three of our named executive
officers, Messrs. White, Huffines and Salmans, were employed by PlainsCapital Corporation or its subsidiaries prior
to the acquisition, and each had an employment agreement. In connection with the acquisition of PlainsCapital, we
entered into a retention agreement with Mr. White to ensure continuity following the closing that was negotiated
based upon the pre-existing rights in his employment agreement with PlainsCapital Corporation. All other existing
employment arrangements at PlainsCapital were amended to terminate on November 30, 2014. Following the
expiration of the employment agreements with Messrs. Huffines and Salmans, we entered into new employment
agreements with them that are consistent with our current compensation philosophy. For a more detailed discussion
of these employment agreements and Mr. White’s retention agreement, see “Narrative Disclosure to Summary
Compensation Table and Grants of Plan-Based Awards Table – Employment Contracts and Incentive Plans –
Employment Contracts” commencing on page 40.
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:2) Review and approval of corporate incentive goals and objectives relevant to compensation;
(cid:2) Evaluation of individual performance results in light of these goals and objectives;
(cid:2) Evaluation of the competitiveness of the total compensation package; and
(cid:2) 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
28
also considers our growth and acquisition strategy and the challenges associated with attracting, retaining and
motivating talent and the importance of compensation in supporting the 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.
Role of the Chief Executive Officers in Compensation Decisions
The Chief Executive Officers of Hilltop and PlainsCapital 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 2014, 97.0% 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. As a result of such vote, the Committee continues to utilize the more comprehensive and robust
compensation framework designed for 2014. Highlights of the compensation program for fiscal 2015 are included
in this Compensation, Discussion & Analysis in order to assist stockholders in evaluating the compensation program
currently in effect. 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.
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 2014, the Committee continued its
engagement of Meridian Compensation Partners, LLC (“Meridian”) as its independent compensation consultant.
Other than performing Monte Carlo valuations with respect to the performance-based restricted stock units granted
to assist in recording their expense, 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 and the chairman of the Committee.
Pursuant to the Committee’s charter, if the Committee elects to use a compensation consultant, the Committee must
assess the consultant’s independence, taking into account the following factors:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
the provision of other services to the Company by the consultant;
the amount of fees the consultant received from the Company;
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:2)
(cid:2)
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 in the determination of 2014 pay 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
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.
In late 2014, Meridian, at the direction of the Committee, re-evaluated the members of the Company’s peer group
given the pending acquisition of SWS. As a result, Meridian developed a new peer group for the Company, which
was reviewed and approved by the Committee. That new peer group was used to ensure that compensation
program developed for 2015 was in the desired benchmark range, as well as competitive.
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.
30
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:
Compensation Component
Pur pose
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 E. Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
Base Salary
2013
2014
$ Change
550,000
330,000
500,000 $
300,000 $
$
$
$
$
$ 1,350,000 $ 1,350,000 (a) $
$
$
$
$
690,000 $
750,000 $
690,000
750,000
50,000
30,000
—
—
—
(a) Mr. White’s base salary is set forth in his retention agreement, which became effective upon the closing of the
acquisition of PlainsCapital Corporation.
In February 2015, the Committee conducted a further evaluation of the salaries of the named executive officers. As
a result of this analysis, the Committee determined to increase the salaries of Messrs. Ford and Parmenter for 2015
to $700,000 and $335,000, respectively, and to maintain the current salary of the Company’s other named executive
officers, as they were found to be competitive with the Company’s peers.
Annual Incentive Awards
Our named executive officers and other employees are eligible to participate in the Annual Incentive Plan and
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.
31
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 2014 were adjusted slightly lower than 2013 in consideration of these factors, and the percentage payout
as a percentage of salary also was reduced accordingly.
Each executive officer had defined performance objectives during the outset of 2014 based upon measurable
performance of both the individual and our Company. Annual Incentive Plan awards are subject to claw back for
improper risk management and non-compliance with applicable laws and regulations.
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 2014, the applicable performance
goals were among the following:
(cid:2) Consolidated net income for Hilltop for named executive officers employed by Hilltop;
(cid:2) Consolidated net income of PlainsCapital for employees of PlainsCapital and its subsidiaries;
(cid:2) Net income results of lines of business for business heads; and
(cid:2) Pre-determined strategic initiatives and individual objectives.
The weights of these factors are summarized in the following table:
Name (a)
Jeremy B. Ford
Darren E. Parmenter
James R. Huffines
Todd L. Salmans
Hilltop
Per for mance
PlainsCapital
Per for mance
Business Unit
Per for mance
Str ategic
Initiatives
70%
50%
--
--
--
--
70%
20%
--
20%
--
50%
30%
30%
30%
30%
(a) Mr. White’s annual incentive compensation is determined pursuant to his retention agreement for the
achievement of performance criteria.
Additionally, a 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.
Each element of the annual cash incentive award is independent of the other. Accordingly, the executive officer
may achieve certain performance goals, while at the same time failing to achieve others. In that case, the executive
officer will be entitled to receive the award for the performance goal achieved, but not an award for a performance
goal for which threshold performance is not achieved. Potential awards for 2014 ranged from 50% of target for
threshold performance to a maximum of 150% of target for stretch performance. Threshold awards were set at 60%
of target. Between the threshold and target amounts, a range of the potential annual cash incentive award is
defined. Our 2014 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 2014 and 2015, the Committee set Annual Incentive Plan compensation target
payments for named executive officers as follows:
32
(a) Determined pursuant to Mr. White’s retention agreement for the achievement of earnings threshold.
Based upon evaluation of their respective performance in 2014, together with operations of the Company, the
Committee determined the Annual Incentive Plan bonuses for 2014 as follows for the following named executive
officers.
Name
Amount ($)
% of Base Salar y
Amount ($)
% of Tar get
2014 Annual Incentive Tar get
2014 Annual Incentive Payout
Jeremy B. Ford
Darren E. Parmenter
Alan B. White (a)
James R. Huffines
Todd L. Salmans
425,000
200,000
1,350,000
550,000
750,000
77%
61%
100%
80%
100%
600,000
325,000
1,350,000
555,000
500,000
141%
163%
100%
101%
67%
(a) Determined pursuant to Mr. White’s retention agreement for the achievement of earnings threshold.
In determining such bonus amounts, the Committee exercised its discretion under the Annual Incentive Plan to
increase the amounts paid to each of Jeremy B. Ford and Darren E. Parmenter above the amounts payable pursuant
to the performance criteria. The increases in the Annual Incentive Plan payment for Mr. Ford were in recognition of
his efforts in connection with the negotiation and consummation of the SWS merger and the integration of the
operations acquired in the FNB acquisition. The Committee increased Mr. Parmenter’s payment in recognition of
the work he performed at NLC, which led to NLC’s best annual operating results since its founding. The Committee
also awarded discretionary bonuses to Todd L. Salmans during 2014 in the amount of $240,000 for cost savings
implemented at PrimeLending and $260,000 as an enticement to sign his employment agreement.
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.
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 2014 was delivered in the form of restricted stock units, the value of which is
ultimately dependent upon the performance of our stock price. 50% of the restricted stock units awarded to each
named executive officer provide for time-based vesting, and the remaining 50% contain performance-based vesting
conditions. Performance-based restricted stock units are earned and cliff vest after three years based 50% on EPS
performance and 50% on relative Total Shareholder Return. All shares of common stock delivered pursuant to the
restricted stock units are subject to a one-year holding period requirement. Further discussion of the 2012 Equity
Incentive Plan pursuant to which such restricted stock units were awarded is found after the “Grants of Plan-Based
Awards” section below.
33
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 2014, 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 stock units on February 24, 2014, to the
following named executive officers as set forth below:
Name
Jeremy B. Ford
Darren E. Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
Time-Based RSUs
Awar ded
Per for mance-Based
RSUs Awar ded
(at Tar get)
Total RSUs
Awar ded
12,696
3,703
14,812
8,887
7,406
12,696
3,703
14,811
8,887
7,406
25,392
7,406
29,623
17,774
14,812
On February 24, 2015, restricted stock units were granted to the named executive officers as set forth below:
Name
Jeremy B. Ford
Darren E. Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
Perquisites and Other Benefits
Time-Based RSUs
Awar ded
Per for mance-Based
RSUs Awar ded (at
Tar get)
Total RSUs
Awar ded
18,004
4,501
18,004
10,803
9,002
18,004
4,501
18,004
10,802
9,002
36,008
9,002
36,008
21,605
18,004
We provide a limited number of perquisites and other benefits to our named executive officers at Hilltop. The only
perquisite currently offered to both named executive officers employed directly by Hilltop is $150 per month to be
applied to a gym membership to promote wellness. In addition, Mr. Jeremy B. Ford is provided access to company
aircraft. 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,
Mr. White is 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
On November 30, 2014, employment agreements with Messrs. Huffines and Salmans expired. Accordingly, on
December 4, 2014, we entered into new employment agreements with Messrs. Huffines and Salmans. A description
of these new employment agreements and the post-contractual benefits provided thereunder is discussed in further
detail under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table—
Employment Contracts and Incentive Plans – Employment Contracts” and “Potential Payments Upon Termination
or Change-in-Control” below
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
34
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 in 2012, we entered into a retention agreement with Mr. White which
was approved by shareholders of PlainsCapital Corporation in connection with our acquisition of PlainsCapital
Corporation. The summary of the severance terms for this retention agreement is set forth below:
Legacy 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 (the “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 Code and the execution of a release of claims.
Huffines and Salmans Employment Agreements
Pursuant to the employment agreements of Messrs. Huffines and Salmans, upon termination of their employment by
us other than for cause, they are entitled to a lump-sum cash payment equal to the sum of (i) his annual base salary
rate immediately prior to the effective date of such termination, and (ii) an amount equal to the annual incentive cash
bonus paid to him in respect of the calendar year immediately preceding the year of the termination. If his
employment is terminated without “Cause” within the twelve months immediately following, or the six months
immediately preceding, a “Change in Control,” he will be entitled to receive a lump-sum cash payment equal to two
times the sum of (A) his annual base salary rate immediately prior to the effective date of such termination and
(B) an amount equal to the annual incentive cash bonus paid to him in respect of the calendar year immediately
preceding the year of the termination. The immediately foregoing cash amount represents a “double trigger” benefit.
Finally, if any payment made as a result of a change in control would constitute a “parachute payment” as defined
under Section 280G of the Code, then the benefits payable will be reduced to $1 below the parachute limit.
Further discussion of the agreements with Messrs. White, Huffines and Salmans 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.
Incentive Plans
35
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 2012 Equity Incentive 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.
Risk Considerations in Our Compensation Program
We do not believe that our compensation policies and practices for 2014 give rise to risks that are reasonably likely
to have a material adverse effect on our Company. In reaching this conclusion for 2014, we considered the
following factors:
(cid:2) Base salary is fixed and the only compensation components that are variable are the annual bonuses and
restricted stock units awarded to named executive officers, which, other than the annual bonus with respect
to Mr. White, were awarded based upon attainment of a pre-determined level of earnings.
(cid:2) 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:2) 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:2) The Annual Incentive Plan awards are subject to claw-back and adjustments for improper risk and
significant compliance issues.
(cid:2) Each year the Committee reviews all compensation programs to ensure existing programs are not
reasonably likely to have a material adverse effect on the 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:2) Six times annual base salary for the Chief Executive Officer; and
(cid:2) 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.
36
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
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 to named executive officers
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 or long-term 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 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 units. 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 Repor t
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
2014, 2013 and 2012 by the named executive officers, who were either serving in such capacities on December 31,
2014, or during 2014, or are reportable pursuant to applicable SEC regulations.
Name and pr incipal position
Year
Salar y ($)
Bonus (a)
($)
Stock
Awar ds (i)
($)
Option
awar ds ($)
Non-Equity
Incentive Plan
Compensation
($)
Change in pension
value and
nonqualified defer r ed
compensation
ear nings ($)
All other
compensation ($)
Total ($)
Jeremy B. Ford
President and
Chief Executive Officer
Darren Parmenter
Executive Vice President and
Principal Financial Officer
Alan B. White
Chief Executive Officer of
PlainsCapital Corporation
James R. Huffines
President and Chief Operating Officer of
PlainsCapital Corporation
Todd L. Salmans
Chief Executive Officer of
PrimeLending
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
537,500 (b)
466,667 (c)
400,000
-
-
300,000
322,500 (b)
296,667 (c)
290,000 (d)
25,000 (j)
-
100,000
1,350,000
1,350,000
112,500 (e)
1,350,000
1,350,000
1,350,000
690,000
690,000
57,500 (e)
750,000
750,000
62,500 (e)
-
-
600,000
500,000
-
900,000
600,013
397,500
-
175,004
66,250
-
699,991
662,500
-
420,000
397,500
-
350,008
331,250
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
600,000
500,000
-
300,000
200,000
-
-
-
-
555,000
555,000
-
500,000
-
-
-
-
-
-
-
-
29,129
28,950
6,431,982
-
-
-
-
-
-
23,028 (f)
1,800 (g)
-
3,318 (f)
1,800 (g)
-
106,142 (f)
132,877 (g)
1,716 (h)
41,433 (f)
41,564 (g)
3,133 (h)
34,967 (f)
31,906 (g)
2,998 (h)
1,760,541
1,365,967
700,000
825,822
564,717
390,000
3,535,263
3,524,327
7,896,198
1,706,433
1,684,064
660,633
2,134,974
1,113,156
965,498
(a) Represents bonuses paid for services during 2014, 2013, and 2012, as applicable.
(b) Reflects increase in annual salary effective on April 1, 2014.
(c) Reflects increase in annual salary effective on April 1, 2013.
(d) Reflects increase in annual salary effective on April 1, 2012.
(e) Represents annual salaries (Mr. White - $1,350,000; Mr. Huffines - $690,000; Mr. Salmans - $750,000) prorated for service from December 1, 2012 to December 31, 2012.
(f) Includes, as applicable, group life
insurance premiums, auto allowance, and
(g) Includes, as applicable, group life
insurance premiums, auto allowance, and
(h) Includes, as applicable, group life
(i) Reflects the grant date fair value
(j) Reflects the portion of his bonus pursuant to the Annual Incentive Plan in excess of the maximum stretch bonus permitted thereunder.
38
Name
Year
Per quisites
and Per sonal
Benefits (1)
All Other Compensation
Gr oss-Ups or
Other
Amounts
Reimbur sed
for the
Payment of
Taxes
Company
Contr ibutions
to Defined
Contr ibution
Plans
Jeremy B. Ford
Darren Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
-
-
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
22,248
1,800
1,800
1,800
96,236
127,729
429
36,285
36,416
2,704
25,061
22,000
2,569
-
-
-
-
-
-
-
-
1,287
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Insur ance
Policies (2)
Dir ector
Fees
Total All Other
Compensation
780
-
-
1,518
-
-
9,906
5,148
-
5,148
5,148
429
9,906
9,906
429
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
23,028
1,800
-
3,318
1,800
-
106,142
132,877
1,716
41,433
41,564
3,133
34,967
31,906
2,998
(1) Year 2014: For Mr. Ford, reflects $1,800 gym allowance and personal use of company airplane ($20,448). For Mr. Parmenter, reflects $1,800
gym membership allowance. For Mr. White, reflects car allowance of $36,000, club expenses totaling $33,768, and the personal use of company
airplane ($24,617), and personal use of company automobile ($1,852). For Mr. Huffines, includes a car allowance of $24,000 and club expenses
totaling $12,285. For Mr. Salmans, includes a car allowance of $12,000, club expenses totaling $10,000.00, and cash incentives totaling $3,061.
Personal use of company aircraft is calculated on a per mile basis utilizing SIFL rates published by the IRS.
(2) Reflects group term life insurance premiums paid during 2014, 2013, and 2012, as applicable.
39
Grants of Plan-Based Awards
Gr ants of Plan-Based Awar ds Table
Fiscal Year 2014
Estimated futur e payouts under non-equity plan
awar ds (b)
Name
Jeremy B. Ford
President and Chief Executive Officer
Darren Parmenter
Executive Vice President and Principal Financial Officer
Alan B. White
Chief Executive Officer of PlainsCapital Corporation
Gr ant Date
(a)
Thr eshold
($)
Tar get ($)
Maximum
($)
02/24/2014
03/11/2014
02/24/2014
03/11/2014
02/24/2014
03/11/2014
212,500
425,000
637,500
100,000
200,000
300,000
1,350,000
(d)
1,350,000
(d)
1,350,000 (d)
All other
stock awar ds:
number of
shar esof
stock or units
(#)
Gr ant Date fair
value of stock
and option
awar ds (c) ($)
25,392
600,013
7,406
175,004
29,623
699,991
James R. Huffines
President and Chief Operating Officer of PlainsCapital Corporation
02/24/2014
03/11/2014
275,000
550,000
825,000
17,774
420,000
Todd L. Salmans
Chief Executive Officer of PrimeLending
02/24/2014
03/11/2014
375,000
750,000
.
1,125,000
14,812
350,008
(a) Represents the effective date of grant of restricted stock under the 2012 Long-Term Incentive Plan and payment of 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 2014 performance. Management incentive award
amounts shown above represent potential awards that may have been earned based on performance during 2014. The actual Annual Incentive Plan awards earned for 2014 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 ASC Topic 718 expenses recognized for restricted stock units granted in 2014. 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 Mr. White would be entitled to under his retention agreement.
Nar r ative Disclosur e to Summar y Compensation Table and Gr ants of Plan-Based Awar ds Table
Employment Contr acts and Incentive Plans
Set forth below is a summary of our retention agreement with Mr. White and our employment agreements with
Messrs. Huffines and Salmans. We do not have employment agreements with Messrs. Jeremy B. Ford or Darren E.
Parmenter. 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 Table” 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.
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
40
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
On December 4, 2014, we entered into an employment agreement with Mr. Huffines, pursuant to which
Mr. Huffines will continue to serve as President and Chief Operating Officer of PlainsCapital. Mr. Huffines’s
previous employment agreement expired on November 30, 2014 in accordance with its terms. The employment
agreement with Mr. Huffines has a three-year term and provides that Mr. Huffines is entitled to an annual base
salary of $690,000 and is eligible to participate in (1) an annual incentive bonus program adopted by the
Compensation Committee and (2) any long-term incentive award programs adopted by the Compensation
Committee. Mr. Huffines is also entitled to participate in the employee benefit programs generally available to
employees of the Company. The agreement also includes, among other things, customary non-competition, non-
solicitation and confidentiality provisions. 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. Salmans
On December 4, 2014, we entered into an employment agreement with Mr. Salmans, pursuant to which Mr.
Salmans will continue to serve as Chief Executive Officer of PrimeLending. Mr. Salmans’s previous employment
agreement expired on November 30, 2014 in accordance with its terms. The employment agreement with Mr.
Salmans has a three-year term and provides that Mr. Salmans is entitled to an annual base salary of $750,000 and is
eligible to participate in (1) an annual incentive bonus program adopted by the Compensation Committee and
(2) any long-term incentive award programs adopted by the Compensation Committee. Mr. Salmans is also entitled
to participate in the employee benefit programs generally available to employees of the Company. Additionally, the
agreement provided for a cash bonus of $260,000, which was paid to Mr. Salmans upon execution of the agreement.
The agreement also includes, among other things, customary non-competition, non-solicitation and confidentiality
provisions. For a description of compensation and benefits to which Mr. Salmans 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.
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
41
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 re-price 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:2)
(cid:2)
(cid:2)
stock price
earnings (including earnings before interest,
taxes, depreciation and amortization)
earnings per share (whether on pre-tax, after-
tax, operations or other basis)
(cid:2)
operating earnings
(cid:2)
total return to shareholders
(cid:2)
ratio of debt to debt plus equity
(cid:2)
net borrowing
(cid:2)
credit quality or debt ratings
(cid:2)
return on assets or operating assets
(cid:2)
asset quality
(cid:2)
net interest margin
(cid:2)
loan portfolio growth
(cid:2)
efficiency ratio
(cid:2)
deposit portfolio growth
(cid:2)
liquidity
(cid:2) market share
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2) market-spending efficiency
(cid:2)
core non-interest income
(cid:2)
change in working capital
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 $10,000,000 per year. Except as otherwise provided in a participant’s employment or
other individual agreement, the payment of a cash bonus to a participant for a performance period will be
conditioned upon the participant’s active employment on the date that the final awards are approved by the
Compensation Committee. We may amend or terminate the Annual Incentive Plan at any time.
43
Outstanding Equity Awards at Fiscal Year End
The following tables presents information pertaining to all outstanding equity awards held by the named
executive officers as of December 31, 2014.
Outstanding Equity Awar ds at Fiscal Year End Table
Fiscal Year 2014
Number
of
Secur ities
Under lying
Unexer cised
Options
(#)
Exer cisable
Number of
Secur ities
Under lying
Unexer cised
Options
(#)
Unexer cisable
Option
Exer cise
Pr ice
($) (b)
Option
Expir ation
Date
Name
Number of
Shar es or
Units of
Stock That
Have Not
Vested
(#)
Mar k et
Value of
Shar es or
Units of
Stock That
Have Not
Vested
($) (c)
Equity
Incentive Plan
Awar ds:
Number of
Unear ned
Shar es, Units
or Other
Rights That
Have Not
Vested
(#)
Equity Incentive
Plan Awar ds:
Mar k et or
Payout Value of
Unear ned
Shar es, Units
or Other Rights
That Have Not
Vested
($)
Jeremy B. Ford
400,000
(a)
100,000
(a)
7.70
11/02/2016
55,392
1,105,070
Darren Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,406
247,500
79,623
1,588,479
47,774
953,091
39,812
794,249
-
-
-
-
-
-
-
-
-
-
(a) These stock options vest in five equal installments on each of November 2, 2011, 2012, 2013, 2014, and 2015.
(b) Represents the exercise price of stock options held by Mr. Jeremy B. Ford, which is the average of the high and low sales prices of Hilltop common
stock on the date of grant of the stock option.
(c) Based upon the closing price of Company common stock on December 31, 2014.
Option Exercises and Stock Vested in 2014
During the fiscal year ended December 31, 2014, 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.
44
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, 2014.
Non-Qualified Defer r ed Compensation Table
Fiscal Year 2014
Executive
contr ibutions
in the last
fiscal year ($)
Registr ant
contr ibutions
in last fiscal
year ($) (1)
Aggr egate
ear nings in
last fiscal year
($) (1)
Aggr egate
withdr awals/
distr ibutions
($)
Aggr egate
balance at
last fiscal
year end ($)
-
-
-
-
-
-
-
-
-
-
-
29,129
-
-
-
-
-
-
-
-
-
6,491,405
-
-
Name
Jeremy B. Ford
Darren Parmenter
Alan B. White
James R. Huffines
Todd L. Salmans
(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. Interest
earned on 2012 deferred compensation contributions of $6,430,890 for Mr. White.
In connection with acquisition of PlainsCapital, we entered into a retention agreement with Mr. White. Pursuant
to this agreement, we agreed to contribute an amount in cash equal to $6,430,890 as deferred compensation to Mr.
White in satisfaction of his rights under Section 6 (Termination Upon Change of Control) of his previous
employment agreement with PlainsCapital. Such amount accrues interest at the prevailing money market rate and is
payable to Mr. White on the 55th day following termination of his employment.
Potential Payments Upon Ter mination or Change-in-Contr ol
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
Mr. White
If Mr. White’s retention contract is terminated by us for cause, by him or due to his death or disability (as such
terms are defined below), he or his estate, as applicable, is entitled to:
(i)
(ii)
his annual base salary through the date of termination, to the extent not already paid and not deferred;
any annual bonus earned by him for a prior award period, to the extent not already paid and not
deferred;
45
(iii)
(iv)
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, Mr. White or his estate, as applicable, is entitled to a lump-sum cash payment equal to $6,430,890,
which represents the amount Mr. White would have been entitled to receive under his prior employment agreement
with PlainsCapital if his employment was terminated. Such amounts described in the preceding paragraph are
referred to as the “White Accrued Amounts.”
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 White 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.
Messrs. Huffines and Salmans
If the employment agreement is terminated (1) by the executive officer, (2) by the Company for “Cause” (as
such term is defined in the employment agreement), or (3) in the event of the executive officer’s death or disability,
the executive officer (or his estate, as applicable) will be entitled to receive his base salary through the effective date
of such termination, all earned and unpaid and/or vested, nonforfeitable amounts owed to executive officer at such
time under the employment agreement or under any compensation or benefit plans, and reimbursement for any
unreimbursed business expenses incurred prior to the effective date of such termination (collectively, the “Officer
Accrued Amounts”).
If the executive officer’s employment is terminated by the Company without “Cause” (other than pursuant to a
“Change in Control” (as such term is defined in the employment agreement)), the executive officer will be entitled
to receive the Officer Accrued Amounts and, subject to the executive officer’s execution and delivery to the
Company of a release, (1) a lump-sum cash payment equal to the sum of (A) the executive officer’s annual base
salary rate immediately prior to the effective date of such termination and (B) an amount equal to the annual
incentive cash bonus paid to the executive officer in respect of the calendar year immediately preceding the year of
the termination, and (2) if the executive officer elects continuation of coverage under the Company’s group health
plan pursuant to COBRA, reimbursement for the executive officer’s COBRA premiums for a period of twelve
months following the date of such termination, or until the executive officer is otherwise eligible for health coverage
under another employer group health plan.
If the executive officer’s employment is terminated without “Cause” within the twelve months immediately
following, or the six months immediately preceding, a “Change in Control,” the executive officer will be entitled to
receive (1) a lump-sum cash payment equal to two times the sum of (A) the executive officer’s annual base salary
rate immediately prior to the effective date of such termination and (B) an amount equal to the annual incentive cash
bonus paid to the executive officer in respect of the calendar year immediately preceding the year of the termination,
and (2) if the executive officer elects continuation of coverage under the Company’s group health plan pursuant to
COBRA, reimbursement for the executive officer’s COBRA premiums for a period of twelve months following the
date of such termination, or until the executive officer is otherwise eligible for health coverage under another
employer group health plan. Notwithstanding, any amounts payable to the executive officer upon a Change of
Control shall not constitute a “parachute payment” and shall be reduced accordingly.
For the purposes of each employment or retention contract described above, “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 its affiliates; (ii) intentional wrongful damage to property of the Company or its affiliates;
46
(iii) intentional wrongful disclosure of trade secrets or confidential information of the Company or its 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 its affiliates. In addition to items above, the
definition of “Cause” in Messrs. Huffines and Salmans employment agreements includes (a) a material violation of
the Company’s written policies, standards or guidelines applicable to the executive officer or (b) the failure or
refusal of the executive officer to follow the reasonable lawful directives of the Board of Directors or the executive
officer’s supervisors.
For the purposes of Mr. White’s retention agreement, “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 agreements with
Messrs. Huffines and Salmans, “disability” is defined in accordance with our disability policy in effect at the time of
the disability.
Set forth below are the amounts that Messrs. Ford, Parmenter, White, Huffines and Salmans would have
received if the specified events had occurred on December 31, 2014:
J er emy B. For d
Accrued Amounts
Cash Payment
Cash Severance
Stock Options (1)
Restricted Stock (2)
Restricted Stock Units (3)
Welfare Benefits
Total
Ter mination for
Cause
-
$
-
-
-
-
-
-
$
-
Ter mination due
to death or
disability
-
$
-
-
-
332,500
154,785
-
487,285
$
Ter mination
without cause
Change of
Contr ol
-
$
-
-
-
332,500
154,785
-
487,285
$
-
$
-
-
1,225,000
598,500
517,343
-
$
2,340,843
(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. The amount
reported 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 2014. 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 $19.95 on
December 31, 2014.
(2) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vests upon such event, which for purposes of the foregoing
assumes December 31, 2014.
(3) The restricted stock units vest ratably upon the death or disability of the participant or termination of the participant without cause.
The foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of
control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock units vest upon such event, which for purposes of
the foregoing, assumes December 31, 2014. In each case, it is assumed the target award is achieved or utilized to calculate vesting of
performance awards.
47
Dar r en E. Par menter
Accrued Amounts
Cash Payment
Cash Severance
Stock Options
Restricted Stock (1)
Restricted Stock Units (2)
Welfare Benefits
Total
Ter mination for
Cause
$
-
-
-
-
-
-
-
$
-
Ter mination due
to death or
disability
$
-
-
-
-
55,417
45,146
-
100,563
$
Ter mination
without cause
Change of
Contr ol
$
-
-
-
-
55,417
45,146
-
100,563
$
-
-
-
-
99,750
147,750
-
247,500
$
(1) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stocks vest upon such event, which for purposes of the foregoing
assumes December 31, 2014.
(2) The restricted stock units vest ratably upon the death or disability of the participant or termination of the participant without cause.
The foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of
control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock units vest upon such event, which for purposes of
the foregoing assumes December 31, 2014. In each case, it is assumed the target award is achieved or utilized to calculate vesting of
performance awards.
Alan B. White
Accrued Amounts (1)
Cash Payment (2)
Cash Severance (3)
Stock Options
Restricted Stock (4)
Restricted Stock Units (5)
Welfare Benefits
Total
Ter mination due
to death or
disability or by
Executive for any
Reason
Ter mination
without cause
or non-r enewal
of r etention
agr eement
Ter mination for
Cause
$
1,350,000
6,491,405
$
1,350,000
6,491,405
-
-
-
-
-
-
-
554,167
180,577
-
$
1,350,000
6,491,405
5,400,000
-
554,167
180,577
-
$
7,841,405
$
8,576,149
$
13,976,149
Change of
Contr ol
-
$
-
-
-
997,500
590,979
-
$
1,588,479
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. White’s annual base salary through December 31, 2014, 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 assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vests upon such event, which for purposes of the foregoing
assumes December 31, 2014.
(5) The restricted stock units vest ratably upon the death or disability of the participant or termination of the participant without cause.
The foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of
control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock units vest upon such event, which for purposes of
the foregoing, assumes December 31, 2014. In each case, it is assumed the target award is achieved or utilized to calculate vesting of
performance awards.
48
J ames R. Huffines
Accrued Amounts (1)
Cash Payment
Cash Severance (2)
Stock Options
Restricted Stock (3)
Restricted Stock Units (4)
Welfare Benefits (5)
Total
Ter mination for
Cause
-
$
-
-
-
-
-
-
$
-
Ter mination due
to death or
disability
-
$
-
-
-
332,500
108,347
-
440,847
$
Ter mination
without cause
Change of
Contr ol
-
$
-
-
$
-
1,240,000
-
332,500
108,347
-
2,480,000
-
598,500
354,591
-
$
1,680,847
$
3,433,091
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. Huffines annual base salary through December 31, 2014, to the extent
not already paid and not deferred; (ii) any earned and unpaid and/or vested, nonforfeitable amounts owing at the date of termination;
and (iii) any business expenses incurred that have not yet been reimbursed as of the date of termination.
(2) Cash severance calculation if Mr. Huffines is terminated without cause is based upon the sum of: (i) Mr. Huffines’s annual base salary
rate and (ii) an amount equal to annual incentive cash bonus paid to Mr. Huffines in respect of the calendar year immediately
preceding the year of the date of termination. If his employment is terminated upon a change in control, the cash severance
calculation is based upon two times the sum of: (i) Mr. Huffines’ annual base salary rate and (ii) an amount equal to annual incentive
cash bonus paid to Mr. Huffines in respect of the calendar year immediately preceding the year of the date of termination.
(3) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vests upon such event, which for purposes of the foregoing
assumes December 31, 2014.
(4) The restricted stock units vest ratably upon the death or disability of the participant or termination of the participant without cause.
The foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of
control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock units vest upon such event, which for purposes of
the foregoing assumes December 31, 2014. In each case, it is assumed the target award is achieved or utilized to calculate vesting of
performance awards.
(5) Assumes Mr. Huffines does not elect COBRA coverage for a period up to twelve months upon termination without cause.
Todd L. Salmans
Accrued Amounts (1)
Cash Payment
Cash Severance (2)
Stock Options
Restricted Stock (3)
Restricted Stock Units (4)
Welfare Benefits (5)
Total
Ter mination due
to death or
disability or by
Executive for any
Reason
-
$
-
-
-
277,083
90,291
-
367,374
$
Ter mination for
Cause
-
$
-
-
-
-
-
-
$
-
Ter mination
without cause
Change of
Contr ol
-
$
-
750,000
-
277,083
90,291
-
$
1,117,374
-
$
-
1,500,000
-
498,750
295,499
-
$
2,294,249
(1) Accrued Amounts calculation based upon the sum of: (i) Mr. Salmans annual base salary through December 31, 2014, to the extent
not already paid and not deferred; (ii) any earned and unpaid and/or vested, nonforfeitable amounts owing at the date of termination;
and (iii) any business expenses incurred that have not yet been reimbursed as of the date of termination.
(2) Cash severance calculation if Mr. Salmans is terminated without cause is based upon the sum of: (i) Mr. Salmans’s annual base salary
rate and (ii) an amount equal to annual incentive cash bonus paid to Mr. Salmans in respect of the calendar year immediately
preceding the year of the date of termination. If his employment is terminated upon a change in control, the cash severance
calculation is based upon two times the sum of: (i) Mr. Salmans’s annual base salary rate and (ii) an amount equal to annual incentive
cash bonus paid to Mr. Salmans in respect of the calendar year immediately preceding the year of the date of termination.
(3) The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The
foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of control
under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vests upon such event, which for purposes of the foregoing
assumes December 31, 2014.
49
(4) The restricted stock units vest ratably upon the death or disability of the participant or termination of the participant without cause.
The foregoing assumes the death or disability or termination of the participant without cause on December 31, 2014. If a change of
control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock units vest upon such event, which for purposes of
the foregoing assumes December 31, 2014. In each case, it is assumed the target award is achieved or utilized to calculate vesting of
performance awards.
(5) Assumes Mr. Salmans does not elect COBRA coverage for a period up to twelve months upon termination without cause.
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 accelerated vesting 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.
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 Inter locks and Insider Par ticipation
During fiscal year 2014, directors Rhodes R. Bobbitt, W. Joris Brinkerhoff, William T. Hill, Jr., Andrew J.
Littlefair and A. Haag Sherman served on the Compensation Committee. During fiscal year 2014:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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.
50
Each of Mr. White, PlainsCapital’s Chief Executive Officer, Mr. Huffines, PlainsCapital’s President and
Chief Operating Officer, and Mr. Feinberg, Chief Executive Officer of First Southwest, serves as a director of
Hilltop. Hilltop’s Compensation Committee is comprised of independent directors, reviews and sets the
compensation of each of Messrs. White, Huffines and Feinberg 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 Owner ship Repor ting 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, 2014, applicable to our officers,
directors and greater than ten percent beneficial owners were timely satisfied, except that one Form 4 relating to a
transaction that occurred in 2012 was filed late by Mr. White.
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, 2014.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Gener al
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
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.
Hilltop Sublease
On December 1, 2012, 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. 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.
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 15.5% of the
outstanding Hilltop common stock at April 21, 2015. He also is a director and the Secretary of 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 15.5% of Hilltop common stock as of April 21, 2015. 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.
51
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.
Consultant
We are currently paying Richard P. Hodge $80,000 per year for tax services. Mr. Hodge also provides tax
services Mr. Gerald J. Ford and his affiliates.
Employment of Cer tain Family Member s
During 2014, 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, serves as Hilltop’s Executive Vice President,
General Counsel and Secretary; Lee Ann White, the wife of Alan B. White, PlainsCapital’s Chairman and Chief
Executive Officer, serves as the Senior Vice President, Director of Public Relations of PlainsCapital; Amy
Passmore, the daughter of Mr. White served as Senior Premier Service Representative of PlainsCapital Bank until
March 31, 2014; Logan Passmore, the son-in-law of Mr. White, serves as Assistant Vice President, Commercial
Loan Officer I of PlainsCapital Bank; Kale Salmans, the son of Todd Salmans, Chief Executive Officer of
PrimeLending, serves as Senior Vice President, Strategic Resources and Process Improvement of PrimeLending;
and Ty Tucker, the son-in-law of Mr. Salmans, serves as Vice President, Risk Analyst of PrimeLending. Pursuant to
our employment arrangements with these individuals, we paid Corey Prestidge $568,711, Lee Ann White $147,000,
Amy Passmore $25,441, Logan Passmore $74,175, Kale Salmans $526,120 and Ty Tucker $109,600 as
compensation for their services as employees during 2014.
Cowboys Stadium Suite
In 2007, the 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.
52
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.
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 25 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
2014 and has been selected to serve in that capacity for 2015, 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 Necessar y to Ratify the Appointment
The appointment of PwC as our independent registered public accounting firm for 2015 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.
Repor t 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.
53
In this context, the Audit Committee reviewed and discussed with management and PwC the audited financial
statements for the year ended December 31, 2014, 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.
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, 2014.
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, 2014 and 2013, 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
Total
Fiscal Year Ended
2014
$4,356,725
397,700
-
1,800
2013
$3,252,350
1,960,200
-
1,800
$4,756,225
$5,214,350
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, 2014 and 2013, 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.
Audit-Related Fees
Represents fees billed for services related to the SWS merger and other SEC filings in 2014 and other SEC
filings for the Company in connection with the FNB Transaction in 2013.
Tax Fees
No tax fees were incurred during 2014 and 2013.
54
All Other Fees
In 2014 and 2013, 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
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 2014 and 2013.
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 2014 or 2013 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 2015.
STOCKHOLDER PROPOSALS FOR 2016
Stockholder proposals intended to be presented at our 2016 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 2, 2016 and must otherwise comply with the requirements of Rule 14a-8 in order to
be considered for inclusion in the 2016 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, 2016, and not later than 5:00 p.m. Dallas, Texas time, on January 31, 2016; provided, however, that in the
event that the date of the 2016 annual meeting is not within 30 days before or after June 12, 2016, notice by the
stockholder in order to be timely must be received no earlier than the 120th day prior to the date of the 2016 annual
meeting and not later than 5:00 p.m. Dallas, Texas time, on the 90th day prior to the date of the 2016 annual meeting
or the 10th day following the day on which public announcement of the date of the 2016 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
55
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 materials 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.
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, 2014 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 the corporate
Secretary at the following address of our principal executive office:
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.
56
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
For the fiscal year ended: December 31, 2014
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-31987
Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)
Maryland
(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:95) Yes (cid:134) 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:95) Yes (cid:134) 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:95)
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:134) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
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, 2014, was approximately $1.4 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 26, 2015 was 100,296,330.
(cid:133)
(cid:133)
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement pertaining to the 2015 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.
TABLE OF CONTENTS
MARKET AND INDUSTRY DATA AND FORECASTS
FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Business .................................................................................................................................................................
Item 1A. Risk Factors ..........................................................................................................................................................
Item 1B. Unresolved Staff Comments ................................................................................................................................
Item 2. Properties ..............................................................................................................................................................
Item 3. Legal Proceedings .................................................................................................................................................
Item 4. Mine Safety Disclosures .......................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...............................................................................................................................................................
Selected Financial Data ........................................................................................................................................
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................................................
Item 8. Financial Statements and Supplementary Data.................................................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .......................
Item 9A. Controls and Procedures .....................................................................................................................................
Item 9B. Other Information ................................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...............................................................................
Item 11. Executive Compensation ......................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....
Item 13. Certain Relationships and Related Transactions, and Director Independence ..............................................
Item 14. Principal Accounting Fees and Services .............................................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules............................................................................................................
5
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50
50
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91
95
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96
97
97
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98
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.
2
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 “Hilltop Securities” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to
“Southwest Securities” refer to Southwest Securities, Inc. (a wholly owned subsidiary of Hilltop Securities), references to “SWS
Financial” refer to SWS Financial Services, Inc. (a wholly owned subsidiary of Hilltop Securities), references to the “Bank” refer to
PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First National Bank, references to
“First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of Hilltop Securities) and its subsidiaries as a
whole, references to “FSC” refer to First Southwest Company, LLC (a wholly owned subsidiary of First Southwest), references to
“PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a
whole, and references to “NLC” refer to National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a
whole.
FORWARD-LOOKING STATEMENTS
This 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 (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than
statements of historical fact, included in this 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,” “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 recent acquisition of SWS Group, Inc. (“SWS”) and integration
thereof, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage
loan origination volume, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our
operations, the appropriateness of our allowance for loan losses and provision for loan losses, and the collectability of loans are
forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into
account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and
can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business
plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking
statements. Certain factors that could cause actual results to differ include, among others:
•
•
•
•
•
•
•
•
•
•
risks associated with merger and acquisition integration, including the diversion of management time on acquisition-related
issues and our ability to promptly and effectively integrate our businesses with those of FNB and SWS and achieve the
synergies and value creation contemplated by the acquisitions;
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”);
3
•
•
•
•
•
•
our ability to use net operating loss carry forwards to reduce future tax payments;
approval of new, or changes in, accounting policies and practices;
changes in key management;
competition in our banking, broker-dealer (formerly financial advisory), mortgage origination 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;
failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; and
our ability to use excess cash in an effective manner, including the execution of successful acquisitions.
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ
materially from those anticipated in these forward-looking statements, 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.
4
PART I
Item 1. Business.
General
Hilltop Holdings Inc., headquartered in Dallas, Texas, 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 to a plan of merger whereby PlainsCapital Corporation merged with and into a wholly owned subsidiary of
Hilltop (the “PlainsCapital Merger”), which continued as the surviving entity under the name “PlainsCapital Corporation”.
Following the PlainsCapital Merger, our primary line of business has been to provide business and consumer banking services from
offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-
dealer (formerly financial advisory), mortgage origination and insurance segments. The Company currently delivers its financial
products and services through the following primary operating business units.
PlainsCapital. PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its
subsidiaries, traditional banking services, residential mortgage lending, wealth and investment management and treasury management
primarily in Texas.
Hilltop Securities. Hilltop Securities is a holding company, headquartered in Dallas, Texas, that provides, through its
subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of
taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage
services throughout the United States.
NLC. NLC is a property and casualty insurance holding company, headquartered in Waco, Texas, that provides, through its
subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the
southern United States.
At December 31, 2014, on a consolidated basis, we had total assets of $9.2 billion, total deposits of $6.4 billion, total loans, including
loans held for sale, of $5.8 billion and stockholders’ equity of $1.5 billion. Our operating results beginning December 1, 2012 include
the banking, mortgage origination and broker-dealer operations acquired in the PlainsCapital Merger. The operations acquired in the
FNB Transaction (defined hereinafter) are included in the results of our banking operations beginning September 14, 2013.
Our common stock is listed on the New York Stock Exchange (“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.
Company Background
In January 2007, we acquired NLC, a property and casualty insurance holding company. As a result, our subsequent 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’s wholly owned subsidiaries,
National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”).
On November 30, 2012, we acquired PlainsCapital Corporation through the PlainsCapital Merger. 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, incl uding 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”).
5
On January 1, 2015, we completed our acquisition of SWS in a stock and cash transaction, whereby SWS merged with and into
Hilltop Securities, formerly Peruna LLC, a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction
(the “SWS Merger”). Following the SWS Merger, our broker-dealer segment operations include Southwest Securities, a clearing
broker-dealer subsidiary registered with the SEC and Financial Industry Regulatory Authority (“FINRA”) and SWS Financial, an
introducing broker-dealer subsidiary that is also registered with the SEC and FINRA. SWS’s banking subsidiary, Southwest
Securities, FSB (“SWS FSB”), was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result, our results of
operations will include those acquired in the SWS Merger beginning January 1, 2015.
We intend to make acquisitions with available cash, excess liquidity and, if necessary or appropriate, from additional equity or debt
financing sources.
Organizational Structure
Our organizational structure is comprised of three primary operating business units, PlainsCapital (banking and mortgage origination),
Hilltop Securities (broker-dealer) and NLC (insurance). Within the PlainsCapital unit are two primary wholly owned operating
subsidiaries: the Bank and PrimeLending. The Hilltop Securities unit includes three primary wholly owned operating subsidiaries:
First Southwest (transferred from the PlainsCapital unit effective January 1, 2015), Southwest Securities and SWS Financial (both
acquired on January 1, 2015). The following provides additional details regarding our current organizational structure.
Geographic Dispersion of our Businesses
The Bank provides traditional banking services, residential mortgage lending, wealth and investment management, and treasury
management. 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. Immediately following the SWS Merger on January 1, 2015, the operations of the former SWS FSB
were merged into the Bank.
Through December 31, 2014, our broker-dealer services were provided through FSC, a diversified investment banking firm and a
registered broker-dealer, which competes for business nationwide. Public finance financial advisory revenues, of which 70% during
2014 were from entities located in Texas, represent a significant portion of total segment revenues. Effective January 1, 2015, the
broker-dealer segment’s operations will include those provided by the broker-dealer subsidiaries acquired as a result of the SWS
Merger. The retail brokerage service operations acquired in the SWS Merger, which represent a significant portion of the historical
revenues of SWS, are concentrated in Texas, California and Oklahoma.
PrimeLending provides residential mortgage origination products and services from over 250 locations in 42 states. For the year ended
December 31, 2014, 61.0% of PrimeLending’s origination volume was concentrated in eight states (none of the other states in which
PrimeLending operated during 2014 had origination volume of 3% or more).
6
The following table is a summary of the origination volume by state for the periods shown (dollars in thousands).
Texas .....................
California ...............
Florida ...................
North Carolina .......
Ohio .......................
Arizona ..................
Virginia .................
South Carolina .......
All other states .......
$
2014
2,453,705
1,552,372
505,507
423,164
401,379
339,830
322,134
307,832
4,057,925
$ 10,363,848
Year Ended December 31,
% of
Total
23.7% $
15.0%
4.9%
4.1%
3.9%
3.3%
3.1%
3.0%
39.0%
100.0% $
2013
2,660,810
2,082,184
456,643
618,802
383,518
392,006
466,531
318,109
4,413,959
11,792,562
% of
Total
22.6 %
17.7 %
3.9 %
5.3 %
3.2 %
3.3 %
4.0 %
2.7 %
37.3 %
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 2014 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).
$
2014
126,273
16,775
14,122
10,903
7,031
Year Ended December 31,
% of
Total
69.3% $
9.2%
7.7%
6.0%
3.9%
2013
125,696
15,904
16,494
10,589
6,393
% of
Total
69.1% $
8.7%
9.1%
5.8%
3.5%
2012
118,361
13,914
15,398
10,527
5,454
7,105
182,209
$
3.9%
100.0% $
6,892
181,968
3.8%
100.0% $
6,547
170,201
Texas .............
Arizona ..........
Oklahoma ......
Tennessee ......
Georgia ..........
All other
states ..........
Total ...........
% of
Total
69.5%
8.2%
9.1%
6.2%
3.2%
3.8%
100.0%
Business Segments
Under U.S. generally accepted accounting principles (“GAAP”), our three business units are comprised of four reportable business
segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer, mortgage
origination and insurance. The SWS Merger has not resulted in changes to our four reportable business segments. 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 banking operations acquired in the FNB
Transaction. At December 31, 2014, our banking segment had $8.0 billion in assets and total deposits of $6.2 billion. The primary
sources of our deposits are residents and businesses located in Texas. Immediately following the SWS Merger on January 1, 2015,
SWS’s banking subsidiary, SWS FSB, was merged into the Bank. The Bank expects the integration of the back office operations of
the former SWS FSB into the Bank to be substantially complete by April 2015.
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
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.
7
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, 2014 (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 $1.5 billion
warehouse line of credit extended to PrimeLending, of which $1.2 billion was drawn at December 31, 2014. Amounts advanced
against the warehouse line are included in the table below, but are eliminated from net loans on our consolidated balance sheets.
Non-covered loans
Commercial and industrial:
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Non-Covered
Loans
Secured ..............................................
Unsecured ..........................................
$
2,450,541
110,350
$
13,374 $
68
2,463,915
110,418
Real estate:
Secured by commercial properties .....
Secured by residential properties .......
Construction and land development:
Residential construction loans ...........
Commercial construction loans and
land development ...........................
Consumer ...............................................
Total non-covered loans ....................
1,175,838
497,113
22,341
1,810
1,198,179
498,923
65,046
—
65,046
339,419
51,009
4,689,316
$
9,178
2,138
48,909 $
348,597
53,147
4,738,225
$
52.0%
2.3%
25.3%
10.5%
1.4%
7.4%
1.1%
100.0%
Covered loans
Commercial and industrial:
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Covered
Loans
Secured ...................................................
Unsecured ...............................................
$
9,135
1,210
$ 13,630
6,805
$
22,765
8,015
Real estate:
Secured by commercial properties ..........
Secured by residential properties ............
Construction and land development:
Residential construction loans ................
Commercial construction loans and
land development ................................
Consumer ....................................................
Total covered loans .................................
42,557
141,329
227,772
141,192
270,329
282,521
1,286
354
1,640
11,735
—
207,252
45,635
—
$ 435,388
$
57,370
—
642,640
$
3.5%
1.2%
42.1%
44.0%
0.3%
8.9%
0.0%
100.0%
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.
We implement our underwriting standards according to the facts and circumstances of each particular loan request, as discussed
below.
8
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,
2014, the Bank had $641.8 million in one-to-four family residential loans, which represented 11.9% 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, 2014, we had $53.1 million of loans for these
purposes, which are shown in the non-covered loans table above as “Consumer.”
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.
9
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.
Broker-Dealer
Through December 31, 2014, our broker-dealer segment’s operations were comprised of 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 FINRA. First
Southwest’s primary focus is on providing public finance services. At December 31, 2014, First Southwest employed approximately
400 people and maintained 25 locations nationwide, nine of which are in Texas. At December 31, 2014, First Southwest had
consolidated assets of $758.6 million, maintained $123.7 million in equity capital and had more than 1,600 public sector clients.
Following the SWS Merger, our broker-dealer segment operations include Southwest Securities, a clearing broker-dealer subsidiary
registered with the SEC and FINRA and a member of the NYSE, and SWS Financial, an introducing broker-dealer subsidiary that is
also registered with the SEC and FINRA. Southwest Securities and SWS Financial are both registered with the Commodity Futures
Trading Commission (“CFTC”) as non-guaranteed introducing brokers and as members of the National Futures Association (“NFA”).
First Southwest, Southwest Securities and SWS Financial are continuing to operate as separate broker-dealers, under coordinated
leadership, until such time as the necessary regulatory approvals are obtained and systems integrations are complete. At December 31,
2014, Southwest Securities employed approximately 700 people and maintained 35 locations nationwide, 11 of which are in Texas. At
December 31, 2014, Southwest Securities had consolidated assets of $2.1 billion and net capital of approximately $170.6 million,
which is approximately $164.6 million in excess of its minimum net capital requirement of approximately $6.0 million.
As of January 1, 2015, our broker-dealer segment has six primary lines of business: (i) public finance, (ii) capital markets, (iii) retail,
(iv) structured finance, (v) clearing, and (vi) securities lending activities.
Public Finance. The First Southwest public finance group, along with a similar group within Southwest Securities, assists public
bodies in originating, syndicating and distributing securities of municipalities and political subdivisions. Our broker-dealer segment
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.
Additionally, First Southwest Asset Management, LLC and Southwest Securities are investment advisors 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.
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 and option orders 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.
Similarly, Southwest Securities specializes in trading and underwriting U.S. government and government agency bonds, corporate
bonds, municipal bonds, mortgage-backed, asset-backed and commercial mortgage-backed securities and structured products. The
clients of its fixed income group include corporations, insurance companies, banks, mutual funds, money managers and other
institutions. Southwest Securities’ equity trading department focuses on executing equity and option orders on an agency basis for
clients. Southwest Securities’ syndicate department, housed within its fixed income sales group, coordinates the distribution of
managed and co-managed corporate equity underwritings, accepts invitations to participate in competitive or negotiated underwritings
managed by other investment banking firms and allocates and markets Southwest Securities selling allotments to institutional clients
and to other broker-dealers.
Retail. Prior to the SWS Merger, the broker-dealer segment did not have substantial retail brokerage service operations. The retail
group we acquired in the SWS Merger acts as a securities broker for retail investors in the purchase and sale of securities, options,
commodities and futures contracts that are traded on various exchanges or in the over-the-counter market through SWS employee
registered representatives or independent contractor arrangements. As a securities broker, we extend margin credit on a secured basis
to our retail customers in order to facilitate securities transactions. Through our insurance subsidiaries, we hold insurance licenses to
facilitate the sale of insurance and annuity products by SWS Financial advisors to retail clients. We retain no underwriting risk related
to these insurance and annuity products. In addition, through the Investment Management Group of Southwest Securities, the retail
group provides a number of advisory programs that offer advisors a wide array of products and services for their advisory business. In
most cases, we charge commissions to our clients in accordance with an established commission schedule, subject to certain discounts
10
based upon the client’s level of business, the trade size and other relevant factors. Some registered representatives also maintain
licenses to sell certain insurance products. Southwest Securities is also a fully disclosed client of two of the largest futures commission
merchants in the United States. At December 31, 2014, Southwest Securities employed 144 registered representatives in 16 retail
brokerage offices and SWS Financial had contracts with 259 independent retail representatives for the administration of their
securities business.
Structured Finance. Through its structured finance group, First Southwest provides structured asset and liability services and
commodity hedging advisory services to facilitate balance sheet management primarily to its public finance clients. In addition, the
structured finance group within First Southwest participates in programs in which it issues forward purchase commitments of
mortgage-backed securities to certain non-profit housing clients and sells U.S. Agency to-be-announced, or TBA, mortgage-backed
securities.
Clearing. The First Southwest clearing group, along with a similar group within Southwest Securities, offers fully disclosed clearing
services to FINRA and SEC registered member firms for trade executing, clearing and back office services such as record keeping,
trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of
securities. At December 31, 2014, First Southwest provided services to approximately 80 correspondent firms, including discount and
full-service brokerage firms, registered investment advisors and institutional firms, while Southwest Securities provided services to
approximately 140 financial service organizations, including correspondent broker-dealers and registered investment advisors.
Securities Lending Activities. The securities lending groups of both First Southwest and Southwest Securities perform activities that
include borrowing and lending securities for other broker-dealers, lending institutions and internal clearing and retail
operations. These activities involve borrowing securities to cover short sales and to complete transactions in which clients have failed
to deliver securities by the required settlement date and lending securities to other broker-dealers for similar purposes.
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, 2014, our mortgage origination segment operated from over 250 locations in 42 states, originating 23.7% of its
mortgages from its Texas locations and 15.0% of its mortgages from locations in California. The mortgage lending business is subject
to variables that can impact loan origination volume, including seasonal and interest rate fluctuations. Historically, the mortgage
origination segment has typically experienced increased loan origination volume from purchases of homes during the spring and
summer, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased
loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased refinancings.
Changes in interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.
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 servicing released. PrimeLending’s determination on whether to retain or
release servicing on mortgage loans it sells is impacted by changes in mortgage interest rates, and refinancing and market activity.
PrimeLending may, from time to time, manage its mortgage servicing rights (“MSR”) asset through different strategies, including
varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. 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.
11
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 2,500 producing $10.4 billion in 2014, of which 80% related to home purchases
volume. 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 it defines 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 23 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 financial strength
ratings for NLIC and ASIC of “A” (Excellent) were affirmed by A.M. Best in April 2014. 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 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 coverage does not include such a deduction for
depreciation; however it does include limited water coverage. These products have been marketed and sold primarily in Texas. Rate
increases and exposure management since 2013 have reduced the proportionate premium provided by these products.
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.
12
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.13.1 and exceeds the Hurricane 500-year return time as modeled by AIR Touchstone v.2. Additionally, NLC purchased an
underlying excess of loss contract that provides $10 million aggregate coverage for sub-catastrophic events. As of January 1, 2015,
NLC retains a 9% participation in this coverage, down from 34% participation during 2014.
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.
Our banking segment primarily competes with national, regional and community banks within the various markets where the Bank
operates. The Bank also faces competition from many other types of financial institutions, including savings and loan associations,
credit unions, finance companies, pension trusts, mutual funds, insurance companies, brokerage and investment banking firms, asset-
based non-bank lenders, government agencies and certain other non-financial institutions. The ability to attract and retain skilled
lending professionals is critical to our banking business. Competition for deposits and in providing lending products and services to
consumers and 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.
Within our broker-dealer segment we face significant competition based on a number of factors, including price, perceived expertise,
quality of advice, reputation, range of services and products, technology, innovation and local presence. Competition for successful
securities traders, stock loan professionals and investment bankers among securities firms and other competitors is intense. Our
broker-dealer 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. Further, our broker-dealer segment competes with discount
brokerage firms that do not offer equivalent services but offer discounted prices.
Our competitors in the mortgage origination business include large financial institutions as well as independent mortgage banking
companies, commercial banks, savings banks and savings and loan associations. Our mortgage origination segment competes on a
number of factors including customer service, quality and range of products and services offered, price, reputation, interest rates and
loan origination fees. The ability to attract and retain skilled mortgage origination professionals is critical to our mortgage origination
business. 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 mortgage loan products and 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.
Employees
At December 31, 2014, we employed approximately 4,400 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. After giving effect to the SWS Merger
on January 1, 2015, we employed approximately 5,300 people.
13
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, 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.
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.
14
•
•
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-
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.
Corporate
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.
15
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.
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.
16
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 in effect as of December 31, 2014, 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;
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, 2014, our ratio of Tier 1
capital to total risk-weighted assets was 19.02% and our ratio of total capital to total risk-weighted assets was 19.69%.
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, 2014, our leverage ratio was 14.17%.
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.
17
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 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 began transitioning to the final rules on January 1, 2015 when the minimum capital requirements, as set forth in the table below,
became effective. However, the 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 the ratios and capital definitions beginning January 1, 2015.
Year (as of January 1)
Minimum common equity Tier 1 capital
2015
2016
2017
2018
2019
ratio .............................................................
4.5%
4.5%
4.5%
4.5%
4.5%
Common equity Tier 1 capital conservation
buffer ..........................................................
N/A
0.625%
1.25%
1.875%
2.5%
Minimum common equity Tier 1 capital
ratio plus capital conservation buffer .........
4.5% 5.125%
5.75%
6.375%
7.0%
Phase-in of most deductions from
common equity Tier 1 (including 10
percent & 15 percent common equity
Tier 1 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
40.0%
6.0%
60.0%
6.0%
80.0%
6.0%
100.0% 100.0%
6.0%
6.0%
N/A
8.0%
6.625%
8.0%
7.25%
8.0%
7.875%
8.0%
8.5%
8.0%
conservation buffer .....................................
N/A
8.625%
9.25%
9.875%
10.5%
* N/A means not applicable.
(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 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 and regional 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 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.
18
The 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 disallow
the inclusion of instruments such as newly issued and, in certain circumstances, existing 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.
•
•
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, stock repurchases 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.
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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”.
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.
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.
20
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
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.
Banking
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, 2014, 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. SWS FSB, which was
merged with the Bank on January 1, 2015, was formerly regulated by the Office of the Comptroller of the Currency. 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
agreement 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.
21
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.
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 Dodd-Frank Act,
de novo interstate branching by 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 be 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. The Bank was classified as
“well capitalized” at December 31, 2014.
22
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.
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.
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 deposit insurance fund (“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, 2014.
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.
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.”
23
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 and implementing
regulations 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;
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.
24
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, 2014, the Bank’s ratio of total risk-
based capital to risk-weighted assets was 14.45%, the Bank’s ratio of Tier 1 capital to risk-weighted assets was 13.74% and the Bank’s
ratio of Tier 1 capital to average total assets was 10.31%.
On January 1, 2015, the Bank began transitioning to the final rules that substantially amend the regulatory risk-based capital rules to
implement the Basel III regulatory capital reforms. For additional discussion of Basel III, see the section entitled “Government
Supervision and Regulation — Corporate — Basel III” earlier in this Item 1.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“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
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 (“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.
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, 2014, 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.
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Federal Home Loan Bank System. The Federal Home Loan Bank (“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.
Broker-Dealer
FSC, Southwest Securities and SWS Financial (collectively, the “Hilltop Broker-Dealers”) are broker-dealers registered with the SEC,
FINRA, all 50 U.S. states and the District of Columbia. FSC and Southwest Securities are also registered in Puerto Rico and the U.S.
Virgin Islands. 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. The Hilltop Broker-Dealers are members of, and are 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, net capital requirements, record keeping and reporting procedures, relationships and conflicts with customers, the
handling of cash and margin accounts, experience and training requirements for certain employees, the conduct of investment banking
and research activities 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 herein. 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 our broker-dealers, their
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 the Hilltop Broker-Dealers may conduct are limited by its agreements with, and its
oversight by, FINRA, other regulatory authorities and 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, the Hilltop-Broker Dealers are operating subsidiaries of Hilltop, which means its
activities are further limited by those that are permissible for subsidiaries of financial holding companies, and as a result, 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, 2014, the Hilltop Broker-Dealers were in compliance with applicable net capital requirements.
The SEC, CFTC, FINRA and other regulatory organizations impose rules that require notification when net capital falls below certain
predefined thresholds. 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.
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Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital. Such rules require that a
certain percentage of our assets be maintained in relatively liquid form and therefore act to restrict our ability to withdraw capital from
our broker-dealer entities, which in turn may limit our ability to pay dividends, repay debt or redeem or purchase shares of our
outstanding common stock. Any change in such rules or the imposition of new rules affecting the scope, coverage, calculation or
amount of capital requirements, or a significant operating loss or any unusually large charge against capital, could adversely affect our
ability to pay dividends, repay debt, meet our debt covenant requirements or to expand or maintain our operations. In addition, such
rules may require us to make substantial capital contributions into one or more of the Hilltop Broker-Dealers in order for such
subsidiaries to comply with such rules, either in the form of cash or subordinated loans made in accordance with the requirements of
all applicable net capital rules.
Customer Protection Rule. The Hilltop Broker-Dealers that hold customers’ funds and securities are subject to the SEC’s customer
protection rule (Rule 15c3-3 under the Exchange Act), which generally provides that such broker-dealers maintain physical possession
or control of all fully-paid securities and excess margin securities carried for the account of customers and maintain certain reserves of
cash or qualified securities.
Securities Investor Protection Corporation (“SIPC”). The Hilltop Broker-Dealers are subject to the Securities Investor Protection Act
and 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.
Anti-Money Laundering. The Hilltop Broker-Dealers must also comply with the USA PATRIOT Act of 2001, as amended, (the
“Patriot Act”), and other rules and regulations designed to fight international money laundering and to block terrorist access to the
U.S. financial system. We are required to have systems and procedures to ensure compliance with such laws and regulations.
CFTC Oversight. Southwest Securities and SWS Financial are registered as introducing brokers with the CFTC and NFA. The CFTC
also has net capital regulations (CFTC Rule 1.17) that must be satisfied. Our futures business is also regulated by the NFA, a
registered futures association. FSC is registered with the CFTC as a commodity trading advisor. Violation of the rules of the CFTC,
the NFA or the commodity exchanges could result in remedial actions including fines, registration restrictions or terminations, trading
prohibitions or revocations of commodity exchange memberships.
Investment Advisory Activity. First Southwest Asset Management, LLC, Southwest Securities and SWS Financial are registered with,
and subject to oversight and inspection by, the SEC as investment advisers under the Investment Advisers Act of 1940, as amended.
The investment advisory business of our subsidiaries is subject to significant federal regulation, including with respect to wrap fee
programs, the management of client accounts, the safeguarding of client assets, client fees and disclosures, transactions among
affiliates and recordkeeping and reporting procedures. Legislation and changes in regulations promulgated by the SEC or changes in
the interpretation or enforcement of existing laws and regulations often directly affect the method of operation and profitability of
investment advisers. The SEC may conduct administrative and enforcement proceedings that can result in censure, fine, suspension,
revocation or expulsion of the investment advisory business of our subsidiaries, our officers or employees.
Volcker Rule. Provisions of the Volcker Rule and the final rules implementing the Volcker Rule restrict certain activities provided by
Hilltop Broker-Dealers, including proprietary trading. For purposes of the Volcker Rule, purchases or sales of financial instruments
such as securities, derivatives, contracts of sale of commodities for future delivery or options on the foregoing for the purpose of
short-term gain are deemed to be proprietary trading (with financial instruments held for less than 60 days presumed to be for
proprietary trading unless an alternative purpose can be demonstrated), unless certain exemptions apply. Exempted activities include,
among others, the following: 1) underwriting; 2) market making; 3) risk mitigating hedging; 4) trading in certain government
securities; 5) employee compensation plans and 6) transactions entered into on behalf of and for the account of clients as agent,
broker, custodian or in a trustee or fiduciary capacity. While management continues to assess compliance with the Volcker Rule, we
have reviewed our processes and procedures in regard to proprietary trading and we believe we are currently complying with the
provisions of the Volcker Rule regarding proprietary trading. However, it remains uncertain how the scope of applicable restrictions
and exceptions will be interpreted and administered by the relevant regulators. Absent further regulatory guidance, we are required to
make certain assumptions as to the degree to which our activities, processes and procedures in these areas comply with the
requirements of the Volcker Rule. If these assumptions are not accurate or if our implementation of compliance processes and
procedures is not consistent with regulatory expectations, we may be required to make certain changes to our business activities,
processes or procedures, which could further increase our compliance and regulatory risks and costs.
Changing Regulatory Environment. The regulatory environment in which the Hilltop Broker-Dealers operate is subject to frequent
change. Our 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, FINRA or other U.S. and state governmental regulatory authorities. The business,
financial condition and operating results of the Hilltop Broker-Dealers 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, the Hilltop Broker-Dealers can expect to incur increasing compliance costs, along with the industry
as a whole.
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Mortgage Origination
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.
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.
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.
On October 22, 2014 the Federal Reserve Board, the SEC and several other agencies collectively issued a final rule that implements
the credit risk retention provisions under Section 941 of the Dodd-Frank Act.
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.
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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.
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.
Risk Retention. This final rule implements the requirements of the Dodd-Frank Act that at least one sponsor of each securitization
retains at least 5% of the credit risk of the assets collateralizing asset-backed securities. Sponsors are prohibited from hedging or
transferring this credit risk, and the rule applies in both public and private transactions. Securitizations backed by “qualified residential
mortgages” or “servicing assets” are exempt from the rule, and the definition of “qualified residential mortgages” is subject to review
of the joint regulators every five years. The rule becomes effective on December 24, 2015 with respect to asset-backed securities
collateralized by residential mortgages and December 24, 2016 with respect to all other classes of asset-backed securities.
Additional rules and regulations are expected. Any additional regulatory requirements affecting PrimeLending mortgage origination
operations will result in increased compliance costs and may impact revenue.
Insurance
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.
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National Association of Insurance Commissioners. The National Association of Insurance Commissioners (“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 (“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, 2014, NLIC and ASIC capital and surplus levels exceeded the minimum RBC requirements that would
trigger regulatory attention. In their 2014 statutory financial statements, both NLIC and ASIC complied with the NAIC’s RBC
reporting requirements.
The NAIC’s Insurance Regulatory Information System (“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 2014, 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
1.9% and ASIC at 1.5%, due to the concentration in cash at each company. We expect improvement in the yields at both companies as
appropriate investment opportunities are identified.
The NAIC adopted an amendment to its “Model Audit Rule” in response to the passage of the Sarbanes-Oxley Act of 2002
(“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 (“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
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scope. The Terrorism Risk Insurance Program Reauthorization Act of 2015 further extended the Program through December 31, 2020
and set the reimbursement percentage at 85%, subject to a decrease of one percentage point per calendar year until it equals 80%, 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 $1.2 million for 2014 and is estimated to be $0.8 million in 2015. 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 2014.
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.
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, 2014, the extraordinary dividend limit for NLIC and ASIC was $14.9 million and $2.9 million, respectively. In
addition, NLC’s insurance companies may only pay dividends out of their earned surplus.
Statutory accounting principles. Statutory accounting principles (“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.
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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 2014, 2013 or 2012. 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 (“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, 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.
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.
Item 1A. Risk Factors.
The following discussion sets forth what management currently believes could be the most significant regulatory, market and
economic, liquidity, legal and business and operational risks and uncertainties that could impact our business, results of operations and
financial condition. Other risks and uncertainties, including those not currently known to us, could also negatively impact our
businesses, results of operations and financial condition. Thus, the following should not be considered a complete discussion of all of
the risks and uncertainties we may face and the order of their respective significance may change.
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Risks Related to our Business
We may fail to realize all of the anticipated benefits of the FNB Transaction or the SWS Merger.
Achieving the anticipated cost savings and financial benefits of the FNB Transaction, the SWS Merger 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 FNB Transaction
or the SWS Merger, 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 acquisitions 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. Under the acquisition method of accounting
requirements, we were required to estimate the fair value of the loan portfolios acquired in each of the PlainsCapital Merger, the FNB
Transaction and the SWS Merger as of the applicable acquisition date and write-down the recorded value of such acquired 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. The allowance for loan losses that had been maintained by PlainsCapital Corporation, FNB or
SWS, as applicable, prior to the transaction was 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. We anticipate that we will establish a new allowance for loan losses 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 SWS Merger.
The estimates of fair value as of the consummation of the PlainsCapital Merger, the FNB Transaction and the SWS Merger 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. As a
result, any such increase in our provision for loan losses or additional loan charge-offs could have a material adverse effect on our
results of operations and financial condition.
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, 2014, 42% 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 a 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 or California
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 results of operations and financial condition may be materially 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, energy prices, bankruptcies, household income and consumer
spending;
general economic consequences of international conditions, such as weakness in the European and Asian economies 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 past economic downturns, 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.
Although the United States has recently seen improvement in certain economic indicators, including improvement in the housing
market, increasing consumer confidence, continued growth in private sector employment, and improved credit availability, these
improvements are relatively recent and may not be sustainable. Several factors could pose risks to the financial services industry,
including political gridlock in Washington, D.C., regulatory uncertainty, continued infrastructure deterioration, and international
political unrest. In addition, 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. At December 31, 2014, substantially all of the real estate loans in our loan
portfolio were secured by properties located in our three largest markets within Texas, with 34.8%, 26.0% and 18.6% secured by
properties located in the Dallas/Fort Worth, Austin/San Antonio and Rio Grande Valley/South Texas markets, respectively.
Substantially all of the real estate loans in our loan portfolio are made to borrowers who live and conduct business in Texas.
Accordingly, economic conditions in Texas have a significant impact on the ability of the Bank’s customers to repay loans, the value
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of the collateral securing loans and the stability of the Bank’s deposit funding sources. Further, recent declines in crude oil prices may
have a more profound effect on the economy of energy-dominant states such as Texas. At December 31, 2014, energy loans
comprised 6.5% of the Bank’s loan portfolio, and the Bank also has loans extended to businesses that depend on the energy industry.
If crude oil prices remain at low levels for an extended period, the Bank could experience weaker energy loan demand and increased
losses within its energy and Texas-related loan portfolios.
In addition, mortgage origination fee income and insurance premium volume are both dependent to a significant degree on economic
conditions in Texas and California. During 2014, 23.7% and 15.0% by dollar volume of our mortgage loans originated were
collateralized by properties located in Texas and California, respectively. Further, Texas insureds accounted for 69.3% of our
insurance segment’s gross premiums written in 2014 and 2013, respectively. Any regional or local economic downturn that affects
Texas or, to a lesser extent, California, whether caused by recession, inflation, unemployment, changing oil prices or other factors,
may affect us and our profitability more significantly and more adversely than our competitors that are less geographically
concentrated and could have a material adverse effect on our results of operations and financial condition.
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
2014, Texas accounted for 69.3%, Arizona accounted for 9.2%, Oklahoma accounted for 7.7%, Tennessee accounted for 6.0% and
Georgia accounted for 3.9% 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.
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Our risk management processes may not fully identify and mitigate exposure to the various risks that we face, including interest
rate, credit, liquidity and market risk.
We continue to refine our risk management techniques, strategies and assessment methods on an ongoing basis. However, risk
management techniques and strategies, both ours and those available to the market generally, may not be fully effective in mitigating
our risk exposure in all economic market environments or against all types of risk. For example, we might fail to identify or anticipate
particular risks, or the systems that we use, and that are used within our business segments generally, may not be capable of
identifying certain risks. Certain of our strategies for managing risk are based upon our use of observed historical market behavior. We
apply statistical and other tools to these observations to quantify our risk exposure. Any failures in our risk management techniques
and strategies to accurately identify and quantify our risk exposure could limit our ability to manage risks. In addition, any risk
management failures could cause our losses to be significantly greater than the historical measures indicate. Further, our quantified
modeling does not take all risks into account. As a result, we also take a qualitative approach in reducing our risk. Our qualitative
approach to managing those risks could also prove insufficient, exposing us to material unanticipated losses.
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 results of operations and financial condition may be adversely affected.
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 broker-dealer 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 broker-dealer segment’s inventory would decrease.
Rapid or significant changes in interest rates could adversely affect the segment’s bond sales, underwriting activities and broker-dealer
businesses. Further, the profitability of our margin and stock lending businesses depends to a great extent on the difference between
interest income earned on loans and investments of customer cash balances and the interest expense paid on customer cash balances
and borrowings.
Our insurance segment invested over 87% of its invested assets in fixed maturity assets such as bonds and mortgage-backed securities
at December 31, 2014. 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.
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.
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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 and financial condition.
Our bank lending, margin lending, stock lending, securities trading and execution and mortgage purchase businesses are all
subject to credit risk.
We are exposed to credit risk in all areas of our business. The Bank is exposed to the risk that its loan customers may not repay their
loans in accordance with their terms, the collateral securing the loans may be insufficient, or its loan loss reserve may be inadequate to
fully compensate the Bank for the outstanding balance of the loan plus the costs to dispose of the collateral. Our mortgage
warehousing activities subject us to credit risk during the period between funding by the Bank and when the mortgage company sells
the loan to a secondary investor.
Our broker-dealer business is subject to credit risk if securities prices decline rapidly because the value of our collateral could fall
below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. Our
securities lending business as well as our securities trading and execution businesses subject us to credit risk if a counterparty fails to
perform or if collateral securing its obligations is insufficient. In securities transactions, we are subject to credit risk during the period
between the execution of a trade and the settlement by the customer.
Significant failures by our customers, including correspondents, or clients to honor their obligations, together with insufficient
collateral and reserves, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our banking segment is subject to funding risks associated with its high deposit concentration and its potential reliance on
brokered deposits.
At December 31, 2014, the Bank’s fifteen largest depositors, excluding Hilltop and First Southwest, accounted for 13.24% of the
Bank’s total deposits, and the Bank’s five largest depositors, excluding First Southwest, accounted for 7.77% of the Bank’s total
deposits. Brokered deposits at December 31, 2014 accounted for 2.8% 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 the
Bank and its subsidiary, PrimeLending, NLC and its two insurance company subsidiaries, NLIC and ASIC, and our Hilltop Securities
subsidiaries. We conduct no material business or other activity other than activities incidental to holding stock in the Bank, NLC and
the Hilltop Securities subsidiaries. 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. Each of the Bank, NLC and the
Hilltop Securities subsidiaries is subject to significant regulatory restrictions limiting their ability to declare and pay dividends to us.
Accordingly, if the Bank, NLC or the Hilltop Securities subsidiaries are unable to make cash distributions to us, then we may be
unable to satisfy our obligations or make distributions on our preferred stock.
NLIC and ASIC are also subject to 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.
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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 or
other debt holders. Insurance regulations promulgated by state insurance departments are primarily intended to protect policyholders
rather than stockholders or other debt holders. Likewise, regulations promulgated by FINRA are primarily intended to protect
customers of broker-dealer businesses rather than stockholders or other debt holders.
These regulations affect our lending practices, capital structure, capital requirements, investment practices, brokerage and investment
advisory activities, dividend policy and growth, among other things. Failure to comply with laws, regulations or policies could result
in money damages, civil money penalties or reputational damage, as well as sanctions and supervisory actions by regulatory agencies
that could subject us to significant restrictions or suspensions on our business and our ability to expand through acquisitions or
branching. Further, our clearing contracts generally include automatic termination provisions that are triggered in the event we are
suspended from any of the national exchanges of which we are a member for failure to comply with the rules or regulations thereof.
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 established 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 adversely 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 substantially amends 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 became effective on a phase-in basis 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 are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital
ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%.
The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios and results 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 will be phased in beginning in January 2016 at
0.625% of risk-weighted assets and will 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.
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In addition, the Federal Reserve Board adopted a final rule in February 2014 that clarifies how companies should incorporate the
Basel III regulatory capital reforms into their capital and business projections during the 2014 and subsequent cycles of capital plan
submissions and stress tests required under the Dodd-Frank Act. For companies and their subsidiary banks with between $10.0 billion
and $50.0 billion in total consolidated assets, the initial stress testing cycle began on October 1, 2013 and the initial nine-quarter
planning horizon for stress capital projections continues through the fourth quarter of 2015, which overlaps with the implementation
of the Basel III capital reforms beginning on January 1, 2015. At December 31, 2014, Hilltop and the Bank had $9.2 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 $9.2 billion and $8.1 billion, respectively. Accordingly, Hilltop and the Bank are not currently subject to capital planning
and stress testing requirements. However, as a result of the SWS Merger, Hilltop has more than $10.0 billion in assets. If such asset
level is maintained, we will become subject to the stress testing requirements, which will increase our cost of regulatory compliance.
Management continues to study the implementation of Basel III regulatory capital reforms and stress testing requirements.
In July 2013 the SEC also adopted various amendments to Rules 15c3-1 and 15c3-3 under the Exchange Act related to, among other
things, securities lending, certain new deductions from net capital, proprietary accounts of broker-dealer customers, certain broker-
dealer insolvency events and corresponding related amendments to books and records rules.
The CFPB has 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. The CFPB’s “qualified mortgage” rule could limit our ability or desire to make certain types of loans or loans to
certain borrowers, or could make it more expensive or time consuming to make these loans. 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 broker-dealer business is subject to various risks associated with the securities industry, particularly those impacting the
public finance industry.
Our broker-dealer 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 broker-dealer 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. Our
broker-dealer business is much smaller and has much less capital than many competitors in the securities industry. In addition, FSC,
Southwest Securities and SWS Financial are operating subsidiaries of Hilltop, which means that their activities are limited to those
that are permissible for subsidiaries of a financial holding company.
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Market fluctuations could adversely impact our broker-dealer business.
Our broker-dealer segment is subject to risks as a result of fluctuations in the securities markets. Our securities trading, market-making
and underwriting activities involve the purchase and sale of securities as a principal, which subjects our capital to significant
risks. Market conditions could limit our ability to sell securities purchased or to purchase securities sold in such transactions. If price
levels for equity securities decline generally, the market value of equity securities that we hold in our inventory could decrease and
trading volumes could decline. In addition, if interest rates increase, the value of debt securities we hold in our inventory would
decrease. Rapid or significant market fluctuations could adversely affect our business, financial condition, results of operations and
cash flow.
In addition, during periods of market disruption, it may be difficult to value certain assets if comparable sales become less frequent or
market data becomes less observable. Certain classes of assets or loan collateral that were in active markets with significant
observable data may become illiquid due to the current financial environment. In such cases, asset valuations may require more
estimation and subjective judgment.
Our investment advisory business may be affected if our investment products perform poorly.
Poor investment returns and declines in client assets in our investment advisory business, due to either general market conditions or
underperformance (relative to our competitors or to benchmarks) by investment products, affects our ability to retain existing assets,
prevent clients from transferring their assets out of products or their accounts, or inhibit our ability to attract new clients or additional
assets from existing clients. Any such poor performance could adversely affect our investment advisory business and the advisory fees
that we earn on client assets.
Our portfolio trading business is highly price competitive and serves a very limited market.
Our portfolio trading business serves one small component of the capital markets group with a small customer base and a high service
model, charging competitive commission rates. Consequently, growing or maintaining market share is very price sensitive. We rely
upon a high level of customer service and product customization to maintain our market share; however, should prevailing market
prices fall, or the size of our market segment or customer base decline, our profitability would be adversely impacted. In addition, in
our portfolio trading business, we purchase securities as principal, which subjects our capital to significant risks.
Our existing correspondents may choose to perform their own clearing services, move their clearing business to one of our
competitors or exit the business.
As our correspondents’ operations grow, they often consider the option of performing clearing functions themselves, in a process
referred to as “self-clearing.” The option to convert to self-clearing operations may be attractive due to the fact that as the transaction
volume of a broker-dealer grows, the cost of implementing the necessary infrastructure for self-clearing may eventually be offset by
the elimination of per transaction processing fees that would otherwise be paid to a clearing firm. Additionally, performing their own
clearing services allows self-clearing broker-dealers to retain their customers’ margin balances, free credit balances and securities for
use in margin lending activities. Furthermore, our correspondents may decide to use the clearing services of one of our competitors or
exit the business. Any significant loss of correspondents due to self-clearing or because of their use of a competitor’s clearing service
or their exiting the business could have a material adverse effect on our business, financial condition, results of operations or cash
flows.
Several of our broker-dealer segment’s product lines rely on favorable tax treatment and changes in federal tax law could impact
the attractiveness of these products to our customers.
We offer a variety of services and products, such as individual retirement accounts and municipal bonds, that rely on favorable federal
income tax treatment to be attractive to our customers. Should favorable tax treatment of these products be eliminated or reduced,
sales of these products could be materially impacted, which could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
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.
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,
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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.
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 MSR assets. 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 MSR assets 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 MSR assets 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. During the three months ended September 30, 2014, the mortgage
origination segment began using derivative financial instruments, including interest rate swaps and swaptions, as a means to mitigate
market risk associated with MSR assets. 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 MSR
assets.
At December 31, 2014, the mortgage origination segment’s MSR asset had a fair value of $37.4 million. All income related to retained
servicing, including changes in the value of the MSR asset, is included in noninterest income. Depending on the interest rate
environment, it is possible that the fair value of our MSR asset may be reduced in the future. If such changes in fair value significantly
reduce the carrying value of our MSR asset, our financial condition and results of operations would be negatively affected.
Income that we recognize in connection with the purchase discount of the credit-impaired loans acquired in the PlainsCapital
Merger, the FNB Transaction and the SWS Merger 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, and we anticipate that we will record a discount on loans acquired in the SWS Merger. The PlainsCapital
Merger, the FNB Transaction and the SWS Merger have each been accounted for under the acquisition 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 $37.4 million and $43.7 million on loans purchased at a discount in
the PlainsCapital Merger and FNB Transaction, respectively, were recorded as interest income during the year ended December 31,
2014. As of December 31, 2014, the balance of our discount on loans in the aggregate was $308.9 million, and we anticipate that we
will record an additional discount on loans after accounting for the loans acquired in the SWS Merger.
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, 2014, contained goodwill of $251.8 million and other intangible assets of $59.8 million.
The SWS Merger will result in additional intangible assets being recorded based on the determination of fair values of identifiable
assets acquired. 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.
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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 municipal advisory services could adversely affect our business and results of operations.
Our broker-dealer 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. Revenues from the public finance group of First Southwest
represented the largest component of our broker-dealer segment’s net revenues for the year ended December 31, 2014. 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
broker-dealer 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.
The soundness of other financial institutions could adversely affect our business.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
We have exposure to many different counterparties and we routinely execute transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, credit unions, investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even negative speculation about, one or more financial services institutions, or the
financial services industry in general, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our
credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the
full amount of the receivable due us. Any such losses could be material and could materially and adversely affect our business,
financial condition, results of operations or cash flows.
We depend on our computer and communications systems and an interruption in service would negatively affect our business.
Our businesses rely on electronic data processing and communications systems. The effective use of technology allows us to better
serve customers and clients, increases efficiency and reduces costs. Our continued success will depend, in part, upon our ability to
successfully maintain, secure and upgrade the capability of our systems, our ability to address the needs of our clients by using
technology to provide products and services that satisfy their demands and our ability to retain skilled information technology
employees. Significant malfunctions or failures of our computer systems, computer security, software or any other systems in the
trading process (e.g., record retention and data processing functions performed by third parties, and third party software, such as
Internet browsers) could cause delays in customer trading activity. Such delays could cause substantial losses for customers and could
subject us to claims from customers for losses, including litigation claiming fraud or negligence. In addition, if our computer and
communications systems fail to operate properly, regulations would restrict our ability to conduct business. Any such failure could
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prevent us from collecting funds relating to customer and client transactions, which would materially impact our cash flows. Any
computer or communications system failure or decrease in computer system performance that causes interruptions in our operations
could have a material adverse effect on our business, financial condition, results of operations or cash flows.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. Many of our competitors have substantially greater resources to invest in technological improvements.
We may not be able to effectively or timely implement new technology-driven products and services or be successful in marketing
these products and services to our customers and clients. Failure to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on our business, financial condition, results of operations or cash
flows.
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
detection and 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, but such incidents could occur again, more frequently or on a more significant scale.
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In February 2014, FINRA released a report identifying principles and effective practices it expects firms to consider as they develop
or enhance their cybersecurity programs. We intend to evaluate our cybersecurity program in light of the guidance in this recent report
and will consider incorporating new practices as necessary to meet FINRA’s expectations.
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.
The financial advisory and investment banking industries also are intensely competitive industries and will likely remain competitive.
Our broker-dealer 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 broker-dealer business competes on the basis of a number of factors, including the quality of advice
and service, technology, product selection, innovation, reputation client relationships and price. Many of our broker-dealer 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 broker-dealer 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 broker-
dealer 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
broker-dealer 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.
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, including 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 which 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.
In addition, a number of new, proposed or potential industry developments also could increase competition in our insurance segment’s
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 our financial condition and results of operations.
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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.
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.
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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 2014
and 2013, our insurance segment’s personal lines ceded 10.2% and 10.2%, 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 4.6%,
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 4.1% in the year ended December 31, 2014, which is
partially attributable to reduced limits, lower rates and lower reinstatement premiums in 2014 of $0.1 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.
At December 31, 2014, our insurance segment had $4.9 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, including potential securities law liabilities, any of which 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.
Further, in the normal course of business, our broker-dealer segment has been subject to claims by customers and clients alleging
unauthorized trading, churning, mismanagement, suitability of investments, breach of fiduciary duty or other alleged misconduct by
our employees or brokers. We are sometimes brought into lawsuits based on allegations concerning our correspondents. As
underwriters, we are subject to substantial potential liability for material misstatements and omissions in prospectuses and other
communications with respect to underwritten offerings of securities. Prolonged litigation producing significant legal expenses or a
substantial settlement or adverse judgment could have a material adverse effect on our business, financial condition, results of
operations or cash flows.
46
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
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
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.
47
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.
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.
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 Small Business
Lending Fund (“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.
48
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, 2014, 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;
49
•
•
•
•
•
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.
FINRA. Any change in control of any of the Hilltop Broker-Dealers, including through acquisition, is subject to prior regulatory
approval by FINRA which may delay, discourage or prevent an attempted acquisition or other change in control of such broker-
dealers.
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, 2014, our banking segment conducted business at 87 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
32 banking locations including our principal offices and we own the remaining 55 banking locations. We have options to renew leases
at most locations.
Broker-dealer. Our broker-dealer segment is headquartered in Dallas, Texas and at December 31, 2014 conducted business at 25
locations in 14 states. Each of these offices is leased by First Southwest.
Mortgage Origination. Our mortgage origination segment is headquartered in Dallas, Texas and at December 31, 2014 conducted
business from over 250 locations in 42 states. Each of these locations is leased by PrimeLending.
Insurance. At December 31, 2014, our insurance segment leases office space in Waco, Texas for all corporate, claims, customer
service and data center operations.
After giving effect to the SWS Merger on January 1, 2015, we had leased or owned an aggregate of approximately 450 locations in 44
states.
50
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.
51
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 $19.33 on February 25, 2015. At February 26, 2015, there were
100,296,330 shares of our common stock outstanding with 540 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 2014 and 2013. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Year Ended December 31, 2014
First Quarter ....................................
Second Quarter ................................
Third Quarter ..................................
Fourth Quarter .................................
Year Ended December 31, 2013
First Quarter ....................................
Second Quarter ................................
Third Quarter ..................................
Fourth Quarter .................................
$
$
$
$
$
$
$
$
Price Range
High
Low
25.61
25.08
22.39
22.20
14.21
16.94
18.71
24.05
$
$
$
$
$
$
$
$
22.42
19.72
19.32
19.27
12.34
12.59
15.46
17.09
52
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2014 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.
Plan Category
Equity compensation plans approved by
security holders* ......................................
Total ........................................................
Equity Compensation Plan Information
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
3,078,374
3,078,374
*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, 2014, 933,004 awards had been granted pursuant to the 2012 Plan,
while 11,378 awards were forfeited and are eligible for reissuance. 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. Excludes 62,994 shares of Hilltop
common stock that are issuable pursuant to awards assumed in the SWS Merger, as these awards were not assumed until January 1,
2015.
Issuer Repurchases of Equity Securities
There were no repurchases of shares of common stock during the three months ended December 31, 2014.
Recent Sales of Unregistered Securities
On October 15, 2014, we issued an aggregate of 2,292 shares of common stock under the 2012 Plan to certain non-employee directors
as compensation for their service on our Board of Directors during the third quarter of 2014. The shares were issued pursuant to the
exemption from registration under Section 4(a)(2) of the Securities Act.
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2014 and 2013 and our consolidated statements of operations data for
the years ended December 31, 2014, 2013 and 2012 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).
53
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 stockholders ...................................
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 ...........
Balance Sheet Data:
Total assets ........................................................
Cash and due from banks ..................................
Securities ...........................................................
Investment in SWS common stock (2)..............
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 .................................
Performance Ratios (3):
Return on average stockholders’ equity ............
Return on average assets ...................................
Net interest margin (taxable equivalent) (4) .....
Efficiency ratio (5)(6)(7) ...................................
Asset Quality Ratios (3):
Total nonperforming assets to total loans and
other real estate (6)........................................
Allowance for loan losses to nonperforming
loans (6) ........................................................
Allowance for loan losses to total loans (6) ......
Net charge-offs to average loans
outstanding (6) ..............................................
Capital Ratios:
Equity to assets ratio .........................................
Tangible common equity to tangible assets ......
2012
$
2014
2013
$
388,769
27,628
361,141
16,933
344,208
799,311
965,353
178,166
65,608
112,558
908
111,650
5,703
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
105,947
$
121,015
1.18
89,710
1.17
90,573
14.93
11.47
$
$
$
$
1.43
84,382
1.40
90,331
13.27
9.70
$
$
$
$
$
$
$
$
$
$
$
2011
$
39,038
10,196
28,842
3,800
25,042
224,232
255,517
(6,243)
(1,145)
(5,098)
494
(5,592)
259
2010
8,154
8,971
(817)
—
(817)
124,073
124,811
(1,555)
(1,007)
(548)
—
(548)
12,939
$
11,049
8,985
2,064
—
2,064
141,650
155,254
(11,540)
(5,009)
(6,531)
—
(6,531)
—
(5,851 ) $
(6,531) $
(13,487)
(0.10 ) $
(0.12) $
58,754
56,499
(0.10 ) $
(0.12) $
(0.24)
56,492
(0.24)
58,754
12.34
8.37
$
$
$
$
$
$
56,499
11.60
11.01
925,425
578,520
224,200
—
—
—
—
—
33,062
—
131,450
—
655,383
56,492
11.56
10.95
939,641
649,439
148,965
—
—
—
—
—
34,587
—
138,350
—
653,055
$ 9,242,416
782,473
1,109,461
70,282
1,309,693
3,920,476
642,640
(41,652)
311,591
6,369,892
56,684
67,012
1,461,239
$ 8,904,122
713,099
1,261,989
—
1,089,039
3,514,646
1,006,369
(34,302)
322,729
6,722,918
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
8.01%
1.26%
4.74%
61.17%
10.48%
1.66%
4.47%
42.58%
-0.62%
-0.08%
4.64%
NM
4.14%
3.70%
74.01%
0.91%
136.39%
0.76%
0.21%
0.18%
NM
NM
NM
NM
15.80%
11.59%
54
14.73%
10.19%
15.71%
10.05%
70.82%
69.74%
69.50%
68.33%
Regulatory Capital Ratios (3):
Hilltop - Leverage ratio (8) ...............................
Hilltop - Tier 1 risk-based capital ratio .............
Hilltop - Total risk-based capital ratio ..............
Bank - Leverage ratio (8) ..................................
Bank - Tier 1 risk-based capital ratio ................
Bank - Total risk-based capital ratio .................
Other Data (9):
Net loss and LAE ratio ......................................
Expense ratio.....................................................
GAAP combined ratio .......................................
Statutory surplus (10) ........................................
Statutory premiums to surplus ratio ..................
2014
2013
2012
2011
2010
14.17%
19.02%
19.69%
10.31%
13.74%
14.45%
57.4%
31.9%
89.3%
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%
$
141,989
$
125,054
$
120,319
$
118,708
$ 119,297
115.8%
130.7%
125.0%
119.4%
102.0%
(1) Series A preferred stock was redeemed in September 2010.
(2) For periods prior to 2014, Hilltop’s investment in SWS common stock was accounted for and included within its available for sale
securities portfolio.
(3) 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.
(4) 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.
(5) Noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(6) 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.
(7) Only considers operations of banking segment.
(8) Ratio for 2012 was calculated using the average assets for the month of December.
(9) Only considers operations of insurance segment.
(10) 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 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.
55
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).
2014
2013
December 31,
2012
2011
2010
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 ..............
$
$
$
14.93
$
13.27
$
12.34 $
11.60
$
11.56
(3.46) $
(3.57) $
(3.97) $
(0.59) $
(0.61)
11.47
$
9.70
$
8.37 $
11.01
$
10.95
$ 1,460,452
114,068
$ 1,311,141
114,068
$ 1,144,496 $
114,068
655,383
—
$
653,055
—
311,591
1,034,793
322,729
874,344
331,508
698,920
33,062
622,321
34,587
618,468
9,242,416
8,904,122
7,286,865
925,425
939,641
311,591
8,930,825
322,729
8,581,393
331,508
6,955,357
33,062
892,363
34,587
905,054
15.80%
14.73%
15.71%
70.82%
69.50%
11.59%
10.19%
10.05%
69.74%
68.33%
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 “Hilltop Securities” refer to
Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Southwest Securities” refer to Southwest
Securities, Inc. (a wholly owned subsidiary of Hilltop Securities), references to “SWS Financial” refer to SWS Financial Services, Inc.
(a wholly owned subsidiary of Hilltop Securities), references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of
PlainsCapital), references to “FNB” refer to First National Bank, references to “First Southwest” refer to First Southwest Holdings,
LLC (a wholly owned subsidiary of Hilltop Securities) and its subsidiaries as a whole, references to “FSC” refer to First Southwest
Company, LLC (a wholly owned subsidiary of First Southwest), references to “PrimeLending” refer to PrimeLending, a
PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, and references to “NLC” refer to
National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.
56
OVERVIEW
We are a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-
Bliley Act of 1999. Our primary line of business is to provide business and consumer banking services from offices located
throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer, mortgage
origination and insurance segments.
Through December 31, 2014, the Company delivered these financial products and services through the following primary operating
business units.
PlainsCapital. PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its
subsidiaries, traditional banking services, residential mortgage lending, investment banking, public finance advisory, wealth and
investment management, treasury management, fixed income sales, asset management, and correspondent clearing services.
NLC. NLC is a property and casualty insurance holding company, headquartered in Waco, Texas, that provides, through its
subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the
southern United States.
At December 31, 2014, on a consolidated basis, we had total assets of $9.2 billion, total deposits of $6.4 billion, total loans, including
loans held for sale, of $5.8 billion and stockholders’ equity of $1.5 billion. Our operating results beginning December 1, 2012 include
the banking, mortgage origination and broker-dealer (formerly financial advisory) operations acquired in the PlainsCapital Merger
(defined hereafter). Accordingly, our operating results and financial condition for the years ended December 31, 2014 and 2013 are
not comparable to prior years. The operations acquired in the FNB Transaction (defined hereafter) are included in the results of our
banking operations beginning September 14, 2013.
Effective January 1, 2015, in connection with our acquisition of SWS Group, Inc. (“SWS”), we modified our organizational structure
into three primary operating business units, PlainsCapital (banking and mortgage origination), Hilltop Securities (broker-dealer) and
NLC (insurance). The PlainsCapital unit continues to include the Bank and PrimeLending, while the new Hilltop Securities unit
includes First Southwest (transferred from the PlainsCapital unit effective January 1, 2015), Southwest Securities and SWS Financial
(both acquired on January 1, 2015).
Company Background
In January 2007, we acquired NLC, a property and casualty insurance holding company. As a result, our subsequent 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’s wholly owned subsidiaries,
National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”).
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, Hilltop 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. 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.
57
On January 1, 2015, we completed our acquisition of SWS in a stock and cash transaction, whereby SWS merged with and into
Hilltop Securities, formerly Peruna LLC, a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction
(the “SWS Merger”). SWS’s broker-dealer subsidiaries, Southwest Securities and SWS Financial, became subsidiaries of Hilltop
Securities. Immediately following the SWS Merger, SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was
merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS Merger, each outstanding share of SWS
common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, equating to $6.92 per
share based on Hilltop’s closing price on December 31, 2014 and resulting in an aggregate purchase price of $349.0 million,
consisting of 10.0 million shares of common stock, $78.2 million in cash and $70.3 million associated with our existing investment in
SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the SWS Merger, the merger
consideration is subject to change, and therefore, preliminary at this time. The SWS Merger will be accounted for using the acquisition
method of accounting, and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities will be
recorded at their respective acquisition date fair values using significant estimates and assumptions to value certain identifiable assets
acquired and liabilities assumed.
Segment Information
Through December 31, 2014, we had two primary operating business units, PlainsCapital (financial services and products) and NLC
(insurance). Within the PlainsCapital unit were three primary wholly owned operating subsidiaries: the Bank, PrimeLending and First
Southwest. Under accounting principles generally accepted in the United States (“GAAP”), our business units were comprised of four
reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-
dealer, mortgage origination and insurance. The SWS Merger has not resulted in changes to our four reportable business segments.
Consistent with the segment operating results during 2013 and 2014, we anticipate that future revenues will be driven primarily from
the banking segment, with the remainder being generated by our broker-dealer, mortgage origination and insurance segments. Based
on historical results of PlainsCapital Corporation, which we acquired on November 30, 2012, the relative share of total revenue
provided by our banking and mortgage origination segments fluctuates depending on market conditions, and operating results for the
mortgage origination segment tend to be more volatile than operating results for the banking segment.
The banking segment includes the operations of the Bank and, since September 14, 2013, the operations acquired in the FNB
Transaction. Beginning January 1, 2015, the banking segment will also include the operations of the former SWS FSB. The banking
segment primarily provides business and consumer banking products and services from offices located throughout Texas and
generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income,
while also deriving revenue from other sources, including service charges on customer deposit accounts and trust fees.
The broker-dealer segment has historically generated a majority of its revenues from fees and commissions earned from investment
advisory and securities brokerage services at First Southwest. The principal subsidiaries of First Southwest are FSC, a broker-dealer
registered with the Securities and Exchange Commission (the “SEC”) and Financial Industry Regulatory Authority, and First
Southwest Asset Management, LLC, 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 (“TBA”) mortgage-backed securities.
These derivatives are marked to market through other noninterest income. Beginning January 1, 2015, the broker-dealer segment will
also include the operations of Southwest Securities and SWS Financial.
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.
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.”
58
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, 2014
Net interest income
(expense) ..............................
Provision for loan losses ......
Noninterest income ..............
Noninterest expense .............
Income (loss) before
Banking
Broker-Dealer
Mortgage
Origination
Insurance
Corporate
All Other and
Eliminations
Hilltop
Consolidated
$ 334,377 $
16,916
67,438
245,790
12,144 $
17
119,451
124,715
(12,591) $
—
456,776
431,820
3,672 $
—
173,577
151,541
5,219 $
—
5,985
13,878
18,320 $
—
(23,916)
(2,391)
361,141
16,933
799,311
965,353
income taxes ................
$ 139,109 $
6,863 $
12,365 $
25,708 $
(2,674) $
(3,205) $
178,166
Year Ended December 31, 2013
Net interest income
(expense) ..............................
Provision for loan losses ......
Noninterest income ..............
Noninterest expense .............
Income (loss) before
Banking
Broker-Dealer
Mortgage
Origination
Insurance
Corporate
All Other and
Eliminations
Hilltop
Consolidated
$ 293,254 $
37,140
71,045
155,102
12,064 $
18
102,714
112,360
(37,840) $
—
537,497
472,284
7,442 $
—
166,163
166,006
(1,597) $
—
—
10,439
22,878 $
—
(27,334)
(4,456)
296,201
37,158
850,085
911,735
income taxes ................
$ 172,057 $
2,400 $
27,373 $
7,599 $ (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
Broker-Dealer
Mortgage
Origination
Insurance
Corporate
All Other and
Eliminations
Hilltop
Consolidated
$
24,885 $
3,670
4,601
16,130
1,191 $
130
10,909
11,078
(4,987) $
—
57,618
50,296
4,730 $
—
154,147
163,585
39 $
—
—
14,487
2,984 $
—
(3,043)
(59)
28,842
3,800
224,232
255,517
income taxes ................
$
9,686 $
892 $
2,335 $
(4,708) $ (14,448) $
— $
(6,243)
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the
income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the
deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results.
Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect
net interest income. We generated $361.1 million in net interest income during the year ended December 31, 2014, compared with net
interest income of $296.2 million in 2013 and net interest income of $28.8 million in 2012. The year-over-year increases in net interest
income were primarily due to the inclusion of those operations acquired as a part of the PlainsCapital Merger and FNB Transaction
within our banking segment.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i)
(ii)
Investment and securities advisory fees and commissions. Through our wholly owned subsidiary, First Southwest,
we provide public finance advisory and various investment banking and brokerage services. We generated $101.9
million, $93.1 million and $11.2 million in investment advisory fees and commissions and securities brokerage fees
and commissions during the years ended December 31, 2014 and 2013 and the month ended December 31, 2012,
respectively.
Income from mortgage operations. Through our wholly owned subsidiary, PrimeLending, we generate noninterest
income by originating and selling mortgage loans. During the years ended December 31, 2014 and 2013 and the
month ended December 31, 2012, we generated $453.4 million, $537.3 and $57.6 million, respectively, in net gains
from the sale of loans, other mortgage production income (including income associated with retained mortgage
servicing rights), and mortgage loan origination fees.
59
(iii)
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 $164.5 million,
$157.5 million and $146.7 million in net insurance premiums earned during 2014, 2013 and 2012, respectively.
In the aggregate, we generated $799.3 million, $850.1 million and $224.2 million in noninterest income during 2014, 2013 and 2012,
respectively. The significant year-over-year decrease in noninterest income in 2014 compared to 2013 was primarily due to the
decrease in loan origination volume within our mortgage origination segment and, to a lesser extent, the recognition of a pre-tax
bargain purchase gain related to the FNB Transaction of $12.6 million during 2013 within our banking segment, partially offset by
increases in noninterest income in our banking, insurance and broker-dealer segments. The significant year-over-year increase in
noninterest income during 2013 was primarily due to the inclusion of the mortgage origination and broker-dealer 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
Net income applicable to common stockholders for the year ended December 31, 2014 was $105.9 million, or $1.17 per diluted share,
compared with net income applicable to common stockholders of $121.0 million, or $1.40 per diluted share, for the year ended
December 31, 2013, and net loss applicable to common stockholders of $5.9 million, or $0.10 per diluted share for the year ended
December 31, 2012. The consolidated operating results for 2013 include the recognition of a bargain purchase gain related to the FNB
Transaction of $12.6 million, before income taxes of $4.5 million.
As a result of the PlainsCapital Merger, the net income of PlainsCapital is included in our operating results for the years ended
December 31, 2014 and 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. We expect the operations acquired in the FNB Transaction to have a significant effect on the
Bank’s operating results in future periods. The operations, assets and liabilities acquired in the SWS Merger will be included in our
balance sheet and operating results beginning January 1, 2015, and we expect them to have a significant effect on our broker-dealer
segment in future periods.
Certain items included in net income for 2014, 2013 and 2012 resulted from purchase accounting associated with the PlainsCapital
Merger and FNB Transaction. Income before taxes for 2014 includes net accretion of $33.9 million and $49.2 million on earning
assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable
intangibles of $9.2 million and $1.0 million, respectively, compared with 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 $9.8 million and $0.3 million, respectively, during 2013. 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:
Return on average stockholders’ equity (1) ..................
Return on average assets (1) .........................................
Net interest margin (taxable equivalent) (2) .................
Year Ended December 31,
2013
2014
Month Ended
December 31, 2012
8.01%
1.26%
4.74%
10.48%
1.66%
4.47%
-0.62%
-0.08%
4.64%
(1) Noted measure is 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 measure for 2012 is not
comparable to subsequent periods.
(2) Taxable equivalent net interest income divided by average interest-earning assets.
60
During the year ended December 31, 2014, the consolidated taxable equivalent net interest margin of 4.74% was impacted by
PlainsCapital Merger related accretion of discount on loans of $37.4 million, amortization of premium on acquired securities of $4.1
million and amortization of premium on acquired time deposits of $0.6 million. Additionally, FNB Transaction related accretion of
discount on loans of $43.6 million and amortization of premium on acquired time deposits of $5.5 million also impacted the
consolidated taxable equivalent net interest margin during the year ended December 31, 2014. These items increased the consolidated
taxable equivalent net interest margin by 125 basis points for the year ended December 31, 2014. 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.
2014
Interest
Average
Outstanding Earned or
Balance
Paid
Year Ended December 31,
Annualized Average
2013
Interest
Yield or
Rate
Outstanding Earned or
Balance
Paid
Annualized
Yield or
Rate
Month Ended December 31,
2012
Interest Annualized
Average
Outstanding Earned or
Balance
Paid
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
$ 5,461,611 $
1,072,564
341,458
29,206
6.21% $ 4,584,079 $
2.72%
947,844
284,782
27,078
6.15% $ 4,513,214 $
2.85%
675,631
23,900
1,604
182,881
7,028
3.84%
192,933
7,158
3.71%
230,733
18,120
52
0.29%
27,996
113
0.40%
54,017
financial institutions .......................
Other ....................................................
Interest-earning assets, gross .....................
Allowance for loan losses ....................
Interest-earning assets, net ........................
Noninterest-earning assets.........................
Total assets .....................................................
698,638
229,461
7,663,275
(40,516)
7,622,759
1,343,070
$ 8,965,829
1,602
11,770
391,116
0.23%
5.16%
5.08%
727,284
160,320
6,640,456
(22,906)
6,617,550
996,327
$ 7,613,877
1,848
10,479
331,458
0.25%
6.58%
4.96%
574,913
159,181
6,207,689
(159)
6,207,530
782,958
$ 6,990,488
Yield or
Rate
6.15%
2.81%
2.51%
2.35%
0.25%
4.84%
5.04%
698
106
121
651
27,080
Liabilities and Stockholders' Equity
Interest-bearing liabilities ..........................
Interest-bearing deposits ......................
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) ..................................
$ 4,490,748 $
934,031
5,424,779
15,742
11,886
27,628
0.35% $ 3,923,895 $
1.27%
0.51%
823,478
4,747,373
14,877
17,997
32,874
0.38% $ 3,233,503 $
2.19%
0.69%
1,048,113
4,281,616
1,013
1,351
2,364
0.37%
1.51%
0.65%
1,862,277
283,922
7,570,978
1,394,351
500
$ 8,965,829
1,370,029
299,871
6,417,273
1,195,960
644
$ 7,613,877
1,322,023
488,759
6,092,398
896,567
1,523
$ 6,990,488
$
363,488
$
298,584
$
24,716
4.57%
4.74%
4.27%
4.47%
4.39%
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 $2.3 million, $2.4 million and
$0.2 million for the years ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively.
On a consolidated basis, net interest income increased $64.9 million during 2014, compared with 2013, while net interest income
increased $267.4 million during 2013, compared with 2012. These increases were primarily due to the inclusion of those operations
acquired as a part of the PlainsCapital Merger and FNB Transaction within our banking segment. Net interest income prior to
December 2012 was limited to interest income on securities and interest expense on notes payable of the insurance segment.
61
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
$16.9 million and $37.2 million during 2014 and 2013, respectively. During 2014 and 2013, the provision for loan losses was
comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $6.1 million
and $33.1 million, respectively, and purchased credit impaired (“PCI”) loans of $10.8 million and $4.1 million, respectively.
Consolidated noninterest income decreased $50.8 million during 2014, compared with 2013, while consolidated noninterest income
increased $625.9 million during 2013, compared with 2012. These year-over-year changes included the recognition of a pre-tax
bargain purchase gain related to the FNB Transaction of $12.6 million during 2013. The remaining changes in noninterest income
between 2014 and 2013 included the reduction in net gains from sale of loans, other mortgage production income and mortgage loan
origination fees within our mortgage origination segment of $83.9 million, slightly offset by increases in noninterest income in our
insurance and broker-dealer segments of $7.4 million and $16.7 million, respectively. The remaining changes between 2013 and 2012
were primarily due to the inclusion of noninterest income generated from the operations of the mortgage origination and broker-dealer
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.
Our consolidated noninterest expense during 2014 increased $53.6 million, compared with 2013, while consolidated noninterest
expense during 2013 increased $656.2 million, compared with 2012. The year-over-year changes between 2014 and 2013 included
significant increases in noninterest expenses within our banking segment of $90.7 million, primarily due to the inclusion of those
operations acquired as part of the FNB Transaction and within our broker-dealer segment of $12.4 million due to increases in
professional fees and compensation costs that vary with noninterest income. These increases were partially offset by significant
decreases in noninterest expenses within our mortgage origination segment of $40.5 million, primarily due to reductions in variable
compensation tied to mortgage loan originations and initiatives to decrease segment operating costs, and within our insurance segment
of $14.5 million due to improved claims loss experience associated with the significant decline in the severity of severe weather-
related events during 2014. Changes between 2014 and 2013 within the major components of noninterest expense included increases
of $10.2 million in employees’ compensation and benefits, $15.4 million in occupancy and equipment and $43.6 million in other
expenses partially offset by decreases of $16.3 million in loss and loss adjustment expenses. The year-over-year changes between
2013 and 2012 primarily resulted from the inclusion of 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 is 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 between 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 2014 and 2013 were $65.6 million and $70.7 million, respectively, reflecting effective rates
of 36.8% and 35.8%, respectively. During 2012, we recorded an income tax benefit, due to losses from operations, of $1.1 million,
reflecting an effective rate of 18.3%. The effective income tax rate for 2012 is not indicative of future effective income tax rates due to
the inclusion of those operations acquired as a part of the PlainsCapital Merger beginning December 1, 2012.
Segment Results
Banking Segment
Income before income taxes in our banking segment for the years ended December 31, 2014 and 2013 and the month ended
December 31, 2012 was $139.1 million, $172.1 million and $9.7 million, respectively. These year-over-year changes included the
recognition of a pre-tax bargain purchase gain related to the FNB Transaction of $12.6 million during the year ended December 31,
2013. The remaining changes in income before income taxes during the year ended December 31, 2014, compared with the year ended
December 31, 2013, were primarily due to an increase in noninterest expense, partially offset by an increase in net interest income and
a decrease in the provision for loan losses. The operations acquired as a part of the FNB Transaction had a significant effect on each of
the components of income before income taxes during the year ended December 31, 2014, compared with the year ended
December 31, 2013. The remaining changes in income before income taxes, and each of its components, are not comparable between
the 2013 and 2012 periods since the operations of our banking segment was acquired as a part of the PlainsCapital Merger.
62
We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.
Performance Ratios:
Efficiency ratio (1)(2) .....................................
Return on average assets (1) ...........................
Net interest margin (taxable equivalent) (3) ...
Year Ended December 31,
2013
2014
Month Ended
December 31, 2012
61.17%
1.20%
5.00%
42.58%
1.78%
5.17%
NM
NM
5.83%
(1) The banking segment was acquired on November 30, 2012. Therefore, noted measure for periods prior to 2013 is not
meaningful.
(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, 2014, the banking segment’s taxable equivalent net interest margin of 5.00% was impacted by
PlainsCapital Merger related accretion of discount on loans of $37.4 million, amortization of premium on acquired securities of $4.1
million and amortization of premium on acquired time deposits of $0.6 million. Additionally, FNB Transaction related accretion of
discount on loans of $43.6 million and amortization of premium on acquired time deposits of $5.5 million also impacted the banking
segment’s taxable equivalent net interest margin during the year ended December 31, 2014. These items increased the banking
segment’s taxable equivalent net interest margin by 143 basis points for the year ended December 31, 2014. 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,
2014
Average
Interest
Outstanding Earned or
Balance
Paid
Annualized
Yield or
Rate
Average
2013
Interest Annualized
Month Ended December 31,
2012
Interest Annualized
Average
Outstanding Earned or
Balance
Paid
Yield or
Rate
Outstanding
Balance
Earned or
Paid
Yield or
Rate
Assets
Interest-earning assets
Loans, gross (1) ..............................
Subsidiary warehouse lines of
credit .........................................
Investment securities - taxable .......
Investment securities - non-
taxable (2) .................................
Federal funds sold and securities
purchased under agreements to
resell ...........................................
Interest-bearing deposits in other
$
4,189,895 $
292,859
6.99% $ 3,279,228 $
238,314
7.27% $
2,886,549 $
19,228
912,652
886,168
34,598
17,956
3.79%
2.03%
947,064
792,860
51,114
14,625
5.40%
1.84%
1,261,768
494,285
149,656
5,800
3.88%
158,739
5,734
3.61%
175,850
5,984
444
481
18,120
52
0.29%
26,373
75
financial institutions ...................
Other ................................................
Interest-earning assets, gross .................
Allowance for loan losses ................
Interest-earning assets, net ....................
Noninterest-earning assets.....................
Total assets .................................................
$
527,678
45,225
6,729,394
(40,352)
6,689,042
1,245,722
7,934,764
1,362
1,717
354,344
0.26%
3.80%
5.27%
1,319
1,311
312,492
494,220
31,794
5,730,278
(22,752)
5,707,526
940,880
$ 6,648,406
0.28%
0.27%
4.12%
5.45%
33,180
48
68
57
26,310
310,747
33,594
5,195,973
248
5,196,221
804,190
6,000,411
$
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits ..................
Notes payable and other
borrowings .................................
Total interest-bearing liabilities (3) .......
Noninterest-bearing liabilities ...............
$
4,451,191 $
15,801
0.35% $ 3,900,867 $
14,889
0.38% $
3,161,312 $
1,009
587,921
5,039,112
1,780
17,581
0.30%
0.35%
391,111
4,291,978
1,340
16,229
0.34%
0.38%
560,572
3,721,884
123
1,132
63
7.77%
5.51%
1.08%
2.24%
1.75%
0.26%
2.03%
5.87%
0.38%
0.26%
0.36%
2014
Interest
Average
Outstanding Earned or
Balance
Paid
Noninterest-bearing deposits ...........
Other liabilities ................................
Total liabilities .......................................
Stockholders’ equity ..............................
Total liabilities and stockholders’
1,808,225
35,755
6,883,092
1,051,672
Year Ended December 31,
Average
2013
Interest Annualized
Outstanding Earned or
Annualized
Yield or
Rate
Month Ended December 31,
2012
Interest Annualized
Average
Paid
Balance
1,419,594
39,028
5,750,600
897,806
Yield or
Rate
Outstanding
Balance
Earned or
Paid
Yield or
Rate
1,397,308
58,491
5,177,683
822,728
equity ....................................................
$
7,934,764
$ 6,648,406
$
6,000,411
Net interest income (2) ..............................
Net interest spread (2)...............................
Net interest margin (2) ..............................
$
336,763
$
296,263
$
25,178
4.92%
5.00%
5.07%
5.17%
5.51%
5.65%
(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, $2.0 million and $0.2 million for the years ended December 31, 2014 and
2013 and the month ended December 31, 2012, respectively.
(3) Excludes the allocation of interest expense on PlainsCapital debt of $1.1 million, $1.0 million and $0.1 million for the years ended December 31, 2014 and 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
broker-dealer segment, as well as the borrowing costs of Hilltop and PlainsCapital, both of which reduce our consolidated net interest
margin. In addition, the banking segment’s interest earning assets include lines of credit extended to subsidiaries. Such yields and
costs are eliminated from the consolidated financial statements.
The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including
the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned
or paid on those items (in thousands). 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 between the year ended December 31, 2013 and the month ended December 31, 2012 due to variances in the volume
of our interest-earning assets and interest-bearing liabilities would not be meaningful and has therefore been omitted.
Interest income
Loans, gross ..................................................
Subsidiary warehouse lines of 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 ..............................................................
Total interest income (2) ...................................
Interest expense
Deposits .........................................................
Notes payable and other borrowings .............
Total interest expense ........................................
Net interest income (2) ......................................
$
$
$
Year Ended December 31,
2014 v. 2013
Change Due To (1)
Volume
Yield/Rate
Change
$
66,182
(1,857)
1,721
(328)
(11,637) $ 54,545
(16,516)
(14,659)
3,331
1,610
66
394
(23)
—
(23)
89
554
66,338
(46)
(148)
(24,486)
43
406
41,852
$
2,101
674
2,775
(1,189) $
(234)
(1,423)
912
440
1,352
63,563
$
(23,063) $ 40,500
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Taxable equivalent.
64
Taxable equivalent net interest income increased $40.5 million during the year ended December 31, 2014, compared with the year
ended December 31, 2013. Increases in the volume of interest-earning assets, primarily loans acquired in the FNB Transaction,
increased taxable equivalent net interest income by $66.4 million during the year ended December 31, 2014, compared with the year
ended December 31, 2013, while increases in the volume of interest-bearing liabilities, primarily deposits assumed in the FNB
Transaction, reduced taxable equivalent interest income by $2.8 million during this same period. Changes in the yields earned on
interest-earning assets decreased taxable equivalent net interest income by $24.5 million during the year ended December 31, 2014,
compared with the year ended December 31, 2013, primarily due to the net effects of lower yields on the loan portfolio and subsidiary
warehouse lines of credit, partially offset by increased yields on the investment portfolio. Changes in rates paid on interest-bearing
liabilities increased taxable equivalent interest income by $1.4 million during the year ended December 31, 2014, compared with the
year ended December 31, 2013, primarily due to the amortization of premiums on time deposits acquired in the FNB Transaction.
The banking segment’s noninterest income was $67.4 million, $71.0 million and $4.6 million during the years ended December 31,
2014 and 2013 and the month ended December 31, 2012, respectively. These year-over-year changes included the recognition of a
pre-tax bargain purchase gain related to the FNB Transaction of $12.6 million during the year ended December 31, 2013. The
remaining changes in noninterest income between the years ended December 31, 2014 and 2013 were primarily due to increases in
service charges and fees on deposits assumed in the FNB Transaction, partially offset by a reduction in intercompany financing fees
charged to the mortgage origination segment which are eliminated from the consolidated financial statements.
The banking segment’s noninterest expenses were $245.8 million, $155.1 million and $16.1 million during the years ended
December 31, 2014 and 2013 and the month ended December 31, 2012, respectively. Noninterest expenses were primarily comprised
of employees’ compensation and benefits, and occupancy expenses. The significant increase in noninterest expenses between the years
ended December 31, 2014 and 2013 was primarily due to the inclusion of the operations acquired in the FNB Transaction and write
downs of $19.7 million associated with covered OREO assets during the year ended December 31, 2014. The write downs to fair
value of the covered OREO reflect new appraisals on certain OREO acquired in the FNB Transaction and OREO acquired from the
foreclosure on certain FNB loans acquired in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired
assets upon acquisition, in some cases additional downward valuations were required.
These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the OREO, including
in some cases the intended use of the OREO due to the availability of more information as well as the passage of time. The process of
determining fair value is subjective in nature and requires the use of significant estimates and assumptions. Although the Bank makes
market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or
decrease. When the Bank determines, based on subsequent information, that its estimates require adjustment, the Bank records the
adjustment. The accounting for such adjustments requires that the decreases to fair value be recorded at the time such new information
is received, while increases to fair value are recorded when the asset is subsequently sold. All of the impairments recorded during
2014 related to covered assets subject to the loss-share agreements with the FDIC.
On October 24, 2014, the Bank notified its federal and state banking regulators and affected customers that, effective January 30,
2015, it would be closing certain branch locations acquired in the FNB Transaction. Eleven of the branches closed were located in the
Texas Rio Grande Valley, and the remaining two branches were located in Houston and Laredo, Texas. The Bank previously notified
its federal and state banking regulators and affected customers of the November 7, 2014 closure of two other branches acquired in the
FNB Transaction in the Houston market. It is anticipated that the closure of these branches will improve the operational efficiencies of
the Bank. In an effort to mitigate potential deposit runoff associated with these branch closures, the Bank will continue to offer
banking services to its customers through other branches operating in these markets.
Broker-Dealer Segment
Income before income taxes in our broker-dealer segment during the years ended December 31, 2014 and 2013 and the month ended
December 31, 2012 were $6.9 million, $2.4 million and $0.9 million, respectively. Most of the improvement during 2014, compared
with 2013, was in fees earned from advising its public finance clients on an increased volume of debt offerings due to lower interest
rates and an improving economy. However, continuing uncertainty in fixed income markets as a result of increased regulations,
uncertainty in the direction of future interest rates and a lack of liquidity in the market have continued to suppress sales of fixed
income securities to institutional customers. Income before income taxes, and each of its components, are not comparable between the
2013 and 2012 periods since our broker-dealer segment was acquired as a part of the PlainsCapital Merger.
The broker-dealer segment had net interest income of $12.1 million, $12.1 million and $1.2 million during the years ended
December 31, 2014 and 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.
65
Noninterest income was $119.5 million, $102.7 million and $10.9 million during the years ended December 31, 2014 and 2013 and
the month ended December 31, 2012, respectively. The majority of the broker-dealer segment’s noninterest income was generated
from fees and commissions earned from investment advisory and securities brokerage activities of $101.9 million, $93.1 million and
$11.2 million during the years ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively. As
discussed above, the increase during 2014, compared with 2013, was primarily from fees earned on advising public finance clients on
an increased volume of debt offerings. The broker-dealer segment participates in programs in which it issues forward purchase
commitments of mortgage-backed securities to certain non-profit housing clients and sells TBAs. The fair values of these derivative
instruments increased $16.2 million, $11.4 million and $0.2 million during the years ended December 31, 2014 and 2013 and the
month ended December 31, 2012, respectively. The fair value of the broker-dealer segment’s trading portfolio, which is used to
support sales, underwriting and other customer activities, increased $1.3 million during the year ended December 31, 2014 and
decreased $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 $124.7 million, $112.4 million and $11.1 million for the years ended December 31, 2014 and 2013 and the
month ended December 31, 2012, respectively. The increase in noninterest expenses of $12.3 million during 2014, compared to 2013,
was primarily due to increases of $10.2 million in employees’ compensation and benefits costs, and $2.3 million in litigation defense
costs associated with a lawsuit pending in the state of Rhode Island. Compensation that varies with noninterest income accounted for
$6.8 million of the noted increase in compensation costs. Employees’ compensation and benefits and occupancy and equipment
accounted for the majority of the costs incurred during all periods.
Mortgage Origination Segment
Income before income taxes in our mortgage origination segment for the years ended December 31, 2014 and 2013 and the month
ended December 31, 2012 was $12.4 million, $27.4 million and $2.3 million, respectively. The decrease in income before income
taxes between the years ended December 31, 2014 and 2013 was primarily due to a decrease in noninterest income, partially offset by
decreases in noninterest expense and net interest expense. Income before income taxes, and each of its components, are not
comparable between the 2013 and 2012 periods since the operations of our mortgage origination segment was acquired as a part of the
PlainsCapital Merger. Net interest expense of $12.6 million, $37.8 million and $5.0 million during the years ended December 31,
2014 and 2013 and the month ended December 31, 2012, respectively, resulted from interest incurred on a warehouse line of credit
held with the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for sale.
The mortgage origination segment originates all of its mortgage loans through a retail channel. The following table provides certain
details regarding our mortgage loan originations for the periods indicated below (dollars in thousands). Because the operations of the
mortgage origination segment acquired in the PlainsCapital Merger are not included in our results of operations for the full fiscal year
ended December 31, 2012, the details regarding the month ended December 31, 2012 would not be meaningful and have therefore
been omitted.
Mortgage Loan Originations - units ......
Mortgage Loan Originations - volume ..
Mortgage Loan Originations:
Conventional .....................................
Government .......................................
Jumbo ................................................
Other ..................................................
Home purchases ................................
Refinancings ......................................
Texas .................................................
California ...........................................
Florida ...............................................
North Carolina ...................................
$
$
$
$
$
$
Year Ended December 31,
% of
Total
2013
% of
Total
55,781
2014
48,655
10,363,848
$
11,792,562
62.60% $
26.41%
8.34%
2.65%
100.00% $
7,505,437
3,465,078
780,604
41,443
11,792,562
80.05% $
19.95%
100.00% $
8,178,970
3,613,592
11,792,562
23.68% $
14.98%
4.88%
4.08%
2,660,810
2,082,184
456,643
618,802
63.65%
29.38%
6.62%
0.35%
100.00%
69.36%
30.64%
100.00%
22.56%
17.66%
3.87%
5.25%
6,487,825
2,737,415
863,770
274,838
10,363,848
8,295,994
2,067,854
10,363,848
2,453,705
1,552,372
505,507
423,164
66
Ohio ...................................................
Arizona ..............................................
Virginia ..............................................
South Carolina ...................................
Washington ........................................
Maryland ...........................................
All other states ...................................
2014
401,379
339,830
322,134
307,832
298,845
298,577
3,460,503
10,363,848
$
Year Ended December 31,
% of
Total
2013
% of
Total
3.87%
3.28%
3.11%
2.97%
2.88%
2.88%
33.39%
100.00% $
383,518
392,006
466,531
318,109
360,100
385,215
3,668,644
11,792,562
3.25%
3.32%
3.96%
2.70%
3.05%
3.27%
31.11%
100.00%
The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate
fluctuations. Historically, the mortgage origination segment has typically experienced increased loan origination volume from
purchases of homes during the spring and summer, when more people tend to move and buy or sell homes. An increase in mortgage
interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends
to result in increased refinancings. Changes in interest rates have historically had a lesser impact on home purchases volume than on
refinancing volume.
Beginning in May 2013 and continuing through the fourth quarter of 2013, mortgage interest rates increased at a pace that, along with
other factors, resulted in a decrease in the mortgage origination segment’s refinancings during the last six months of 2013.
Refinancing volume totaled $2.6 billion and $1.0 billion (40% and 19%, respectively, of total loan origination volume) during the first
and second six months of 2013, respectively. During the first three quarters of 2014, refinancing volumes as a percentage of total loan
origination volume were consistent with the last six months of 2013, ranging between 16% and 21%. During the fourth quarter 2014,
refinancing volume increased to 25% of total origination volume, as interest rates decreased during that time. While total refinancing
volumes decreased between 2013 and 2014 ($3.6 billion and $2.1 billion, respectively), home purchases volume of $8.3 billion during
the year ended December 31, 2014 was virtually unchanged from the year ended December 31, 2013. Due to additional declines in
mortgage interest rates subsequent to December 31, 2014, we anticipate refinancing as a percentage of total loan origination volume to
continue to increase through the first quarter of 2015.
While the mortgage origination segment’s total loan origination volume decreased 12.1% between the years ended December 31, 2014
and 2013, income before income taxes decreased 54.8% between the same periods (from $27.4 million income in 2013 to $12.4
million income in 2014), primarily due to a reduction in noninterest income, partially offset by decreases in noninterest expense and
net interest expense. 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. Salaries and benefits expenses for the year ended December 31, 2014 decreased 11% as compared with the
year ended December 31, 2013, as the benefits of the headcount reductions made in the third and fourth quarters of 2013 were realized
in 2014. The mortgage origination segment also engaged in other initiatives to reduce segment operating costs during the third and
fourth quarters of 2013 that were primarily responsible for the decrease of 6% in non-employee related expenses, including occupancy
and administrative costs, during the year ended December 31, 2014, as compared with the year ended December 31, 2013.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, the
majority servicing released. During the six months ended June 30, 2013, the mortgage origination segment retained servicing on
approximately 8% of loans sold. This rate was increased to approximately 22% during the third and fourth quarters of 2013, and
approximately 31% during 2014. The related mortgage servicing rights (“MSR”) asset was valued at $37.4 million on $3.8 billion of
serviced loan volume at December 31, 2014, compared with a value of $20.1 million on $2.0 billion of serviced loan volume at
December 31, 2013. The mortgage origination segment has also retained servicing on certain loans sold to the banking segment. The
MSR value associated with these loans at December 31, 2014 was $1.2 million on $145.9 million of serviced loan volume. Gains and
losses associated with this sale to the banking segment and the related MSR are eliminated in consolidation. All income related to
retained servicing, including changes in the value of the MSR asset, is included in noninterest income. The mortgage origination
segment’s determination on whether to retain or release servicing on mortgage loans it sells is impacted by changes in mortgage
interest rates, and refinancing and market activity. The mortgage origination segment may, from time to time, manage its MSR asset
through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling
MSR assets. During the third quarter of 2014, the mortgage origination segment began using derivative financial instruments,
including interest rate swaps, swaptions and forward commitments to sell mortgage-backed securities (“MBSs”), as a means to
mitigate market risk associated with MSR assets. Changes in the net value of the MSR and the related derivatives resulted in a loss of
$4.3 million during the year ended December 31, 2014. No similar gains or losses were recorded during the year ended December 31,
2013. In July 2014, the mortgage origination segment sold MSR assets of $11.4 million, which represented $1.0 billion of its serviced
loan volume at that time.
67
Noninterest income was $456.8 million, $537.5 million and $57.6 million for the years ended December 31, 2014 and 2013 and the
month ended December 31, 2012, respectively. Noninterest income was comprised of net gains on the sale of loans and other
mortgage production income, and mortgage origination fees. Noninterest income decreased 15.0% during 2014 when compared with
2013 primarily as a result of a decrease of 12.1% in loan origination volume and a decrease in average loan origination margins
resulting from increased pricing competition. Average loan origination margins began to decrease during the fourth quarter of 2013
and continued to decrease through the second quarter of 2014. While these average margins increased during the last six months of
2014, surpassing average margins recognized during the fourth quarter of 2013, average loan origination margins have not returned to
levels recognized during the first three quarters of 2013.
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 the mortgage origination segment to mitigate interest rate risk
associated with its IRLCs and mortgage loans held for sale, are included in noninterest income. The related net fair value increased
$14.3 million during the year ended December 31, 2014, compared with decreases in net fair value of $11.1 million and $8.8 million
during the year ended December 31, 2013 and the month ended December 31, 2012, respectively. During the year ended
December 31, 2014, the increase in net fair value was primarily a result of an increase in the volume of IRLCs and mortgage loans
held during this period and an increase in the average value of individual IRLCs and mortgage loans. During both the year ended
December 31, 2013 and the month ended December 31, 2012, the decrease in net fair value was primarily the result of a decrease in
the volume of IRLCs and mortgage loans held during these respective periods, partially offset by an increase in the average value of
individual IRLCs and mortgage loans.
Noninterest expenses were $431.8 million, $472.3 million and $50.3 million for the years ended December 31, 2014 and 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
decreased $20.9 million during the year ended December 31, 2014, compared with the year ended December 31, 2013, and comprised
approximately 58% and 59% of the total employees’ compensation and benefits expenses during the years ended December 31, 2014
and 2013, respectively. In addition, employee salaries and benefits decreased $14.5 million during the year ended December 31, 2014,
as compared with the year ended December 31, 2013, primarily as a result of headcount reductions in the third and fourth quarters of
2013. The mortgage origination segment records unreimbursed closing costs as noninterest expense 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 years ended December 31, 2014 and 2013 and the month ended December 31, 2012 were $32.7 million, $30.1 million and
$5.9 million, respectively.
Between January 1, 2005 and December 31, 2014, the mortgage origination segment sold mortgage loans totaling $65.6 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, the mortgage origination segment evaluates the claim and
determines if the claim can be satisfied through additional documentation or other deliverables. If the claim cannot be satisfied in that
matter, the mortgage origination segment negotiates with the investor to reach a settlement of the claim. Settlements typically result in
either the repurchase of a loan or reimbursement to the investor for losses incurred on the loan. Following is a summary of the
mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 2005 and December 31, 2014
(dollars in thousands).
Claims resolved with no payment .........................
$
168,442
0.26% $
—
0.00%
Original Loan Balance
Loss Recognized
Amount
% of
Loans
Sold
% of
Loans
Sold
Amount
Claims resolved as a result of a loan
repurchase or payment to an investor for
losses incurred (1) .............................................
193,758
362,200
$
0.30%
0.56% $
25,439
25,439
0.04%
0.04%
68
(1) Losses incurred include refunded purchased servicing rights.
At December 31, 2014 and 2013, the mortgage origination segment’s indemnification liability reserve totaled $17.6 million and $21.1
million, respectively. The related provision for indemnification losses was $3.1 million, $3.5 million and $0.4 million for the years
ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively.
Insurance Segment
Income before income taxes in our insurance segment was $25.7 million and $7.6 million during 2014 and 2013, respectively,
compared with a loss before income taxes of $4.7 million during 2012. 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, 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 significant improvement in operating results in our insurance segment during 2014, compared with 2013, was primarily a result of
growth in earned premium and improved claims loss experience associated with the significant decline in the general severity of
severe weather-related events during 2014. Based on our estimates of the ultimate losses, claims associated with these storms totaled
$21.7 million through December 31, 2014, with a net loss, after reinsurance, of $19.9 million during 2014. 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 considered catastrophic losses as they exceeded our $8 million reinsurance
retention during the third quarter of 2013. The estimate of ultimate losses from these storms totaled $26.5 million through
December 31, 2013 with a net loss, after reinsurance, of $22.1 million.
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. Based on this review, the insurance segment increased rates on
certain products in several states in 2014. A state-by-state review of the insurance segment’s products and pricing continues and has
resulted in additional rate filings. 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. These
actions have both reduced the rate of premium growth for 2014 when compared with the patterns exhibited in prior years and reduced
the insurance segment’s exposure to volatile weather through a lower number of insureds in these areas to improve its loss experience
during 2014. The insurance segment aims to manage and diversify its business concentrations and products to minimize the effects of
future weather-related events.
The insurance segment’s operations resulted in combined ratios of 89.3% during 2014, compared with 102.6% and 108.8% during
2013 and 2012, respectively. The year-over-year improvement in the combined ratios was primarily driven by the increase in net
earned premiums and improvement in our claims loss experience. 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 $173.6 million, $166.2 million and $154.1 million during 2014, 2013 and 2012, respectively, included net
insurance premiums earned of $164.5 million, $157.5 million and $146.7 million, respectively. The increases in earned premiums
were primarily attributable to rate and volume increases in homeowners and mobile home products.
69
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 .................................................................
Year Ended December 31,
2014
2013
2012
2014 vs 2013
Variance
2013
vs 2012
$
$
76,250
54,375
37,611
3,973
255
172,464
$
$
79,711
54,566
34,940
4,489
276
173,982
$
$
73,943
51,345
30,123
8,043
326
163,780
$
$
(3,461) $
(191)
2,671
(516)
(21)
(1,518) $
5,768
3,221
4,817
(3,554)
(50)
10,202
The total direct insurance premiums written for our three largest insurance product lines decreased by $1.0 million during 2014,
compared with 2013, due to efforts to reduce concentrations both geographically and within specific product lines. During 2013, total
direct insurance premiums written for our three largest insurance product lines increased by $13.8 million compared to 2012. This
increase was 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.
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 .................................................................
Year Ended December 31,
2014
2013
2012
2014 vs 2013
Variance
2013
vs 2012
$
$
72,739
51,871
35,880
3,790
244
164,524
$
$
72,175
49,407
31,636
4,065
250
157,533
$
$
66,233
45,990
26,982
7,204
292
146,701
$
$
564
2,464
4,244
(275)
(6)
6,991
$
$
5,942
3,417
4,654
(3,139)
(42)
10,832
Net insurance premiums earned during 2014 and 2013 increased compared to 2013 and 2012, respectively, primarily due to the
increases in net insurance premiums written of $0.9 million and $13.0 million in 2014 and 2013, respectively. During the fourth
quarter of 2014, compared with the same period in 2013, net insurance premiums earned were relatively flat. This reduction in the rate
of premium growth when compared with the patterns exhibited in prior quarters and years was consistent with the insurance segment’s
previously discussed efforts to manage and diversify its business concentrations and products to minimize the effects of future
weather-related events.
Noninterest expenses of $151.5 million, $166.0 million and $163.6 million during 2014, 2013 and 2012, 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 2014 was
$94.4 million, compared to $110.8 million and $109.2 million during 2013 and 2012, respectively. As a result, the loss and LAE ratio
during 2014, 2013 and 2012 was 57.4%, 70.3% and 74.4%, respectively. These year-over-year ratio improvements were primarily a
result of growth in earned premium and improved claims loss experience associated with the significant decline in the severity of
severe weather-related events during 2014 and the improved containment of expected losses during 2013 from the prior year weather
events.
The insurance segment seeks to generate underwriting profitability. 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 2014, catastrophic events that did not exceed reinsurance retention accounted for $19.9
million of the total loss and loss adjustment expense, as compared to $22.3 million and $23.3 million during 2013 and 2012,
respectively. The inclusion of catastrophic events increased insurance segment combined ratios by 14.1%, 14.3% and 15.8% during
2014, 2013 and 2012, 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. The expense
ratio during 2012 included other underwriting expenses of $1.7 million related to the write down of a policy administration system
NLC was unable to successfully implement. This charge increased the expense ratio during 2012 by 1.1%.
70
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.....................................................
Corporate
Year Ended December 31,
Variance
2014
2013
2012
2014 vs 2013
2013 vs 2012
$
$
$
41,609
13,823
55,432
(3,023)
52,409
164,524
$
$
$
40,592
12,859
53,451
(2,571)
50,880
157,533
$
$
$
38,757
13,829
52,586
(2,073)
50,513
146,701
$
$
$
1,017
964
1,981
(452)
1,529
6,991
$
$
$
1,835
(970)
865
(498)
367
10,832
31.9%
32.3%
34.4%
-0.4%
-2.1%
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, was $5.2 million, $6.6 million and $7.0 million during 2014, 2013 and 2012, respectively. On
October 2, 2014, Hilltop exercised its warrant to purchase 8,695,652 shares of SWS common stock at an exercise price of $5.75 per
share (the “SWS Warrant”). The aggregate exercise price was paid by the automatic elimination of the $50.0 million aggregate
principal amount note receivable from SWS. Consequently, recurring quarterly investment and interest income of $1.6 million were
no longer recognized beginning in the fourth calendar quarter of 2014. This transaction is discussed in more detail within the section
entitled “Liquidity and Capital Resources — SWS” below.
Interest expense of $8.2 million and $7.0 million during 2013 and 2012, respectively, was due to interest costs associated with the
7.50% Senior Exchangeable Notes due 2025 of HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop. 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.
Following the exercise of the SWS Warrant, Hilltop owned approximately 21% of the outstanding shares of SWS common stock as of
October 2, 2014. Contemporaneous with the exercise of the SWS Warrant, Hilltop changed the accounting method for its investment
in SWS common stock and elected to account for its investment in accordance with the provisions of the Fair Value Option
Subsections of the Accounting Standards Codification (“ASC”) (“Fair Value Option”) as permitted by GAAP. Hilltop had previously
accounted for its investment in SWS common stock as an available for sale security. Under the Fair Value Option, Hilltop’s
investment in SWS common stock is recorded at fair value effective October 2, 2014, with changes in fair value being recorded in
other noninterest income within the consolidated statement of operations rather than as a component of other comprehensive income.
Hilltop’s election to apply the provisions of the Fair Value Option resulted in Hilltop recording those unrealized gains previously
associated with its investment in SWS common stock of $7.2 million. For the period from October 3, 2014 through December 31,
2014, the change in fair value of Hilltop’s investment in SWS common stock resulted in a loss of $1.2 million. In the aggregate,
Hilltop recorded a $6.0 million net gain in other noninterest income during 2014.
Noninterest expenses of $13.9 million, $10.4 million and $14.5 million during 2014, 2013 and 2012, respectively, were primarily
comprised of employees’ compensation and benefits, professional fees and transaction costs associated with acquisition efforts.
During 2014, noninterest expenses included year-over-year increases in professional fees, including corporate governance, legal and
transaction costs, and headcount and related costs. 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 $1.4 million, $0.1 million and $6.4 million of
transaction costs associated with acquisition efforts during 2014, 2013 and 2012, respectively. We expect to incur additional estimated
SWS Merger-related transaction costs of $4.9 million during 2015.
71
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2014 as compared to
December 31, 2013 and 2012.
Securities Portfolio
At December 31, 2014, 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. We have the ability to categorize investments as trading, available for sale, and held to maturity.
Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked
to market through operations and held at the Bank and First Southwest. Securities that may be sold in response to changes in market
interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and other similar factors are
classified as available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other
comprehensive income (loss). Securities are classified as held to maturity based on the intent and ability of our management, at the
time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.
The table below summarizes our securities portfolio (in thousands).
Trading securities, at fair value .................................
$
65,717
$
58,846
$
90,113
2014
December 31,
2013
2012
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-backed securities ..................
Equity securities .......................................................
Note receivable .........................................................
Warrant .....................................................................
19,613
43,528
7,185
516,241
52,898
87,124
98,472
136,785
640
13,762
—
—
925,535
662,732
60,087
120,461
76,608
156,835
760
22,079
47,909
12,144
1,203,143
526,237
18,893
97,924
87,177
175,759
1,073
20,428
44,160
12,117
990,953
Securities held to maturity, at amortized cost
U.S. Treasury securities ............................................
U.S. government agencies:
Residential mortgage-backed securities ................
Collateralized mortgage obligations .....................
States and political subdivisions ...............................
Total securities portfolio ............................................
$
25,008
—
—
29,782
57,328
6,091
118,209
1,109,461
$
—
—
—
—
1,261,989
$
—
—
—
—
1,081,066
We had net unrealized gains of $0.8 million and $12.5 million related to the available for sale investment portfolio at December 31,
2014 and 2012, respectively, compared with a net unrealized loss of $53.7 million at December 31, 2013. The significant changes in
the net unrealized gain (loss) position of our available for sale investment portfolio during 2013 and 2014 were due to the effects of
increases in market interest rates beginning May 2013 that resulted in a decrease in the fair value of our debt securities until
January 2014 when the effects of decreases in market interest rates resulted in an increase in the fair value of our debt securities. As
previously discussed, Hilltop’s election to apply the provisions of the Fair Value Option for its investment in SWS common stock
effective October 2, 2014, resulted in Hilltop recording an unrealized net gain of $7.2 million associated with its investment in SWS
common stock. Therefore, Hilltop’s securities portfolio included its $70.3 million investment in SWS common stock in other assets
within the consolidated balance sheet at December 31, 2014. This transaction is discussed in more detail within the section entitled
“Liquidity and Capital Resources — SWS” below.
The market value of securities held to maturity at December 31, 2014 approximated book value.
72
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, 2014, the
banking segment’s securities portfolio of $916.5 million was comprised of trading securities of $20.8 million, available for sale
securities of $777.5 million and held to maturity securities of $118.2 million.
Broker-Dealer Segment
Our broker-dealer 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 $44.9 million at December 31, 2014 as trading.
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, 2014, the insurance
segment’s securities portfolio was comprised of $148.0 million in available for sale securities and $6.2 million of other investments
included in other assets within the consolidated balance sheet.
Corporate
At December 31, 2014, Hilltop’s portfolio was comprised of its $70.3 million investment in SWS common stock included in other
assets within the consolidated balance sheet. On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash
transaction. This transaction is discussed in more detail within the section entitled “Liquidity and Capital Resources — SWS” below.
The following table sets forth the estimated maturities of debt securities, excluding trading securities. Contractual maturities may be
different (dollars in thousands, yields are tax-equivalent).
One Year
Or Less
One Year to
Five Years
December 31, 2014
Five Years to
Ten Years
Greater Than
Ten Years
Total
U.S. Treasury securities:
Amortized cost ..............................
Fair value ......................................
Weighted average yield.................
$
29,361
29,356
$
0.22%
10,086
10,102
$
1.12%
$
4,943
5,157
2.65%
—
—
—
$ 44,390
44,615
0.70%
U.S. government agencies:
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:
6,469
6,591
3.63%
2,018
2,008
2.08%
—
—
—
5,743
5,822
1.60%
1,033
1,051
2.23%
1,034
1,046
1.93%
16,668
18,144
3.57%
493,128
485,684
522,008
516,241
2.14%
2.20%
3,438
3,494
3.14%
2,682
2,712
1.98%
74,656
76,655
81,145
83,208
3.21%
3.17%
142,903
140,264
146,619
144,022
1.99%
1.98%
Amortized cost ..................................
Fair value ..........................................
Weighted average yield ....................
10,624
10,728
3.77%
46,732
50,033
4.34%
35,133
36,747
3.39%
917
964
6.25%
93,406
98,472
3.94%
73
States and political subdivisions:
Amortized cost ..................................
Fair value ..........................................
Weighted average yield ....................
Commercial mortgage-backed securities:
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, 2014
Five Years to
Ten Years
Greater Than
Ten Years
Total
365
366
4.93%
—
—
—
4,762
4,772
1.72%
11,126
11,191
2.34%
125,257
126,591
141,510
142,920
2.56%
2.52%
—
—
—
—
—
—
593
640
6.24%
593
640
6.24%
48,837
49,049
1.56%
69,390
72,826
3.40%
73,990
77,445
3.16%
837,454
830,798
1,029,671
1,030,118
2.28%
2.38%
Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and segregated
between those considered to be PCI loans and all other originated or acquired loans (in thousands). PCI loans showed evidence of
credit deterioration that makes it probable that all contractually required principal and interest payments will not be collected.
December 31, 2014
Commercial and industrial ...............
Real estate ........................................
Construction and land
development .................................
Consumer .........................................
Non-covered loans, gross .............
Allowance for loan losses .................
Non-covered loans, net of
Loans, excluding
PCI Loans
PCI
Loans
$
1,745,409
1,670,684
$
13,442
24,151
$
404,465
51,009
3,871,567
(31,722)
9,178
2,138
48,909
(5,319)
Total
Loans
1,758,851
1,694,835
413,643
53,147
3,920,476
(37,041)
allowance ..................................
$
3,839,845
$
43,590
$
3,883,435
December 31, 2013
Commercial and industrial ...............
Real estate ........................................
Construction and land
development .................................
Consumer .........................................
Non-covered loans, gross .............
Allowance for loan losses .................
Non-covered loans, net of
Loans, excluding
PCI Loans
PCI
Loans
$
1,600,450
1,418,003
$
36,816
39,250
$
344,734
51,067
3,414,254
(30,104)
19,817
4,509
100,392
(3,137)
Total
Loans
1,637,266
1,457,253
364,551
55,576
3,514,646
(33,241)
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, net of
Loans, excluding
PCI Loans
PCI
Loans
$
1,588,907
1,122,667
$
71,386
62,247
$
247,413
26,629
2,985,616
(3,409)
33,070
77
166,780
—
Total
Loans
1,660,293
1,184,914
280,483
26,706
3,152,396
(3,409)
allowance ..................................
$
2,982,207
$
166,780
$
3,148,987
74
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 $4.7 billion, $4.2 billion and
$4.1 million at December 31, 2014, 2013 and 2012, respectively. The banking segment’s non-covered loan portfolio includes a $1.5
billion warehouse line of credit extended to PrimeLending, of which $1.2 billion was drawn at December 31, 2014. At December 31,
2013 and 2012, the banking segment’s non-covered loan portfolio included $1.0 billion and $1.3 billion, respectively, drawn against
the PrimeLending warehouse line of credit, as well as term loans to First Southwest that had outstanding balances of $23.0 million and
$4.0 million, respectively. Amounts advanced against the warehouse line of credit and the First Southwest term loans are eliminated
from net loans on our consolidated balance sheets.
The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. The areas
of concentration within our non-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, 2014, the banking segment’s non-
covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of its total non-covered loans
included non-construction commercial real estate loans within the non-covered real estate portfolio. At December 31, 2014, non-
construction commercial real estate loans were 23.32% of the banking segment’s total non-covered loans. The banking segment’s non-
covered loan concentrations were within regulatory guidelines at December 31, 2014.
Broker-Dealer Segment
The loan portfolio of the broker-dealer 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 broker-dealer segment’s total non-covered loans, net of the allowance for non-covered loan losses,
were $378.3 million, $281.6 million and $277.0 million at December 31, 2014, 2013 and 2012, respectively. These increases were
primarily attributable to increased borrowings in margin accounts held by FSC customers and correspondents.
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages
funded through PrimeLending, and IRLCs with a customer pursuant to which we agree to originate a mortgage loan on a future date at
an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in
thousands).
Loans held for sale:
Unpaid principal
balance .......................
Fair value adjustment .....
IRLCs:
Unpaid principal
balance .......................
Fair value adjustment .....
2014
December 31,
2013
2012
$
$
$
$
1,218,792
53,360
1,272,152
621,216
17,057
638,273
$
$
$
$
1,037,528
21,555
1,059,083
602,467
12,151
614,618
$
$
$
$
1,359,829
40,908
1,400,737
968,083
15,150
983,233
The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and
IRLCs. The notional amounts of these forward commitments at December 31, 2014, 2013 and 2012, were $1.5 billion, $1.4 billion
and $1.4 billion, respectively, while the related estimated fair values were $(11.1) million, $10.5 million and $0.7 million,
respectively.
75
Covered Loan Portfolio
Banking Segment
Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as “covered loans” and
reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to
reimburse the Bank the following amounts with respect to the covered assets (including covered loans): (i) 80% of losses on the first
$240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred;
and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any
subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10
years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank
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 of
December 31, 2014, the Bank estimated that covered losses and reimbursable expenses exceed $240.4 million, but do not exceed
$365.7 million. Unless the estimates of covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record
additional reimbursement receivable from the FDIC. As of December 31, 2014, the Bank had billed $75.5 million of covered net
losses to the FDIC, of which 80%, or $60.4 million, are reimbursable under the loss-share agreements. As of December 31, 2014, the
Bank had received aggregate reimbursements of $38.5 million from the FDIC.
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since
origination. 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.
Covered loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
10,345
183,886
$
20,435
368,964
$
December 31, 2014
Commercial and industrial ...............
Real estate ........................................
Construction and land
development .................................
Consumer .........................................
Covered loans, gross ....................
Allowance for loan losses .................
Covered loans, net of allowance ...
$
$
13,021
—
207,252
(77)
207,175
December 31, 2013
Commercial and industrial ...............
Real estate ........................................
Construction and land
development .................................
Consumer .........................................
Covered loans, gross ....................
Allowance for loan losses .................
Covered loans, net of allowance ...
Loans, excluding
PCI Loans
$
$
28,533
223,304
25,376
—
277,213
(179)
277,034
45,989
—
435,388
(4,534)
430,854
PCI
Loans
38,410
564,678
126,068
—
729,156
(882)
728,274
$
$
$
$
$
$
30,780
552,850
59,010
—
642,640
(4,611)
638,029
Total
Loans
66,943
787,982
151,444
—
1,006,369
(1,061)
1,005,308
At December 31, 2014, 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, 2014, non-construction residential real estate loans and non-construction commercial real estate loans
were 38.30% and 41.10%, respectively, of the banking segment’s total covered loans. The banking segment’s covered loan
concentrations were within regulatory guidelines at December 31, 2014.
76
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
land development) ...................................
Total .........................................................
Fixed rate loans ............................................
Floating rate loans ........................................
Total .........................................................
$
$
$
$
December 31, 2014
Due Within
One Year
Due From One
To Five Years
Due After
Five Years
1,992,858
$
509,995
$
102,260
$
313,160
2,306,018
2,162,921
143,097
2,306,018
$
$
$
974,476
1,484,471
1,435,589
48,882
1,484,471
$
$
$
1,434,969
1,537,229
1,535,952
1,277
1,537,229
$
$
$
Total
2,605,113
2,722,605
5,327,718
5,134,462
193,256
5,327,718
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. Management has
responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our Board of
Directors and the Loan Review Committee of the Bank’s board of directors.
It is management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the
allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the Financial
Accounting Standards Board (“FASB”) ASC. 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.
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 using one of three impairment measurement methods as
of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market
price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in our estimate of the
allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require
the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies
Topic are calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year
average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates
commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate;
therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter
net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to
better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.
77
While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon
which we determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental
factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience,
including but not limited to:
•
•
•
•
•
•
•
changes in the volume and severity of past due, nonaccrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of
loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The
magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.
We design our loan review program to identify and monitor problem loans by maintaining a credit grading process, requiring that
timely and appropriate changes are made to reviewed loans and coordinating the delivery of the information necessary to assess the
appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed,
typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified,
(iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a
problem. We review on an individual basis all loan relationships equal to or greater than $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.
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, 2014, additional provisions for losses on existing loans may be
necessary in the future. Within our non-covered portfolio, we recorded net charge-offs of $3.9 million, $6.3 million and $0.4 million
for the years ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively. Our allowance for non-
covered loan losses totaled $37.0 million, $33.2 million and $3.4 million at December 31, 2014, 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, 2014, 2013 and
2012 was 0.94%, 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. Within our covered portfolio,
we recorded net charge-offs of $5.6 million for the year ended December 31, 2014. Our allowance for covered loan losses totaled $4.6
million and $1.1 million at December 31, 2014 and 2013, respectively. The ratio of the allowance for covered loan losses to total
covered loans held for investment at December 31, 2014 and 2013 was 0.72% and 0.11%, respectively.
Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the
banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing
loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations,
generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its
portfolio. The provision for loan losses, primarily in the banking segment, was $16.9 million, $37.2 million and $3.8 million for the
years ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively. The increase in our provision for
loan losses during 2013 and 2014, compared with 2012, was related to the accumulation of a reserve on the non-covered and covered
78
loan portfolios subsequent to the PlainsCapital Merger and the FNB Transaction, respectively, at which time the respective acquired
loan portfolios were recorded at estimated fair value with no carryover of the related allowance for loan loss. The decrease in the
provision for loan losses during 2014, compared with 2013, was attributable to lower charge-offs related to the pooling of PCI loans
acquired in the FNB Transaction, lower originations and lower historical losses used in the calculation of the required reserve.
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. With respect to
the covered portfolio, the year ended December 31, 2013 below refers to the period from September 14, 2013 through December 31,
2013.
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 ..................................................
Covered Portfolio
Balance, beginning of year ...........................................
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 year .....................................................
Year Ended December 31,
2013
2014
$
33,241
7,747
$
3,409
36,093
Month Ended
December 31, 2012
—
3,800
$
—
—
—
—
—
391
—
—
—
391
(391)
3,409
2,944
218
185
105
3,452
6,926
114
—
359
7,399
(3,947)
37,041
$
3,439
282
265
61
4,047
9,359
209
524
216
10,308
(6,261)
33,241
$
Year Ended December 31,
2014
2013
1,061
9,186
$
—
1,065
—
—
—
—
—
90
5,399
147
—
5,636
(5,636)
4,611
$
—
—
—
—
—
4
—
—
—
4
(4)
1,061
$
$
$
79
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).
2014
% of
Gross
December 31,
2013
% of
Gross
2012
%
of
Gross
Non-Covered
Non-Covered
Non-Covered
Reserve
Loans
Reserve
Loans
Reserve
Loans
$
18,999
44.86% $
16,865
46.58% $
1,845
52.67%
17,581
461
37,041
$
53.78%
1.36%
100.00% $
16,288
88
33,241
51.84%
1.58%
100.00% $
1,559
5
3,409
46.48%
0.85%
100.00%
Non-Covered Portfolio
Commercial and industrial .........
Real estate (including
construction and land
development) .........................
Consumer ...................................
Total .......................................
December 31,
2014
2013
% of
Gross
Covered
loans
% of
Gross
Covered
Loans
Reserve
4.79% $
1,053
6.65%
Reserve
$
1,193
3,418
—
4,611
$
95.21%
0.00%
100.00% $
8
—
1,061
93.35%
0.00%
100.00%
Covered Portfolio
Commercial and industrial ............
Real estate (including
construction and land
development) ............................
Consumer ......................................
Total ..........................................
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has
concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or
financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans
contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving,
the loan is subject to downgrade, typically to substandard, in three to six months. Within our non-covered loan portfolio at
December 31, 2014, we had three credit relationships totaling $1.8 million of potential problem loans, which are assigned a grade of
special mention within our risk grading matrix. At December 31, 2013, we had ten credit relationships totaling $24.7 million of non-
covered potential problem loans. Within our covered loan portfolio at December 31, 2014, we had no credit relationships with
potential problem loans assigned a grade of special mention within our risk grading matrix, compared with two credit relationships
totaling $3.3 million at December 31, 2013.
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 ............................................................................................
2014
2013
2012
December 31,
$
$
16,648
4,707
703
—
22,058
$
$
16,730
6,511
112
—
23,353
$
$
—
1,756
—
—
1,756
Non-covered non-performing loans as a percentage of total non-
covered loans ......................................................................................
0.42%
0.51%
0.04%
Non-covered other real estate owned ......................................................
$
808
$
4,805
$
11,098
80
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,
2014
2013
$
361
2012
$
13
557
23,227
$
28,171
$
13,411
0.25%
0.32%
0.18%
19,237
2,901
$
$
7,301
1,055
$
$
3,563
—
At December 31, 2014, total non-covered non-performing assets decreased $5.0 million to $23.2 million, compared with $28.2 million
at December 31, 2013. Non-covered non-performing loans totaled $22.1 million at December 31, 2014 and $23.4 million at
December 31, 2013. At December 31, 2014, non-covered non-accrual loans included twelve commercial and industrial relationships
with loans of $15.0 million secured by accounts receivable, inventory, equipment, life insurance, and a total of $1.6 million in lease
financing receivables. Non-covered non-accrual loans at December 31, 2014 also included $4.7 million characterized as real estate
loans, including two commercial real estate loan relationships of $0.4 million and loans secured by residential real estate of $1.3
million, $3.0 million of which were classified as loans held for sale, as well as construction and land development loans of $0.7
million. Total non-covered non-performing assets increased $14.8 million to $28.2 million at December 31, 2013, 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. At
December 31, 2013, non-covered non-accrual loans included five commercial and industrial relationships with loans of $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 of $2.5 million and loans secured by residential real estate of $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.
Non-covered OREO decreased $4.0 million to $0.8 million at December 31, 2014, compared with $4.8 million at December 31, 2013.
Changes in non-covered OREO included the disposal of twelve properties totaling $5.8 million and the addition of seven properties
totaling $2.6 million. At December 31, 2014, non-covered OREO included commercial properties of $0.4 million and commercial real
estate property consisting of parcels of unimproved land of $0.4 million. 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.
Non-covered loans past due 90 days or more and still accruing were $19.2 million, $7.3 million and $3.6 million at December 31,
2014, 2013 and 2012, respectively, Included in those amounts were $19.2 million, $6.8 million and $1.6 million, respectively, of loans
held for sale that are subject to repurchase by PrimeLending, all of which are guaranteed by U.S. Government agencies. The
remaining amounts of loans past due and still accruing at December 31, 2013 and 2012 included secured commercial and industrial
loans, and a real estate loan.
At December 31, 2014, troubled debt restructurings (“TDRs”) on non-covered loans totaled $10.3 million, of which $2.9 million relate
to non-covered loans that are considered to be performing and non-covered non-performing loans of $7.4 million reported in non-
accrual loans. At December 31, 2013, TDRs on non-covered loans totaled $11.4 million. These TDRs were comprised of $1.1 million
of non-covered loans that are considered to be performing and non-covered non-performing loans of $10.3 million reported in non-
accrual loans.
The following table presents components of our covered non-performing assets (dollars in thousands).
Covered loans accounted for on a non-accrual basis:
Commercial and industrial ........................................
Real estate .................................................................
Construction and land development ..........................
Consumer ..................................................................
December 31,
2014
2013
$
$
1,325
31,869
1,029
—
34,223
$
$
973
249
575
—
1,797
81
Covered non-performing loans as a percentage of total
covered loans .............................................................
Covered other real estate owned:
Real estate - residential ..............................................
Real estate - commercial ...........................................
Construction and land development - residential ......
Construction and land development - commercial ....
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 .............................................................
$
$
$
$
$
$
December 31,
2014
2013
5.33%
0.18%
15,711
40,889
21,719
58,626
136,945
—
171,168
$
$
$
$
11,634
51,897
36,866
42,436
142,833
—
144,630
1.85%
1.62%
67
$
326
$
—
—
At December 31, 2014, covered non-performing assets increased by $26.6 million to $171.2 million, compared with $144.6 million at
December 31, 2013, primarily due to an increase in covered non-accrual loans of $32.4 million. Covered non-performing loans totaled
$34.2 million at December 31, 2014 and $1.8 million at December 31, 2013. At December 31, 2014, covered non-performing loans
included two commercial and industrial relationships with loans of $2.1 million secured by accounts receivable and inventory, four
commercial real estate loan relationships of $30.8 million, nine residential real estate loan relationships of $1.1 million, as well as
construction and land development loans of $1.0 million. At December 31, 2013, covered non-performing loans of $1.8 million
included one commercial and industrial relationship with loans of $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 of $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. Covered OREO decreased $5.9 million to $136.9 million at December 31,
2014, compared with $142.8 million at December 31, 2013. The decrease was primarily due to the disposal of 252 properties totaling
$55.1 million and fair value valuation decreases of $19.7 million, partially offset by the addition of 210 properties totaling $64.9
million.
Covered loans past due 90 days or more and still accruing totaled $0.1 million at December 31, 2014 and included a secured
commercial and industrial loan, a construction and land development loan, and a residential real estate loan. There were no covered
loans past due 90 days or more and still accruing at December 31, 2013.
At December 31, 2014, TDRs on covered loans totaled $0.7 million, of which $0.3 million relate to covered loans that are considered
to be performing and covered non-performing loans of $0.4 million included in non-accrual loans.
Insurance Losses and Loss Adjustment Expenses
At December 31, 2014 and 2013, our reserves for unpaid losses and LAE were $25.4 million and $23.0 million, respectively, net of
estimated recoveries from reinsurance of $4.3 million and $4.5 million, respectively. The increase in the net reserve for unpaid losses
and LAE was primarily due to increased reserves attributable to prior period adverse development associated with litigation emerging
from a series of hail storms within the 2012 accident year. 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, less a reduction for reinsurance
recoverables related to those liabilities. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the
liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact
of reinsurance. The amount of liabilities for reported claims is based primarily on a claim-by-claim evaluation of coverage, liability,
injury severity or scope of property damage, and any other information considered relevant to estimating exposure presented by the
claim.
82
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”). 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. This process is commonly referred to as loss
development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year
and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss
development patterns indicated in the companies’ historical loss triangles (which utilize historical trends, adjusted for changes in loss
costs, underwriting standards, policy provisions, product mix and other factors) and applicable insurance industry loss development
factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to
significant variation. Liabilities for LAE are intended to cover the ultimate cost of settling claims, including investigation and defense
of lawsuits resulting from such claims.
The 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 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.
We would consider reasonably likely changes in the key assumptions to have an impact on our best estimate by plus or minus 10%. At
December 31, 2014, this equates to approximately plus or minus $2.5 million, or 1.76% of insurance segment equity, and 2.7% of
calendar year 2014 insurance losses.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investment in loans and
securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin.
The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail
within the section entitled “Liquidity and Capital Resources — Banking Segment” below, is constantly changing due to the banking
segment’s needs and market conditions. Overall, average deposits totaled $6.4 billion for the year ended December 31, 2014, an
increase from average deposits of $5.3 billion for the year ended December 31, 2013 and $4.6 billion for the month ended
December 31, 2012. The significant year-over-year increases in average deposits were primarily due to those deposits assumed as a
part of the FNB Transaction. For the periods presented below, the average rates paid associated with certificates of deposits include
the effects of amortization of the deposit premiums booked as a part of the PlainsCapital Merger and the FNB Transaction.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
Year Ended December 31,
2014
2013
Month Ended
December 31, 2012
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Noninterest-bearing
demand deposits ..............
$
1,862,277
0.00% $
1,370,029
0.00% $
1,322,023
Interest-bearing demand
deposits ...........................
Savings deposits ..................
Certificates of deposit .........
2,249,527
304,774
1,936,447
6,353,025
$
0.22%
0.19%
0.53%
0.25% $
1,930,622
247,789
1,745,483
5,293,923
0.24%
0.32%
0.54%
0.28% $
1,700,265
177,803
1,355,435
4,555,526
0.00%
0.25%
0.32%
0.53%
0.26%
83
The maturity of consolidated interest-bearing time deposits of $100,000 or more at December 31, 2014 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 .................................
$
$
279,056
161,787
299,525
469,459
1,209,827
The banking segment experienced a decline of $464.6 million in interest-bearing time deposits of $100,000 or more at December 31,
2014 compared with December 31, 2013, primarily due to our strategic decisions to both not renew any “listing service” time deposits
and offer lower renewal rates on certain time deposits acquired in the FNB Transaction to conform to the legacy Bank interest rate
structure. Interest-bearing time deposits of $100,000 or more at December 31, 2013, compared with December 31, 2012 increased by
$693.1 million primarily due to those deposits assumed as a part of the FNB Transaction. At December 31, 2014, there were $1.1
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 .............................
2014
2013
2012
December 31,
Balance
$ 762,696
56,684
67,012
$ 886,392
Average
Rate Paid
Balance
Average
Rate Paid
Balance
Average
Rate Paid
0.32% $
4.27%
342,087
56,327
0.36% $ 728,250
141,539
6.33%
3.52%
0.88% $
67,012
465,426
67,012
3.59%
2.10% $ 936,801
0.33%
5.89%
3.53%
1.40%
Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the Federal
Home Loan Bank (“FHLB”) and short-term bank loans. The $420.6 million increase in short-term borrowings at December 31, 2014
compared with December 31, 2013 was primarily due to an increase of $375.0 million in borrowings at the FHLB that had an original
maturity of one year. This increase was the result of a strategic decision to lengthen the weighted-average duration of the Bank’s
funding in an effort to manage interest rate risk, higher funding requirements associated with the increase in our mortgage origination
segment’s balance on its warehouse line of credit with the Bank and a decrease in deposits acquired in the FNB Transaction. The
$386.2 million decrease in short-term borrowings at December 31, 2013 compared with December 31, 2012 was primarily the result
of lower funding requirements due to a reduction in our mortgage origination segment’s balance on it warehouse line of credit with the
Bank. Notes payable at December 31, 2014 of $56.7 million was 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 of HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop, being called for redemption
during the fourth quarter of 2013. The First Southwest nonrecourse notes of $4.2 million at December 31, 2014 were paid off in
January 2015.
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, 2014, Hilltop had $146.0 million in freely available cash and cash equivalents, a decrease of $17.9
million from $163.9 million at December 31, 2013. As a result of the SWS Merger, Hilltop used $78.2 million of this available cash to
settle the cash portion of the merger consideration. If necessary or appropriate, we may also finance acquisitions with the proceeds
from equity or debt issuances. Subject to regulatory restrictions, Hilltop may also receive dividends from its subsidiaries. The current
short-term liquidity needs of Hilltop include operating expenses and dividends on preferred stock.
84
SWS
On October 2, 2014, Hilltop exercised its SWS Warrant in full, acquiring 8,695,652 shares of SWS common stock at an exercise price
of $5.75 per share. Pursuant to the terms of the warrant and a credit agreement with SWS, the aggregate exercise price was paid by the
automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Following the
exercise of the SWS Warrant, Hilltop (i) owned 10,171,039 shares of SWS common stock, representing approximately 21% of the
outstanding shares of SWS common stock and (ii) was no longer a lender under the credit agreement. Contemporaneous with the
exercise of the SWS Warrant, Hilltop changed the accounting method for its investment in SWS common stock and elected to account
for its investment in accordance with the provisions of the Fair Value Option as permitted by GAAP. Hilltop had previously accounted
for its investment in SWS common stock as an available for sale security. Under the Fair Value Option, Hilltop’s investment in SWS
common stock is recorded at fair value effective October 2, 2014, with changes in fair value being recorded in other noninterest
income within the consolidated statement of operations rather than as a component of other comprehensive income. Hilltop’s election
to apply the provisions of the Fair Value Option resulted in Hilltop recording those unrealized gains previously associated with its
investment in SWS common stock of $7.2 million. For the period from October 3, 2014 through December 31, 2014, the change in
fair value of Hilltop’s investment in SWS common stock resulted in a loss of $1.2 million. In the aggregate, Hilltop recorded a $6.0
million net gain in other noninterest income during 2014. At December 31, 2014, Hilltop’s investment in SWS common stock is
included in other assets within the consolidated balance sheet and is recorded at a fair value of $70.3 million.
On January 1, 2015, we completed our acquisition of SWS in a stock and cash transaction, whereby SWS merged with and into
Hilltop Securities, a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction. SWS’s broker-dealer
subsidiaries, Southwest Securities and SWS Financial, became subsidiaries of Hilltop Securities. Immediately following the SWS
Merger, SWS’s banking subsidiary, SWS FSB, was merged into the Bank. As a result of the SWS Merger, each outstanding share of
SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, equating to
$6.92 per share based on Hilltop’s closing price on December 31, 2014 and resulting in an aggregate purchase price of $349.0 million,
consisting of 10.0 million shares of common stock, $78.2 million in cash and $70.3 million associated with our existing investment in
SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the SWS Merger, the merger
consideration is subject to change, and therefore, preliminary at this time.
Series B Preferred Stock
As a result of the PlainsCapital Merger, the outstanding shares of PlainsCapital Corporation’s Non-Cumulative Perpetual Preferred
Stock, Series C, all of which were held by the U.S. Treasury, were converted on a one-for-one basis into shares of Hilltop Series B
Preferred Stock. The terms of our Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis.
The dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of
“qualified small business lending” (“QSBL”) by the Bank. The shares of Hilltop Series B Preferred Stock are senior to shares of our
common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At both
September 30, 2014 and December 31, 2013, $114.1 million of our Series B Preferred Stock was outstanding. During the three months
ended December 31, 2014, we accrued dividends of $1.4 million on the Hilltop Series B Preferred Stock.
The dividend rate on the Hilltop Series B Preferred Stock is fixed at 5.0% per annum from January 1, 2014 until March 26, 2016,
based upon our level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on any outstanding shares of
Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.
Loss-Share Agreements
In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2
billion of loans and OREO acquired in the FNB Transaction, which we refer to as “covered assets”. Pursuant to the loss-share
agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on
the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses
incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for
any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and
10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years,
respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-
up” payment to the FDIC approximately ten 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.
85
Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our
financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
In July 2013, federal banking regulators released final rules for the regulation of capital and liquidity for U.S. banking organizations
(“Basel III”), a new comprehensive capital framework for U.S. banking organizations that will become effective for reporting periods
beginning after January 1, 2015 (subject to a phase-in period through January 2019).
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to
continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows to
above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an
acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in
2016). All of the debentures issued to PCC Statutory Trusts I, II, III and IV (the “Trusts”), less the common stock of the Trusts,
qualified as Tier 1 capital as of December 31, 2014, under guidance issued by the Board of Governors of the Federal Reserve System.
We anticipate that 100% of the Trusts, less the common stock of the Trusts, will qualify as Tier 1 Capital.
The final rules also provide for a number of adjustments to and deductions from the new common equity Tier 1 capital ratio, as well as
changes to the calculation of risk weighted assets which is expected to increase the absolute level. Under current capital standards, the
effects of accumulated other comprehensive items included in capital are excluded for the purposes of determining regulatory capital
ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced
approaches banking organizations, including Hilltop and the Bank, may make a one-time permanent election to continue to exclude
these items. Hilltop and Bank expect to make this election in order to avoid significant variations in the level of capital depending
upon the impact of interest rate fluctuations on the fair value of our securities portfolio. In addition, deductions include, for example,
the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments
in non-consolidated financial entities be deducted from the common equity Tier 1 capital ratio to the extent that any one such category
exceeds 10% of the common equity Tier 1 capital ratio or all such categories in the aggregate exceed 15% of the common equity Tier
1 capital ratio. Further, deferred tax assets which are related to operating losses and tax credit carry forward are excluded from the
common equity Tier 1 capital ratio.
At December 31, 2014, Hilltop exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of
19.69%, Tier 1 capital to risk weighted assets ratio of 19.02% and a Tier 1 capital to average assets, or leverage, ratio of 14.17%. The
Bank’s consolidated actual capital amounts and ratios at December 31, 2014 resulted in it being considered “well-capitalized” under
regulatory requirements, without giving effect to Basel III, and included a total capital to risk weighted assets ratio of 14.45%, Tier 1
capital to risk weighted assets ratio of 13.74% and a Tier 1 capital to average assets, or leverage, ratio of 10.31%. Management
believes that, as of December 31, 2014, Hilltop and the Bank would meet all applicable capital adequacy requirements under the Basel
III capital rules for banks with less than $15 billion in assets on a fully phased-in basis as if such requirements were currently in effect.
We discuss regulatory capital requirements in more detail in Note 21 to our consolidated financial statements, as well as under the
caption “Government Supervision and Regulation — Banking — BASEL III” set forth in Part I, Item I. of our Annual Report on
Form 10-K.
Cash Flow Activities
Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled $813.1 million at December 31,
2014, an increase of $67.1 million from $746.0 million at December 31, 2013. Deposit flows, calls of investment securities and
borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local
economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of
funds.
Cash used in operations during 2014 was $91.4 million, a decrease in cash flow of $488.1 million compared with 2013. Cash used in
operations increased primarily due to reductions in cash provided by our mortgage loan origination activities. 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 those operating activities acquired as a part of the PlainsCapital Merger for the year ended
December 31, 2013 compared with the month ended December 31, 2012.
86
Cash provided by our investing activities during 2014 was $259.8 million, including net proceeds from securities in our investment
portfolio of $147.7 million, net changes in loans of $103.0 million, and net sales of premises and equipment and other real estate
owned of $26.2 million. 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 $11.8 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 in our investment portfolio.
Cash used in financing activities during 2014 was $101.4 million, a decrease in cash used of $499.7 million compared with 2013. The
decrease in cash used in financing activities was primarily due to an increase in short-term borrowings during 2014, offset by a greater
decrease in deposits, primarily due to our strategic decisions to both not renew any “listing service” time deposits and offer lower
renewal rates on certain time deposits acquired in the FNB Transaction, during 2014, compared with 2013. Cash used in financing
activities during 2013 increased by $620.9 million compared with 2012. The increase in cash used was primarily due to those
financing activities of the banking segment acquired as a part of the PlainsCapital Merger 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 $6.4 billion at December 31, 2014, a decrease of $353.0 million from $6.7 billion at December 31, 2013. This
decrease is primarily due to our strategic decisions to both not renew any “listing service” time deposits and offer lower renewal rates
on certain time deposits acquired in the FNB Transaction to conform to the legacy PlainsCapital Bank interest rate structure. 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, 2014, money market deposits, including brokered deposits, were $941.8 million; time
deposits, including brokered deposits, were $1.7 billion; and noninterest bearing demand deposits were $2.1 billion. Money market
deposits, including brokered deposits, decreased by $213.6 million from $1.2 billion and time deposits, including brokered deposits,
decreased $631.6 million from $2.3 billion at December 31, 2013.
The Bank’s 15 largest depositors, excluding Hilltop and First Southwest, accounted for 13.24% of the Bank’s total deposits, and the
Bank’s five largest depositors, excluding First Southwest, accounted for 7.77% of the Bank’s total deposits at December 31, 2014. The
loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations
related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new
deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. We have not experienced any liquidity
issues to date with respect to brokered deposits or our other large balance deposits, and we believe alternative sources of funding are
available to more than compensate for the loss of one or more of these customers.
Broker-Dealer Segment
FSC relies on its equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances,
correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and
operations. FSC has credit arrangements with four unaffiliated banks of up to $305.0 million, which are used to finance securities
owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit
arrangements are provided on an “as offered” basis and are not committed lines of credit. At December 31, 2014, FSC had borrowed
$123.2 million under these credit arrangements.
87
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse line of credit of up to $1.5 billion maintained with the
Bank. At December 31, 2014, PrimeLending had outstanding borrowings of $1.2 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, 2014, PrimeLending had no borrowings under the JPMorgan Chase line of credit.
Insurance Segment
Our insurance operating subsidiary’s primary investment objectives are to preserve capital and manage for a total rate of return.
NLC’s strategy is to purchase securities in sectors that represent the most attractive relative value. Bonds, cash and short-term
investments of $214.6 million, or 91.5%, equity investments of $13.8 million and other investments of $6.2 million comprised NLC’s
$234.5 million in total cash and investments at December 31, 2014. NLC does not currently have any significant concentration in both
direct and indirect guarantor exposure or any investments in subprime mortgages. NLC has custodial agreements with Wells Fargo
Bank, N.A. and an investment management agreement with DTF Holdings, LLC.
Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2014 (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.
The following table reflects First Southwest’s payoff of its $4.2 million nonrecourse notes contractually due January 2035 in
January 2015. The contractual obligations assumed as a part of the SWS Merger, effective January 1, 2015, are not included in the
following table.
Reserve for losses and loss adjustment
expenses ........................................................
Short-term borrowings ......................................
Long-term debt obligations ...............................
Capital lease obligations ...................................
Operating lease obligations ...............................
Cash portion of SWS merger consideration ......
Total ..............................................................
Impact of Inflation and Changing Prices
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
Total
$
$
20,059
764,403
13,932
1,090
24,588
78,216
902,288
$
$
7,904
—
9,556
2,232
34,238
—
53,930
$
$
1,605
—
9,917
2,354
19,776
—
33,652
$
$
148
—
198,433
10,348
28,169
—
237,098
$
29,716
764,403
231,838
16,024
106,771
78,216
$ 1,226,968
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.
88
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our
consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include
commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate
risk in excess of the amounts recognized in our consolidated balance sheets.
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified
rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining
specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting
them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and
have recorded a liability related to such credit risk in our consolidated financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party.
In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required
to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the
contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our
policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in
loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.4 billion at December 31, 2014 and
outstanding financial and performance standby letters of credit of $45.1 million at December 31, 2014.
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, use of derivatives to support
certain non-profit housing organization clients, 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, amounts receivable under the loss-share agreements with the FDIC (“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
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.
89
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, less a reduction for
reinsurance recoverables related to those liabilities. 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 (“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.
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.
90
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 retained
MSR 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 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.
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. Purchase date valuations,
which 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. 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.
At December 31, 2014, total notes payable outstanding on our consolidated balance sheet was $56.7 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.
91
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
assets ...................................
Total interest sensitive
assets ................................
3 Months or
Less
> 3 Months to
1 Year
> 1 Year to
3 Years
> 3 Years to
5 Years
> 5 Years
Total
December 31, 2014
$ 3,079,529 $
24,144
614,022 $
75,537
739,362 $
278,873
293,244 $
215,786
654,707 $ 5,380,864
916,490
322,150
30,602
448,544
—
—
—
—
—
—
—
—
30,602
448,544
3,582,819
689,559
1,018,235
509,030
976,857
6,776,500
92
Interest sensitive liabilities:
Interest bearing checking .............
Savings .........................................
Time deposits ...............................
Notes payable & other
borrowings ...............................
Total 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, 2014
$ 2,268,982 $
299,051
495,527
— $
—
639,870
— $
—
496,333
— $
—
35,926
— $ 2,268,982
299,051
—
1,673,672
6,016
414,652
225,476
1,355
727
5,163
647,373
liabilities ...........................
3,478,212
865,346
497,688
36,653
11,179
4,889,078
Interest sensitivity gap .................
$
104,607 $
(175,787) $
520,547 $
472,377 $
965,678 $ 1,887,422
Cumulative interest sensitivity
gap ...........................................
$
104,607 $
(71,180) $
449,367 $
921,744 $ 1,887,422
Percentage of cumulative gap to
total interest sensitive assets ....
1.54%
-1.05%
6.63%
13.60%
27.85%
The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase.
Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement
techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and
decrements of 1%, 2% and 3% to determine the effect on net interest income changes for the next twelve months. The banking
segment also measures the effects of changes in interest rates on economic value of equity by discounting projected cash flows of
deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using
duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation
analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to
changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The
sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account
the effect of embedded options in the securities and loan portfolios as well as any off-balance-sheet derivatives.
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, 2014 (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
$
$
$
$
15,201
4,087
(2,762)
414
6.16% $
1.65% $
-1.12% $
0.17% $
68,676
43,831
21,591
(17,823)
5.36%
3.42%
1.68%
-1.39%
The projected changes in net interest income and economic value of equity to changes in interest rates at December 31, 2014 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.
Broker-Dealer Segment
Our broker-dealer 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, and in our trading activities,
which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and
changes in credit ratings of the issuer.
93
Our broker-dealer 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 broker-dealer 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.
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.
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.
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 MBSs 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 retained MSR. One of the principal risks
associated with MSR 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. The mortgage origination segment uses derivative financial instruments, including interest rate
swaps, swaptions, and forward MBS commitments, as a means to mitigate market risk associated with MSR assets. 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 MSR.
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.
94
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.
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, 2014 in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as it relates to
the inclusion within our control environment of new or updated controls and processes associated with covered loans, FDIC
Indemnification Asset and covered OREO acquired in the FNB Transaction.
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.
95
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, 2014. In making this
assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. Based on our assessment, management concluded that, at
December 31, 2014, our internal control over financial reporting is effective.
Item 9B. Other Information.
None.
96
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 2015 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 2015 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 2015 Annual Meeting of Stockholders,
or in Item 5 of this Annual Report for the year ended December 31, 2014, 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 2015 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 2015 Annual Meeting of Stockholders,
and is incorporated herein by reference.
97
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..........................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
2. Financial Statement Schedules.
The financial statements as of June 30, 2014 and 2013 and for each of the three years in the period ended June 30, 2014 of
SWS Group, Inc., are filed as Exhibit 99.1 to this Annual Report on Form 10-K and are incorporated by reference herein.
All other financial statement schedules have been omitted because they are not required, not applicable or the information has
been included in our consolidated financial statements.
3. Exhibits. See the Exhibit Index following the signature page hereto.
98
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: February 26, 2015
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
/s/ Lee Lewis
Lee Lewis
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 26, 2015
Executive Vice President — Principal Financial Officer
(Principal Financial and Accounting Officer)
February 26, 2015
Director
Director
February 26, 2015
February 26, 2015
Director and Audit Committee Member
February 26, 2015
Director
February 26, 2015
Director and Chairman of Audit Committee
February 26, 2015
Director
Director
February 26, 2015
February 26, 2015
Director and Audit Committee Member
February 26, 2015
Director
Director
Director
Director
99
February 26, 2015
February 26, 2015
February 26, 2015
Signature
Capacity in which Signed
Date
Andrew J. Littlefair
/s/ W. Robert Nichols, III
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
/s/ Robert Taylor, Jr.
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
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
100
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4.1
4.4.2
4.4.3
Description of Exhibit
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).
Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated
as of March 31, 2014 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 1,
2014 (File No. 001-31987) and incorporated herein by reference).
Articles of Amendment and Restatement of Affordable Residential Communities Inc., dated February 16,
2004, as amended or supplemented by: Articles Supplementary, dated February 16, 2004; Corporate Charter
Certificate of Notice, dated June 6, 2005; Articles of Amendment, dated January 23, 2007; Articles of
Amendment, dated July 31, 2007; Corporate Charter Certificate of Notice, dated September 23, 2008; Articles
Supplementary, dated December 15, 2010; Articles Supplementary, dated as of November 29, 2012 relating to
Subtitle 8 election; Articles Supplementary, dated November 29, 2012 relating to Non-Cumulative Perpetual
Preferred Stock, Series B, of Hilltop Holdings Inc.; and Articles of Amendment, dated March 31, 2014 (filed as
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-31987)
and incorporated herein by reference).
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).
101
4.4.4
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
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
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).
102
4.6.2
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†
Indenture, 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 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).
103
10.2.2†
10.3
10.4†
10.5†
10.6†
10.7†
10.8†*
10.9†*
10.10†
10.11†
10.12
10.13
10.14†
10.15†
10.16†
Form of Affordable Residential Communities Inc. 2003 Equity Incentive Plan Non-Qualified Stock Option
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).
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).
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).
Employment Agreement, dated as of December 4, 2014, by and between James R. Huffines and Hilltop
Holdings Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on December 9,
2014 (File No. 001-31987) and incorporated herein by reference).
Employment Agreement, dated as of December 4, 2014, by and between Todd Salmans and Hilltop Holdings
Inc.
Compensation arrangement with Hill A. Feinberg.
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
104
10.17†
10.18†
10.19†
21.1*
23.1*
23.2*
23.3*
31.1*
31.2*
32.1*
99.1*
herein by reference).
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. (filed
as Exhibit 10.19 to the Registrant’s Report on Form 10-K for the year ended December 31, 2013 filed on
March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
First Amendment to Sublease, dated February 28, 2014, by and between Hunter’s Glen/Ford, LTD and Hilltop
Holdings Inc. (filed as Exhibit 10.20 to the Registrant’s Report on Form 10-K for the year ended December 31,
2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
List of subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP.
Consent of Ernst & Young LLP.
Consent of Grant Thornton 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.
Audited consolidated financial statements of SWS Group, Inc. as of June 30, 2014 and 2013 and for each of the
three years in the period ended June 30, 2014.
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.
105
(This page has been left blank intentionally.)
Index to Consolidated 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 ...............
Audited Consolidated Financial Statements, Years Ended December 31, 2014, 2013 and 2012 ...........................................
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-2
F-3
F-4
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, 2014 and 2013, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2014 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) 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.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 26, 2015
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 $924,755 and $1,256,862, respectively) ..................................
Held to maturity, at amortized cost (fair value of $118,345) ...................................................................................
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 $4,611 and $1,061, respectively ...........................................................................
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: .....................................................................................................................................
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 ..............................
Common stock, $0.01 par value, 125,000,000 and 100,000,000 shares authorized; 90,181,888 and
90,175,688 shares issued and outstanding, respectively ................................................................................
Additional paid-in capital ......................................................................................................................................
Accumulated other comprehensive income (loss) ...............................................................................................
Accumulated deficit .............................................................................................................................................
Total Hilltop stockholders’ equity ............................................................................................................................
Noncontrolling interests ............................................................................................................................................
Total stockholders’ equity ..............................................................................................................................................
Total liabilities and stockholders’ equity .......................................................................................................................
See accompanying notes.
F-5
$
$
$
December 31,
2014
2013
$
782,473
30,602
$
713,099
32,924
58,846
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
200,706
188,291
142,833
20,149
279,745
251,808
70,921
8,904,122
1,773,749
4,949,169
6,722,918
129,678
27,468
88,422
342,087
56,327
67,012
158,288
7,592,200
65,717
925,535
118,209
1,109,461
1,309,693
3,920,476
(37,041)
3,883,435
638,029
167,884
25,066
20,416
206,991
130,437
136,945
36,155
453,238
251,808
59,783
9,242,416
2,076,385
4,293,507
6,369,892
179,042
29,716
88,176
762,696
56,684
67,012
227,959
7,781,177
$
$
114,068
114,068
902
1,390,788
651
(45,957)
1,460,452
787
1,461,239
9,242,416
$
902
1,388,641
(34,863)
(157,607)
1,311,141
781
1,311,922
8,904,122
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 .................................................................................................................................
Year Ended December 31,
2014
2013
2012
$
341,458
$
284,782
$
29,206
4,681
52
1,602
11,770
388,769
15,742
2,205
2,532
2,360
4,789
27,628
361,141
16,933
344,208
—
390,361
63,011
164,524
101,874
—
79,541
799,311
490,706
94,429
46,942
101,697
231,579
965,353
178,166
65,608
112,558
908
111,650
5,703
105,947
1.18
1.17
89,710
90,573
$
$
$
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
$
$
$
$
$
$
23,900
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
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
Year Ended December 31,
2014
$
112,558
2013
$
126,709
2012
$
(5,098)
tax of $22,268, $(21,972) and $(3,172), respectively ......................
40,090
(39,709)
(5,889)
Reclassification adjustment for gains included in net income, net
of tax of $(2,582) $(1,793) and $0, and other ..................................
Comprehensive income (loss) ..................................................................
Less: comprehensive income attributable to noncontrolling interest .......
(4,576)
148,072
908
(3,248)
83,752
1,367
—
(10,987)
494
Comprehensive income (loss) applicable to Hilltop ................................
$
147,164
$
82,385
$
(11,481)
See accompanying notes.
F-7
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8
-
F
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 ................................................................................................................
Net gain on investment in SWS common stock ........................................................................
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 held to maturity ..........................................................................................
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 paid (received) for Federal Home Loan Bank and Federal Reserve Bank stock ............
Net cash from acquisitions ..............................................................................................................
Net cash provided by 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 ...................................................................................
Conversion of available for sale investment to SWS common stock .............................................
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 ...............................................................................................
See accompanying notes.
F-9
Year Ended December 31,
2013
2012
2014
$
112,558
$
126,709
$
(5,098)
16,933
(83,279)
—
—
(5,985)
(22,782)
19,000
(6,871)
(145,283)
(36,167)
214,755
2,248
(246)
57,329
(390,361)
(10,839,905)
11,016,636
(91,420)
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
5,203
315,166
(123,520)
(49,156)
103,031
(43,186)
69,400
(17,114)
—
259,824
(518,417)
420,609
3,000
(2,643)
—
(5,619)
(902)
2,620
(101,352)
67,052
746,023
813,075
28,846
26,859
71,502
—
67,542
—
—
$
$
$
$
$
$
$
$
—
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
—
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25,639
—
—
$
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$
$
$
$
$
$
$
$
$
$
$
$
$
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
—
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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
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered
under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop
acquired PlainsCapital Corporation pursuant to a plan of merger whereby PlainsCapital Corporation merged with and into a wholly
owned subsidiary of Hilltop (the “PlainsCapital Merger”), which continued as the surviving entity under the name “PlainsCapital
Corporation” (“PlainsCapital”).
The Company has two primary operating business units, PlainsCapital and National Lloyds Corporation (“NLC”). PlainsCapital is a
financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and
services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public
finance advisory, wealth and investment management, treasury management, fixed income sales, asset management, and
correspondent clearing services. NLC is a property and casualty insurance holding company that provides, through its subsidiaries, fire
and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United
States.
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, 2014 and 2013 and relating to the post-acquisition years ended December 31, 2014 and 2013 and one month period
ended December 31, 2012.
On September 13, 2013 (the “Bank Closing Date”), PlainsCapital Bank (the “Bank”) assumed substantially all of the liabilities,
including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank (“FNB”) from
the Federal Deposit Insurance Corporation (the “FDIC”), as receiver, and reopened former FNB branches acquired from the FDIC
under the “PlainsCapital Bank” name (the “FNB Transaction”). Pursuant to the Purchase and Assumption Agreement (the “P&A
Agreement”), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain
covered loans and covered other real estate owned (“OREO”) that the Bank acquired, as further described in Note 2 to the
consolidated financial statements. The acquisition of FNB’s expansive branch network allowed the Bank to increase its presence in
Texas to include the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.
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.
The presentation of the Company’s historical consolidated financial statements has been modified and certain items in the 2012
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.
Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of the Bank and
100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a
PlainsCapital Company (“PrimeLending”), PCB-ARC, Inc. and RGV-ARC, Inc. The Bank has a 100% membership interest in First
Southwest Holdings, LLC (“First Southwest”) and PlainsCapital Securities, LLC.
F-10
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, LLC (“FSC”), a broker-dealer registered with the
Securities and Exchange Commission (the “SEC”) and the Financial Industry Regulatory Authority and a member of the New York
Stock Exchange (“NYSE”), and First Southwest Asset Management, LLC, a registered investment advisor under the Investment
Advisors Act of 1940.
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”).
On October 2, 2014, as discussed in Note 4 to the consolidated financial statements, Hilltop exercised the SWS Warrant (defined
hereafter) in full and paid the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount
note due to Hilltop under the credit agreement. Consequently, Hilltop owned approximately 21% of the outstanding shares of SWS
Group, Inc. (“SWS”) common stock. Contemporaneous with the exercise of the SWS Warrant, Hilltop changed the accounting
method for its investment in SWS common stock and elected to account for its investment in accordance with the provisions of the
Fair Value Option Subsections of the ASC (“Fair Value Option”) as permitted by GAAP. Hilltop had previously accounted for its
investment in SWS common stock as an available for sale security. Under the Fair Value Option, Hilltop’s investment in SWS
common stock is recorded at fair value effective October 2, 2014, with changes in fair value being recorded in other noninterest
income within the consolidated statement of operations rather than as a component of other comprehensive income. Hilltop’s election
to apply the provisions of the Fair Value Option resulted in Hilltop recording those unrealized gains previously associated with its
investment in SWS common stock of $7.2 million. For the period from October 3, 2014 through December 31, 2014, the change in
fair value of Hilltop’s investment in SWS common stock resulted in a loss of $1.2 million. In the aggregate, Hilltop recorded a $6.0
million net gain in other noninterest income within the consolidated statement of operations during 2014. At December 31, 2014,
Hilltop’s investment in SWS common stock is included in other assets within the consolidated balance sheet and is recorded at fair
value.
PlainsCapital also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which are
not included in the consolidated financial statements under the requirements of the Variable Interest Entities Subsections of the ASC,
because the primary beneficiaries of the Trusts are not within the consolidated group.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable intangible assets,
and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net assets purchased exceeds the
consideration given, a “bargain purchase gain” is recognized. If the consideration given exceeds the fair value of the net assets
received, goodwill is recognized.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as collateralized
financings and are carried at the amounts at which the securities will subsequently be resold as specified in the agreements.
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.
F-11
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.
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. Changes in the fair value of the loans held for sale are recognized in earnings and fees and costs associated
with origination are recognized as incurred. The specific identification method is used to determine realized gains and losses on sales
of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to certain indemnification provisions
with investors, including the repurchase of loans sold and repayment of certain sales proceeds to investors under certain conditions. In
addition, certain mortgage loans guaranteed by U.S. Government agencies and sold into Government National Mortgage Association
(“GNMA”) pools may, under certain conditions specified in the government programs, become subject to repurchase by
PrimeLending. Such loans subject to repurchase no longer qualify for sale accounting and are reported as loans held for sale in the
consolidated balance sheets.
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, the majority 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.
F-12
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.
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 collateral; 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.
F-13
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.
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. FSC was required to segregate
$76.0 million in cash and securities at December 31, 2014, which is included in other assets within the consolidated balance sheet. At
December 31, 2013, FSC was not required to segregate cash and securities.
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, 2014 and 2013.
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, 2014 and 2013, 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, 2014 and 2013, 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.
F-14
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.
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 and $0.2
million in 2013 and 2012 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.
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 forward commitments, and
interest rate swaps and swaptions, to manage interest rate risk or to hedge specified assets and liabilities. The Company’s derivative
financial instruments also include interest rate lock commitments (“IRLCs”) executed with its customers that allow those customers to
obtain a mortgage loan on a future date at an agreed-upon interest rate. The IRLCs, forward commitments, and interest rate swaps and
swaptions 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 $4.6 million, $5.3 million and $0.4 million during 2014, 2013
and 2012, 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 did not recognize certain tax benefits from uncertain tax positions within the
provision for income taxes. At December 31, 2014, the net unrecognized tax benefit was $0.4 million. If the Company were to prevail
on all uncertain tax positions, the effect would be a benefit to the Company’s effective tax rate. Due to uncertainties in any tax audit
outcome, estimates of the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ
significantly from the estimate.
Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance when, in the
opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be realized. Periodic reviews of the
carrying amount of deferred tax assets are made when it is more likely than not that all or a portion of a deferred tax asset will not be
realized. Based on that evaluation, management determined at December 31, 2014 that it was appropriate to establish a valuation
allowance on the portion of the deferred tax asset associated with its capital losses from investments that could not be carried back to
prior tax years. The Company has no valuation allowance on the remainder of its deferred tax assets at December 31, 2014 or 2013.
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. During 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 stockholders by the weighted average number of common shares outstanding during the period,
excluding participating nonvested restricted shares.
F-17
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the
number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the
participating securities, were issued using the treasury stock method. During 2014, stock options and RSUs are the only potentially
dilutive non-participating instruments issued by Hilltop, while potentially dilutive non-participating instruments during 2013 included
stock options, RSUs and the Notes, which were called for redemption during the fourth quarter of 2013. Next, the Company
determines and includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities
using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment
awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of
the Company.
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
sheets. Collectively, covered loans and covered OREO are referred to as “covered assets”. Pursuant to the loss-share agreements, the
FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4
million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and
(iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent
recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years,
respectively, from the Bank 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. The asset arising from the loss-share agreements, referred to as the “FDIC Indemnification
Asset,” is measured separately from the covered loan portfolio because the agreements are not contractually embedded in the covered
loans and are not transferable should the Bank choose to dispose of the covered loans.
In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten
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, 2013 through December 31, 2013, FNB’s operations included net interest income of $32.0 million, other revenues of
$20.4 million and net income of $18.5 million. Such operating results included a 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.
During 2013, transaction-related expenses of $0.1 million associated with the FNB Transaction are included in noninterest expense
within the consolidated statement of operations. 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 acquisition method of accounting and, accordingly, purchased assets, including
identifiable intangible assets and assumed liabilities, were recorded at their respective fair values as of the Bank Closing Date using
significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. The amounts are 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.
F-18
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
$
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
during 2013, 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 for any properties purchased or leased by the Bank. The Bank paid $10.3 million to the
FDIC during 2013 for furniture, fixtures and data management equipment. The Bank was required to pay rent to the FDIC on
properties owned or leased by FNB and furniture and equipment at such properties until it surrendered 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 ...................................
Deposits .............................................................................
Other liabilities ...................................................................
Total liabilities assumed .................................................
Net identifiable assets acquired/bargain purchase gain ......
$
$
362,695
286,214
42,884
1,116,583
78,399
185,680
135,187
26,300
4,270
2,238,212
(2,211,740 )
(13,887 )
(2,225,627 )
12,585
F-19
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 loans acquired with a deterioration of credit quality ........................
$
$
1,533,667
542,241
991,426
168,595
822,831
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 of Hilltop, 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 PlainsCapital Merger was accounted for using the acquisition method of accounting, and accordingly, purchased assets, including
identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The 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 .......................................................
$
393,132
84,352
730,779
1,520,833
3,195,309
149,457
96,886
70,650
F-20
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 .............................................................
$
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
The amount of goodwill recorded in connection with the PlainsCapital Merger is not deductible for tax purposes. For further
information regarding goodwill recorded in connection with the PlainsCapital Merger, refer to Note 9, Goodwill and Other Intangible
Assets.
During 2012, transaction expenses of $6.6 million associated with the PlainsCapital Merger are included in noninterest expense within
the consolidated statement of operations. 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 operations acquired in the FNB Transaction are included in the Company’s operating results beginning September 14, 2013. The
purchase of assets and assumption of certain liabilities of FNB from the FDIC, as receiver, was sufficiently significant to require
disclosure of historical financial statements and related pro forma financial disclosure. Due to the nature and magnitude of the FNB
Transaction, coupled with the federal assistance and protection resulting from the FDIC loss-share agreements, historical financial
information of FNB is not relevant to future operations. The Company has omitted certain historical financial information and the
related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial
F-21
Statements of Acquired Troubled Financial Institutions (“SAB 1:K”), and a request for relief granted by the SEC. SAB 1:K provides
relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant
engages in an acquisition of a significant amount of assets of a troubled financial institution for which audited financial statements are
not reasonably available and in which federal assistance is so pervasive as to substantially reduce the relevance of such information to
an assessment of future operations. 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 on the Company’s results of operations (excluding
the impact of acquisition-related merger and restructuring charges discussed below) since the acquisition date through December 31,
2012 (in thousands). The table also presents pro forma results had the PlainsCapital Merger taken place on January 1, 2011 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
Net interest income ................
Other revenues .......................
Net income .............................
$
24,029
70,085
8,361
3. Fair Value Measurements
Fair Value Measurements and Disclosures
Pro Forma Combined
Twelve Months
Ended
ecember 31, 2012
D
$
221,635
901,347
75,138
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.
F-22
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and retained MSR at fair value,
under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so
that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. At December 31, 2014, the aggregate fair value of
PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.27 billion, and the unpaid principal
balance of those loans was $1.22 billion. At December 31, 2013, the aggregate fair value of PrimeLending’s mortgage loans held for
sale accounted for under the Fair Value Option was $1.06 billion, and the unpaid principal balance of those loans was $1.04 billion.
The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of
operations.
On October 2, 2014, as discussed in Note 1 to the consolidated financial statements, Hilltop elected to measure its investment in SWS
common stock under the provisions of the Fair Value Option. At December 31, 2014, the fair value of Hilltop’s investment in SWS
common stock was $70.3 million and is included in other assets within the consolidated balance sheet.
The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of
the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using
Level 2 inputs, as further described below.
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 from SWS and the SWS Warrant prior to October 2, 2014,
the determination of fair value used 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.
Derivatives — Derivatives are reported at fair value using either Level 2 or Level 3 inputs. 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, PrimeLending uses dealer quotes to value interest rate swaps and
swaptions executed to hedge its MSR asset and First Southwest entered into a derivative option agreement (“Fee Award Option”)
valued using discounted cash flow and probability of exercise. The Fee Award Option was exercised during the fourth quarter of 2014.
Mortgage servicing rights asset — The MSR 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 MSR asset is impacted
by a variety of factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 10
to the consolidated financial statements.
Investment in SWS Common Stock — The investment in SWS common stock is reported at fair value using quoted market prices
for SWS’s common stock as traded on the NYSE, which is considered a Level 1 input.
F-23
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in
thousands).
December 31, 2014
Trading securities .........................................
Available for sale securities .........................
Loans held for sale .......................................
Derivative assets ..........................................
MSR asset ....................................................
Investment in SWS common stock ..............
Trading liabilities .........................................
Derivative liabilities .....................................
December 31, 2013
Trading securities .........................................
Available for sale securities .........................
Loans held for sale .......................................
Derivative assets ..........................................
MSR asset ....................................................
Trading liabilities .........................................
Derivative liabilities .....................................
$
$
L
$
L
$
Level 1
Inputs
39
13,762
—
—
—
70,282
—
—
Level 1
Inputs
33
22,079
—
—
—
—
—
L
$
L
$
evel 2
Inputs
65,678
911,773
1,263,135
23,805
—
—
48
12,849
evel 2
Inputs
58,813
1,121,011
1,031,988
23,564
—
46
139
evel 3
Inputs
Total
Fair Value
—
—
9,017
—
36,155
—
—
—
evel 3
Inputs
—
60,053
27,729
—
20,149
—
5,600
$
$
65,717
925,535
1,272,152
23,805
36,155
70,282
48
12,849
Total
Fair Value
58,846
1,203,143
1,059,717
23,564
20,149
46
5,739
The following table includes a rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).
Balance at
Beginning of
Year
Purchases/
Additions
Sales/
Transfers into
Reductions
Level 3
Included in
Net Income
Included in Other
Comprehensive
Income (Loss)
Balance at
End of Year
Total Gains or Losses
(Realized or Unrealized)
Year ended December 31,
2014
Available for sale
securities ................
Loans held for sale .....
MSR asset ...................
Derivative
liabilities ................
Total .................................
Year ended December 31,
2013
Available for sale
securities ................
Loans held for sale .....
MSR asset ...................
Derivative
liabilities ................
Total .................................
Year ended December 31,
2012
Available for sale
securities ................
MSR asset ...................
Derivative
liabilities ................
Total .................................
$
$
$
$
$
$
$
60,053
27,729
20,149
$
—
24,851
35,056
(61,283) $
(44,597)
(11,387)
(5,600)
102,331
$
(177)
59,730
$
6,827
(110,440) $
$
$
$
$
56,277
—
2,080
(4,490)
53,867
$
—
—
13,886
—
13,886
60,377
—
—
60,377
$
$
—
2,204
(4,455)
(2,251) $
—
—
—
—
—
—
—
—
—
$
$
$
$
—
—
—
—
—
—
27,729
—
—
27,729
—
—
—
—
$
$
$
$
$
$
$
1,848
1,034
(7,663)
(1,050)
(5,831) $
$
2,166
—
4,183
(1,110)
5,239
$
1,867
(124)
$
(35)
1,708
$
(618) $
—
—
—
(618) $
—
9,017
36,155
—
45,172
1,610
—
—
—
1,610
$
$
60,053
27,729
20,149
(5,600)
102,331
(5,967) $
—
—
(5,967) $
56,277
2,080
(4,490)
53,867
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements.
The available for sale securities noted in the table above reflect Hilltop’s note receivable from SWS and the SWS Warrant. On
October 2, 2014, as discussed in Note 1 to the consolidated financial statements, Hilltop exercised the SWS Warrant in full and paid
the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under
the credit agreement. Excluding these available for sale securities and derivative liabilities representing the Fee Award Option entered
into by First Southwest, the unrealized gains (losses) relate to financial instruments still held at December 31, 2014.
F-24
For Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2014, the significant unobservable
inputs used in the fair value measurements were as follows.
Financial instrument
Loans held for sale ...............................
Valuation Technique
Discounted cash flow /
Market comparable
Unobservable Input
Projected price
Mortgage servicing rights asset............
Discounted cash flow
Constant prepayment rate
Discount rate
Weighted
Average / Range
82 - 92%
12.17%
11.01%
The fair value of certain loans held for sale that are either non-standard (i.e. loans that cannot be sold through normal sale channels) or
non-performing is measured using unobservable inputs. The fair value of such loans is generally based upon estimates of expected
cash flows using unobservable inputs including listing prices of comparable assets, uncorroborated expert opinions, and/or
management’s knowledge of underlying collateral.
The MSR asset, as discussed previously, is valued by projecting net servicing cash flows, which are then discounted to estimate the
fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment rates and discount rates, the most
significant unobservable inputs, are discussed further in Note 10 to the consolidated financial statements.
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).
Year Ended December 31, 2014
Y
Other
Total
Noninterest Changes in
Net
Gains (Losses)
Income
Fair Value
Gains (Losses)
ear Ended December 31, 2013
Other
Noninterest
Income
Total
Changes in
Fair Value
Y
Net
ear Ended December 31, 2012
Other
Noninterest
Income
Changes in
Fair Value
Total
Net
Gains (Losses)
Loans held for sale .............
Investment in SWS
common stock ..............
Mortgage servicing
rights asset ....................
Time deposits .....................
$
31,805 $
— $
31,805 $
(19,353) $
— $
(19,353) $
(3,297 ) $
— $
(3,297)
—
5,985
5,985
(7,663)
—
—
—
(7,663)
—
—
4,183
—
—
—
12
—
4,183
12
—
(124)
—
—
—
7
—
(124)
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. PCI loans with a fair value of $172.9 million and $822.8 million were acquired by the
Company 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 significant unobservable inputs regarding default rates, loss severity rates
assuming default, prepayment speeds and estimated collateral values. At December 31, 2014, these inputs included estimated
weighted average default rates, loss severity rates and prepayment speed assumptions of 47%, 51% and 0%, respectively, for those
PCI loans acquired in the PlainsCapital Merger and 63%, 38% and 4%, respectively, for those PCI loans acquired in the FNB
Transaction. The resulting weighted average expected loss on PCI loans associated with each of the PlainsCapital Merger and the FNB
Transaction was 24%.
The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at least annually,
in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a quarterly basis. If the
quarterly review indicates that the fair value of the collateral may have deteriorated, the Company will order an updated appraisal of
the fair value of the collateral. Since the Company obtains updated appraisals when evidence of a decline in the fair value of collateral
exists, it typically does not adjust appraised values.
F-25
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 either the allowance for loan losses or the related PCI pool discount
when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are
charged against earnings. The Company determines fair value primarily using independent appraisals of OREO properties. The
resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs
determine the fair value measurement. The Company considers a number of factors in determining the extent to which specific fair
value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time
elapsed since the receipt of independent market price or appraised value, and current market conditions. At December 31, 2014, the
most significant unobservable input used in the determination of fair value of OREO was a discount to independent appraisals for
estimated holding periods of OREO properties. Such discount was 1% per month for estimated holding periods of 6 to 24 months.
Level 3 inputs were used to determine the fair value of a large group of smaller balance properties that were acquired in the FNB
Transaction. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share
agreements. At December 31, 2014 and 2013, the estimated fair value of covered OREO was $136.9 million and $142.8 million,
respectively, and the underlying fair value measurements utilize Level 2 and Level 3 inputs. The fair value of non-covered OREO at
December 31, 2014 and 2013 was $0.8 million and $4.8 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 following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring basis for
which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in thousands).
December 31, 2014
Non-covered impaired loans ........
Covered impaired loans ...............
Non-covered other real estate
owned .......................................
Covered other real estate
owned .......................................
$
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
Total Gains (Losses) for the
Year Ended December 31,
2014
2013
— $
—
—
—
— $
—
26,823 $
55,213
26,823 $
55,213
(2,182) $
(3,652)
(3,558)
—
409
—
409
(372)
47,198
15,855
63,052
(19,672)
430
—
The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities,
including the financial assets and liabilities previously discussed. The methods for determining estimated fair value for financial assets
and liabilities measured at fair value on a recurring or non-recurring basis are discussed above. For other financial assets and
liabilities, the Company utilizes quoted market prices, if available, to estimate the fair value of financial instruments. Because no
quoted market prices exist for a significant portion of the Company’s financial instruments, the fair value of such instruments has been
derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows,
and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the estimates provided
herein do not necessarily indicate amounts which could be realized in a current transaction. Further, as it is management’s intent to
hold a significant portion of its financial instruments to maturity, it is not probable that the fair values shown below will be realized in
a current transaction.
Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may be difficult to
make reasonable comparisons of the Company’s fair value information to that of other financial institutions. The aggregate estimated
fair value amount should in no way be construed as representative of the underlying value of Hilltop and its subsidiaries. The
following methods and assumptions are typically used in estimating the fair value disclosures for financial instruments:
Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable estimate of
fair value.
Held to Maturity Securities — For securities held to maturity, estimated fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held for Sale — Loans held for sale consist primarily of certain mortgage loans held for sale that are subject to purchase by
related parties. Such loans are reported at fair value, as discussed above, using Level 2 inputs that consist of commitments on hand
from investors or prevailing market prices.
Loans — 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.
F-26
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.
Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of
similar remaining maturities. The carrying amount for variable-rate certificates of deposit approximates their fair values.
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, Federal
Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.
Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for similar
types of borrowing arrangements.
The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either
a recurring or non-recurring basis (in thousands).
December 31, 2014
Financial assets:
Cash and cash equivalents ............................
Held to maturity securities ............................
Loans held for sale ........................................
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, 2013
Financial assets:
Cash and cash equivalents ............................
Loans held for sale ........................................
Non-covered loans, net .................................
Covered loans, net .........................................
Broker-dealer and clearing organization
receivables ................................................
FDIC indemnification asset ..........................
Other assets ...................................................
L
$
Carrying
Amount
Level 1
Inputs
$
$
813,075
118,209
37,541
3,883,435
638,029
813,075
—
—
—
—
167,884
130,437
59,432
6,369,892
179,042
762,696
123,696
2,144
—
—
—
—
—
—
—
—
Carrying
Amount
Level 1
Inputs
$
$
746,023
29,322
3,481,405
1,005,308
746,023
—
—
—
L
$
119,317
188,291
66,055
Estimated Fair Value
L
evel 2
Inputs
evel 3
Inputs
Total
—
118,345
37,541
378,425
—
167,884
—
43,937
6,365,555
179,042
762,696
117,028
2,144
$
—
—
—
3,528,769
767,751
$
813,075
118,345
37,541
3,907,194
767,751
—
130,437
15,495
167,884
130,437
59,432
—
—
—
—
—
6,365,555
179,042
762,696
117,028
2,144
Total
Estimated Fair Value
L
evel 2
Inputs
evel 3
Inputs
—
29,322
281,712
—
119,317
—
43,946
6,722,909
129,678
$
—
—
3,119,319
997,371
$
746,023
29,322
3,401,031
997,371
—
188,291
22,109
119,317
188,291
66,055
—
—
6,722,909
129,678
—
—
—
—
—
Financial liabilities:
Deposits ........................................................
Broker-dealer and clearing organization
payables ....................................................
6,722,918
129,678
F-27
December 31, 2013
Short-term borrowings ..................................
Debt ...............................................................
Other liabilities .............................................
Carrying
Amount
342,087
123,339
3,362
Level 1
Inputs
L
evel 2
Inputs
Estimated Fair Value
L
evel 3
Inputs
—
—
—
342,087
114,671
3,362
—
—
—
Total
342,087
114,671
3,362
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 and held to maturity securities are summarized as follows (in thousands). No
securities were classified as held to maturity at December 31, 2013.
December 31, 2014
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 ............................
Totals .............................................
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, 2014
U.S. Treasury securities .................
U.S. government agencies:
Residential mortgage-backed
securities ................................
Collateralized mortgage
obligations .............................
States and political subdivisions ....
Totals .............................................
Amortized
Cost
Available for Sale
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
19,382
$
264
$
(33) $
19,613
522,008
51,363
89,291
93,406
135,419
593
13,293
924,755
$
1,749
1,672
133
5,125
2,083
(7,516)
516,241
(137)
52,898
(2,300)
(59)
(717)
87,124
98,472
136,785
640
13,762
925,535
47
469
11,542
$
—
—
(10,762) $
$
Amortized
Cost
Available for Sale
Unrealized
Gains
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)
—
—
—
—
(67,825) $
120,461
76,608
156,835
760
22,079
47,909
12,144
1,203,143
Amortized
Cost
Held to Maturity
Unrealized
Gains
Unrealized
Losses
Fair Value
$
25,008
$
—
$
(6) $
25,002
29,782
57,328
6,091
118,209
$
F-28
$
528
—
47
575
$
—
30,310
(430)
(3)
(439) $
56,898
6,135
118,345
At December 31, 2013, available for sale securities included 1,475,387 shares of SWS common stock, a $50.0 million aggregate
principal amount note issued by SWS and a warrant to purchase 8,695,652 shares of SWS common stock (the “SWS Warrant”). SWS
issued the note in July 2011 under a credit agreement pursuant to a senior unsecured loan from Hilltop. The note bore interest at a rate
of 8.0% per annum, was prepayable by SWS subject to certain conditions after three years, and had a maturity of five years. The SWS
Warrant provided for the purchase of 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-
dilution adjustments. On October 2, 2014, Hilltop exercised the SWS Warrant in full and paid the aggregate exercise price by the
automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Consequently,
Hilltop owned 10,171,039 shares of SWS common stock, representing approximately 21% of the outstanding shares of SWS common
stock as of October 4, 2014, and is no longer a lender under the credit agreement. As discussed in Note 1 to the consolidated financial
statements, Hilltop’s investment in SWS common stock is accounted for under the provisions of the Fair Value Option effective
October 2, 2014. Hilltop’s election to apply the provisions of the Fair Value Option resulted in Hilltop recording those unrealized
gains previously associated with its investment in SWS common stock of $7.2 million. At December 31, 2014, Hilltop’s investment in
SWS common stock is included in other assets within the consolidated balance sheet and is recorded at a fair value of $70.3 million.
Information regarding available for sale securities that were in an unrealized loss position is shown in the following table (dollars in
thousands).
Available for Sale
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
twelve months ........................................
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 .....................................................
December 31, 2014
Number of
Securities
Fair Value
Losses
Unrealized
D
Number of
Securities
ecember 31, 2013
Fair Value
Losses
Unrealized
4
1
5
3
22
25
—
4
4
3
8
11
—
1
1
7
81
88
17
$
7,703
$
1,706
9,409
34,847
373,035
407,882
—
11,056
11,056
7,141
61,108
68,249
—
1,939
1,939
4,432
54,178
58,610
54,123
27
6
33
153
7,363
7,516
—
137
137
40
2,260
2,300
—
59
59
7
710
717
227
6
$
12,748
$
—
6
35
5
40
2
3
5
7
2
9
7
—
7
46
150
196
—
12,748
526,817
90,931
617,748
2,194
9,309
11,503
84,054
4,995
89,049
10,754
—
10,754
30,245
96,882
127,127
238
—
238
45,274
10,453
55,727
54
530
584
4,320
70
4,390
378
—
378
669
5,839
6,508
103
666,812
50,933
117
134 $
503,022
557,145 $
10,535
10,762
160
263 $ 868,929 $
202,117
16,892
67,825
F-29
December 31, 2014
D
ecember 31, 2013
Number of
Securities
Fair Value
Unrealized Number of
Securities
Losses
Unrealized
Fair Value
Losses
Held to Maturity
U.S. treasury securities:
Residential mortgage-backed securities:
Unrealized loss for less than twelve
months....................................................
1 $
25,002 $
Unrealized loss for twelve months or
longer .....................................................
Collateralized mortgage obligations:
Unrealized loss for less than twelve
months....................................................
Unrealized loss for twelve months or
longer .....................................................
States and political subdivisions:
Unrealized loss for less than twelve
months....................................................
Unrealized loss for twelve months or
longer .....................................................
Total held to maturity:
Unrealized loss for less than twelve
months....................................................
Unrealized loss for twelve months or
longer .....................................................
—
1
2
—
2
4
—
4
7
—
7 $
—
25,002
56,898
—
56,898
1,899
—
1,899
83,799
—
83,799 $
6
—
6
430
—
430
3
—
3
439
—
439
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
During 2014, 2013 and 2012, the Company did not record any other-than-temporary impairments. While all of the investments are
monitored for potential other-than-temporary impairment, the Company’s analysis and experience indicate that these available for sale
investments generally do not present a significant risk of other-than-temporary-impairment, as fair value should 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, 2014.
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations
with or without penalties. The amortized cost and fair value of securities, excluding trading and available for sale equity securities, at
December 31, 2014 are shown by contractual maturity below (in thousands).
Available for Sale
Held to Maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
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 ....
$
$
24,881
72,671
67,345
606,214
771,111
52,898
87,124
640
911,773
$
$
25,008
—
1,195
4,896
31,099
29,782
57,328
—
118,209
$
$
25,002
—
1,194
4,941
31,137
30,310
56,898
—
118,345
24,639
69,196
64,048
612,332
770,215
51,363
89,291
593
911,462
$
$
F-30
The Company realized a net gain of $2.1 million and net losses of $2.8 million and $0.7 million from its trading securities portfolio
during the years ended December 31, 2014 and 2013 and the month ended 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 $895.5 million and $1.0 billion (with a fair value of $890.3 million and $938.1 million,
respectively) at December 31, 2014 and 2013, 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 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, 2014 and 2013, NLC had investments on deposit in custody for various state insurance departments with carrying
values of $9.2 million and $9.4 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. 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,
2014
1,758,851
1,694,835
413,643
53,147
3,920,476
(37,041)
3,883,435
2013
$
$
1,637,266
1,457,253
364,551
55,576
3,514,646
(33,241)
3,481,405
$
$
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’
equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful
consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any
collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size 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 .................................................
$
December 31,
2014
48,909
67,740
2013
$
100,392
141,983
F-31
Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).
Balance, beginning of period ......................................................
Additions ................................................................................
Reclassifications from (to) nonaccretable difference, net
(1) .......................................................................................
Disposals of loans ...................................................................
Accretion ................................................................................
Balance, end of period ................................................................
$
$
Year Ended December 31,
2013
2014
17,601
—
$
17,553
622
Month Ended
December 31, 2012
18,427
—
$
15,225
(4,927)
(15,085)
12,814
$
18,793
(3,692)
(15,675)
17,601
$
—
(22)
(852)
17,553
(1) Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly
recasts. Reclassifications to nonaccretable difference occur when accruing loans are moved to nonaccrual and expected cash
flows are no longer predictable and the accretable yield is eliminated.
The remaining nonaccretable difference for non-covered PCI loans was $18.4 million and $38.6 million at December 31, 2014 and
2013, respectively.
Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments,
which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered
impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans.
Non-covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. The amounts shown in
following tables include loans accounted for on an individual basis, as well as acquired loans accounted for in pools (“Pooled Loans”).
For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level.
Non-covered impaired loans are summarized by class in the following tables (in thousands).
December 31, 2014
Commercial and industrial:
Unpaid
Contractual
Recorded
Investment with
Principal Balance
No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Related
Allowance
Secured ..................................................
Unsecured ..............................................
$
51,036
4,120
$
14,096
92
$
11,783
68
$
25,879
160
$
Real estate:
Secured by commercial properties .........
Secured by residential properties ...........
Construction and land development:
Residential construction loans ...............
Commercial construction loans and
land development ...............................
Consumer ...................................................
29,865
4,701
—
7,243
1,583
—
15,536
1,390
22,779
2,973
—
—
16,108
5,785
111,615
$
8,062
171
31,247
$
1,819
1,967
32,563
$
9,881
2,138
63,810
$
$
3,341
—
1,878
85
—
154
282
5,740
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 ......................................................
$
63,636
11,865
$
21,540
336
$
17,147
1,204
$ 38,687
1,540
$
3,126
15
Real estate:
Secured by commercial properties .................
Secured by residential properties ...................
Construction and land development:
Residential construction loans .......................
Commercial construction loans and land
development ...............................................
Consumer ...........................................................
49,437
5,407
33
20,317
1,745
—
16,070
1,648
36,387
3,393
—
—
339
39
—
48,628
7,946
186,952
$
15,337
4,509
63,784
$
4,592
—
40,661
19,929
4,509
$ 104,445
$
39
—
3,558
$
F-32
Average investment in non-covered impaired loans 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 ......................................................................................
Year Ended December 31,
2013
2014
30,626
802
$
29,517
2,984
—
14,849
3,324
82,102
$
51,670
2,432
45,887
4,862
354
26,090
2,293
133,588
$
$
Non-covered non-accrual loans, 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 ......................................................................................
December 31,
2014
2013
16,488
160
$
438
1,253
—
703
—
19,042
$
15,430
1,300
2,638
398
—
112
—
19,878
$
$
At December 31, 2014 and 2013, non-covered non-accrual loans included non-covered PCI loans of $6.6 million and $15.8 million,
respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered
PCI loans can no longer be reasonably estimated. In addition to the non-covered non-accrual loans in the table above, $3.0 million and
$3.5 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at
December 31, 2014 and 2013, respectively.
Interest income including recoveries and cash payments recorded on non-covered impaired loans was $3.3 million, $3.2 million and
$0.9 million for the years ended December 31, 2014 and 2013 and the month ended December 31, 2012, respectively.
The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and that the debtor
is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can
be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules.
The Bank also reconfigures a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad”
loan which is charged off and a “good” loan or loans the terms of which comply with the Bank’s customary underwriting policies. The
debt charged off on the “bad” loan is not forgiven to the debtor.
F-33
The outstanding balance of TDRs granted in the twelve months ended December 31, 2014 and 2013, respectively, is shown in the
following tables (in thousands). There were no TDRs granted during the month ended December 31, 2012. At December 31, 2014 and
2013, the Bank had $0.5 million and $0.5 million in unadvanced commitments to borrowers whose loans have been restructured in
TDRs.
Recorded Investment in Loans Modified by
A/B Note
Interest Rate
Adjustment
Payment Term
Extension
Total
Modification
Year Ended December 31, 2014
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 .....................................................
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 .....................................................
A/B Note
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
$
$
2,465
—
$
317
248
—
128
—
3,158
$
2,465
—
317
248
—
128
—
3,158
Recorded Investment in Loans Modified by
Interest Rate
Adjustment
Payment Term
Extension
Total
Modification
$
$
—
—
—
—
—
—
—
—
$
$
10,390
—
$
10,390
—
279
777
—
—
—
11,446
$
279
777
—
—
—
11,446
There were no TDRs granted in the twelve months preceding December 31, 2014 and 2013, for which a payment was at least 30 days
past due in 2014 and 2013, respectively.
An analysis of the aging of the Bank’s non-covered loan portfolio is shown in the following tables (in thousands).
December 31, 2014
Commercial and industrial:
Loans Past Due
Loans Past Due
30-59 Days
60-89 Days
Loans Past Due
90 Days or More
Total
Past Due Loans
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
Past Due
90 Days or More
Secured .............................
Unsecured .........................
$
6,073 $
35
964 $
3
8,022 $
—
15,059 $ 1,620,000 $
13,374 $ 1,648,433 $
38
110,312
68
110,418
Real estate:
Secured by commercial
properties ....................
Secured by residential
properties ....................
Construction and land
development:
Residential
construction loans .......
Commercial
construction loan
s and land
development ...............
Consumer ...............................
67
454
175
—
1,187
—
—
—
—
67
1,173,504
22,341
1,195,912
1,641
495,472
1,810
498,923
175
64,871
—
65,046
4,319
414
11,537 $
—
37
2,191 $
575
—
8,597 $
4,894
451
334,525
50,558
9,178
2,138
348,597
53,147
22,325 $ 3,849,242 $
48,909 $ 3,920,476 $
$
—
—
—
—
—
—
—
—
F-34
December 31, 2013
Commercial and industrial:
Loans Past Due
Loans Past Due
30-59 Days
60-89 Days
Loans Past Due
90 Days or More
Total
Past Due Loans
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
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 loan
s and land
development ...............
Consumer ...............................
192
1,045
415
—
36
—
132
203
324
1,044,437
36,255
1,081,016
1,284
371,958
2,995
376,237
—
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
In addition to the non-covered loans shown in the table above, $19.2 million and $6.8 million of loans included in loans held for sale
were 90 days past due and accruing interest at December 31, 2014 and 2013, respectively. These loans, which are guaranteed by U.S.
government agencies and were previously sold into GNMA loan pools, are subject to repurchase by PrimeLending.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels,
(iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets.
The Bank utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an
assessment of the borrower’s management, collateral position, financial capacity, and economic factors. The general characteristics of
the various risk grades are described below.
Pass — “Pass” 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, 2014
Commercial and industrial:
Pass
Special Mention
Substandard
PCI
Total
Secured ......................................................
Unsecured ..................................................
$ 1,566,208
110,256
$
1,105
—
$
67,746
94
$
13,374
68
$ 1,648,433
110,418
Real estate:
Secured by commercial properties .............
Secured by residential properties ...............
Construction and land development:
Residential construction loans ...................
Commercial construction loans and land
development ...........................................
Consumer .......................................................
1,151,454
492,549
65,046
712
—
—
21,405
4,564
22,341
1,810
1,195,912
498,923
—
—
65,046
338,078
50,968
$ 3,774,559
$
—
—
1,817
$
1,341
41
95,191
$
9,178
2,138
48,909
348,597
53,147
$ 3,920,476
F-35
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
Real estate:
Secured by commercial properties .............
Secured by residential properties ...............
Construction and land development:
Residential construction loans ...................
Commercial construction loans and
land development ...................................
Consumer .......................................................
Allowance for Loan Losses
1,038,930
367,758
65,079
4,436
—
—
1,395
5,484
—
36,255
2,995
1,081,016
376,237
—
65,079
275,808
51,052
$ 3,353,035
$
3,384
1
24,673
$
463
14
36,546
$
19,817
4,509
100,392
299,472
55,576
$ 3,514,646
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents
management’s best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for
determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company’s Board of Directors
and the Loan Review Committee of the Bank’s board of directors.
It is management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the
allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated
credit losses are the probable current amount of loans that the Company will be unable to collect given facts and circumstances as of
the evaluation date. When management determines that a loan or portion thereof is uncollectible, the loan, or portion thereof, is
charged off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount.
Recoveries on charge-offs 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. The Bank’s
loan portfolio is designated into two populations: acquired loans and originated loans. The allowance for loan losses is calculated
separately for acquired and originated loans.
Originated Loans
The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and
Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables
Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated 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, adjusted for qualitative or environmental factors. The Bank uses a
rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further
disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the
loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current
quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss
rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at
80%.
While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon
which the Company determines the appropriate level for the allowance for loan losses. Management considers recent qualitative or
environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss
experience, including but not limited to:
•
•
•
changes in the volume and severity of past due, nonaccrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
F-36
•
•
•
•
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of
loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The
magnitude of the impact of these factors on the qualitative assessment of the allowance for loan loss changes from quarter to quarter.
The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that
timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the
appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed,
typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified,
(iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a
problem.
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, 2014 and 2013, there were no material delinquencies in these types of loans.
Acquired Loans
Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the
related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any
required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described
above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount
for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If
less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for
the loan and once the discount is depleted, losses are applied against the allowance established for that loan.
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.
The allowance for both originated and acquired loans is subject to regulatory examinations and determinations as to appropriateness,
which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance.
Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).
Year Ended December 31, 2014
Balance, beginning of year ......................
Provision charged to operations ...............
Loans charged off ....................................
Recoveries on charged off loans ..............
Balance, end of year .................................
Year Ended December 31, 2013
Balance, beginning of year ......................
Provision charged to operations ...............
Loans charged off ....................................
Recoveries on charged off loans ..............
Balance, end of year .................................
Commercial and
Industrial
Real Estate
$
$
16,865
6,116
(6,926)
2,944
18,999
Commercial and
Industrial
$
$
1,845
20,940
(9,359)
3,439
16,865
$
$
$
$
8,331
2,696
(114)
218
11,131
Real Estate
977
7,281
(209)
282
8,331
F-37
$
Construction and
Land Development
7,957
(1,692)
—
185
6,450
$
$
Construction and
Land Development
582
7,634
(524)
265
7,957
$
Consumer
Total
$
$
$
$
88
627
(359)
105
461
Consumer
5
238
(216)
61
88
$
$
$
$
33,241
7,747
(7,399)
3,452
37,041
Total
3,409
36,093
(10,308)
4,047
33,241
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
$
$
—
2,236
(391)
—
1,845
$
$
—
977
—
—
977
$
Construction and
Land Development
—
582
—
—
582
$
Consumer
Total
$
$
—
5
—
—
5
$
$
—
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, 2014
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
11,842
$
1,420
$
703
$
—
$
13,965
Loans collectively evaluated for
impairment ...........................................
PCI Loans ................................................
December 31, 2013
Loans individually evaluated for
1,733,567
13,442
1,758,851
1,669,264
24,151
$ 1,694,835
$
$
403,762
9,178
413,643
$
51,009
2,138
53,147
3,857,602
48,909
$ 3,920,476
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 ................................................
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
The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2014
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, 2013
Loans individually evaluated for
15,658
2,920
18,999
$
9,168
1,963
11,131
$
$
6,296
154
6,450
$
179
282
461
$
31,301
5,319
37,041
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
421
$
—
$
—
$
—
$
421
Loans collectively evaluated for
impairment ...........................................
PCI Loans ................................................
13,724
2,720
16,865
$
7,953
378
8,331
$
$
7,918
39
7,957
$
88
—
88
$
29,683
3,137
33,241
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. 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. The asset arising from the loss-share agreements, referred to as the
“FDIC Indemnification Asset,” is measured separately from the covered loan portfolio because the agreements are not contractually
embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.
F-38
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 the FNB Transaction that are subject to a loss-share agreement are referred to as “covered loans” and reported
separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may be
received from the FDIC.
The Bank’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any
allowance for loan losses. Acquired covered loans were preliminarily segregated between those considered to be PCI loans and those
without credit impairment at acquisition.
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since
origination. The Company’s accounting policies for acquired covered loans, including covered PCI loans, are consistent with that of
acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its
PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two
layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for
applying the subsequent recognition and measurement provisions for income accretion and impairment testing.
The following table presents the carrying value of the covered loans summarized by portfolio segment (in thousands).
Commercial and industrial ...................................
Real estate ............................................................
Construction and land development .....................
Consumer .............................................................
Total covered loans ..............................................
Allowance for covered loans ................................
Total covered loans, net of allowance ..................
$
$
December 31,
2014
30,780
552,850
59,010
—
642,640
(4,611)
638,029
2013
$
$
66,943
787,982
151,444
—
1,006,369
(1,061)
1,005,308
The following table presents the carrying value and the outstanding contractual balance of the covered PCI loans (in thousands).
Carrying amount ......................................................
Outstanding balance ................................................
$
435,388
685,393
$
December 31,
2014
2013
729,156
1,022,514
Changes in the accretable yield for the covered PCI loans were as follows (in thousands).
Year Ended
December 31,
2014
Period from
September 14, 2013
through December 31,
2013
Balance, beginning of period .....................
Additions ................................................
Reclassifications from (to)
nonaccretable difference, net (1) ........
Transfer of loans to covered OREO
(2) .......................................................
Accretion ................................................
Balance, end of period ................................
$
$
156,548
—
$
105,470
7,703
(76,228)
193,493
$
—
167,974
3,492
4,407
(19,325 )
156,548
(1) Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in
the quarterly recasts. Reclassifications to nonaccretable difference occur when accruing loans are moved to
nonaccrual and expected cash flows are no longer predictable and the accretable yield is eliminated.
F-39
(2) Transfer of loans to covered OREO is the difference between the value removed from the pool and the
expected cash flows for the loan.
The remaining nonaccretable difference for covered PCI loans was $382.5 million and $517.9 million at December 31, 2014 and
2013, respectively.
Covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. Substantially all covered
impaired loans are PCI loans. The amounts shown in following tables include Pooled Loans, as well as loans accounted for on an
individual basis. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured
at the pool level.
Covered impaired loans are summarized by class in the following tables (in thousands).
December 31, 2014
Commercial and industrial:
Unpaid
Contractual
Principal Balance
Recorded
Investment with
No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Related
Allowance
Secured ..........................................
Unsecured ......................................
$
26,447
14,111
$
7,436
2,107
$
6,636
4,697
$
14,072
6,804
$
265
882
Real estate:
Secured by commercial
properties ...................................
387,302
193,111
35,142
228,253
Secured by residential
properties ...................................
235,505
129,571
12,918
142,489
Construction and land
development:
Residential construction loans .......
Commercial construction loans
and land development ................
Consumer ...........................................
December 31, 2013
Commercial and industrial:
2,749
1,018
354
1,372
94,949
—
761,063
$
45,646
—
378,889
$
—
—
59,747
$
45,646
—
438,636
$
Unpaid
Contractual
Principal Balance
Recorded
Investment with
No Allowance
Recorded
Investment with
Allowance
Total
Recorded
Investment
Secured ..........................................
Unsecured ......................................
$
43,957
16,280
$
28,611
9,008
$
$
—
882
28,611
9,890
$
$
Real estate:
Secured by commercial
properties ...................................
528,825
365,346
Secured by residential
properties ...................................
289,094
199,581
Construction and land
development:
Residential construction loans .......
Commercial construction loans
and land development ................
Consumer ...........................................
8,920
5,280
183,117
—
1,070,193
$
121,363
—
729,189
$
$
—
—
—
—
—
882
365,346
199,581
5,280
121,363
—
730,071
$
$
Average investment in covered impaired loans is summarized by class in the following table (in thousands).
Commercial and industrial:
Secured ......................................................................................
Unsecured ..................................................................................
$
21,296
8,347
$
14,260
4,945
Real estate:
Secured by commercial properties.............................................
296,780
182,653
Year Ended December 31,
2014
2013
F-40
2,381
937
69
—
—
4,534
Related
Allowance
—
882
—
—
—
—
—
882
Secured by residential properties ...............................................
Construction and land development:
Residential construction loans ...................................................
Commercial construction loans and land development .............
Consumer ......................................................................................
Year Ended December 31,
2014
2013
170,931
3,039
83,505
—
583,898
$
99,686
2,353
60,682
—
364,579
$
Covered non-accrual loans, 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 ......................................................................................
December 31,
2014
2013
$
$
$
442
883
30,823
1,046
1,018
11
—
34,223
$
91
882
40
209
575
—
—
1,797
At December 31, 2014, covered non-accrual loans included covered PCI loans of $31.2 million for which discount accretion has been
suspended because the extent and timing of cash flows from these covered PCI loans can no longer be reasonably estimated.
Interest income recorded on covered accruing impaired loans and on covered non-accrual loans during 2014 and 2013 was nominal.
Except as noted above, covered PCI loans are considered to be performing due to the application of the accretion method.
The Bank classifies loan modifications of covered loans as TDRs in a manner consistent with that of non-covered loans as discussed
in Note 5 to the consolidated financial statements. The outstanding balance of TDRs granted in the twelve months ended December
31, 2014 is shown in the following table (in thousands). Pooled Loans are not in the scope of the disclosure requirements for TDRs.
There were no TDRs granted during the year ended December 31, 2013. At December 31, 2014, the Bank had nominal unadvanced
commitments to borrowers whose loans have been restructured in TDRs.
Recorded Investment in Loans Modified by
Year Ended December 31, 2014
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 ....................................................................................
A/B Note
Interest Rate
Adjustment
Payment Term
Extension
Total
Modification
$
$
$
—
—
$
—
—
—
369
—
—
—
369
$
—
326
—
—
—
326
$
—
—
—
—
—
—
—
—
$
$
—
—
—
695
—
—
—
695
F-41
An analysis of the aging of the Bank’s covered loan portfolio is shown in the following tables (in thousands).
December 31, 2014
Commercial and industrial:
Loans Past Due
Loans Past Due
30-59 Days
60-89 Days
Loans Past Due
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
Past Due
90 Days or More
Secured ......................................
Unsecured ..................................
$
— $
10
— $
—
454 $
—
454 $
10
8,681 $
1,200
13,630 $
6,805
22,765 $
8,015
Real estate:
Secured by commercial
properties .............................
Secured by residential
properties .............................
Construction and land
development:
Residential construction
loans .....................................
Commercial construction
loans and land
development ........................
Consumer ........................................
876
3,089
—
—
493
—
105
405
896
981
41,576
227,772
270,329
3,987
137,342
141,192
282,521
896
390
354
1,640
39
—
4,014 $
25
—
518 $
8
—
1,868 $
72
—
11,663
—
45,635
—
57,370
—
6,400 $ 200,852 $ 435,388 $ 642,640 $
$
11
—
—
48
—
8
—
67
December 31, 2013
Commercial and industrial:
Loans Past Due
Loans Past Due
30-59 Days
60-89 Days
Loans Past Due
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
Past Due
90 Days or More
Secured .....................................
Unsecured .................................
$
3,904 $
10
$
10
259
81 $
—
3,995 $
269
20,918 $
3,351
28,520 $
9,890
53,433 $
13,510
Real estate:
Secured by commercial
properties ............................
Secured by residential
properties ............................
Construction and land
development:
Residential construction
loans ....................................
Commercial construction
loans and land
development .......................
Consumer .......................................
999
1,679
1,861
244
—
8,697 $
$
—
678
—
20
—
967
40
209
1,039
63,780
365,306
430,125
2,566
155,919
199,372
357,857
576
2,437
5,026
4,705
12,168
—
—
906 $
264
—
17,649
—
121,363
—
139,276
—
10,570 $ 266,643 $ 729,156 $ 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 tables
present the internal risk grades of covered loans in the portfolio by class (in thousands).
December 31, 2014
Commercial and industrial:
Pass
Special Mention
Substandard
PCI
Total
Secured .........................................................
Unsecured .....................................................
$
7,712 $
1,210
Real estate:
Secured by commercial properties ................
Secured by residential properties ..................
Construction and land development:
Residential construction loans ......................
Commercial construction loans and land
development ..............................................
Consumer ..........................................................
35,973
133,756
268
9,501
—
$ 188,420 $
—
—
—
—
—
—
—
—
$
$
1,423
—
$
13,630
6,805
$
22,765
8,015
6,584
7,573
1,018
227,772
141,192
270,329
282,521
354
1,640
2,234
—
18,832
$
45,635
—
435,388
$
57,370
—
642,640
F-42
December 31, 2013
Commercial and industrial:
Pass
Special Mention
Substandard
PCI
Total
Secured .........................................................
Unsecured .....................................................
$
24,152
3,040
$
$
—
—
$
761
580
28,520
9,890
$
53,433
13,510
Real estate:
Secured by commercial properties ................
Secured by residential properties ..................
Construction and land development:
Residential construction loans ......................
Commercial construction loans and land
development ..............................................
Consumer ..........................................................
59,343
155,439
6,087
17,806
—
$ 265,867
$
3,310
—
—
—
—
3,310
$
2,166
3,046
1,376
107
—
8,036
365,306
199,372
430,125
357,857
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 and expected cash flows for a loan or pool decreases, an
increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or
pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable
yield which will be taken into income over the remaining life of the loan.
Additionally, provision for credit losses will be recorded on advances on covered loans subsequent to the acquisition date in a manner
consistent with the allowance for non-covered loan losses.
Changes in the allowance for covered loan losses, distributed by portfolio segment, are shown below (in thousands). The year ended
December 31, 2013 below refers to the period from September 14, 2013 through December 31, 2013.
Year Ended December 31, 2014
Balance, beginning of year ..................
Provision charged to operations ...........
Loans charged off ................................
Recoveries on charged off loans ..........
Balance, end of year .............................
Commercial and
Industrial
Real Estate
$
$
1,053
230
(90)
—
1,193
$
$
8
8,725
(5,399)
—
3,334
Year Ended December 31, 2013
Balance, beginning of year ......................
Provision charged to operations ...............
Loans charged off ....................................
Recoveries on charged off loans ..............
Balance, end of year .................................
Commercial and
Industrial
Real Estate
$
$
—
1,057
(4)
—
1,053
$
$
—
8
—
—
8
$
Construction and
Land Development
—
231
(147)
—
84
$
$
Construction and
Land Development
—
—
—
—
—
$
Consumer
Total
$
$
$
$
—
—
—
—
—
Consumer
—
—
—
—
—
$
$
$
$
1,061
9,186
(5,636)
—
4,611
Total
—
1,065
(4)
—
1,061
The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
December 31, 2014
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
—
$
—
$
801
$
—
$
801
Loans collectively evaluated for
impairment ...........................................
PCI Loans ................................................
10,345
20,435
30,780
$
183,886
368,964
552,850
$
$
12,220
45,989
59,010
$
—
—
—
$
206,451
435,388
642,640
F-43
December 31, 2013
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
—
$
—
$
—
$
—
$
—
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
The allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2014
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
—
$
—
$
—
$
—
$
—
Loans collectively evaluated for
impairment ...........................................
PCI Loans ................................................
46
1,147
1,193
$
16
3,318
3,334
$
$
15
69
84
$
—
—
—
$
77
4,534
4,611
December 31, 2013
Loans individually evaluated for
Commercial and
Industrial
Real Estate
Construction and
Land Development
Consumer
Total
impairment ...........................................
$
—
$
—
$
—
$
—
$
—
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 is as follows (in thousands).
Balance, beginning of period ...................................
Fair value of assets acquired as of Bank Closing
Date .........................................................................
Additions to covered OREO ....................................
Dispositions of covered OREO ...............................
Valuation adjustments in the period ........................
Balance, end of period .............................................
$
$
Year Ended
December 31,
2014
Period from
September 14, 2013
through December 31,
2013
142,833
$
—
64,934
(51,150)
(19,672)
136,945
$
—
135,187
19,185
(11,539)
—
142,833
During 2014, the Bank wrote down certain covered OREO assets to fair value to reflect new appraisals on certain OREO acquired in
the FNB Transaction and OREO acquired from the foreclosure on certain loans acquired in the FNB Transaction. Although the Bank
recorded a fair value discount on the acquired assets upon acquisition, in some cases additional downward valuations were required.
These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the OREO, including
in some cases the intended use of the OREO due to the availability of more information as well as the passage of time. The process of
determining fair value is subjective in nature and requires the use of significant estimates and assumptions. Although the Bank makes
market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or
decrease. When the Bank determines, based on subsequent information, that its estimates require adjustment, the Bank records the
adjustment. The accounting for such adjustments requires that the decreases to fair value be recorded at the time such new information
is received, while increases to fair value are recorded when the asset is subsequently sold. All of the impairments recorded during
2014 related to covered assets subject to the loss-share agreements with the FDIC.
F-44
A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).
Balance, beginning of period ...................................
Fair value of assets acquired as of Bank Closing
Date .....................................................................
FDIC Indemnification Asset accretion
(amortization) ......................................................
Transfers to due from FDIC and other ....................
Balance, end of period .............................................
$
$
Year Ended
December 31,
2014
Period from
September 14, 2013
through December 31,
2013
188,291
$
—
3,445
(61,299)
130,437
$
—
185,680
1,699
912
188,291
As of December 31, 2014, the Bank had billed $60.4 million to the FDIC, which represented covered losses and expenses through
September 30, 2014, of which $38.5 million had been collected as of December 31, 2014. The remaining $21.9 million was received
during January 2015.
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,
2014
2013
47,947
76,381
425,704
1,500
230,941
782,473
$
$
59,451
64,193
364,709
1,500
223,246
713,099
$
$
The amounts above include interest-bearing deposits of $628.3 million and $565.3 million at December 31, 2014 and 2013,
respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at December 31, 2014.
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,
2014
2013
122,560
142,255
264,815
(57,824)
206,991
$
$
121,211
107,644
228,855
(28,149)
200,706
$
$
The amounts shown above include assets recorded under capital leases of $6.6 million and $7.1 million, net of accumulated
amortization of $1.2 million and $0.6 million at December 31, 2014 and 2013, respectively.
Occupancy expense was reduced by rental income of $2.4 million, $1.8 million and $0.1 million during 2014, 2013 and 2012,
respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of capital leases,
amounted to $30.7 million, $24.8 million and $1.9 million in 2014, 2013 and 2012, respectively.
9. Goodwill and Other Intangible Assets
At both December 31, 2014 and 2013, the carrying amount of goodwill of $251.8 million was comprised of $24.0 million recorded in
connection with the acquisition of NLC, and as discussed in Note 2 to the consolidated financial statements, $227.8 million recorded
in connection with the PlainsCapital Merger.
F-45
Other intangible assets of $59.8 million and $70.9 million at December 31, 2014 and 2013, 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, 2014, 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, 2014.
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, 2014
Core deposits..............................................................
Trademarks and trade names .....................................
Noncompete agreements ............................................
Customer contracts and relationships ........................
Agent relationships ....................................................
December 31, 2013
Core deposits..............................................................
Trademarks and trade names .....................................
Noncompete agreements ............................................
Customer contracts and relationships ........................
Agent relationships ....................................................
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
$
$
$
$
38,770
20,000
11,650
14,100
3,600
88,120
Gross
Intangible
Assets
38,770
20,000
11,650
14,100
3,600
88,120
$
$
$
$
(12,104) $
(3,723)
(4,794)
(7,729)
(2,987)
(31,337) $
26,666
16,277
6,856
6,371
613
56,783
Accumulated
Amortization
Net
Intangible
Assets
(6,159) $
(2,589)
(2,492)
(6,210)
(2,749)
(20,199) $
32,611
17,411
9,158
7,890
851
67,921
Estimated
Useful Life
(Years)
7-12
10-20
4-6
8-12
13
Estimated
Useful Life
(Years)
7-12
10-20
4-6
8-12
13
F-46
Amortization expense related to intangible assets during 2014, 2013 and 2012 was $11.1 million, $11.1 million and $2.0 million,
respectively.
The estimated aggregate future amortization expense for intangible assets at December 31, 2014 is as follows (in thousands).
2015 ...............................................
2016 ...............................................
2017 ...............................................
2018 ...............................................
2019 ...............................................
Thereafter .......................................
$
$
11,020
10,182
9,254
7,429
6,489
12,409
56,783
10. Mortgage Servicing Rights
The following tables present the changes in fair value of the Company’s MSR and other information related to the serviced portfolio
(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 ................................................................
$
$
Year Ended December 31,
2014
2013
$
20,149
35,056
(11,387)
$
Month Ended
December 31, 2012
—
2,204
—
2,080
13,886
—
(5,267)
(2,396)
36,155
$
4,782
(599)
20,149
$
(51)
(73)
2,080
Mortgage loans serviced for others ................................................
MSR as a percentage of serviced mortgage loans ..........................
December 31,
2014
3,645,220
2013
1,965,883
$
$
0.99%
1.02%
(1) Primarily represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in
interest rates and the refinement of other MSR model assumptions.
The key assumptions used in measuring the fair value of the Company’s MSR were as follows.
Weighted average constant prepayment rate ........................................
Weighted average discount rate ............................................................
Weighted average life (in years) ...........................................................
December 31,
2014
2013
12.17%
11.01%
6.3
9.72%
12.37%
7.6
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 .....................................................
$
(1,648) $
(3,169)
Discount rate:
Impact of 100 basis point adverse change ....................................
Impact of 200 basis point adverse change ....................................
(1,431)
(2,753)
(601)
(1,170)
(631)
(1,236)
December 31,
2014
2013
F-47
This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the 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.
Contractually specified servicing fees, late fees and ancillary fees earned of $13.3 million, $3.2 million and $0.4 million during the
years ended December 31, 2014 and 2013 and the month ended December 31, 2012, 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,
2014
2,076,385
2013
$
$
1,242,110
861,851
79,937
136,886
299,051
1,575,910
97,762
6,369,892
$
$
1,773,749
1,083,596
878,578
276,760
47,636
357,325
2,110,947
194,327
6,722,918
At December 31, 2014, the scheduled maturities of interest-bearing time deposits are as follows (in thousands).
2015 ..............................................................
2016 ..............................................................
2017 ..............................................................
2018 ..............................................................
2019 and thereafter .......................................
$
$
1,066,373
179,185
380,913
41,185
6,016
1,673,672
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,
2014
128,100
136,396
375,000
123,200
762,696
2013
$
$
$
$
137,225
107,462
—
97,400
342,087
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 tables
(dollars in thousands).
Average balance during the period .............................................
Average interest rate during the period .......................................
Maximum month-end balance during the period ........................
$
319,806
$
0.17%
535,232
F-48
Year Ended December 31,
2013
2014
Month Ended
December 31, 2012
277,470
0.25%
355,350
281,067 $
0.19%
415,730
Average interest rate at end of period .................................
Securities underlying the agreements at end of period:
December 31,
2014
2013
0.15%
0.16%
Carrying value ................................................................
Estimated fair value ........................................................
$
$
166,734
163,852
$
$
144,991
138,719
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, 2014, the Bank had available collateral of $1.4 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
2014
$
261,550
$
106,415
Month Ended
December 31, 2012
301,613
$
0.18%
575,000
0.13%
525,000
0.14%
250,000
December 31,
2014
2013
Average interest rate at end of period ........................................
0.16%
—
FSC uses short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents, and
underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the
borrowings at December 31, 2014 and 2013 was 1.07% and 1.15%, respectively.
13. Notes Payable
Notes payable consisted of the following (in thousands).
December 31,
2014
2013
NLIC note payable due May 2033, three-month LIBOR plus 4.10% (4.35% at
December 31, 2014) with interest payable quarterly .............................................
$
10,000
$
10,000
NLIC note payable due September 2033, three-month LIBOR plus 4.05%
(4.30% at December 31, 2014) with interest payable quarterly .............................
10,000
10,000
ASIC note payable due April 2034, three-month LIBOR plus 4.05% (4.30% at
December 31, 2014) 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
7,500
4,184
7,500
6,827
3.40% (3.65% at December 31, 2014) with interest payable quarterly ..................
20,000
20,000
Insurance company line of credit due December 31, 2015, 3.25% plus a
calculated index rate (4.00% at December 31, 2014) with interest payable
quarterly .................................................................................................................
$
5,000
56,684
$
2,000
56,327
NLIC, ASIC and Insurance Company 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, 2014.
F-49
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. The First Southwest nonrecourse notes
were paid off in January 2015.
Insurance Company Line of Credit
The Company’s insurance subsidiary has a line of credit with a financial institution which allows for borrowings by NLC of up to $7.5
million and is collateralized by substantially all of NLC’s assets. The loan agreements relating to the line of credit contain various
financial and other covenants which must be maintained until all indebtedness to the financial institution is repaid. The Company was
in compliance with the covenants at December 31, 2014.
Principal Maturities
At December 31, 2014, notes payable outstanding of $56.7 million includes scheduled maturities of $5.0 million during 2015 and
$51.7 million during 2033 and thereafter.
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).
F-50
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.
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 the Company’s consolidated financial statements.
The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have invested the
proceeds from the securities in floating rate Debentures of 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, 2014 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.
15. Income Taxes
The significant components of the income tax provision (benefit) are as follows (in thousands).
Current:
Federal .................................................
State .....................................................
Deferred:
Federal .................................................
State .....................................................
2014
Year Ended December 31,
2013
2012
$
$
85,303
3,087
88,390
(21,851)
(931)
(22,782)
65,608
$
$
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)
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:
Tax-exempt income, net ......................
State income taxes ...............................
Valuation allowance ............................
Nondeductible expenses ......................
Minority interest ..................................
2014
Year Ended December 31,
2013
2012
$
62,358
$
69,088
$
(2,185)
(2,085)
1,401
1,950
2,201
(318)
F-51
(2,042)
3,035
—
2,363
(479)
(151)
103
—
352
(174)
Nondeductible transaction costs ..........
Prior year return to provision
adjustment .......................................
Other ....................................................
2014
Year Ended December 31,
2013
2012
102
—
360
(361)
65,608
$
(1,141)
(140)
70,684
$
$
1,151
(150)
(91)
(1,145)
The components of the tax effects of temporary differences that give rise to the net deferred tax asset included in other assets within
the consolidated balance sheets are as follows (in thousands).
December 31,
2014
2013
Deferred tax assets:
$
Net operating loss carryforward .........................................
Covered loans .....................................................................
Purchase accounting adjustment - loans .............................
Allowance for loan losses ...................................................
Compensation and benefits ................................................
Indemnification agreements ...............................................
Foreclosed property ............................................................
Capital loss carryforward ...................................................
Net unrealized change in securities and other
investments .....................................................................
Other ..................................................................................
Deferred tax liabilities:
Premises and equipment .....................................................
FDIC Indemnification Asset ..............................................
Intangible assets .................................................................
Derivatives .........................................................................
Net unrealized change in securities and other
investments .....................................................................
Loan servicing ....................................................................
Other ...................................................................................
$
15,919
53,195
15,110
15,255
22,498
6,631
13,458
1,950
—
14,793
158,809
13,567
38,546
18,989
9,368
260
13,531
19,646
113,907
Total net deferred tax asset .....................................................
Less valuation allowance ........................................................
Net deferred tax asset .............................................................
$
44,902
(1,950 )
42,952
$
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
—
39,858
At December 31, 2014 and 2013, the Company had net operating loss carryforwards for Federal income tax purposes of $45.5 million.
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 Company expects to realize its current deferred tax asset for these net operating loss carryforwards
through the implementation of certain tax planning strategies, core earnings, and reversal of timing differences. The Company
recorded a valuation allowance of $1.9 million during 2014 against its gross deferred tax asset for capital loss carryforwards. The
amount of the deferred tax asset considered realizable, however, could increase during the carryforward period if unexpected capital
gains are recognized. The Company has no valuation allowance on the remainder of its deferred tax assets at December 31, 2014 or
2013.
GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position taken, or
expected to be taken in a tax return, and the benefit recognized for accounting purposes. At December 31, 2014, the total amount of
gross unrecognized tax benefits established in the current year was $0.6 million, of which $0.4 million if recognized, would favorably
impact the Company’s effective tax rate. There were no uncertain tax positions at December 31, 2013. The Company does not
anticipate a significant change in the unrecognized tax benefits within the next twelve months.
F-52
The Company files income tax returns in U.S. federal and numerous state jurisdictions. The Company is subject to tax audits in
numerous jurisdictions in the U.S. until the applicable statute of limitations expires. The Company is no longer subject to U.S. federal
tax examinations for tax years prior to 2011. The Company is open for various state tax audits for tax years 2010 and later. The
Company is currently under income tax examination by several state authorities for tax years 2010, 2011 and 2012. The Company
does not expect any significant liability to arise as a result of the examinations.
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. In
addition, Hilltop, PlainsCapital and the Bank make additional contributions to employees’ 401(k) accounts based on achievement of
certain corporate objectives. The amount charged to operating expense for these matching contributions totaled $8.8 million, $7.5
million and $0.7 million during 2014, 2013 and 2012, respectively.
In connection with the PlainsCapital Merger, PlainsCapital terminated its employee stock ownership plan (“ESOP”) and distributed
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, 2014 and 2013, the carrying value of the policies included in other assets was
$24.8 million and $24.5 million, respectively. For the years ended December 31, 2014 and 2013 and the month ended December 31,
2012, the Bank recorded income of $0.4 million, $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, 2014, 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 B. 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 $24,030 per month. This Sublease Agreement continues in effect until July 31, 2018 or such earlier date that the base lease
expires.
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, 2014. 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 $32.7 million and $8.0 million at December 31, 2014 and 2013, 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 2014,
total principal additions were $11.9 million, total principal payments were $10.4 million and additions due to changes in status as a
related party were $23.2 million.
F-53
At December 31, 2014 and 2013, the Bank held deposits of related parties of $161.9 million and $154.0 million, respectively.
A related party is the lessor in an operating lease with the Bank. The Bank’s minimum payment under the lease is $0.5 million
annually through 2028, for an aggregate remaining obligation of $7.0 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, 2014 and 2013, 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, 2014 and 2013, the Bank had outstanding loans of $0.2 million and $3.0
million, respectively, in which PlainsCapital Equity, LLC had a limited partnership interest. The investment of PlainsCapital Equity,
LLC in these limited partnerships was $3.8 million and $3.7 million at December 31, 2014 and 2013, respectively.
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
at December 31, 2013. At December 31, 2014, there were no such amounts outstanding.
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.
Each of Hilltop, Hilltop Securities Holdings LLC (“Hilltop Securities”), formerly Peruna LLC (wholly owned subsidiary of Hilltop),
SWS and the individual members of the board of directors of SWS have been named as defendants in two purported stockholder class
action lawsuits arising out of the merger. Both lawsuits were filed in Delaware Chancery Court (Joseph Arceri v. SWS Group, Inc. et
al and Chaile Steinberg v. SWS Group, Inc. et al filed April 8, 2014 and April 11, 2014, respectively). On May 13, 2014, the Delaware
Chancery Court consolidated the two actions (the “Consolidated Action”) for all purposes. On June 10, 2014, plaintiffs filed a
consolidated amended complaint. The complaint generally alleges, among other things, that the SWS board of directors breached its
fiduciary duties to stockholders by failing to take steps to maximize stockholder value or to engage in a fair sale process before
approving the merger, that the SWS board of directors labored under conflicts of interest, that certain provisions of the merger
agreement unduly restrict SWS’s ability to negotiate with other potential bidders, and that the other defendants aided and abetted the
SWS board of director’s breaches of fiduciary duty. The complaint further alleges, among other things, that the proxy
statement/prospectus filed by Hilltop on May 29, 2014 omits or misstates certain material information. The complaints seek relief that
includes, among other things, an injunction prohibiting the consummation of the merger, rescission to the extent the merger terms
have already been implemented, damages for the alleged breaches of fiduciary duty, and the payment of plaintiffs’ attorneys’ fees and
costs.
F-54
On November 13, 2014, the parties to the Consolidated Action entered into a memorandum of understanding (the “MOU”) reflecting
the terms of an agreement, subject to final approval by the Court and certain other conditions, to settle the Consolidated Action.
Pursuant to the MOU, defendants, without admitting any wrongdoing, agreed to make certain supplemental disclosures requested by
plaintiffs in the Consolidated Action, as set forth in SWS’s Current Report on Form 8-K dated November 14, 2014. In addition,
Hilltop agreed to forbear from asserting certain rights under the Agreement and Plan of Merger, dated as of March 31, 2014, by and
among Hilltop, Hilltop Securities and SWS. The MOU further contemplates that, following confirmatory discovery, the parties will
enter into a stipulation of settlement, which will be subject to customary conditions, including court approval following notice to the
former stockholders of SWS. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will
consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter
into a stipulation of settlement, that the applicable court will approve any proposed settlement, or that any eventual settlement will be
under the same terms as those contemplated by the MOU.
Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock, representing a total
of approximately 8.43 million shares of common stock of SWS, filed petitions in the Court of Chancery of the State of Delaware
seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. The actions are captioned as
follows: Highland Select Equity Master Fund, L.P. et al. v. SWS Group, Inc. et al., C.A. No. 10554-VCG; Lone Star Value Investors,
LP et al. v. SWS Group, Inc. et al., C.A. No. 10572-VCG; Merlin Partners, LP et al. v. SWS Group, Inc. et al., C.A. No. 10578-VCG.
The Company believes these claims are without merit and intends to vigorously defend these actions.
On or about November 2, 2012, FSC, along with thirteen other defendants, was named in a lawsuit pending in the state of Rhode
Island Superior Court styled Rhode Island Economic Development Corporation v. Wells Fargo Securities, LLC, et al. FSC is included
in connection with its role as financial advisor to the State of Rhode Island, specifically in connection with the Rhode Island Economic
Development Corporation’s issuance of $75 million in bonds to finance a loan to 38 Studios, LLC. FSC intends to defend itself
vigorously in this action.
The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews,
examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities
and self-regulatory bodies regarding certain of its businesses, business practices and policies, as well as the conduct of persons with
whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives
document requests, subpoenas and other requests for information. The Inquiries, including the Inquiry described below, could develop
into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect
on the Company’s consolidated financial position, results of operations or cash flows as a whole. Such consequences could include
adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business
practices, and could result in additional expenses and collateral costs, including reputational damage.
As a part of an industry-wide inquiry, PrimeLending received a subpoena from the Office of Inspector General of the U.S. Department
of Housing and Urban Development regarding mortgage-related practices, including those relating to origination practices for loans
insured by the Federal Housing Administration (the “FHA”). On August 20, 2014, PrimeLending received a Civil Investigative
Demand from the United States Department of Justice (the “DOJ”) related to this Inquiry. According to the Civil Investigative
Demand, the DOJ is conducting an investigation to determine whether PrimeLending has violated the False Claims Act in connection
with originating and underwriting single-family residential mortgage loans insured by the FHA. No allegations have been asserted
against PrimeLending. PrimeLending cannot predict the ultimate outcome of this investigation, and cannot make a reasonable estimate
of potential liability, if any, at this time. PrimeLending is cooperating with the investigation and continues to respond to the Civil
Investigative Demand.
While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of
the opinion that the outcome of pending and threatened litigation and Inquiries will not have a material effect on the Company’s
business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future
developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the
Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of
occurrence.
Other Contingencies
The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that each
loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower
representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the
affected loan from the investor or reimburses the investor’s losses. The mortgage origination segment has established an
indemnification liability reserve for such probable losses.
F-55
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, 2014 and 2013, the mortgage origination segment’s indemnification liability reserve totaled $17.6 million and $21.1
million, respectively. The provision for indemnification losses was $3.1 million, $3.5 million and $0.4 million during the years ended
December 31, 2014 and 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).
Balance, beginning of period .................................................
Claims made ......................................................................
Claims resolved with no payment ......................................
Repurchases .......................................................................
Indemnification payments ..................................................
Balance, end of period ...........................................................
Balance, beginning of period .................................................
Additions for new sales ......................................................
Repurchases .......................................................................
Early payment defaults ......................................................
Indemnification payments ..................................................
Change in estimate .............................................................
Balance, end of period ...........................................................
Reserve for Indemnification Liability:
Specific claims ...................................................................
Incurred but not reported claims ........................................
Total ...................................................................................
Representation and Warranty Specific Claims Activity - Origination
Loan Balance
Year Ended December 31,
2014
51,912
50,558
(29,257)
(15,439)
(3,868)
53,906
2013
$
$
39,693
40,001
(17,746)
(6,255)
(3,781)
51,912
$
$
Month Ended
December 31, 2012
35,217
6,463
(1,565)
(422)
—
39,693
Indemnification Liability Reserve Activity
Month Ended
December 31, 2012
18,544
420
(31)
(51)
—
82
18,964
Year Ended December 31,
2014
21,121
3,109
(1,593)
(143)
(1,708)
(3,167)
17,619
2013
$
$
18,964
3,539
(251)
(528)
(1,003)
400
21,121
$
$
December 31,
2014
2013
7,912
9,707
17,619
$
$
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;
F-56
(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 of
December 31, 2014, the Bank estimated that covered losses and reimbursable expenses exceed $240.4 million, but do not exceed
$365.7 million. Unless the estimates of covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record
additional reimbursement receivable from the FDIC. As of December 31, 2014, the Bank had billed $75.5 million of covered net
losses to the FDIC, of which 80%, or $60.4 million, are reimbursable under the loss-share agreements. As of December 31, 2014, the
Bank had received aggregate reimbursements of $38.5 million from the FDIC.
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, Hilltop and its subsidiaries maintain employment contracts with certain officers that provide
for benefits in the event of a “change in control” as defined in these agreements.
Hilltop and its subsidiaries lease space, primarily for 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 $31.4 million, $29.2 million and $2.9 million in 2014, 2013 and 2012,
respectively. Future minimum lease payments under these agreements follow (in thousands).
2015 ....................................................................................................................
2016 ....................................................................................................................
2017 ....................................................................................................................
2018 ....................................................................................................................
2019 ....................................................................................................................
Thereafter ...........................................................................................................
Total minimum lease payments ..........................................................................
Amount representing interest..............................................................................
Present value of minimum lease payments .........................................................
$
Operating Leases
24,588
19,677
14,561
12,565
7,211
28,169
106,771
$
Capital Leases
1,090
1,103
1,129
1,167
1,187
10,348
16,024
(6,126)
9,898
$
$
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 $1.4 billion at December 31, 2014 and
outstanding financial and performance standby letters of credit of $45.1 million at December 31, 2014.
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.
F-57
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, use of derivatives to support
certain non-profit housing organization clients, 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, 2014, 3,078,374 shares of common stock remain available for issuance pursuant to the 2012 Plan.
During 2014, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees
an aggregate of 444,175 restricted stock units (“RSUs”) pursuant to the 2012 Plan, of which 434,864 remain outstanding at
December 31, 2014. At December 31, 2014, 364,827 of the outstanding RSUs are subject to time-based vesting conditions and
generally cliff vest on the third anniversary of the grant date, and 70,037 outstanding RSUs vest based upon the achievement of certain
performance goals over a three-year period. These RSUs are subject to service conditions set forth in the award agreements, with
associated costs recognized on a straight-line basis over the respective vesting periods. The weighted average grant date fair value
related to these RSUs was $23.16 per share. At December 31, 2014, unrecognized compensation expense related to these RSUs was
$7.9 million, which will be amortized through December 2017. The RSUs are not transferable, and the shares of common stock
issuable upon conversion of vested RSUs are generally subject to transfer restrictions for a period of one year following conversion,
subject to certain exceptions. In addition, the applicable RSU award agreements provide for accelerated vesting under certain
conditions.
During 2013, 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, of which 466,000 remain
outstanding at December 31, 2014. These Restricted Stock Awards generally cliff vest on the third anniversary of the grant date and
are subject to service conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the
respective vesting periods. The weighted average grant date fair value related to these Restricted Stock Awards was $13.32 per share.
At December 31, 2014, unrecognized compensation expense related to these Restricted Stock Awards was $2.7 million, which will be
amortized through September 2016. The award agreements governing these Restricted Stock Awards provide for accelerated vesting
under certain conditions.
During 2014, 2013 and 2012, Hilltop granted 9,519, 9,343 and 5,183 shares of common stock, respectively, to independent members
of the Company’s Board of Directors for services rendered to the Company pursuant to the 2012 Plan.
Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000
shares of the Company’s common stock (the “Stock Option Awards”) at an exercise price of $7.70 per share were outstanding at
December 31, 2014. These Stock Option Awards vest in five equal installments beginning on the grant date, with the remainder
vesting on each grant date anniversary through 2015. At December 31, 2014, unrecognized compensation expense related to these
Stock Option Awards was $49 thousand, which will be amortized through October 2015. 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%.
Compensation expense related to the plans was $4.7 million, $1.7 million and $0.5 million during 2014, 2013 and 2012, 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.
F-58
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).
In July 2013, federal banking regulators released final rules for the regulation of capital and liquidity for U.S. banking organizations,
establishing a new comprehensive capital framework (“Basel III”) for U.S. banking organizations that will become effective for
reporting periods beginning after January 1, 2015 (subject to a phase-in period through January 2019).
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to
continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows to
above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an
acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in
2016). All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of December 31,
2014, under guidance issued by the Board of Governors of the Federal Reserve System.
Management believes that, as of December 31, 2014, Hilltop and the Bank would meet all applicable capital adequacy requirements
under the Basel III capital rules for banks with less than $15 billion in assets on a fully phased-in basis as if such requirements were
currently in effect.
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.
Actual
Minimum Capital
Requirements
To Be Well Capitalized
Minimum Capital
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2014
Tier 1 capital (to average assets):
Bank ...............................................................
Hilltop ............................................................
$
845,656
1,231,724
10.31% $
14.17%
328,025
347,619
4% $
4%
410,031
N/A
Tier 1 capital (to risk-weighted assets):
Bank ...............................................................
Hilltop ............................................................
845,656
1,231,724
13.74%
19.02%
Total capital (to risk-weighted assets):
Bank ...............................................................
Hilltop ............................................................
888,744
1,275,023
14.45%
19.69%
246,099
259,078
492,198
518,157
4%
4%
8%
8%
369,148
N/A
615,247
N/A
December 31, 2013
Tier 1 capital (to average assets):
Bank ...............................................................
Hilltop ............................................................
$
762,364
1,112,424
9.29% $
12.81%
328,275
347,480
4% $
4%
410,344
N/A
Tier 1 capital (to risk-weighted assets):
Bank ...............................................................
Hilltop ............................................................
762,364
1,112,424
13.38%
18.53%
Total capital (to risk-weighted assets):
Bank ...............................................................
Hilltop ............................................................
797,771
1,148,736
14.00%
19.13%
227,984
240,159
455,968
480,318
4%
4%
8%
8%
341,976
N/A
569,960
N/A
5%
N/A
6%
N/A
10%
N/A
5%
N/A
6%
N/A
10%
N/A
To be considered “adequately capitalized” (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1
capital to total average assets and 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.
F-59
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) ............................................................
Broker-Dealer
December 31, 2014
D
ecember 31, 2013
Bank
$ 1,104,048
Hilltop
$ 1,460,452
Bank
985,519
Hilltop
$ 1,311,141
$
787
—
787
65,000
781
—
781
65,000
3,484
(651)
42,901
34,863
(259,048)
(3,615)
845,656
(290,052)
(3,812)
1,231,724
(264,822)
(2,015)
762,364
(297,174)
(2,187)
1,112,424
43,088
—
888,744
43,088
211
$ 1,275,023
$
35,407
—
797,771
35,407
905
$ 1,148,736
$
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, 2014, FSC had net capital of $64.3 million (the minimum net capital requirement was $5.3 million),
net capital maintained by FSC was 24% of aggregate debits, and net capital in excess of the minimum requirement was $59.0 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 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, 2014, 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.
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 ......
Statutory net income (loss):
National Lloyds Insurance Company .........
American Summit Insurance Company ......
$
$
December 31,
2014
2013
113,023
28,966
$
98,602
26,452
Year Ended December 31,
2014
2013
2012
14,893
2,554
$
3,583
521
$
(3,858)
972
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, 2014, the Company’s insurance subsidiaries had
statutory surplus in excess of the minimum required.
F-60
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, 2014, 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, 2014, $225.6 million of its earnings was available for dividend declaration without prior regulatory approval.
At December 31, 2014, the maximum aggregate dividend that may be paid to NLC from its insurance company subsidiaries in 2015
without regulatory approval is $17.8 million.
Series B Preferred Stock
As discussed in Note 2, and as a result of the PlainsCapital Merger, the outstanding shares of PlainsCapital’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 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 Hilltop common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for
regulatory purposes. At both December 31, 2014 and 2013, $114.1 million of Hilltop Series B Preferred Stock was outstanding.
The dividend rate on the Hilltop Series B Preferred Stock is fixed at 5.0% from January 1, 2014 until March 26, 2016, based upon the
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.
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.
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:
Change in fair value of FSC derivatives .................................
Commission and insurance agency income ............................
Direct bill fees and insurance service fee income ...................
FDIC Indemnification Asset accretion ...................................
Net gain (loss) from trading securities portfolio .....................
Net gain on investment in SWS common stock ......................
Rent and other income from other real estate owned ..............
$
F-61
Year Ended December 31,
2014
2013
$
16,228
3,380
5,719
3,445
2,126
5,985
5,703
2012
$
11,427
2,765
5,697
1,699
(2,773)
—
625
238
2,159
5,174
—
(646)
—
—
Revenue from check and stored value cards ...........................
Service charges on depositor accounts....................................
Trust fees ................................................................................
Other .......................................................................................
Other noninterest expense:
Accounting fees ......................................................................
Acquisition costs .....................................................................
Amortization of intangible assets ............................................
Data processing .......................................................................
Funding fees ...........................................................................
Management fees ....................................................................
Marketing ................................................................................
Other professional services .....................................................
Printing, stationery and supplies .............................................
Repossession and foreclosure .................................................
Telecommunications ...............................................................
Unreimbursed loan closing costs ............................................
Other .......................................................................................
Year Ended December 31,
2014
2013
2012
7,614
16,730
6,330
6,281
79,541
5,247
1,406
11,138
23,096
2,521
—
21,372
39,310
4,902
17,621
11,249
32,669
61,048
231,579
$
$
$
4,682
11,376
5,050
4,122
44,670
5,455
117
11,087
17,922
4,403
—
17,257
32,526
4,583
3,546
8,350
30,095
52,606
187,947
$
$
$
$
$
$
276
724
411
237
8,573
2,269
6,570
1,986
4,033
593
1,025
2,245
5,004
735
47
834
5,944
3,083
34,368
24. Derivative Financial Instruments
The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management
strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse
impacts from changes in interest rates on the 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”). Additionally, PrimeLending has interest rate risk relative to its MSR asset. During the three
months ended September 30, 2014, PrimeLending began using derivative instruments, including interest rate swaps and swaptions, to
hedge this risk. FSC uses forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to
hedge related exposure to interest rate risk in certain inventory positions.
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans
held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions.
The fair values of PrimeLending’s IRLCs, forward commitments, and interest rate swaps and swaptions are recorded in other assets or
other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains
from sale of loans and other mortgage production income. The fair value of PrimeLending’s derivative instruments decreased $16.3
million during the year ended December 31, 2014, compared with an increase of $8.2 million during the year ended December 31,
2013 and a decrease of $5.9 million during the month ended December 31, 2012. Changes in fair value are attributable to changes in
the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR, and changes in market interest
rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR
asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on
PrimeLending’s loans held for sale and MSR asset is discussed in Note 3 to the consolidated financial statements. The fair values of
FSC’s derivative instruments are recorded in other assets or other liabilities, as appropriate, and the fair values of FSC’s derivatives
increased $16.2 million, $11.4 million and $0.2 million for the years ended December 31, 2014 and 2013 and the month ended
December 31, 2012, respectively. The changes in fair value were recorded as a component of other noninterest income.
F-62
Derivative positions are presented in the following table (in thousands).
December 31, 2014
D
ecember 31, 2013
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
Derivative instruments:
IRLCs .............................................................
Commitments to purchase MBSs ...................
Commitments to sell MBSs ...........................
Interest rate swaps and swaptions ..................
Fee Award Option ..........................................
$
$
621,216
510,553
1,968,768
83,000
—
$
17,057
6,040
(12,566)
425
—
$
602,467
236,305
1,645,332
—
20,432
12,151
(109)
11,383
—
(5,600)
PrimeLending has advanced cash collateral totaling $6.6 million and $1.3 million to offset net liability derivative positions on its
commitments to sell MBSs at December 31, 2014 and 2013, respectively. In addition, PrimeLending has advanced cash collateral
totaling $3.3 million in initial margin on its interest rate swaps and swaptions at December 31, 2014. These amounts are included in
other assets within the consolidated balance sheets.
25. Balance Sheet Offsetting
Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be
eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The
following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar
agreements with offsetting rights (in thousands).
Gross Amounts
of Recognized
Assets
December 31, 2014
Securities borrowed:
Institutional
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
of Assets
Presented in the
Balance Sheet
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
counterparties .............
$
152,899 $
— $
152,899 $
(152,899) $
— $
—
Interest rate swaps and
swaptions:
Institutional
counterparties .............
425
—
425
—
—
425
Forward MBS
derivatives:
Institutional
counterparties .............
$
41
153,365 $
—
— $
41
153,365 $
—
(152,899) $
—
— $
41
466
December 31, 2013
Securities borrowed:
Institutional
counterparties .............
$
107,365 $
— $
107,365 $
(107,365) $
— $
—
Forward MBS
derivatives:
Institutional
counterparties .............
$
11,489
118,854 $
(76)
(76) $
11,413
118,778 $
—
(107,365) $
(286)
(286) $
11,127
11,127
F-63
Gross Amounts
of Recognized
Liabities
December 31, 2014
Securities loaned:
Institutional
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
of Liabilities
Presented in the
Balance Sheet
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
counterparties ..............
$
117,822 $
— $
117,822 $
(117,822) $
— $
Repurchase agreements:
Customer
counterparties ..............
136,396
—
136,396
(136,396)
—
—
—
Forward MBS
derivatives:
Institutional
counterparties ..............
$
12,829
267,047 $
(223)
(223) $
12,606
266,824 $
—
(254,218) $
(6,137)
(6,137) $
6,469
6,469
December 31, 2013
Securities loaned:
Institutional
counterparties ..............
$
74,913 $
— $
74,913 $
(74,913) $
— $
Repurchase agreements:
Customer
counterparties ..............
107,462
—
107,462
(107,462)
—
Forward MBS derivatives:
Institutional
counterparties ..............
$
30
182,405 $
—
— $
30
182,405 $
—
(182,375) $
(17)
(17) $
—
—
13
13
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,
2014
2013
$
152,899
$
107,365
3,497
11,471
17
167,884
117,822
51,930
5,960
3,330
179,042
$
$
$
7,160
4,698
94
119,317
74,913
44,852
5,523
4,390
129,678
$
$
$
F-64
27. Deferred Policy Acquisition Costs
Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to the successful issuance of a
new or renewal policy incurred by NLC are deferred and charged against income ratably over the terms of the related policies. A
summary of the activity in deferred policy acquisition costs is as follows (in thousands).
Balance, beginning of year ..........
$
20,991
$
19,812
Year Ended December 31,
2013
2014
Acquisition expenses
capitalized ...........................
Amortization charged to
41,034
41,771
income .................................
Balance, end of year ....................
$
(41,609)
20,416
$
(40,592)
20,991
Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated statements of
operations.
28. Reserve for Losses and Loss Adjustment Expenses
A rollforward of NLC’s reserve for unpaid losses and LAE is as follows (in thousands).
2014
Year Ended December 31,
2013
2012
Balance, beginning of year ...............
Less reinsurance recoverables ......
Net balance, beginning of year .........
$
$
27,468
(4,508)
22,960
$
34,012
(10,385)
23,627
44,835
(25,083)
19,752
Incurred related to:
Current year ..........................
Prior years ............................
Total incurred ...........................
Payments related to:
Current year ..........................
Prior years ............................
Total payments .........................
86,642
7,787
94,429
(73,841)
(18,147)
(91,988)
110,096
659
110,755
(96,284)
(15,138)
(111,422)
Net balance, end of year ...................
Plus reinsurance recoverables.......
Balance, end of year .........................
$
25,401
4,315
29,716
$
22,960
4,508
27,468
$
109,328
(169)
109,159
(90,743)
(14,541)
(105,284)
23,627
10,385
34,012
The increase in the NLC’s reserves at December 31, 2014 as compared with December 31, 2013 of $2.2 million is primarily due to
increased reserves attributable to the prior period adverse development. This prior period adverse development totaled $7.8 million
during 2014 and was primarily related to litigation emerging from a series of hail storms within the 2012 accident year.
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 2014, reinsurance receivables have a carrying value of $4.9 million, which is
included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at December 31,
2014, based on NLC’s quality requirements.
F-65
Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2014 are listed
below (in thousands).
Federal Emergency Management
Agency ...................................................
Everest Re ..................................................
Lloyd’s Syndicate # 2001 ..........................
R+V Versicherung AG ...............................
General Reinsurance ..................................
Lloyd’s Syndicate #2791 ...........................
Balances
Due From
Reinsurers
A.M. Best
Rating
$
$
3,476
480
432
360
320
273
5,341
N/A
A+
A+
N/A
A++
N/A
The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).
2014
Written
Earned
Year Ended December 31,
2013
Written
Earned
2012
Written
Earned
Premiums from direct business ....
Reinsurance assumed ...................
Reinsurance ceded .......................
Net premiums ...........................
$
$
172,464 $
9,746
(17,845)
164,365 $
173,496 $
8,960
(17,932)
164,524 $
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
The effects of reinsurance on incurred losses are as follows (in thousands).
Loss and LAE incurred .................
Reinsurance recoverables ..............
Net loss and LAE incurred ........
$
$
Year Ended December 31,
2014
97,011
(2,582)
94,429
2013
$
$
117,089
(6,334)
110,755
2012
$
$
115,347
(6,188)
109,159
Multi-line excess of loss coverage
In addition to the catastrophe reinsurance noted below, both NLIC and ASIC participate in an excess of loss program placed with
various reinsurers. This program is limited to each risk with respect to property and liability in the amount of $500,000 for each of
NLIC and ASIC. Each of NLIC and ASIC retain $500,000 in this program.
Catastrophic coverage
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, 2014, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention
by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.5 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 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, 2014, total retention for any one catastrophe that affects both NLIC
and ASIC was limited to $8 million in the aggregate.
F-66
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.
Effective January 1, 2015, NLC renewed its underlying excess of loss contract that provides $10 million aggregate coverage for sub-
catastrophic events. NLC retains a 9% participation in this coverage.
During 2014, NLC experienced no significant catastrophes that resulted in losses in excess of retention at NLIC, compared to two
significant catastrophes during 2013 and one significant catastrophe during 2012. NLC did not experience any significant catastrophe
that resulted in losses in excess of retention at ASIC during 2014, 2013 or 2012. There were eight tornado, hail and wind storms
during 2014 that fit the coverage criteria for the underlying excess of loss contract providing aggregate coverage for sub-catastrophic
events. These events had a gross incurred loss total of $21.7 million, which developed a reinsured recoverable of $1.8 million at the
66% subscription level. The two tornado, hail and wind storms that exceeded retention in 2013 had incurred losses of $18.3 million.
The Texas hail storm that exceeded retention in 2012 had incurred losses of $8.3 million. 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 2014,
2013 and 2012 of $0.2 million, $0.3 million and $0.5 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.
The banking segment includes the operations of the Bank, which, since September 14, 2013, includes the operations acquired in the
FNB Transaction. The broker-dealer (formerly financial advisory) segment is composed of First Southwest. The mortgage origination
segment is composed of PrimeLending. The insurance segment is composed of NLC.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing
and investing activities, 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, 2014
Net interest income (expense) .........
Provision for loan losses .................
Noninterest income ..........................
Noninterest expense ........................
Income (loss) before income
Banking
Broker-Dealer
Mortgage
Origination
Insurance
$
$
334,377
16,916
67,438
245,790
$
12,144
17
119,451
124,715
(12,591) $
—
456,776
431,820
3,672
—
173,577
151,541
$
Corporate
5,219
—
5,985
13,878
All Other and
Eliminations
$
18,320
—
(23,916)
(2,391)
Hilltop
$
Consolidated
361,141
16,933
799,311
965,353
taxes .......................................
$
139,109
$
6,863
$
12,365
$
25,708
$
(2,674) $
(3,205) $
178,166
Year Ended December 31, 2013
Net interest income (expense) .........
Provision for loan losses .................
Noninterest income ..........................
Noninterest expense ........................
Income (loss) before income
Banking
Broker-Dealer
Mortgage
Origination
Insurance
Corporate
All Other and
Eliminations
$
$
293,254
37,140
71,045
155,102
$
12,064
18
102,714
112,360
(37,840) $
—
537,497
472,284
$
7,442
—
166,163
166,006
(1,597) $
—
—
10,439
22,878
—
(27,334)
(4,456)
Hilltop
$
Consolidated
296,201
37,158
850,085
911,735
taxes .......................................
$
172,057
$
2,400
$
27,373
$
7,599
$
(12,036) $
—
$
197,393
F-67
Year Ended December 31, 2012
Net interest income (expense) .........
Provision for loan losses .................
Noninterest income ..........................
Noninterest expense ........................
Income (loss) before income
Banking
Broker-Dealer
Mortgage
Origination
Insurance
$
$
24,885
3,670
4,601
16,130
$
1,191
130
10,909
11,078
(4,987) $
—
57,618
50,296
4,730
—
154,147
163,585
$
Corporate
39
—
—
14,487
All Other and
Eliminations
$
2,984
—
(3,043)
(59)
Hilltop
$
Consolidated
28,842
3,800
224,232
255,517
taxes .......................................
$
9,686
$
892
$
2,335
$
(4,708) $
(14,448) $
—
$
(6,243)
December 31, 2014
Goodwill ..........................................
$
207,741
$
7,008
Total assets ......................................
$ 8,036,729
$
758,636
December 31, 2013
Goodwill ..........................................
$
207,741
$
7,008
Total assets ......................................
$ 7,981,517
$
520,412
$
$
$
$
13,071
1,498,846
13,071
1,249,091
$
$
$
$
23,988
$
—
$
—
$
251,808
328,693
$ 1,522,655
$
(2,903,142) $
9,242,416
23,988
$
—
$
—
$
251,808
308,160
$ 1,316,398
$
(2,471,456) $
8,904,122
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 common
stockholders ...................................................................
$
$
$
$
$
Year Ended December 31,
2014
2013
2012
105,947
(547)
$
121,015
(672)
$
(5,851)
—
105,400
$
120,343
$
(5,851)
89,710
84,382
58,754
1.18
$
1.43
$
(0.10)
105,947
$
121,015
$
(5,851)
—
5,059
—
105,947
$
126,074
$
(5,851)
Weighted average shares outstanding - basic ....................
Effect of potentially dilutive securities ..............................
Weighted average shares outstanding - diluted .................
89,710
863
90,573
84,382
5,949
90,331
58,754
—
58,754
Diluted earnings (loss) per common share.........................
$
1.17
$
1.40
$
(0.10)
During 2012, the computation of diluted loss per common share did not include 6,208,000 equivalent shares issuable upon conversion
of the Notes as the equivalent exchange rate per share was in excess of the average stock prices for the noted period. Additionally,
options to purchase 688,000 weighted average outstanding shares of Hilltop’s common stock were not included in the computation of
diluted loss per common share during 2012, 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.
F-68
Condensed Statements of Operations and Comprehensive Income (Loss)
Investment income ......................................................................
Interest expense ..........................................................................
Net gain on investment in SWS common stock ..........................
General and administrative expense ...........................................
Loss before income taxes, equity in undistributed earnings
of subsidiaries and preferred stock activity .............................
Income tax benefit ......................................................................
Equity in undistributed earnings of subsidiaries .........................
Net income (loss) ........................................................................
Other comprehensive income (loss), net .................................
Comprehensive income (loss) .....................................................
Condensed Balance Sheets
Assets..........................................................................................
Cash and cash equivalents .....................................................
Securities, available for sale ..................................................
Investment in subsidiaries ......................................................
Investment in SWS common stock ........................................
Other assets ............................................................................
Total assets .........................................................................
Liabilities and Stockholders’ Equity .......................................
Accounts payable and accrued expenses ...............................
Notes payable .........................................................................
Stockholders’ equity ..............................................................
Total liabilities and stockholders’ equity ...........................
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 ....................................................................
Net gain on investment in SWS common stock ..............................
Loss on redemption of senior exchangeable notes ..........................
Other, net ........................................................................................
Net cash provided by (used in) operating activities ............................
Investing Activities ............................................................................
Advance to subsidiary .....................................................................
Capital contribution to subsidiary ...................................................
Cash paid for acquisition ................................................................
Net cash used in investing activities ...................................................
Financing Activities ..........................................................................
Payments to repurchase common stock ..........................................
Redemption of senior exchangeable notes ......................................
Dividends paid on preferred stock ..................................................
F-69
Year Ended December 31,
2013
$
2014
5,219
—
5,985
13,878
2012
$
6,635
8,232
—
10,439
(2,674)
(592)
114,640
112,558
35,514
148,072
$
$
(12,036)
(4,680)
134,065
126,709
(43,418)
83,291
$
$
7,035
6,996
—
14,488
(14,449)
(3,313)
6,038
(5,098)
(4,900)
(9,998)
December 31,
2014
2013
2012
145,948
—
1,218,182
70,282
88,243
1,522,655
62,203
—
1,460,452
1,522,655
$
$
$
$
163,856
69,023
1,069,226
—
14,293
1,316,398
5,257
—
1,311,141
1,316,398
$
$
$
$
204,754
64,082
944,546
—
27,743
1,241,125
5,779
90,850
1,144,496
1,241,125
$
$
$
$
$
$
$
2014
Year Ended December 31,
2013
2012
$
112,558
$
126,709
$
(5,098)
(114,640)
156
(5,985)
—
(1,379)
(9,290)
(6,000)
—
—
(6,000)
—
—
(5,619)
(134,065)
8,850
—
3,733
132
5,359
—
(35,000)
—
(35,000)
—
(11,088)
(2,985)
(6,038)
(1,011)
—
—
(3,370)
(15,517)
—
—
(311,805)
(311,805)
(1,298)
—
—
Other, net ........................................................................................
Net cash 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 Schedule of Non-Cash Activities ..............................
Conversion of available for sale investment in SWS common
stock ............................................................................................
Redemption of senior exchangeable notes for common stock ........
Preferred stock issued in acquisition ...............................................
Common stock issued in acquisition ...............................................
$
$
$
$
$
2014
Year Ended December 31,
2013
2012
3,001
(2,618)
(17,908)
163,856
145,948
71,502
—
—
—
$
$
$
$
$
2,816
(11,257)
(40,898)
204,754
163,856
—
83,950
—
—
$
$
$
$
$
—
(1,298)
(328,620)
533,374
204,754
—
—
114,068
387,583
During September 2013, Hilltop contributed capital of $35.0 million to the Bank to provide additional capital in connection with the
FNB Transaction.
As discussed in Note 1 to the consolidated financial statements, Hilltop’s investment in SWS common stock is accounted for under the
provisions of the Fair Value Option effective October 2, 2014. Hilltop had previously accounted for its investments in SWS as
available for sale securities. Under the Fair Value Option, Hilltop’s investment in SWS common stock is recorded at fair value, with
changes in fair value being recorded in other noninterest income within Hilltop’s condensed statement of operations rather than as a
component of other comprehensive income. Hilltop’s election to apply the provisions of the Fair Value Option resulted in Hilltop
recording those unrealized gains previously associated with its investment in SWS common stock of $7.2 million. For the period from
October 3, 2014 through December 31, 2014, the change in fair value of Hilltop’s investment in SWS common stock resulted in a loss
of $1.2 million. In the aggregate, Hilltop recorded a $6.0 million net gain in income within Hilltop’s condensed statement of
operations during 2014.
33. Recently Issued Accounting Standards
In November 2014, the FASB issued ASU 2014-17 to provide companies with the option to apply pushdown accounting in its
separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The election to
apply pushdown accounting can be made either in the period in which the change of control occurred, or in a subsequent period. If the
election is made in a subsequent period, the application of this guidance would be considered a change in accounting principle. The
amendments in this ASU are effective as of November 18, 2014. The adoption will not have a significant impact on the Company’s
consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-14 to reduce diversity in practice by clarifying how to classify and measure certain
government-guaranteed mortgage loans upon foreclosure. The amendment is effective for annual periods, and interim reporting
periods within those annual periods, beginning after December 15, 2014 and may be adopted using either a modified retrospective
transition method or a prospective transition method. The Company adopted the amendment as of January 1, 2015 using the
prospective transition method and does not expect the amendment to have a significant effect on its future consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09 which clarifies the principles for recognizing revenue from contracts with
customers. The amendment outlines a single comprehensive model for entities to depict the transfer of goods or services to customers
in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The
amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. The amendment is effective for annual periods, and interim reporting periods within those annual periods,
beginning after December 15, 2016 and may be adopted using either a full retrospective transition method or a modified retrospective
transition method. Early adoption is not permitted. The Company is currently evaluating the provisions of the amendment and the
impact on its future consolidated financial statements.
F-70
In April 2014, the FASB issued ASU No. 2014-08 which raises the threshold for a disposal to qualify as a discontinued operation and
requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued
operation. The amendment is intended to reduce the frequency of disposals reported as discontinued operations by focusing on
strategic shifts that have or will have a major effect on an entity’s operations and financial results and will permit companies to have
continuing cash flows and significant continuing involvement with the disposed component. The amendment is effective for disposals
(or classifications as held for sale) and acquired businesses or nonprofit activities that are classified as held for sale upon acquisition
that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. As such, the
Company will evaluate the provisions of the amendment as it relates to any potential disposals or acquisitions beginning on or after
January 1, 2015.
In January 2014, the FASB issued ASU No. 2014-04 to clarify that an in substance repossession or foreclosure occurs upon either the
creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all
interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or
through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of
foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized
by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after
December 15, 2014 and may be adopted using either a modified retrospective transition method or a prospective transition method.
The Company adopted the amendment as of January 1, 2015 using the prospective transition method and does not expect the
amendment to have a significant effect on its future consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11 to require an entity to present an unrecognized tax benefit, or portion thereof, in the
financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a
liability and should not be combined with deferred tax assets. The amendment became effective for the Company on January 1, 2014,
and its adoption did not have any effect on the Company’s consolidated financial statements as the amendment is to be applied
prospectively to all unrecognized tax benefits that exist at the balance sheet date.
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
stockholders ..................................................
Earnings per common share:
Basic .............................................................
Diluted .........................................................
$
$
$
$
$
Year Ended December 31, 2014
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
99,316
7,802
91,514
4,125
213,795
246,768
54,416
20,950
33,466
$
93,217
7,457
85,760
4,033
212,135
254,744
39,118
14,010
25,108
104,408
5,962
98,446
5,533
203,281
251,212
44,982
16,294
28,688
$
91,828
6,407
85,421
3,242
170,100
212,629
39,650
14,354
25,296
Full
Year
388,769
27,628
361,141
16,933
799,311
965,353
178,166
65,608
112,558
325
33,141
1,425
$
296
24,812
1,426
$
177
28,511
1,426
$
110
25,186
1,426
$
908
111,650
5,703
31,716
$
23,386
$
27,085
$
23,760
$
105,947
0.35
0.35
$
$
0.26
0.26
$
$
0.30
0.30
$
$
0.26
0.26
$
$
1.18
1.17
F-71
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
stockholders ..................................................
Earnings per common share:
Basic .............................................................
Diluted .........................................................
35. Subsequent Events
$
$
$
$
$
Year Ended December 31, 2013
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
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
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
Full
Year
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
29,528
$
38,174
$
20,943
$
32,370
$
121,015
0.34
0.34
$
$
0.45
0.43
$
$
0.25
0.24
$
$
0.39
0.39
$
$
1.43
1.40
On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash transaction, whereby SWS merged with and into
Hilltop Securities, a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction (the “SWS Merger”).
SWS’s broker-dealer subsidiaries, Southwest Securities, Inc. (“Southwest Securities”) and SWS Financial Services, Inc. (“SWS
Financial”), became subsidiaries of Hilltop Securities. Immediately following the SWS Merger, SWS’s banking subsidiary, Southwest
Securities, FSB, was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS Merger, each
outstanding share of SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in
cash, equating to $6.92 per share based on Hilltop’s closing price on December 31, 2014 and resulting in an aggregate purchase price
of $349.0 million, consisting of 10.0 million shares of common stock, $78.2 million in cash and $70.3 million associated with
Hilltop’s existing investment in SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the
SWS Merger, the merger consideration is subject to change, and is therefore, preliminary as of the date of this report. The SWS
Merger will be accounted for using the acquisition method of accounting, and accordingly, purchased assets, including identifiable
intangible assets and assumed liabilities will be recorded at their respective acquisition date fair values. Because of (i) the short time
period between the acquisition date and the date the Company’s financial statements were issued (February 26, 2015) and (ii) the work
of third party specialists engaged to assist in valuing certain assets and liabilities, along with management’s review and approval, not
being complete, the Company used significant estimates and assumptions to value certain identifiable assets acquired and liabilities
assumed. The acquisition date valuations related to loans, premises and equipment, intangible assets, assumed liabilities and taxes are
considered preliminary and could differ significantly when finalized.
A summary of the preliminary estimated fair values of the identifiable assets acquired, and liabilities assumed, of SWS at January 1,
2015 are summarized in the following table (in thousands).
Cash and due from banks ...................................................
Federal funds sold and securities purchased agreements
to resell ...........................................................................
Assets segregated for regulatory purposes .........................
Securities ............................................................................
Non-covered loans, net ......................................................
Broker-dealer and clearing organization receivables .........
Other assets ........................................................................
Total identifiable assets acquired ...................................
Deposits .............................................................................
Broker-dealer and clearing organization payables .............
Short-term borrowings .......................................................
$
118,538
44,741
181,610
707,476
854, 778
1,261,022
118,910
3,287,075
(1,287,394)
(1,113,075)
(164,240)
F-72
Advances from Federal Home Loan Bank .........................
Other liabilities ...................................................................
Total liabilities assumed .................................................
Preliminary estimated bargain purchase gain .....................
Less Hilltop existing investment in SWS ...........................
Net identifiable assets acquired ..........................................
$
(76,643)
(216,411)
(2,857,763)
(80,326)
348,986
(70,282)
278,704
The following table discloses the impact of SWS on the Company’s results of operations (excluding the impact of acquisition-related
merger and restructuring charges discussed below). The table also presents unaudited pro forma results had the SWS Merger taken
place on January 1, 2014 and includes the estimated impact of purchase accounting adjustments (in thousands). The purchase
accounting adjustments reflect the impact of recording the acquired loans at fair value, including the estimated accretion of the
purchase discount on the loan portfolio. The unaudited pro forma results do not include any potential operating cost savings as a result
of the SWS Merger. Further, certain costs associated with any restructuring or integration activities are also not reflected in the
unaudited pro forma results. Unaudited pro forma results exclude nonrecurring items resulting directly from the SWS Merger and that
do not have a continuing impact on results of operations.
The unaudited pro forma results are not indicative of what would have occurred had the SWS Merger taken place on the indicated
date.
Net interest income ...............................
Other revenues ......................................
Net income ............................................
Twelve Months
Ended
December 31, 2014
420,894
1,005,701
110,279
$
In connection with the SWS Merger, FSC and its related entities also became subsidiaries of Hilltop Securities. First Southwest,
Southwest Securities and SWS Financial will continue to operate as separate broker-dealers, under coordinated leadership, until such
time as the necessary regulatory approvals are obtained and systems integrations are complete.
F-73
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, 2009, 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, 2014, 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 KBW Regional Banking Index, and (c) our selected peer group of the
following institutions: 1st Source Corporation; BancFirst Corporation; Banner Corporation; Capital Bank;
Financial Corp.; Community Trust Bancorp, Inc.; First Financial Bankshares, Inc.; First Financial
Holdings, Inc.; First Midwest Bancorp, Inc.; IBERIABANK Corporation; International Banchares Corp.;
MB Financial, Inc.; Old National Bancorp; Park National Corporation; Pinnacle Financial Partners, Inc.;
Texas Capital Bancshares, Inc.; Southside Bancshares, Inc.; Sterling Financial Corporation; Westamerica
Bancorporation; Trustmark Corporation; and Umpqua Holdings Corporation.
)
%
(
n
r
u
t
e
R
l
a
t
o
T
120.00
100.00
80.00
60.00
40.00
20.00
0.00
(20.00)
(40.00)
9
0
0
2
/
1
3
/
2
1
0
1
0
2
/
1
3
/
2
1
1
1
0
2
/
1
3
/
2
1
2
1
0
2
/
1
3
/
2
1
3
1
0
2
/
1
3
/
2
1
4
1
0
2
/
1
3
/
2
1
HTH
HTH Comps (1)
KBW Regional Bank
Date
12/31/2014
12/31/2013
12/31/2012
12/30/2011
12/31/2010
HTH
HTH Selected Peer
Group
71.39
98.71
16.32
(27.41)
(14.78)
71.07
71.89
18.39
7.34
7.77
KBW Regional Bank
74.55
74.20
21.26
9.78
18.22
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
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Jeremy B. Ford
J. Markham Green
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 E. 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 Company
200 Crescent Court, Suite 1330
Dallas, Texas 75201
Telephone: (214) 855-2177
Facsimile: (214) 855-2173