2017 Annual Report,
Notice of 2018 Annual Meeting &
Proxy Statement
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Hilltop Holdings Inc.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
Tel: 214.855.2177
Fax: 214.855.2173
www.hilltop-holdings.com
NYSE: HTH
NOTICE OF 2018 ANNUAL MEETING
AND PROXY STATEMENT
April 30, 2018
You are cordially invited to attend our 2018 Annual Meeting of Stockholders at 10:00 a.m., Dallas, Texas, local
time, on July 25, 2018. The meeting will be held at 2323 Victory Avenue, 5th Floor, Dallas, Texas 75219.
This booklet includes the formal notice of the meeting and our Proxy Statement. The Proxy Statement tells you
about the matters to be addressed, and the procedures for voting, at the meeting.
YOUR VOTE IS VERY IMPORTANT. Even if you only have a few shares, we want your shares to be represented.
If your shares are held in a brokerage account, your broker no longer has discretion to vote on your behalf with
respect to electing directors or certain other non-routine matters. Accordingly, you must provide specific voting
instructions to your broker in order to vote. Please vote promptly in order to ensure that your shares are represented at
the meeting.
The Notice of Internet Availability of Proxy Materials or this Proxy Statement and the accompanying proxy card, as
applicable, Notice of 2018 Annual Meeting of Stockholders and annual report for the year ended December 31, 2017 will
be provided to stockholders of record on or about May 24, 2018.
We look forward to seeing you at the meeting.
Very truly yours,
Jeremy B. Ford
President and Co-Chief Executive Officer
Alan B. White
Vice Chairman and Co-Chief Executive Officer
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON JULY 25, 2018.
Our Proxy Statement and our annual report for the fiscal year ended December 31, 2017 are both available at
www.proxyvote.com.
(This page has been left blank intentionally.)
Notice of 2018 Annual Meeting of Stockholders
To Be Held on July 25, 2018
WHEN:
WHERE:
Thursday, July 25, 2018, 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 20 directors to serve on our Board of Directors until the 2019 annual meeting
of stockholders or 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 2018; 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 May 10, 2018.
ANNUAL REPORT: Our 2017 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, 2017, over the Internet.
As a result, we are providing to many of our stockholders a Notice of Internet Availability of Proxy Materials instead of
a paper copy of our proxy materials. The notice contains instructions on how to access those proxy materials over the
Internet, as well as instructions on how to request a paper copy of our proxy materials. All stockholders who are not sent
a notice will be sent a paper copy of our proxy materials by mail. This electronic distribution process reduces the
environmental impact and lowers the costs of printing and distributing our proxy materials.
Your vote is very important. Please read the Proxy Statement and voting instructions on the enclosed proxy
card. Then, whether or not you plan to attend the Annual Meeting in person, and no matter how many shares
you own, please vote by Internet, telephone or by marking, signing, dating and promptly returning the enclosed
proxy card in the enclosed envelope, which requires no additional postage if mailed in the United States. Please
see “General Information – What should I do if I want to attend in person?” for information on how to obtain
directions to be able to attend the meeting and vote in person.
By Order of the Board of Directors,
April 30, 2018
Dallas, Texas
Corey G. Prestidge
Executive Vice President, General Counsel & Secretary
PROXY STATEMENT
TABLE OF CONTENTS
Page
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
5
PROPOSAL ONE — ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominees for Election as Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Meeting Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Vote Necessary to Elect Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Director Nomination Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Securities Authorized for Issuance under Equity Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
PROPOSAL TWO — ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . 56
Vote Necessary to Approve, on an Advisory Basis, Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
PROPOSAL THREE — RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . 57
Vote Necessary to Ratify the Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Report of the Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Independent Auditor’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
STOCKHOLDER PROPOSALS FOR 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
i
2018 PROXY STATEMENT
HILLTOP HOLDINGS INC.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
PROXY STATEMENT
2018 Annual Meeting of Stockholders
To be Held on July 25, 2018
GENERAL INFORMATION
The Notice of Internet Availability of Proxy Materials, or this Proxy Statement and the accompanying proxy card, as applicable,
Notice of 2018 Annual Meeting of Stockholders and Annual Report for the year ended December 31, 2017 will be provided to
stockholders of record on or about May 24, 2018.
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 “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to
“Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to the “Bank” refer
to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to “FNB” refer to First National Bank, references to
“SWS” refer to the former SWS Group, Inc., references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned
subsidiary of Securities Holdings) and its subsidiaries as a whole, 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 receiving these proxy materials?
The Board of Directors of Hilltop, or the Board of Directors, has made these materials available to you on the Internet or has
delivered printed versions of these materials to you by mail in connection with the Board of Directors’ solicitation of proxies for use at
our 2018 Annual Meeting of Stockholders, or the Annual Meeting, which will take place at 10:00 a.m. (Dallas, Texas local time) on
Thursday, July 25, 2018, 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 with respect to your vote.
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of printed proxy
materials?
In accordance with rules promulgated by the Securities and Exchange Commission, or the SEC, instead of mailing a printed copy
of our proxy materials to all of our stockholders, we have elected to furnish such materials to selected stockholders by providing
access to these documents over the Internet. Accordingly, on or about May 24, 2018, we will provide a Notice of Internet Availability
of Proxy Materials, or the Notice, to selected stockholders of record and beneficial owners. These stockholders will 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 printing and distribution of our proxy materials.
How can I get electronic access to the proxy materials?
The Notice provides you with instructions regarding how to:
(cid:190) view our proxy materials for the Annual Meeting on the Internet;
(cid:190) vote your shares after you have viewed our proxy materials;
(cid:190)
(cid:190)
(cid:190)
register to attend the meeting in person;
request a printed copy of the proxy materials; and
instruct us to send our future proxy materials to you electronically by email.
1
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 printing and distributing our proxy materials. 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 a 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.
2018 PROXY STATEMENT
What am I voting on?
At the Annual Meeting, stockholders will be asked to:
(cid:190) Elect 20 directors to serve on our Board of Directors until the 2019 annual meeting of stockholders or until their
successors are duly elected and qualified;
(cid:190) Conduct an advisory vote to approve executive compensation;
(cid:190) Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2018;
and
(cid:190) 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:190) FOR each of our director candidates;
(cid:190) FOR the approval, on an advisory basis, of the compensation of our named executive officers;
(cid:190) FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for 2018.
Who is entitled to vote?
Holders of record of our common stock at the close of business on May 10, 2018 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 May 10, 2018. Our stockholders are not entitled to cumulative voting rights, and dissenters’ rights are not applicable to the
matters being voted upon.
How do I vote?
If you are a stockholder of record, there are four ways to vote:
(cid:190)
In Person. You may vote in person at the Annual Meeting. Bring your printed proxy card if you received one by mail.
Otherwise, we will provide stockholders of record with a ballot at the Annual Meeting. We recommend that you vote by
proxy even if you plan to attend the Annual Meeting. You always can change your vote at the Annual Meeting.
(cid:190) Via the Internet. You may vote by proxy via the Internet by visiting www.proxyvote.com. Have your proxy card or
Notice in hand when you access the website and follow the instructions to obtain your records and to create an electronic
voting instruction form.
(cid:190) Via Telephone. If you received or requested printed copies of the proxy materials by mail, you may vote by proxy by
calling the toll-free number found on the proxy card.
(cid:190) Via Mail. If you received or requested printed copies of the proxy materials by mail, you may vote by proxy by marking,
signing and dating the proxy card and sending it back in the envelope provided.
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2018 PROXY STATEMENT
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 to you. New York Stock Exchange, or NYSE, rules prohibit
your broker from voting for the election of directors and the approval of executive compensation on your behalf without specific
voting instructions from you. Many brokers allow stockholders to provide voting instructions by mail, telephone and the Internet.
How do proxies work?
Our Board of Directors is asking for your proxy. Giving your proxy to the persons named by us means you authorize them to vote
your shares at the Annual Meeting in the manner you direct. You may vote for all of our director candidates or withhold your vote as
to one or more 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 2018.
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, on an advisory basis, of our
executive compensation, and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for 2018.
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 NYSE, 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 materials 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 matters are considered “routine” or “non-routine”?
The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for
2018 is considered 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 revoke my proxy after I have voted?
You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting (or before any earlier
deadline specified in the Notice or the proxy card) by (a) voting again via the Internet or by telephone (only your latest Internet or
telephone proxy submitted prior to the Annual Meeting will be counted), (b) signing and returning a new proxy card with a later date
or creating a new electronic voting 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 59.
Will my shares be voted if I don’t sign a proxy?
If you hold your shares directly in your own name, they will not be voted unless you provide a proxy or attend the Annual
Meeting and vote in person. Under certain conditions, shares that you own that are held by a broker or nominee may be voted even if
you do not provide voting instructions to the broker or nominee. As discussed above under “General Information— How do proxies
work?”, brokerage firms have the authority under applicable rules to vote on certain “routine” matters, including the ratification of the
appointment of auditors.
3
What constitutes a quorum?
In order to carry on the business of the Annual Meeting, a quorum must be present. This means that the holders of at least a
majority of the outstanding shares eligible to be cast must be represented at the Annual Meeting, either in person or by proxy. 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 above) are counted as present for purposes of determining the presence of a
quorum. On April 27, 2018, we had 96,064,044 shares of common stock outstanding.
2018 PROXY STATEMENT
How many votes are needed for approval?
Election of Directors
The director candidates receiving the highest number of affirmative votes, or a plurality, 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, although they will be considered present for purposes of determining a quorum. 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, our executive
compensation. The Compensation Committee of the Board of Directors will review the results of this advisory vote 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, although they will be considered present for purposes of determining a quorum.
Ratification of Independent Registered Public Accounting Firm
The appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2018 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 on 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 will not be
counted as votes cast and will have no effect on the result of the vote, although they will be considered present for purposes of
determining a quorum. Because it is a routine matter, we do not expect any broker non-votes with respect to this proposal.
Who conducts the proxy solicitation?
Our Board of Directors is soliciting the proxies, and we will bear all costs of this solicitation, including the preparation, assembly,
printing and mailing of this Proxy Statement and the Notice. 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 the Annual Meeting in person?
You will need an admission ticket to attend the Annual Meeting. Attendance at the Annual Meeting will be limited to
stockholders of record at the close of business on May 10, 2018 (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 59. 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.
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2018 PROXY STATEMENT
General
PROPOSAL ONE — ELECTION OF DIRECTORS
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 Officers, setting the scope of executives’ authority to manage our day-
to-day operations and the evaluation of executives’ 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 20 persons currently serving
as directors whose terms are expiring at the Annual Meeting.
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. Biographical information on each of our nominees is given below.
Nominees for Election as Directors
Charlotte Jones Anderson
Age 51
Rhodes R. Bobbitt
Age 72
Tracy A. Bolt
Age 53
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. Joris Brinkerhoff
Age 66
J. Taylor Crandall
Age 64
Charles R. Cummings
Age 81
Hill A. Feinberg
Age 71
2018 PROXY STATEMENT
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 has served as a director of Hilltop since April 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, 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 equipment
primarily for the oil and gas industry; DCB 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 serves as Chairman and Chief Executive Officer of Hilltop Securities, a continuation
of Mr. Feinberg’s previous role with 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 was a
member of the board of directors of Energy XXI (Bermuda) Limited, a public company that filed
bankruptcy in 2016. 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
Gerald J. Ford
Age 73
Jeremy B. Ford
Age 43
J. Markham Green
Age 74
2018 PROXY STATEMENT
Mr. Gerald J. 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. Gerald J. Ford served as interim Chief
Executive Officer of Hilltop from January 1, 2010 until March 11, 2010. Mr. Gerald J. 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 43 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. Gerald J. 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 as Chairman of the Board of Freeport McMoRan Copper
and Gold Inc. and as a director of Scientific Games Corporation and Mechanics Bank. Mr. Gerald
J. Ford previously served as Chairman of Pacific Capital Bancorp and a director of First
Acceptance Corporation, SWS Group, Inc. and McMoRan Exploration Co. Mr. Gerald J. 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 Co-Chief
Executive Officer, Jeremy B. Ford, is the son of Mr. Gerald J. Ford, and Hilltop’s Executive Vice
President, General Counsel and Secretary, Corey G. Prestidge, is the son-in-law of Mr. Gerald
J. Ford.
Mr. Jeremy B. Ford was appointed Co-Chief Executive Officer of Hilltop in September 2016 and
prior to that he served as the sole Chief Executive Officer of Hilltop since March 2010. Mr. Jeremy
B. Ford also has served as President and a director of Hilltop since 2010. Mr. Jeremy B. Ford has
worked in the financial services industry for over 20 years, primarily focused on investments in,
and acquisitions of, depository institutions and insurance and finance companies. He has been
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 (acquired by Citigroup Inc.),
and Salomon Smith Barney (acquired by Citigroup Inc.). Jeremy B. 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 including
general partner of Goldman, Sachs & Co. and co-head of its Financial Services Industry Group.
From 1967 to 1973, Mr. Green worked in the Research Department and Investment Banking
Division of Merrill Lynch. Mr. Green is Chairman Emeritus of Owner Resource Group, a private
equity firm. He is Chairman of ORG Chemical Holdings, LLC a portfolio company of Owner
Resource Group.
7
William T. Hill, Jr.
Age 75
Lee Lewis
Age 66
Andrew J. Littlefair
Age 57
W. Robert Nichols, III
Age 73
2018 PROXY STATEMENT
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. 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 June 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. 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.
8
C. Clifton Robinson
Age 80
Kenneth D. Russell
Age 69
A. Haag Sherman
Age 52
2018 PROXY STATEMENT
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 currently serves as
the President and Chief Executive Officer of First Acceptance Corporation. Prior to that he served
as the President and Chief Executive Officer of Mechanics Bank from June 2015 to October 2016.
Mr. Russell has been a Principal of Ford Financial Fund II, L.P., a private equity fund based in
Dallas, Texas, since 2010. Over a long career at KPMG, he rose from a staff accountant in the U.S.
division to become a member of KPMG Germany’s managing Board of Directors. During 20 years
in KPMG LLP’s Dallas office, he led the engagement efforts with the firm’s regional banking,
thrift and other financial service clients. In 1993, Mr. Russell joined KPMG’s national office in
New York and led their financial services advisory unit, which supported many of the nation’s
largest banks. In 2001, he joined the Managing Board for KPMG in Germany, where he served as
the global lead partner in the firm’s relationship with Deutsche Bank. That position entailed
managing and consulting on banking operations in over 50 countries for the multi-national German
bank. Mr. Russell retired from the KPMG Germany Managing Board in 2008 in order to lead a new
Partner Mentoring Program for KPMG’s offices throughout Europe, working to help young
professionals become category and practice leaders. He also serves on the Board of Directors of
First Acceptance Corporation and Mechanics Bank.
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 of Tectonic Holdings LLC, a
registered investment advisor and Sanders Morris Harris LLC, a broker-dealer. Mr. Sherman also is
the Chairman of T Bancshares, Inc. and a director of T Bank. 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. He previously served as a director of Miller
Energy Resources and ZaZa Energy Corp. Mr. Sherman has served 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.
9
Robert C. Taylor, Jr.
Age 70
Carl B. Webb
Age 68
Alan B. White
Age 69
2018 PROXY STATEMENT
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 and has served as its President
since its acquisition by Albertsons LLC. 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
distribution 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. Mr. Webb is a Co-Managing
Member of Ford Financial Fund II, L.P., a private equity fund based in Dallas, Texas. 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. 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, and 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 the
Chairman of Mechanics Bank and a director of Prologis, Inc. He is a former director of Pacific
Capital Bancorp, M&F Worldwide Corp. and Plum Creek Timber Company.
Mr. White is one of PlainsCapital’s founders. He has served as Co-Chief Executive Officer of
Hilltop since September 2016. He also 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.
Director Independence
Our Board of Directors has affirmatively determined that 12 of the 20 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 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.
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 one
director it determined to be independent —Mr. Littlefair — has, or a member of his immediate family or an affiliated company in
which he is employed or in which he is a principal equity holder has, received a loan from the Bank in the ordinary course of business,
10
2018 PROXY STATEMENT
which our Board of Directors does not view as compensation. In our management’s opinion, this loan was 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 does 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 1.4% of the
outstanding shares of common stock of Clean Energy Fuels Corp. at April 10, 2018. From late 2011 through March 31, 2018, the
Bank purchased, in a series of transactions, an aggregate of approximately $16.4 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.
Meeting Attendance
Our Board of Directors met six times during 2017. 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 2017, other than Mr. Brinkerhoff who did not attend two special
meetings of the Board of Directors and two special meetings of the Compensation Committee. 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 and
Hill A. Feinberg attended the 2017 annual meeting of stockholders.
Vote Necessary to Elect Directors
The director candidates receiving the highest number of affirmative votes, or a plurality, 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, although they will be considered present for purposes of determining a quorum. Under applicable NYSE rules, a broker or
other nominee does not have the authority to vote for the director nominees in the absence of instructions from the beneficial owner of
the relevant shares. Stockholders may not cumulate votes in the election of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE
NOMINEES IDENTIFIED ABOVE.
Director Compensation
General
Members of our Board of Directors who also are full-time employees do not receive any compensation for their service on the
Board of Directors or any committee of the Board of Directors. During 2017, the Chairman of the Board of Directors and all other
directors received the following compensation for their service on the Board of Directors:
Committee
Board of Directors
Audit Committee
Nominating and Corporate Governance Committee
Compensation Committee
Investment Committee
Risk Committee (a)
Merger and Acquisition Committee
Executive Committee (b)
Annual Fee
for Chairperson ($)
Annual Fee
for Other Members ($)
210,000
70,000
15,000
15,000
30,000
32,500
15,000
—
48,000
8,000
5,000
5,000
5,000
6,500
5,000
5,000
(a) Effective July 1, 2017, the Compensation Committee of the Board of Directors approved an increase in annual fee compensation to from $15,000
to $50,000 for the chairman of the Risk Committee and from $5,000 to $8,000 for other members of the Risk Committee.
(b) The chairman of the Executive Committee is Alan B. White, Co-Chief Executive Officer of the Company. As a result, no fee is paid to the
chairman of the Executive Committee.
11
2018 PROXY STATEMENT
Members of our Board of Directors may elect to receive their aggregate Board of Directors and board committee compensation:
•
•
•
entirely in the form of cash;
entirely in the form of common stock; or
one-half in cash and one-half in common stock.
Any elections, or changes in elections, by directors regarding the form of compensation to be received may only occur during a
“trading window” and only become effective at the “trading window” immediately following such election or change in election. Cash
and shares of common stock are paid and issued, respectively, in arrears on a calendar quarterly basis, with no vesting requirements.
Customarily, these payments and issuances occur by the 15th day of the month following the applicable calendar quarter-end. The
value of the common stock awarded is based upon the average closing price per share of our common stock for the last ten
consecutive trading days of the applicable calendar quarter. In lieu of fractional shares of common stock that would otherwise be
issuable to directors, we pay cash to the director based upon the value of those fractional shares at the value of the shares 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 or her 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.
12
2018 PROXY STATEMENT
2017 Director Compensation
Director Compensation Table for 2017(a)
Fees Earned or Fees Earned or
All Other
Name
Charlotte Jones Anderson
Rhodes R. Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford (b)
Jeremy B. Ford
J. Markham Green
William T. Hill, Jr.
James R. Huffines (d)
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
Paid in Cash
($)
29,057
88,000
22
53,000
68,000
123,000
—
72
—
67,500
39,401
—
53,000
26,552
68,000
48,000
54,500
68,000
29,057
52
—
Paid in Stock
Compensation
($)
28,943
—
93,478
—
—
—
—
214,928
—
—
23,599
—
—
26,448
—
—
—
—
28,943
52,948
—
($)
—
—
—
—
—
—
—
853,200 (c)
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
58,000
88,000
93,500
53,000
68,000
123,000
—
1,068,200
—
67,500
63,000
—
53,000
53,000
68,000
48,000
54,500
68,000
58,000
53,000
—
(a) Fees earned for services performed in 2017 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, and the dollar value reported in the table represents the aggregate dollar amount of cash fees forgone.
(b) Mr. Ford held an aggregate 120,000 unvested RSUs as of April 27, 2018.
(c) Reflects grant date fair value of stock awards calculated in accordance with the provisions of the Stock Compensation Topic of the Accounting
Standards Codification (“ASC”), with the exception that the amount shown assumes no forfeitures. Such awards represent time-based RSUs that
cliff vest upon the earlier of February 23, 2020 and a change of control.
(d) Mr. Huffines retired effective December 31, 2017, from all positions with the Company and its subsidiaries, including as a member of the Board of
Directors.
As described above, the 2017 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.
13
The following numbers of shares of our common stock were issued to our directors for services performed during 2017:
2018 PROXY STATEMENT
Name
Charlotte Jones Anderson
Tracy A. Bolt
Gerald J. Ford
William T. Hill, Jr.
Andrew J. Littlefair
Robert C. Taylor, Jr.
Carl B. Webb
Number of
Shares
1,125
3,648
8,354
929
1,028
1,125
2,058
For further information about the stockholdings of these directors and our management, see “Security Ownership of Certain
Beneficial Owners and Management” commencing on page 22 of this Proxy Statement.
Board 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
Nominating and Corporate Governance Committee, the Risk Committee, the Investment Committee, the Merger and Acquisition
Committee, and the Executive Committee. A more detailed description of these committees is set forth below. Our Board of Directors
may, from time to time, establish certain other committees to facilitate our management. The Board of Directors has adopted a written
charter for each of these committees. 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 “Investor Relations — 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 59.
14
Committee Membership
The following table shows the current membership of, and the 2017 fiscal year meeting information for, each of the committees
2018 PROXY STATEMENT
of the Board of Directors.
Audit
Compensation Nominating and Corporate Risk
Name
Charlotte Jones Anderson*
Rhodes Bobbitt*
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.*
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 2017
* Denotes independent director.
Audit Committee
Committee Committee
Governance Committee
(cid:98)(cid:3)
(cid:98)(cid:3)
(cid:3)(cid:3) (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Chairman (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
9
(cid:98)(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Chairman (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
6
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
Chairman
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
4
Merger and
Investment
Executive
Committee Committee Acquisition Committee Committee
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) Chairman (cid:3)
(cid:3)
(cid:3)
(cid:3) Chairman (cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
5
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) (cid:98)(cid:3)
(cid:3) Chairman
6
(cid:98)(cid:3)
(cid:98)(cid:3)
(cid:98)(cid:3)
(cid:3)
Chairman
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:98)(cid:3)
(cid:3)
(cid:3)
1
(cid:3)
(cid:3)
(cid:3)
(cid:3)
8
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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 57. 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.
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 and the Hilltop Holdings Inc. 2012 Equity Incentive Plan and produces the annual
report on executive compensation for inclusion in our annual proxy statement, which appears on page 38. 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:
•
Identify, screen and recommend to our Board of Directors individuals qualified to serve as members, and on committees, of
the Board of Directors;
• Advise our Board of Directors with respect to the composition, procedures and committees of the Board of Directors;
• Advise our Board of Directors with respect to the corporate governance principles applicable to the Company; and
• Oversee the evaluation of the Board of Directors and our management.
15
2018 PROXY STATEMENT
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:
• The Company’s risk governance structure;
• The Company’s risk tolerance;
• The Company’s risk management and risk assessment guidelines and policies regarding market, credit, operational, liquidity,
strategic, legal, compliance and such other risks as necessary;
• The Company’s capital and liquidity and funding; and
• 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 of the Merger and Acquisition Committee is independent in accordance with the listing standards of the
NYSE.
Executive Committee
The Executive Committee, with certain exceptions, has the power and authority of the Board of Directors to manage the affairs of
the Company between meetings of the Board of Directors.
Corporate Governance
General
We are committed to good corporate governance practices and, as such, we have adopted formal corporate governance guidelines
to maintain our effectiveness. The guidelines govern, among other things, board member qualifications, responsibilities, education 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 “Investor Relations — Corporate Information — Governance Documents.” A copy also may be obtained upon
request from our corporate Secretary at the address listed under “Questions” on page 59.
Board Leadership Structure
We have separated the offices of Co-Chief Executive Officers 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.
16
2018 PROXY STATEMENT
Risk Oversight
Our Board of Directors and the Risk Committee of the Board of Directors oversee an enterprise-wide approach to risk
management, including cybersecurity risks, 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 an evaluation of performance with a view to improving efficacy and effectiveness of the Board
of Directors. In addition, the full Board of Directors reviews annually the qualifications and effectiveness of the Audit Committee and
its members.
Director Qualifications for Service
As described below, the Nominating and Corporate Governance Committee considers a variety of factors when evaluating a
potential candidate to fill a vacancy on the Board of Directors or when nomination of an incumbent director for re-election is under
consideration. The Nominating and Corporate Governance Committee and the Board of Directors strive to balance a diverse mix of
experience, perspective, skill and background with the practical requirement that the Board of Directors will operate collegially, with
the common purpose of overseeing our business on behalf of our stockholders. All of our directors possess relevant experience, and
each of them approaches the business of the Board of Directors and his or her 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 brand management.
Rhodes R. Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
Mr. Bobbitt has an extensive investment background. This is particularly important given 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.
J. Taylor Crandall
Mr. Crandall has significant experience in finance and management and board governance, including
his experience serving on the boards of directors of public and private companies.
Charles R. Cummings
Mr. Cummings has an extensive operational and accounting background. His expertise in these
matters brings considerable strength to our Audit Committee and Board of Directors in these areas.
17
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
William T. Hill, Jr.
Lee Lewis
2018 PROXY STATEMENT
Mr. Feinberg has extensive knowledge and experience concerning the broker-dealer segment and
the industry in which it operates through his extended period of service to First Southwest and
Hilltop Securities.
Mr. Gerald J. 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
43 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 experience 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. His extensive
knowledge of our operations makes him a valuable member of our Board of Directors.
Mr. Green has an extensive background in financial services, as well as board service. His
investment banking background also provides our Board of Directors with expertise surrounding
acquisitions and investments.
Mr. 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.
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 an owner and chief executive officer of a Texas-based
company also provides unique insight to the Board of Directors.
Andrew J. Littlefair
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.
W. Robert Nichols III
Mr. Nichols has broad experience in managing and leading enterprises. This significant experience
provides our Board of Directors with additional perspectives on our operations.
C. Clifton Robinson
Kenneth D. Russell
A. Haag Sherman
Robert C. Taylor, Jr.
Mr. Robinson possesses particular knowledge and experience in the insurance industry, as we
purchased NLC from him in 2007. Mr. Robinson 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.
Carl B. Webb
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.
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2018 PROXY STATEMENT
Alan B. White
Mr. White possesses knowledge of our business and industry through his lengthy tenure as
PlainsCapital’s Chief Executive Officer, and his service as our Co-Chief Executive Officer, which
aid him in efficiently and effectively identifying and executing our strategic priorities.
Executive Board Sessions
The current practice of our Board of Directors is to hold an executive session of its non-management directors at least once per
quarter. The individual who serves as the chair at these executive sessions is the Chairman of the Board of Directors. Executive
sessions of the independent directors of the Board of Directors also are held at least once per fiscal year, 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, 2323 Victory Avenue, Suite 1400, Dallas, Texas 75219.
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 Co-Chief Executive Officers, 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 “Investor Relations —
Corporate Information — Governance Documents.” Copies also may be obtained upon request by writing our corporate Secretary at
the address listed under “Questions” on page 59. 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.
Director Nomination Procedures
The Nominating and Corporate Governance Committee believes that, at a minimum, candidates for membership on the Board of
Directors should have a demonstrated ability to make a meaningful contribution to the Board of Directors’ oversight of our business
and affairs and have a record and reputation for honest and ethical conduct. The Nominating and Corporate Governance Committee
recommends director nominees to the Board of Directors based on, among other things, its evaluation of a candidate’s experience,
knowledge, skills, expertise, integrity, ability to make independent analytical inquiries, understanding of our business environment and
a willingness to devote adequate time and effort to board responsibilities. In making its recommendations to the Board of Directors,
the Nominating and Corporate Governance Committee also seeks to have the Board of Directors nominate candidates who have
diverse backgrounds and areas of expertise so that each member can offer a unique and valuable perspective.
The Nominating and Corporate Governance Committee expects, in the future, to identify potential nominees by asking current
directors and executive officers to notify the committee if they become aware of persons who meet the criteria described above. The
Nominating and Corporate Governance Committee also, from time to time, may engage firms, at our expense, that specialize in
identifying director candidates. As described below, the Nominating and Corporate Governance Committee also will consider
candidates recommended by stockholders.
Once a person has been identified by the Nominating and Corporate Governance Committee as a potential candidate, the
committee expects to collect and review publicly available information regarding the person to assess whether the person should be
considered further. If the Nominating and Corporate Governance Committee determines that the candidate warrants further
19
2018 PROXY STATEMENT
consideration, and if the person expresses a willingness to be considered and to serve on the Board of Directors, the Nominating and
Corporate Governance Committee expects to request information from the candidate, review the person’s accomplishments and
qualifications, including in light of any other candidates that the committee might be considering, and conduct one or more interviews
with the candidate. In certain instances, members of the Nominating and Corporate Governance Committee may contact one or more
references provided by the candidate or may contact other members of the business community or other persons that may have greater
first-hand knowledge of the candidate’s accomplishments.
In addition to formally nominating individuals for election as directors in accordance with our Third Amended and Restated
Bylaws, as summarized below on page 59 under “Stockholder Proposals for 2019,” 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., 2323 Victory
Avenue, Suite 1400, Dallas, Texas 75219. Director recommendations submitted by stockholders should include the following
information regarding the stockholder making the recommendation and the individual(s) recommended for nomination:
•
•
•
•
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;
• 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);
•
•
•
•
•
•
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 59); and
all other information that would be required to be disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and the rules promulgated
thereunder.
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 local 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
20
2018 PROXY STATEMENT
advanced more than 30 days prior to, or delayed by more than 60 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 local time, on the later of the 90th day prior to the date of such annual
meeting of stockholders or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date
of such annual meeting, 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 local 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.
The Nominating and Corporate Governance Committee did not receive any recommendations for director nominees from any
non-management stockholder or group of stockholders that beneficially owns more than 5% of our common stock.
21
2018 PROXY STATEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding our common stock beneficially owned as of April 27, 2018 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 Address of Beneficial Owner
Gerald J. Ford (b)
200 Crescent Court, Suite 1350
Dallas, Texas 75201
The Vanguard Group (c)
100 Vanguard Boulevard
Malvern, Pennsylvania 19355
Dimensional Fund Advisors LP (d)
Building One
6300 Bee Cave Road
Austin, Texas 78746
FMR LLC (e)
245 Summer Street
Boston, Massachusetts 02210
Amount and Nature of Percent of
Class (a)
Beneficial Ownership
15,591,587
16.2 %
5,966,147
6.2 %
5,661,685
5.9 %
4,969,942
5.2 %
(a) Based on 96,064,044 shares of common stock outstanding on April 27, 2018. Shares issuable under instruments to purchase our common stock that are exercisable
within 60 days of April 27, 2018 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. Gerald J. Ford include 39,047 shares that are owned by Turtle Creek Revocable Trust, a revocable trust
for the benefit of the members of Mr. Gerald J. Ford’s family, and indirectly by Mr. Gerald J. Ford as settlor of the trust. Mr. Gerald J. Ford disclaims beneficial
ownership of the shares held by the trust except to the extent of his pecuniary interest therein. Also includes 15,544,674 shares owned by Diamond A Financial,
LP. Mr. Gerald J. Ford is the sole manager of Diamond HTH Stock Company GP, LLC, which is the sole general partner of Diamond HTH Stock Company, LP,
which is the sole general partner of Diamond A Financial, LP. Turtle Creek Revocable Trust is the sole member of Diamond HTH Stock Company GP, LLC and
the sole limited partner of Diamond HTH Stock Company, LP. Each of Mr. Gerald J. Ford, Diamond A Financial, LP, Diamond HTH Stock Company, LP,
Diamond HTH Stock Company GP, LLC and Turtle Creek Revocable Trust may be deemed to have shared voting and dispositive power of these shares. Excludes
120,000 restricted stock units, or RSUs, that will not vest within 60 days of April 27, 2018.
(c) Based on the Schedule 13G (Amendment No. 2) filed with the SEC by The Vanguard Group on February 9, 2018. According to the Schedule 13G (Amendment
No. 2), The Vanguard Group has sole voting power over 82,742 shares of our common stock, shared voting power over 9,980 shares of our common stock, sole
dispositive power over 5,880,540 shares of our common stock and shared dispositive power over 85,607 shares of our common stock. The Schedule 13G
(Amendment No. 2) reports that Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, is the beneficial owner of 75,627 shares
of our common stock as a result of its serving as investment manager of collective trust accounts and that Vanguard Investments Australia, Ltd., a wholly owned
subsidiary of The Vanguard Group, is the beneficial owner of 17,095 shares of our common stock as a result of its serving as investment manager of Australian
investment offerings.
(d) Based on the Schedule 13G (Amendment No. 1) filed with the SEC by Dimensional Fund Advisors LP on February 9, 2018. According to the Schedule 13G
(Amendment No. 1), Dimensional Fund Advisors LP, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, furnishes
investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager or sub-adviser to
certain other commingled funds, group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the “Funds”). In
certain cases, subsidiaries of Dimensional Fund Advisors LP may act as an adviser or sub-adviser to certain Funds. In its role as investment advisor, sub-adviser
and/or manager, Dimensional Fund Advisors LP or its subsidiaries (collectively, “Dimensional”) may possess voting and/or investment power over the securities
of the Issuer that are owned by the Funds, and may be deemed to be the beneficial owner of the shares of the Issuer held by the Funds. However, according to the
Schedule 13G, all securities reported are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. In addition, the Schedule 13G
disclaims that the reporting person or any of its affiliates is the beneficial owner of any securities covered by the Schedule 13G for any purposes other than Section
13(d) of the Securities Exchange Act of 1934.
(e) Based on the Schedule 13G filed with the SEC by FMR LLC on February 13, 2018. According to the Schedule 13G, FMR LLC has sole voting power over 2,421
shares of our common stock and sole dispositive power over 4,969,942 shares of our common stock. According to the Schedule 13G, Abigail P. Johnson is a
Director, the Chairman, and the Chief Executive Officer of FMR LLC. Members of the Johnson family, including Abigail P. Johnson, are the predominant
owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family
group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in
accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the
shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various
investment companies registered under the Investment Company Act of 1940 advised by Fidelity Management & Research Company, a wholly owned subsidiary
of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. Fidelity Management & Research Company carries out the voting of the shares
under written guidelines established by the Fidelity Funds’ Boards of Trustees.
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2018 PROXY STATEMENT
Security Ownership of Management
The following table sets forth information regarding the number of shares of our common stock beneficially owned as of April 27,
2018, by:
•
•
•
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., 2323 Victory
Avenue, Suite 1400, Dallas, Texas 75219. Except as otherwise indicated in the footnotes to this table, the persons named in the table
have specified that they have sole voting and investment power with respect to all shares of stock shown as beneficially owned by
them, subject to any applicable community property law.
Name of Beneficial Owner
Charlotte Jones Anderson
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
200 Crescent Court, Suite 1350
Dallas, Texas 75201
Jeremy B. Ford
William B. Furr
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
Todd L. Salmans
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
All Directors and Executive Officers,
as a group (26 persons)
* Represents less than 1% of the outstanding shares of such class.
Common Stock
Amount and Nature of
Beneficial Ownership
9,746
126,059 (b)
20,456
25,228
— (c)
37,476
934,882 (d)
15,591,587 (e)
Percent of
Class (a)
*
*
*
*
*
*
1.0%
16.2%
671,163 (f)
13,974 (g)
114,763
31,423 (h)
387,860 (i)
656,199 (j)
13,080
31,000 (k)
1,265,024
—
12,040 (l)
14,422
35,211
113,407
1,552,043 (m)
*
*
*
*
*
*
*
*
1.3%
*
*
*
*
*
1.6%
21,454,827 (n) 22.3%
(a) Based on 96,064,044 shares of common stock outstanding on April 27, 2018. Shares issuable under instruments to purchase our common stock that are exercisable
within 60 days of April 27, 2018 are treated as if outstanding for computing the percentage ownership of the person holding these instruments, but are not treated
as outstanding for purposes of computing the percentage ownership of any other person.
Includes 62,100 shares of common stock held in an IRA account for the benefit of Mr. Bobbitt.
(b)
(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
(d)
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. Excludes 47,249 shares of common stock deliverable upon the vesting of
RSUs that will not vest within 60 days of April 27, 2018.
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2018 PROXY STATEMENT
(f)
(e) The shares of common stock beneficially owned by Mr. Gerald J. Ford include 39,047 shares that are owned by Turtle Creek Revocable Trust, a revocable trust
for the benefit of the members of Mr. Gerald J. Ford’s family, and indirectly by Mr. Gerald J. Ford as settlor of the trust. Mr. Gerald J. Ford disclaims beneficial
ownership of the shares held by the trust except to the extent of his pecuniary interest therein. Also includes 15,544,674 shares owned by Diamond A Financial,
LP. Mr. Gerald J. Ford is the sole manager of Diamond HTH Stock Company GP, LLC, which is the sole general partner of Diamond HTH Stock Company, LP,
which is the sole general partner of Diamond A Financial, LP. Turtle Creek Revocable Trust is the sole member of Diamond HTH Stock Company GP, LLC and
the sole limited partner of Diamond HTH Stock Company, LP. Each of Mr. Gerald J. Ford, Diamond A Financial, LP, Diamond HTH Stock Company, LP,
Diamond HTH Stock Company GP, LLC and Turtle Creek Revocable Trust may be deemed to have shared voting and dispositive power of these shares. Excludes
120,000 RSUs that will not vest within 60 days of April 27, 2018.
Jeremy B. Ford is a beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, LP (see footnote (e)). Excludes 162,942 shares of
common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 27, 2018 and 15,544,674 shares of common stock held by
Diamond A Financial, LP.
(g) Excludes 50,699 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 27, 2018.
(h)
(i)
Includes 15,550 shares of common stock held in a SEP IRA account for the benefit of Mr. Hill.
Includes 47,000 shares of common stock held by the James Huffines 1994 Trust for the benefit of Mr. Huffines and 12,028 shares of common stock held in a self-
directed individual retirement account. Excludes 20,214 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April
27, 2018.
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.
(k)
(l) Excludes 48,374 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 27, 2018.
(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”), and (f) 1,316,458 shares of common
stock held by Maedgen & White, Ltd. 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. Excludes 96,747 shares of common stock deliverable upon the vesting of RSUs
that will not vest within 60 days of April 27, 2018.
(j)
(n) Represents 26 persons. Excludes 514,743 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 27, 2018.
24
MANAGEMENT
2018 PROXY STATEMENT
Executive Officers
General
We have identified the following officers as “executive officers,” consistent with the definition of that term as used by the SEC,
as of April 27, 2018:
Name
Keith E. Bornemann
Hill A. Feinberg
Jeremy B. Ford
William B. Furr
Darren E. Parmenter
Corey G. Prestidge
Todd L. Salmans
Jerry L. Schaffner
Alan B. White
Age
45
71
43
40
55
44
69
60
69
Position
Executive Vice President, Corporate Controller and Principal Accounting Officer
Chairman and Chief Executive Officer of Hilltop Securities
President and Co-Chief Executive Officer
Executive Vice President, Chief Financial Officer
Executive Vice President, Chief Administrative Officer
Executive Vice President, General Counsel and Secretary
Chief Executive Officer of PrimeLending
President and Chief Executive Officer of the Bank
Vice Chairman and Co-Chief Executive Officer
Officer
Since
2017
2012
2010
2016
2007
2008
2012
2012
2012
Business Experience of Executive Officers
Information concerning the business experience of Messrs. Hill A. Feinberg, Jeremy B. Ford, and Alan B. White is set forth
above under “Proposal One — Election of Directors — Nominees for Election as Directors” beginning on page 5.
Keith E Bornemann. Mr. Bornemann has served as the Executive Vice President and Principal Accounting Officer of Hilltop
since November 2017 and Corporate Controller of Hilltop since February 2017. He also served as Senior Vice President and Director
of Accounting and Reporting of Hilltop from January 2016 to January 2017 and Vice President of Financial Reporting of Hilltop from
January 2013 to January 2016. Prior to joining Hilltop in 2013, Mr. Bornemann was the Vice President and Corporate Controller at
First Acceptance Corporation.
William B. Furr. Mr. Furr has served as the Chief Financial Officer of Hilltop since September 2016. Prior to joining Hilltop,
Mr. Furr served as Executive Vice President and Community Bank Chief Financial Officer for KeyCorp from November 2012 to
August 2016. Before joining KeyCorp, Mr. Furr served in various financial leadership roles at Regions Financial Corporation and
Bank of America Corporation.
Darren E. Parmenter. Mr. Parmenter has served as Executive Vice President and Chief Administrative Officer since
September 2016. Mr. Parmenter previously served as Executive Vice President and Principal Financial Officer of Hilltop since
February 2014 and 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 Co-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 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 40 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
25
2018 PROXY STATEMENT
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 by our Board of Directors annually or, as necessary, to fill vacancies or newly created offices.
Each executive officer holds office until his successor is duly elected and qualified 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
and under “Management — Executive Officers — Business Experience of Executive Officers” on page 25, (a) there are no familial
relationships among any of our current directors or executive officers and (b) none of our director nominees hold, or in the last five
year have held, 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
This Compensation Discussion and Analysis section reviews the compensation program for our named executive officers
(“NEOs”), which include our principal executive officers, principal financial officer and our three other most highly-compensated
executive officers, during the year ended December 31, 2017.
For 2017, our NEOs were:
Named Executive Officer
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines (a)
Todd L. Salmans
Title/Role
President and Co-Chief Executive Officer
Vice Chairman and Co-Chief Executive Officer
Executive Vice President, Chief Financial Officer
Chairman and Chief Executive Officer of Hilltop Securities
Former Executive Vice President, Chief Operating Officer of Subsidiaries
Chief Executive Officer of PrimeLending
(a) Mr. Huffines retired effective December 31, 2017, from all positions with the Company and its subsidiaries, including as a member of the Board of Directors.
2017 Business and Financial Highlights
2017 represented another strong year for the Company, with the following key accomplishments:
• Generated $132.5 million in income applicable to common stockholders, or $1.36 per diluted share, during 2017, after giving
effect to non-recurring charges as a result of the Tax Cuts and Jobs Act. Return on average equity was 7.00% and return on
average assets was 1.03% for 2017.
• Maintained strong asset quality compared to peers with non-performing assets as a percentage of total assets of 0.33% as of
December 31, 2017, excluding covered loans and covered other real estate owned.
• Maintained strong capital ratios with a Tier 1 Leverage Ratio of 12.94% and a Common Equity Tier 1 Risk Based Capital
Ratio of 17.69% at December 31, 2017.
• Distributed $23.1 million, or $0.24 per common share, of capital to stockholders, equating to a dividend payout ratio of
17.59% (excluding the results of the SWS Group Inc. appraisal matter).
26
2018 PROXY STATEMENT
These results contributed to an increase in our book value per share from $18.98 at December 31, 2016 to $19.92 at December 31,
2017. Additional detail regarding our results and achievements can be found in our Annual Report on Form 10-K for the year ended
December 31, 2017.
Our 2017 Executive Compensation Program
The Compensation Committee, or, as used in this Compensation Discussion and Analysis, the Committee, has the responsibility
to establish, implement and monitor 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. The Committee
administers the Company’s executive compensation program in light of our unique structure and acquisition activity. As a holding
company that conducts its operations through its subsidiaries, we provide performance-based compensation to the chief executives of
each of our business units that is based on both the results of the business unit and the consolidated Company.
Philosophy and Objectives of Our Executive Compensation Program
Our compensation program continues to focus on performance-based pay that reflects our achievements on an annual basis and
our ability to deliver long-term value to our stockholders. The Committee regularly reviews the Company’s compensation programs to
ensure they are consistent with sound business practices, regulatory requirements, emerging industry trends and stockholder interests.
With this in mind, the following principles help guide our decisions regarding compensation of our NEOs:
• Compensation opportunities should be competitive with market practices. We are committed to providing competitive total
annual compensation opportunities 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.
• A significant portion of compensation should be performance-based. Our executive compensation program emphasizes pay-
for-performance. Both our annual and long-term incentives are earned based on a combination of corporate, business unit and
individual performance. Our annual incentive compensation also can be reduced based upon improper risk taking and non-
compliance with applicable laws and regulations.
• Management’s interests should be aligned with those of our stockholders. Our long-term incentive compensation is delivered
in the form of restricted stock units, or RSUs, to support our goals for alignment, ownership and retention. Half of the RSUs
awarded vest upon achievement of predefined performance goals. The value of these performance-based RSUs ultimately
depends upon our total stockholder return, or TSR, relative to members of the KBW Regional Banking Index and our
cumulative earnings per share calculated in accordance with generally accepted accounting principles, or EPS, over the three-
year vesting period. Commencing with awards in 2016, the percentage of these awards that vest is based first on cumulative
EPS over a three-year period and then multiplied by a modifier based on our relative TSR during the same period.
• 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.
• Our compensation program should be balanced and mitigate risk taking. We have a balanced approach to total
compensation that includes a mix of fixed and performance-based pay, including cash and equity compensation and short-
and long-term incentive compensation. We believe this approach effectively aligns our pay with performance while
discouraging inappropriate risk taking.
27
2018 PROXY STATEMENT
Governance Highlights
The Committee maintains the following compensation best practices:
• Robust stock ownership guidelines for executive officers and directors;
• Clawback policy for incentive compensation;
• Anti-hedging and pledging policy;
• Limited perquisites;
• No excise tax gross-ups in new employment agreements;
• One year holding requirement on all vested equity awards; and
• Annual compensation risk assessment.
Role of Stockholder Say-on-Pay Votes and Stockholder Engagement
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 2017, over 71% of the votes cast (excluding abstentions and broker non-
votes) on the say-on-pay proposal were voted in favor of the proposal. The Committee recognized this result as a significant decline
from the 97% support received in 2016 and sought to understand stockholder perspectives on our executive compensation program.
We reached out to our top 25 stockholders, representing 57% of our outstanding common stock (excluding common stock owned by
our directors and executives), to offer a conversation with Mr. Sherman, the chair of our Committee. Mr. Sherman had conversations
with six stockholders, representing 24% of our outstanding common stock, during this process.
During these conversations, stockholders provided their perspectives on our executive compensation programs with our
Committee Chair. Several stockholders expressed concerns with severance provisions in the retention agreement we entered into with
Mr. White upon our acquisition of PlainsCapital Corporation in 2012 and subsequently amended in 2016 upon his promotion to Co-
CEO of the Company. In these discussions, Mr. Sherman highlighted the origins of these provisions in Mr. White’s agreement,
namely that they were designed to keep Mr. White whole for amounts which would have otherwise been due to him immediately upon
any termination of his employment agreement following our acquisition of PlainsCapital Corporation, the company he founded. The
Committee did not believe it was appropriate to revise these provisions when asking Mr. White to assume additional responsibilities,
particularly given that the revised agreement did not provide for any increases in compensation. Mr. Sherman also discussed with
stockholders the Committee’s intention to avoid similar provisions in any new employment arrangements going forward.
Stockholders generally conveyed that they were otherwise supportive of the design of our executive compensation program and
provided several items to consider. As such, the Committee has maintained our current programs and will evaluate the suggestions
received. The Committee remains open to stockholder perspectives on our executive compensation programs and will continue to
consider the outcome of the Company’s say-on-pay votes when making future compensation decisions for the NEOs.
Background on Our Executive Employment Arrangements
We completed the acquisition of PlainsCapital on November 30, 2012, and the compensation of our NEOs who were employed
by PlainsCapital is, therefore, in part based upon the compensation they were paid by PlainsCapital prior to the acquisition. Four of
our NEOs, Messrs. White, Feinberg, Huffines and Salmans, were employed by PlainsCapital or its subsidiaries prior to the acquisition.
As discussed above, in connection with the acquisition of PlainsCapital, and to ensure continuity following the closing, we entered
into a retention agreement with Mr. White that was negotiated based upon the pre-existing rights in his employment agreement with
PlainsCapital Corporation. All other existing employment agreements at PlainsCapital or its subsidiaries, other than
Mr. Jerry Schaffner, 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. The term of Mr. Huffines’ employment agreement terminated on December 4, 2017, and he retired from the
Company on December 31, 2017. We also entered into an employment agreement with Mr. Furr in connection with his appointment
as our Chief Financial Officer effective September 1, 2016. For a more detailed discussion of these employment agreements and
Mr. White’s retention agreement, see “Executive Compensation — Narrative Disclosure to Summary Compensation Table and Grants
of Plan-Based Awards Table — Employment Contracts and Incentive Plans — Employment Contracts.”
28
2018 PROXY STATEMENT
Elements of our Executive Compensation Program
The basic elements of our executive compensation program are summarized below. Our compensation policies and programs are
considered by the Committee in a total rewards framework, which considers both “pay” — base salary, annual incentive awards and
long-term incentive awards — and “benefits” — perquisites and other benefits and compensation. Our executive compensation
program consists primarily of the following components:
Compensation Component
Base Salary
Purpose
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 retain, motivate and reward the individual’s contribution
to achieving our long-term objectives and creating stockholder value.
Perquisites and Other Benefits
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 NEO commensurate with the services he provides to us. 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 executive officers of the Company and its peers and any increased level of responsibility, among other items. Except for the
increases to the salaries of the Co-Chief Executive Officers noted in the table below, the Committee determined to maintain the
current salaries of all NEOs for 2017, as they were found to be competitive with the Company’s peers. The following table lists the
base salaries for our NEOs in 2016 and 2017:
Base Salary
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
2017
$ 725,000 (a)
$ 1,400,000 (b)
2016
$
700,000
$ 1,350,000
$
$
$
$
425,000 (c) $ 425,000
$ 500,000
500,000
$ 690,000
690,000
$ 750,000
750,000
% Increase
3.6 %
3.7 %
—
—
—
—
(a) Mr. Ford’s base salary increased to $725,000 on April 1, 2017.
(b) Mr. White’s original base salary of $1,350,000 was set forth in his retention agreement, which became effective upon the closing of the acquisition
of PlainsCapital. An increase in base salary to $1,400,000 was approved and made effective on April 1, 2017.
(c) Mr. Furr’s base salary effective upon his hiring as our Chief Financial Officer on September 1, 2016.
In March 2018, the Committee assessed base salaries of the NEOs and decided to provide the following increases beginning on
April 1, 2018: $25,000 for Mr. Ford (new salary $750,000), $50,000 for Mr. White (new salary $1,450,000), and $25,000 for Mr. Furr
(new salary $450,000).
Annual Incentive Awards
Our NEOs and other employees are eligible to participate in the Annual Incentive Plan and receive annual cash incentive awards
based upon our financial performance and other factors, including individual performance. The Committee believes that this element
of compensation is important to focus management efforts on, and provide rewards for, annual financial and strategic results that are
aligned with creating value for our stockholders.
29
2018 PROXY STATEMENT
Target Annual Incentive Opportunities
Target incentive awards are defined at the start of the year in consideration of market data provided by the Committee’s
consultant, each NEO’s total compensation package and the entity’s budgetary considerations. The Committee increased annual
incentive targets (as a percent of salary) for Mr. Ford and Mr. Feinberg following a review of market practices. The following table
sets for information concerning Annual Incentive Plan opportunities for 2017:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Annual Incentive Value
Target
Threshold
($)
130,500
—
67,500
90,000
99,900
90,000
Amount
($)
725,000
1,400,000
375,000
750,000
555,000
750,000
% of Annual
Base Salary
100 %
100 %
88 %
150 %
80 %
100 %
Maximum
($) (b)
1,087,500
—
562,500
1,125,000
832,500
1,125,000
(a) Mr. White’s annual incentive compensation is determined pursuant to his retention agreement for the achievement of specified performance
criteria.
(b) Awards are capped at 150% of the target amount.
Performance Measures
Each NEO had pre-defined performance objectives based upon measurable performance of both our Company and the individual,
other than Mr. White, whose pre-defined performance objectives are based solely upon Hilltop’s performance. At least 70% of each
executive’s incentive was based on the net income of our Company and/or their relevant business unit. Our 2017 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 without creating excessive risk.
The measures and weights of the performance objectives for each NEO for 2017 are summarized in the following table:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Hilltop
Net Income
Business Unit
Net Income
Strategic/
Individual Goals
70 %
100 %
70 %
20 %
70 %
20 %
—
—
—
50 %
—
50 %
30 %
—
30 %
30 %
30 %
30 %
(a) Determined pursuant to Mr. White’s retention agreement for the achievement of earnings target.
In addition to the above criteria, all payouts under the Annual Incentive Plan are subject to forfeiture in the event of any improper
risk management or non-compliance with applicable laws and regulations.
The individual strategic objectives for the NEOs are developed through an iterative process between the Committee and
management. Management develops an initial set of recommendations based upon the business needs. The Committee reviews the
proposed goals and revises/amends them at its discretion, ensuring that goals are aligned with the Board of Director’s strategic focus.
The following strategic and individual goals, among others, were established for the NEOs in 2017:
• Mr. Ford: execute the Company’s 2017 strategic plan, continue to identify strategic acquisition opportunities that
complement the Company’s business mix and lead our shared-services initiative.
• Mr. Furr: execute our shared-services initiative, redesign our procurement process, and complete successful Dodd-Frank Act
Stress Test submission.
• Mr. Feinberg: support our shared-services initiative, select and finalize new broker-dealer technology and support system,
develop capital markets strategy that compliments municipal efforts and execute on risk management and inventory control.
30
2018 PROXY STATEMENT
• Mr. Huffines: support our shared-services initiative, effective risk management by subsidiary management, attract and retain
talent, execute on subsidiary strategic plans, succession planning and effective enterprise communication.
• Mr. Salmans: support our shared-services initiative, maintain customer and employee satisfaction, protect and grow company
culture, foster and drive organic growth in existing and new markets, grow joint venture business, succession planning and
development and growth of key successors.
Performance Results and Payouts
The Committee, in its sole discretion, determines the final amount of each participant’s award based on attainment of the
applicable performance goals and assessments of individual and strategic performance.
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 ranged from 50% for threshold performance to a maximum of 150% for stretch performance.
At the end of the fiscal year, the Committee determined a payout based on net income performance. 2017 performance goals and
actual net income performance were as follows (dollars in millions):
2017 Performance Goal
Hilltop Adjusted Net Income
PlainsCapital Pre-Tax Income
Hilltop Securities Pre-Tax Income
PrimeLending Pre-Tax Income
Threshold ($)
Target ($)
Stretch ($)
Actual ($)
Achievement
89.7
89.2
34.0
33.7
149.5
148.6
56.6
56.2
186.9
185.8
70.8
70.2
160.9
151.6
64.9
53.7
108 %
102 %
115 %
96 %
Based upon evaluation of their respective individual performance in 2017, the Committee awarded the NEOs scores ranging from
70% to 135% for their strategic and individual goals. The Committee also assessed risk and compliance performance for each NEO
and determined that no reductions were warranted.
Based on the above financial and individual performance measures and the Committee’s discretion, the 2017 annual cash
incentive payments were awarded as follows relative to the 2017 target value:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
2017 Annual
Incentive Payment ($)
% of 2017 Target
Annual Incentive
790,000
1,450,000
425,000
900,000
555,000
825,000
109 %
104 %
113 %
120 %
100 %
110 %
(a) The Committee used its discretionary authority to increase Mr. White’s 2017 Annual Incentive Plan Award above the level determined pursuant to
his retention agreement for the achievement of earnings target.
See “Executive Compensation — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards
Table — Annual Incentive Plan” for more information with respect to our stockholder-approved Annual Incentive Plan.
31
2018 PROXY STATEMENT
Long-Term Incentive Awards
As described above, we believe that a portion of each NEO’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, the Committee determined that the award vehicle mix
should be:
Award Vehicle Mix
Time-Based Restricted Stock Units
Performance-Based Restricted Stock Units
% of Award
50%
50%
Time-based RSUs cliff vest on the third anniversary of the date of grant. Performance-based RSUs are earned and cliff vest
subject to certain performance goals being met after the three-year performance period from January 1, 2017 through December 31,
2019.
Under the current form of RSU award agreement, the percentage of performance-based RSUs that vest following a performance
period is determined based on Hilltop’s three-year cumulative EPS relative to pre-established performance objectives, multiplied by a
modifier that is determined based on Hilltop’s TSR relative to the KBW Regional Banking Index. The EPS component of the
performance calculation ranges from 50% at threshold to 150% at maximum, and the TSR modifier ranges from 80% at threshold to
120% at maximum. The total number of shares earned from the performance awards can range from 40% to 180% of the target
number of RSUs granted. No shares will be awarded if EPS results are below threshold.
All shares of common stock delivered pursuant to the RSUs are subject to a one-year holding period requirement after vesting.
Further discussion of the 2012 Equity Incentive Plan pursuant to which such RSUs were awarded is found under “Executive
Compensation — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” below.
In 2017, 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 RSUs on February 23, 2017, to the following NEOs as set forth below:
Performance-Based
Time-Based RSUs RSUs Awarded
Awarded
(at Target)
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Todd L. Salmans
27,734
12,307
6,154
6,154
7,033
6,154
31,766
14,096
7,753
8,055
7,048
Total RSUs
Awarded
55,468
24,613
12,307
12,307
14,065
12,307
27,734
12,306
6,153
6,153
7,032
6,153
Total RSUs
Awarded
63,532
28,192
15,505
16,110
14,096
31,766
14,096
7,752
8,055
7,048
On March 5, 2018, the Committee continued the same mix of long-term incentive awards and approved a grant of RSUs to the
NEOs, excluding Mr. Huffines who retired from the Company on December 31, 2017, as set forth below:
Performance-Based
Time-Based RSUs RSUs Awarded
Awarded
(at Target)
Since the adoption of the 2012 Equity Incentive Plan, all equity-based awards, including those made to the NEOs, have been
made pursuant to the 2012 Equity Incentive Plan. All equity-based awards made to the NEOs are approved by the Committee and not
pursuant to delegated authority.
32
2018 PROXY STATEMENT
Payout for 2015-2017 Performance Based RSUs
The following table provides the calculation of the payout for performance-based RSUs granted in 2015. Payouts for the 2015
awards were based on our three-year cumulative EPS results and our three-year TSR relative to members of the KBW Regional
Banking Index. Performance-based RSUs granted during 2015 are earned and cliff vest after three years based 50% on EPS
performance and 50% on relative TSR.
Metric
Cumulative EPS
Relative TSR percentile
$
Threshold
2.44
35th
$
Target
3.25
50th
$
Maximum
4.06
75th
Actual Performance
$
4.94
13th
Our three-year cumulative EPS results generated a maximum payout of 150% of target, while our TSR results were below the
threshold for a payout. Accordingly, the aggregate payout for the performance-based RSUs awarded in 2015 was 75% of target.
Perquisites and Other Benefits
We provide various perquisites and other benefits to certain NEOs. Messrs. Jeremy B. Ford and Alan B. White are provided
access to company aircraft. Messrs. White, Huffines and Salmans are or were provided with a monthly car allowance and
reimbursement for country club membership dues. In addition, Mr. White is provided bank-owned life insurance. Otherwise, our
NEOs generally 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
We generally do not currently maintain any severance or change in control programs other than change in control provisions in
our 2012 Equity Incentive Plan (with exceptions noted below). However, we have historically paid severance, the amount of which is
generally determined both by length of tenure and level of compensation, when termination occurs other than for cause and pursuant
to which certain benefits may be provided to the NEOs. Absent the negotiation of specific agreements with the NEOs, severance
benefits would be provided on the same basis as provided to other employees of the Company.
In connection with our acquisition of PlainsCapital in 2012, we entered into employment agreements with Messrs. Huffines and
Salmans. We subsequently entered into new employment agreements with Messrs. Huffines and Salmans in 2014 following the
expiration of their previous agreements. Mr. Huffines’ agreement was amended in September 2016 to reflect changes in his
responsibilities. The term of Mr. Huffines’ employment agreement expired on December 4, 2017, and he retired from the Company on
December 31, 2017. Mr. Salmans’ agreement was amended in November 2017 to extend the term of the agreement to December 31,
2019. A description of these employment agreements and the post-contractual benefits provided thereunder is discussed in further
detail under “Executive Compensation — 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.
In connection with our acquisition of PlainsCapital in 2012, we entered into a retention agreement with Mr. White which was
approved by shareholders of PlainsCapital in connection with our acquisition of PlainsCapital. The summary of the severance terms
for this retention agreement is set forth below:
Legacy Retention Agreement
Pursuant to Mr. White’s retention agreement:
(1) we agreed to contribute an amount of cash equal to $6,430,890 as deferred compensation to Mr. White in satisfaction of
Mr. White’s rights under Section 6 (Termination Upon Change in Control) of his previous employment agreement with
PlainsCapital, which 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; and
(2) upon a 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
33
2018 PROXY STATEMENT
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, or 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 upon 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.
Mr. White’s retention agreement was amended in 2016 solely to recognize his promotion to Co-Chief Executive Officer of the
Company and to specify that his annual incentive would be based on the consolidated results of Hilltop (as opposed to just the results
of PlainsCapital). The amendment did not include any changes to his pay opportunity or the other terms of his employment. The
Committee did not believe it was appropriate to alter other terms of the agreement given that it (a) increased his duties and
responsibilities without providing Mr. White additional compensation and (b) was negotiated as part of our acquisition of
PlainsCapital to secure Mr. White’s continued employment, including the amounts payable under subparagraph (1) above which
would otherwise have been due to Mr. White immediately upon any termination of his employment following our acquisition of
PlainsCapital. Further, Mr. White had the right to terminate his employment in the event other modifications were required in
connection with the amendment.
Furr Employment Agreement
Pursuant to our employment agreement with Mr. Furr, upon termination of employment by us other than for cause, Mr. Furr is
entitled receive, subject to such termination of employment being on or after September 1, 2017, 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, if the “change in control” is on or after September 1, 2017, 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.
Huffines and Salmans Employment Agreements
Pursuant to our employment agreements with Messrs. Huffines and Salmans, upon termination of employment by us other than
for cause, the applicable executive is 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. The term of Mr. Huffines’ employment
agreement expired on December 4, 2017, and he retired from the Company on December 31, 2017. In November 2017, the term of
Mr. Salmans’ employment agreement was extended until December 31, 2019.
Further discussion of the agreements with Messrs. White, Furr, Huffines and Salmans, including the definitions of “cause” and
“disability” under such arrangements, as well as potential payments made pursuant thereto may be found under the headings
“Executive Compensation — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” and
“Executive Compensation — Potential Payments Upon Termination or Change-in-Control” below.
34
2018 PROXY STATEMENT
Incentive Plans
The 2012 Equity Incentive Plan, under which we have granted awards to the NEOs, 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 under “Executive Compensation — Potential Payments Upon Termination or Change-in-Control”) 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 “Executive Compensation — 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 2017 give rise to risks that are reasonably likely to have a
material adverse effect on our Company. In reaching this conclusion for 2017, we considered the following factors:
• Base salary is fixed and the only compensation components that are variable are the annual incentives and performance-based
RSUs awarded to NEOs, which were awarded based upon attainment of pre-determined levels of earnings.
• Annual Incentive Plan payments to the NEOs were determined or approved following the completion of the audit of the
Company’s consolidated 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 its decisions.
• We have a balanced program that includes multiple performance goals, rewards short-term and multi-year performance, pays
in cash and equity and provides a meaningful portion of pay in stock, which is tied to our long-term performance.
• The Annual Incentive Plan awards are subject to clawback and adjustments for improper risk taking and significant
compliance issues.
• Each year the Committee reviews all compensation programs to ensure existing programs are not reasonably likely to have a
material adverse effect on the Company.
Executive Compensation Process, Programs and Policies
Role of the Compensation Committee
The Committee is responsible for reviewing and approving all aspects of the compensation programs for our NEOs 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:
• Review and approval of corporate incentive goals and objectives relevant to compensation;
• Evaluation of individual performance results in light of these goals and objectives;
• Evaluation of the competitiveness of the total compensation package; and
• 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 Co-Chief Executive Officers, as well as
assessing their individual performance.
35
2018 PROXY STATEMENT
In setting the compensation of our NEOs, the Committee, in its discretion, considers (i) the transferability of managerial skills,
(ii) the relevance of each NEO’s experience to other potential employees, and (iii) the readiness of the NEO to assume a different or
more significant role, either within our organization or with another organization. When the Committee makes pay-related decisions,
the Committee considers our acquisition and growth strategy, our desire to attract, retain and motivate 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 the “Board
Committees” section.
Role of the Co-Chief Executive Officers in Compensation Decisions
The Co-Chief Executive Officers provide input and recommendations to the Committee regarding compensation decisions for
their direct reports, including the other NEOs. 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 and payouts, specific individual performance objectives, and
individual performance assessments. The Co-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 Co-Chief Executive Officers’ recommendations when determining any
compensation changes affecting our officers or executives. Neither Co-Chief Executive Officer plays any role with respect to his own
compensation.
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 2017, the Committee continued its engagement of Meridian Compensation Partners, LLC, or
Meridian, as its independent compensation consultant. Meridian is engaged directly by the Committee.
Pursuant to its engagement, 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 NEOs. A representative of Meridian generally attends
meetings of the Committee, is available to participate in executive sessions of the Committee 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:
• 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;
• 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.
During 2017, the Company paid Meridian fees totaling $10,000 related to the valuation of performance-based RSUs. 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.
36
2018 PROXY STATEMENT
Benchmarking Compensation
The Committee regularly assesses the components of the executive compensation program with advice from its independent
compensation consultant. In October 2016, Meridian provided an analysis of base salary, annual incentive and long-term incentive
practices of comparable companies in the financial industry. Meridian considered individual compensation elements as well as the
total compensation package. This analysis was considered by the Committee when it established 2017 pay opportunities for
executives.
In performing this analysis, Meridian developed market data using publicly-disclosed compensation information from a peer
group of comparable financial institutions, as well as compensation surveys. Survey data reflected financial institutions of similar size
to Hilltop and our operating subsidiaries. The Committee did not review the specific companies included in the survey data.
The compensation peer group includes institutions of generally similar asset size and, to the extent possible, organizations with
significant other operating segments. The Committee approved changes to our peer group in July 2016 in order to account for changes
among the peer companies and to position Hilltop more closely to the median asset size of the peers.
The following financial institutions were included in the compensation peer group:
First Financial Bankshares, Inc.* First Midwest Bancorp, Inc.
IBERIABANK Corporation
Cullen/Frost Bankers, Inc.
Hancock Holding Company
LegacyTexas Financial Group, Inc.* MB Financial, Inc.
Pinnacle Financial Partners, Inc.*
South State Corporation
Trustmark Corporation
Union Bankshares Corporation
Prosperity Bancshares, Inc.
TCF Financial Corporation
UMB Financial Corporation
WesBanco, Inc.
International Bancshares Corporation
Old National Bancorp
Simmons First National Corporation*
Texas Capital Bancshares, Inc.
Umpqua Holdings Corporation
Wintrust Financial Corporation
* Added to the peer group in 2016. Associated Banc-Corp, First Citizens BancShares, Inc., First Horizon National Corporation,
FirstMerit Corporation and United Bankshares, Inc. were removed from the peer group.
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 NEOs and other members of the management team.
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:
• Six times annual base salary for the Co-Chief Executive Officers; and
• Three times annual base salary for the other executive officers.
Under this policy, directors are expected to own shares with a value greater than five times their annual retainer for serving on the
Board of Directors of the Company, unless they are subject to certain restrictions on receiving director fees. Our director
compensation program permits directors to elect to receive their director compensation in cash, Company common stock or a
combination of cash and Company common stock.
In calculating equity ownership for purposes of this requirement, we 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 and unearned performance shares
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 this
holding requirement, provided his or her total stock ownership level does not fall below the ownership guidelines.
37
2018 PROXY STATEMENT
In addition, all awards of RSUs granted since February 2014 to NEOs are, subject to certain exceptions, required to be held for
one year after vesting.
As of April 27, 2018, all NEOs are on track to meet the ownership guidelines.
Clawback Policy
Our compensation program also includes a clawback from any annual cash or long-term incentive award for improper risk taking
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 certain named executive
officers. Prior to the Tax Cuts and Jobs Act of 2017, or the Tax Legislation, exceptions were 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
historically considered the implications of Section 162(m) of the Code in the design of its executive compensation programs. The
Committee, however, reserved the flexibility, where appropriate, to approve compensation arrangements that may not have been tax
deductible to the Company, such as base salary and awards of time-based RSUs.
The performance-based exception from 162(m) deductibility limits have been repealed, effective for taxable years beginning after
December 31, 2017. The Tax Legislation included certain transition relief for historical arrangements; however, it is currently
uncertain how the transition relief will be interpreted and applied. The Committee continues to reserve flexibility to provide
compensation arrangements that it believes are consistent with its compensation philosophy even if the arrangements will result in
non-deductible compensation.
Trading Controls and Hedging, Short Sale and Pledging Policies
Executive officers, including the NEOs, 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 NEOs, may enter into a trading plan under
Rule 10b5-1 under 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 NEO bears full responsibility if he or she violates our policy by permitting shares to be bought or sold without
pre-approval or when trading is restricted.
Executive officers are prohibited from entering into hedging and short sale transactions and are subject to restrictions on pledging
our securities.
Compensation Committee Report
The Compensation Committee of the Board of Directors of Hilltop Holdings Inc. has reviewed and discussed with management
the Compensation Discussion and Analysis contained in this Proxy Statement. Based on its review, the Compensation Committee
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement.
The foregoing report has been submitted by the following members of the Compensation Committee:
A. Haag Sherman (Chairman)
Rhodes Bobbitt
W. Joris Brinkerhoff
William T. Hill, Jr.
Andrew Littlefair
38
Executive Compensation
The following tables set forth information concerning the compensation earned for services performed during 2017, 2016 and
2015 by the NEOs, who were either serving in such capacities on December 31, 2017, during 2017, or are reportable pursuant to
applicable SEC regulations.
2018 PROXY STATEMENT
Summary Compensation Table
Fiscal Years 2017, 2016 and 2015
Bonus (a)
($)
Stock
Awards (b)
($)
Option
Awards
($)
Change in Pension
Non-Equity
Incentive Plan
Compensation (c)
($)
Value and
Nonqualified Deferred
Compensation
Earnings (d) ($)
All Other
Compensation (e)
($)
Name and principal position
Jeremy B. Ford
President and
Co-Chief Executive Officer
Alan B. White
Vice Chairman and
Co-Chief Executive Officer
William B. Furr
Executive Vice President and
Chief Financial Officer (f)
Hill A. Feinberg
Chairman and Chief Executive
Officer of Hilltop Securities
James R. Huffines (h)
Former Executive Vice President and
and Chief Operating Officer of
Subsidiaries
Todd L. Salmans
Chief Executive Officer of
PrimeLending
Year
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
Salary
($)
718,500
700,000
662,500
1,387,500
1,350,000
1,350,000
425,000
143,438
—
500,000
500,000
500,000
690,000
690,000
690,000
750,000
750,000
750,000
—
—
—
1,582,502
699,996
679,741
1,450,000
1,400,000
1,350,000
—
518,000 (g)
—
—
—
—
—
—
—
—
—
—
702,209
699,996
679,741
351,119
939,528
—
351,119
299,994
242,765
401,274
419,994
407,849
351,119
349,998
339,871
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
790,000
715,000
740,000
—
—
—
425,000
—
—
900,000
750,000
650,000
555,000
555,000
555,000
825,000
1,100,000
1,000,000
—
—
—
44,519
29,392
29,261
—
—
—
—
—
—
—
—
—
—
—
—
70,310
60,534
70,861
170,383
126,848
110,142
117,270
31,562
—
25,176
18,177
11,896
58,464
58,471
41,824
Total ($)
3,161,312
2,175,530
2,153,102
3,754,611
3,606,236
3,519,144
1,318,389
1,632,528
—
1,776,295
1,568,171
1,404,661
1,704,738
1,723,465
1,694,673
43,095
55,122
53,292
1,969,214
2,255,120
2,143,163
(a) Represents bonuses paid for services during 2017, 2016 and 2015, as applicable.
(b) Reflects the grant date fair value calculated in accordance with the provisions of the Stock Compensation Topic of the ASC, with the exception that the amounts
shown assume no forfeitures. The value of performance-based stock awards is based on the probable outcome of the applicable performance conditions. The
following table presents the value of performance-based awards included in the table above based on the achievement of both probable and maximum outcomes:
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Year
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
Performance-Based Stock Awards
(Probable Achievement) ($)
(Maximum Achievement) ($)
793,747
349,998
332,624
352,198
349,998
332,624
176,099
—
—
176,099
149,997
118,794
201,256
209,989
199,567
176,099
174,991
166,312
1,190,621
524,997
498,936
528,297
524,997
498,936
264,148
—
—
264,148
224,995
178,191
301,884
314,984
299,350
264,148
262,487
249,468
(c) For 2017, represents cash awards earned under the Annual Incentive Plan for services during 2017, but paid in March 2018. For 2016, represents cash awards
earned under the Annual Incentive Plan for services during 2016, but paid in March 2017. For 2015, represents cash awards earned under the Annual Incentive
Plan for services during 2015, but paid in March 2016.
(d) Represents interest earned on non-qualified deferred compensation contributions to Mr. White during 2017, 2016 and 2015, as applicable. For additional
(e)
information, see “— Non-Qualified Deferred Compensation.”
Includes amounts paid during 2017, 2016 and 2015, as applicable, for group life insurance premiums, auto allowance, gym and club expenses, use of a company
car and aircraft, moving expenses, and cellular phone reimbursement. The table following these footnotes is a breakdown of all other compensation included in the
“Summary Compensation Table” for the NEOs.
(f) Mr. Furr began serving as our Executive Vice President and Chief Financial Officer effective September 1, 2016.
(g)
(h) Mr. Huffines retired effective December 31, 2017, from all positions with the Company and its subsidiaries.
Includes sign-on bonus of $143,000.
39
2018 PROXY STATEMENT
All Other Compensation
Gross-Ups or
Other
Amounts
Company
Reimbursed
Contributions
Perquisites
and Personal
Benefits (a) ($)
for the
Payment of
Taxes ($)
Year
to Defined
Contribution
Insurance
Plans ($)
Policies (b) ($)
Total All Other
Compensation ($)
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
60,164
50,754
70,081
95,699
105,275
100,236
71,659
19,572
—
—
—
—
37,494
38,714
36,676
22,000
32,000
43,386
366
—
—
80
—
—
36,161
9,730
—
108
—
—
2,064
—
—
2,189
4,216
—
9,000
9,000
—
9,000
9,000
—
9,000
2,125
—
9,000
8,271
9,000
9,000
9,000
—
9,000
9,000
—
780
780
780
65,604
12,573
9,906
450
135
—
16,068
9,906
2,896
9,906
10,757
5,148
9,906
9,906
9,906
70,310
60,534
70,861
170,383
126,848
110,142
117,270
31,562
—
25,176
18,177
11,896
58,464
58,471
41,824
43,095
55,122
53,292
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
(a) Year 2017: For Mr. Jeremy B. Ford, reflects $1,800 gym membership allowance and personal use of company airplane of $58,364. For Mr. White, reflects car
allowance of $36,000, club expenses of $25,721, personal use of company airplane of $31,326 and personal use of company automobile of $1,288. For Mr. Furr,
reflects a cellular phone reimbursement of $1,500, a moving reimbursement of $14,669 and taxable moving expenses of $55,490. For Mr. Huffines, includes a car
allowance of $24,000, club expenses of $10,729 and a cellular phone reimbursement of $1,500. For Mr. Salmans, includes a car allowance of $12,000 and club
expenses of $10,000. Personal use of company aircraft is calculated on a per mile basis utilizing SIFL rates published by the IRS.
(b) Reflects group term life insurance premiums paid during 2017, 2016 and 2015, for Messrs. Ford, Furr, Feinberg, Huffines, and Salmans, as applicable. For
Mr. White, represents group term life insurance of $12,804 and key man life insurance of $52,800.
40
Grants of Plan-Based Awards
Grants of Plan-Based Awards Table
Fiscal Year 2017
2018 PROXY STATEMENT
All Other
Stock Awards:
Number of
Shares of
Grant Date
Fair Value of
Share and
(c) (#)
27,734
(d) ($)
788,755
793,747
12,307
6,154
6,154
7,033
6,154
350,011
352,198
175,020
176,099
175,020
176,099
200,019
201,256
175,020
176,099
Estimated Future Payouts Under Non-Equity
Threshold
($)
Incentive Plan Awards (a)
Target
($)
($)
Estimated Future Payouts Under Equity
Incentive Plan Awards (b)
Target
(#)
(#)
(#)
Maximum Threshold
Maximum Stock or Units Option Awards
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Grant Date
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
2/23/2017
130,500
725,000
1,087,500
13,867
27,734
41,601
—
1,400,000 (e)
—
12,306
12,306
12,306
67,500
375,000
562,500
3,077
6,153
9,230
90,000
750,000
1,125,000
3,077
6,153
9,230
99,900
555,000
832,500
3,516
7,032
10,548
90,000
750,000
1,125,000
3,077
6,153
9,230
(a) Represent the value of potential payments under the Annual Incentive Plan to the NEOs based on 2017 performance. Management incentive award amounts
shown above represent potential awards that may have been earned based on performance during 2017. The actual amounts earned pursuant to Annual Incentive
Plan awards for 2017 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.
(b) Represents performance-based RSUs that vest based upon the achievement of certain performance goals during the three-year period beginning January 1, 2017
and ending December 31, 2019. These RSUs were issued pursuant to the 2012 Equity Incentive Plan and a form of award agreement and are subject to forfeiture,
accelerated vesting and other restrictions as more fully set forth in the 2012 Equity Incentive Plan and the form of award agreement. For additional information,
see “Compensation Discussion and Analysis — Elements of our Executive Compensation Program — Long-Term Incentive Awards.”
(c) Represents time-based RSUs that cliff vest upon the earlier of the third anniversary of the date of grant and a change of control. These RSUs were issued pursuant
to the 2012 Equity Incentive Plan and a form of award agreement and are subject to forfeiture, accelerated vesting and other restrictions as more fully set forth in
the 2012 Equity Incentive Plan and the form of award agreement. For additional information, see “Compensation Discussion and Analysis — Elements of our
Executive Compensation Program — Long-Term Incentive Awards.”
(d) Reflects the grant date fair value calculated in accordance with the provisions of the Stock Compensation Topic of the ASC, with the exception that the amounts
shown assume no forfeitures. The value of the performance-based stock awards is based on the probable outcome of the applicable performance conditions. For
more information regarding outstanding awards held by the NEO, refer to section “Outstanding Equity Awards at Fiscal Year-End” below.
(e) Represents the amount Mr. White would be entitled to under his retention agreement.
41
2018 PROXY STATEMENT
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Contracts and Incentive Plans
Set forth below is a summary of our retention agreement with Mr. White and our employment agreements with Messrs. Furr,
Huffines and Salmans. We do not have employment agreements with Messrs. Jeremy B. Ford or Feinberg. 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 NEOs. 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 NEOs 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. We amended the retention agreement on September 12, 2016 solely for the purpose of recognizing his promotion to Co-
CEO of Hilltop, including a corresponding change to compensate him based upon the consolidated results of Hilltop, as opposed to
PlainsCapital. 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 at least $1,350,000. He is also entitled to an annual bonus that varies based upon the performance of the Company. If
Hilltop’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 Hilltop’s annual net income exceeds $70,000,000, he is entitled to
a bonus equal to 100% of his annual base salary. Additionally, in accordance with the agreement, Mr. White is entitled to participate
in all of the Company’s employee benefit plans and programs. Further, the agreement provides that the Company will provide
Mr. White with the use of a corporate aircraft and an automobile allowance, each at the same level that such benefits were available to
Mr. White immediately prior to our acquisition of PlainsCapital. He continues to have bank-owned life insurance and access to the
country club that was available to him through PlainsCapital’s membership prior to our acquisition of PlainsCapital. The agreement
also includes, among other things, customary non-competition, non-solicitation and confidentiality provisions. Mr. White’s non-
competition and non-solicitation obligations terminate thirty-six (36) months after his termination. 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. Furr
In connection with the appointment of Mr. Furr as Chief Financial Officer of the Company, the Company and Mr. Furr entered
into an employment agreement effective as of September 1, 2016. The employment agreement remains in effect until the third
anniversary of the effective date. Pursuant to this agreement, Mr. Furr is entitled to an annual base salary of $425,000 and is eligible to
participate in (1) an annual incentive bonus program adopted by the Compensation Committee of the Board of Directors of the
Company, or whomever is delegated such authority by the Board of Directors, and (2) any long-term incentive award programs
adopted by the Compensation Committee, or whomever is delegated such authority by the Board of Directors. With respect to
calendar year 2016, the Employment Agreement provides that Mr. Furr was entitled to receive a minimum bonus of $325,000 under
the Annual Incentive Plan and a long-term incentive plan award having a value of at least $300,000. Mr. Furr also is entitled to
reimbursement of employment-related expenses and to participate in the employee benefit programs generally available to employees
of the Company. Additionally, the employment agreement provides that Mr. Furr was entitled to receive a grant of RSUs having an
aggregate fair market value of $200,000 on the date of grant. In addition, the employment agreement provides that Mr. Furr was
entitled to receive a cash sign-on bonus of $143,000 and a grant of RSUs having a value of $739,519, in each case, which was based
upon the value of KeyCorp stock. The employment agreement provides that Mr. Furr was entitled to be reimbursed for airfare and up
to approximately $148,200 of out-of-pocket costs related to Mr. Furr’s relocation to Dallas, Texas. The agreement also includes,
among other things, customary non-competition, non-solicitation and confidentiality provisions. Mr. Furr’s non-competition and non-
solicitation obligations continue for twelve (12) months following the earlier of (i) his termination and (ii) the termination of his
employment agreement. For a description of compensation and benefits to which Mr. Furr is entitled in the event of his termination or
a change in control, see “Potential Payments Upon Termination or Change-in-Control” below.
42
2018 PROXY STATEMENT
Mr. Huffines
On December 4, 2014, we entered into an employment agreement with Mr. Huffines, which was amended on September 12, 2016
to reflect his new role as Chief Operating Officer for Subsidiaries of the Company. The employment agreement with Mr. Huffines had
an original three-year term and provided for an annual base salary of $690,000. Mr. Huffines was 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 was 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. Mr. Huffines’ non-competition and non-solicitation obligations continue for twelve (12) months following
the earlier of (i) his termination and (ii) the termination of his employment agreement. The term of Mr. Huffines’ employment
agreement terminated on December 4, 2017, and he retired from the Company on December 31, 2017. For a description of
compensation and benefits to which Mr. Huffines was 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. In November 2017, the term of Mr. Salmans’ employment was extended until
December 31, 2019. Pursuant to this agreement, 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 provides for a one-time 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. Mr. Salmans’s non-competition and non-solicitation obligations continue
for twelve (12) months following the earlier of (i) his termination and (ii) the termination of his employment agreement. 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 September 20, 2012, our stockholders approved the 2012 Equity Incentive Plan, which provides for the grant of equity-based
awards, including restricted shares of our common stock, RSUs, stock options, grants of shares, stock appreciation rights, or 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 the 2012 Equity Incentive Plan.
All shares granted and outstanding pursuant to the 2012 Equity Incentive Plan, whether vested or unvested, are entitled to receive
dividends and to vote, unless forfeited. No participant in our 2012 Equity Incentive Plan may be granted performance-based equity
awards in any fiscal year representing more than 500,000 shares of our common stock or stock options or SARs representing in excess
of 750,000 shares of our common stock. The maximum number of shares underlying incentive stock options granted under the 2012
Equity Incentive Plan may not exceed 2,000,000.
The 2012 Equity Incentive Plan is 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
performance goals and other terms and conditions of the awards. 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 2012 Equity Incentive Plan provides 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.
43
2018 PROXY STATEMENT
Stock options granted under 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 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
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 us to achieve favorable business results and to assist
us 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 performance criteria outlined in the
Annual Incentive Plan.
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 determines 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 $10,000,000 per year. Except as otherwise
provided in a participant’s employment or other individual agreement, the payment of a cash bonus to a participant for a performance
period is conditioned upon the participant’s active employment on the date that the final awards are approved by the Compensation
Committee. We may amend or terminate the Annual Incentive Plan at any time.
44
Outstanding Equity Awards at Fiscal Year End
The following table presents information pertaining to all outstanding equity awards held by the NEOs as of December 31, 2017.
2018 PROXY STATEMENT
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Stock Awards
Equity Incentive
Equity Incentive
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
(a) ($)
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(a) (#)
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
(a) ($)
18,004 (b)
21,971 (d)
27,734 (f)
31,766 (h)
18,004 (b)
21,971 (d)
12,307 (f)
14,096 (h)
22,540 (j)
8,965 (k)
6,154 (f)
7,753 (h)
6,430 (b)
9,416 (d)
6,154 (f)
8,055 (h)
— (l)
— (l)
— (l)
9,002 (b)
10,986 (d)
6,154 (f)
7,048 (h)
456,041
556,525
702,502
804,633
456,041
556,525
311,736
357,052
570,937
227,083
155,881
196,383
162,872
238,507
155,881
204,033
—
—
—
228,021
278,275
155,881
178,526
18,004 (c)
21,971 (e)
27,734 (g)
31,766 (i)
18,004 (c)
21,971 (e)
12,306 (g)
14,096 (i)
—
—
6,153 (g)
7,752 (i)
6,430 (c)
9,416 (e)
6,153 (g)
8,055 (i)
10,802 (c)
13,182 (e)
7,032 (g)
9,002 (c)
10,985 (e)
6,153 (g)
7,048 (i)
456,041
556,525
702,502
804,633
456,041
556,525
311,711
357,052
—
—
155,855
196,358
162,872
238,507
155,855
204,033
273,615
333,900
178,121
228,021
278,250
155,855
178,526
(a) Value based upon the closing price of $25.33 for our common stock on December 29, 2017. With respect to performance-based RSUs, the number of shares
underlying each award was calculated based on the achievement of target level performance.
(b) Represents time-based RSUs that cliff vested on February 24, 2018.
(c) Represents performance-based RSUs that vested on February 24, 2018 upon the achievement of certain performance goals during the three-year period beginning
January 1, 2015 and ending December 31, 2017. Based on applicable performance goal threshold performance during the noted period and as approved by the
Compensation Committee on March 5, 2018, actual shares issued under performance awards were 75% of unvested shares reported in the table above at
December 31, 2017.
(d) Represents time-based RSUs that cliff vest upon the earlier of February 23, 2019 and a change of control.
(e) Represents performance-based RSUs that vest upon the achievement of certain performance goals during the three-year period beginning January 1, 2016 and
ending December 31, 2018.
(f) Represents time-based RSUs that cliff vest upon the earlier of February 23, 2020 and a change of control.
(g) Represents performance-based RSUs that vest upon the achievement of certain performance goals during the three-year period beginning January 1, 2017 and
ending December 31, 2019.
(h) Represents time-based RSUs that cliff vest upon the earlier of March 5, 2021 and a change of control.
(i) Represents performance-based RSUs that vest upon the achievement of certain performance goals during the three-year period beginning January 1, 2018 and
ending December 31, 2020.
(j) Represents outstanding time-based RSUs that vest upon the earlier of (i) four installments of 10,607; 8,618; 10,607; and 3,315 that commenced on February 15,
2017 and annually thereafter or (ii) a change of control.
(k) Represents time-based RSUs that cliff vest upon the earlier of September 6, 2019 and a change of control.
(l) Mr. Huffines’ time-based RSUs vested pro-rata upon his retirement on December 31, 2017.
45
Option Exercises and Stock Vested in 2017
The following table presents information pertaining to any outstanding stock awards held by the NEOs that vested during 2017.
There were no option awards outstanding during 2017.
2018 PROXY STATEMENT
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Stock Awards
Number of
Shares Acquired
on Vesting (#)
Value
Realized on
Vesting ($)
22,218
623,437 (a)
25,921
727,343 (a)
10,607
296,784 (b)
7,777
218,223 (a)
35,767
735,159 (c)
12,961
363,686 (a)
(a) Value based upon the closing price of $28.06 for our common stock on February 23, 2017 multiplied by the number of vested RSUs.
(b) Value based upon the closing price of $27.98 for our common stock on February 15, 2017 multiplied by the number of vested RSUs.
(c) 15,553 shares vested based upon the closing price of $28.06 for our common stock on February 23, 2017, with 11,794 shares vesting based on the closing price of
$25.33 for our common stock on December 29, 2017 (the last business day before Mr. Huffines’ retirement on December 31, 2017).
Non-Qualified Deferred Compensation
The following table shows the non-qualified deferred compensation activity for our NEOs during the fiscal year ended
December 31, 2017.
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
James R. Huffines
Todd L. Salmans
Executive
Registrant
Contributions
in Last Fiscal
Year ($)
Contributions
in Last Fiscal
Year ($)
Aggregate
Earnings in
Last Fiscal
Year (a) ($)
Aggregate
Withdrawals/
Distributions
($)
Aggregate
Balance at Last
Fiscal Year End
End (b) ($)
—
—
—
—
—
—
—
—
—
—
—
44,519
—
6,594,577
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) Represents interest earned on 2012 deferred compensation contributions of $6,430,890 for Mr. White. All amounts reported as aggregate earnings in the last fiscal
year are reported as compensation in the last completed fiscal year in the Summary Compensation Table.
(b) All amounts were reported as compensation in the Summary Compensation Table for the last completed fiscal year or prior fiscal years.
In connection with our 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.
46
2018 PROXY STATEMENT
Potential Payments Upon Termination or Change-in-Control
The 2012 Equity Incentive Plan, under which we have granted awards to the NEOs, 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) his annual base salary through the date of termination, to the extent not already paid and not deferred;
(ii) any annual bonus earned by him for a prior award period, to the extent not already paid and not deferred;
(iii) any business expenses he incurred that are not yet 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 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.
Mr. Furr
If Mr. Furr’s employment agreement is terminated (1) by Mr. Furr, (2) by the Company for “Cause” (as such term is defined in
the employment agreement), or (3) in the event of Mr. Furr’s death or disability, Mr. Furr (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 him 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. With respect to a termination resulting from
Mr. Furr’s death or disability, the unvested portion of the equity grants will also vest, subject to certain conditions.
If Mr. Furr’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)), Mr. Furr will be entitled to receive the amounts in the foregoing paragraph and,
subject to his execution and delivery to the Company of a release, a lump-sum cash payment equal to 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 incentive bonus paid to him in
respect of the calendar year immediately preceding the year of the termination. Any unvested portion of the equity grants will also
vest.
47
2018 PROXY STATEMENT
If Mr. Furr’s employment is terminated without “Cause” within the 12 months immediately following, or the six months
immediately preceding, a “Change in Control,” Mr. Furr will be entitled to receive the same amount upon a termination for “Cause”
and 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 incentive bonus paid to him in respect of the calendar year immediately preceding the
year of the termination, provided that Mr. Furr executes and delivers a release to the Company. Any unvested portion of the equity
grants will also vest. Notwithstanding, any amounts payable to Mr. Furr upon a Change in Control shall not constitute a “parachute
payment” and shall be reduced accordingly.
Mr. Huffines
On December 4, 2014, we entered into an employment agreement with Mr. Huffines, which was amended on September 12, 2016
to reflect his new role as Chief Operating Officer for Subsidiaries of the Company. The employment agreement with Mr. Huffines had
an original three-year term and provided for an annual base salary of $690,000. Mr. Huffines was 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 was 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. Mr. Huffines’ non-competition and non-solicitation obligations continue for twelve (12) months following
the earlier of (i) his termination and (ii) the termination of his employment agreement. The term of Mr. Huffines’ employment
agreement terminated on December 4, 2017, and he retired from the Company on December 31, 2017.
With respect to Mr. Huffines, if the employment agreement is terminated (1) by the executive officer, (2) by the Company for
“cause” (as such term is defined below), 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 applicable employment agreement of such executive officer)), 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 of
claims, (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.
Further, 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, upon execution of a release, 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 the above, any amounts payable to the executive officer upon a
change of control shall not constitute a “parachute payment” and shall be reduced accordingly.
Mr. Salmans
With respect to Mr. Salmans, if the employment agreement is terminated (1) by the executive officer, (2) by the Company for
“cause” (as such term is defined below), 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”).
48
2018 PROXY STATEMENT
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 applicable employment agreement of such executive officer)), 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 of
claims, (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.
Further, 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, upon execution of a release, 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 the above, any amounts payable to the executive officer upon a
change of control shall not constitute a “parachute payment” and shall be reduced accordingly.
Definitions of “Cause” and “Disability” Under Employment Contracts
For the purposes of Mr. White’s retention agreement and the employment agreements of Messrs. Furr, Huffines and Salmans,
“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;
(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. Furr, 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. Jeremy B. Ford, White, Furr, Feinberg, Huffines and Salmans would have received
if the specified events had occurred on December 31, 2017:
Jeremy B. Ford
Accrued amounts
Cash payment
Cash severance
Restricted stock units (a)
Welfare benefits
Total
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
451,140
—
451,140 $
— $
—
—
451,140
—
—
—
—
3,430,138
—
451,140 $ 3,430,138
(a) RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For additional information, see “—Incentive Plans.”
49
Alan B. White
Accrued amounts (a)
Cash payment (b)
Cash severance (c)
Restricted stock units (d)
Welfare benefits
Total
2018 PROXY STATEMENT
$
Termination due
to Death or
Termination for
Cause
1,400,000 $
6,594,577
—
—
—
Disability or by
Executive for any
Reason
1,400,000 $
6,594,577
—
234,041
—
Termination
Without Cause
or Non-Renewal
of Retention
Agreement
1,400,000 $
6,594,577
5,533,333
234,041
—
—
—
—
2,648,581
—
8,228,618 $ 13,761,951 $ 2,648,581
Change of
Control
$
7,994,577 $
(a) Accrued amounts calculation based upon the sum of: (i) Mr. White’s annual base salary through December 31, 2017, 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.
(b) Cash payment 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.
(c) 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.
(d) RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For additional information, see “—Incentive Plans.”
William B. Furr
Accrued amounts
Cash payment
Cash severance
Restricted stock units (a)
Welfare benefits
Total
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
113,360
—
113,360 $
— $
—
800,000
113,360
—
—
—
1,600,000
1,109,757
—
913,360 $ 2,709,757
(a) The RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For additional information, see “—Incentive Plans.”
Hill A. Feinberg
Accrued amounts
Cash payment
Cash severance
Restricted stock units (a)
Welfare benefits
Total
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
110,247
—
110,247 $
— $
—
—
110,247
—
—
—
—
1,114,495
—
110,247 $ 1,114,495
(a) The RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For additional information, see “—Incentive Plans.”
50
James R. Huffines
Accrued amounts
Cash payment
Cash severance
Restricted stock units (a)
Welfare benefits
Total
2018 PROXY STATEMENT
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
135,480
—
135,480 $
— $
—
—
135,480
—
—
—
—
1,571,347
—
135,480 $ 1,571,347
(a) RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For addition information, see “—Incentive Plans.”
Todd L. Salmans
Accrued amounts
Cash payment
Cash severance (a)
Restricted stock units (b)
Welfare benefits
Total
Termination due
to Death or
Disability or by
Termination for Executive for any Termination
without cause
Reason
Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
117,024
—
—
—
2,500,000
1,324,303
—
117,024 $ 1,367,024 $ 3,824,303
— $
—
1,250,000
117,024
—
(a) 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.
(b) RSUs 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, 2017. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested RSUs vest
upon such event, which for purposes of the foregoing assumes December 31, 2017. In each case, it is assumed the target award is achieved or utilized to calculate
vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s
termination. For additional information, see “—Incentive Plans.”
Incentive Plans
Each of the incentive plans has a complex definition of “change in control.” Generally speaking 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.
Our 2012 Equity Incentive Plan is a “single trigger” plan, 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 is 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, with respect to awards granted pursuant to the 2012 Equity Incentive Plan: (i) all outstanding
stock options and SARs will become fully vested and exercisable; (ii) all restrictions on any restricted stock, RSUs or other stock-
based awards that are not subject to performance goals will become fully vested; and (iii) all restrictions on any restricted stock,
RSUs, performance units or other stock-based awards that are subject to performance goals will be deemed to be fully achieved.
51
2018 PROXY STATEMENT
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. However, in 2015, we revised our form of award for
time-based and performance-based RSUs to include a non-solicitation provision that lasts for twelve months following a participant’s
termination for any reason. In the event of a breach of the non-solicitation provision, the participant’s RSUs granted under the form of
award will immediately cease vesting and any unvested RSUs or vested RSUs that have not been converted into shares of common
stock will be forfeited.
Co-CEO Pay Ratios
Item 402(u) of Regulation S-K, implementing a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, requires that we disclose a ratio that compares the annual total compensation of our median employee to that of each of our co-
CEOs for 2017 and future years.
In order to determine the median employee, we prepared a list of all employees as of December 31, 2017, along with their gross
income as reported on IRS form W-2 for 2017. We included all employees, whether employed on a full-time, part-time, or seasonal
basis. Gross income as reported on IRS form W-2 for 2017 was annualized for those employees that were permanent employees but
were not employed for the full year. No assumptions, adjustments or estimates were made with respect to total compensation. We
believe that W-2 income is a consistently applied compensation measure because we do not widely distribute annual equity awards to
employees.
The annual compensation for 2017 for Jeremy B. Ford, President and Co-Chief Executive Officer, was $2,118,740. The annual
compensation for 2017 for Alan B. White, Vice Chairman and Co-Chief Executive Officer, was $3,597,306. The annual compensation
for the median employee for 2017 was $96,078. The resulting ratios of Mr. Ford’s and Mr. White’s pay to that of our median
employee for 2017 were 22:1 and 37:1, respectively.
We believe executive pay must be internally consistent and equitable to motivate our employees to create stockholder value. We
are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay our executive
officers receive and the pay our non-managerial employees receive.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2017, 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 2017:
•
•
•
•
•
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.
During 2017, each of Mr. Jeremy Ford, Hilltop’s Co-Chief Executive Officer and President, Mr. White, Hilltop’s Vice Chairman
and Co-Chief Executive Officer, Mr. Feinberg, Chairman and Chief Executive Officer of Hilltop Securities, and Mr. Huffines,
Hilltop’s former Executive Vice President and Chief Operating Officer of Subsidiaries, served as a director of Hilltop. Hilltop’s
Compensation Committee is comprised of independent directors, reviews and sets the compensation of each of Messrs. Jeremy Ford,
White and Feinberg and does not believe that these interlocks pose any risks that are likely to have a material adverse effect on us.
52
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2017 with respect to compensation plans under which shares of our
common stock may be issued.
Equity Compensation Plan Information
2018 PROXY STATEMENT
Plan Category
Equity compensation plans approved by security holders*
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
—
—
—
— $
—
— $
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in first
column)
1,634,804
—
1,634,804
* In September 2012, our stockholders approved the 2012 Equity Incentive 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. In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Equity Incentive
Plan. At December 31, 2017, 2,517,316 awards had been granted pursuant to the 2012 Equity Incentive Plan, while 222,696 awards were forfeited and are eligible
for reissuance. All shares outstanding under the 2012 Equity Incentive 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 awards in any fiscal year covering more than 1,250,000 shares of our common stock.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires officers, 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, 2017, applicable to our officers, directors and greater than ten
percent beneficial owners were timely satisfied.
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, 2017.
53
2018 PROXY STATEMENT
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
General
Transactions with related persons are governed by our General Code of Ethics and Business Conduct, which applies to all
officers, directors and employees. This code covers a wide range of potential activities, including, among others, conflicts of interest,
self-dealing and related party transactions. Waiver of the policies set forth in this 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 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 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 President and Co-Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a
49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owns 16.2% of the outstanding Hilltop
common stock as of April 27, 2018. 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 Directors of Hilltop and the beneficial owner of 16.2% of
Hilltop common stock as of April 27, 2018. 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, Hilltop’s Executive Vice President,
General Counsel and Secretary, is the beneficiary of a trust that also owns a 46% limited partnership interest in Hunter’s
Glen/Ford, Ltd. and a trust that owns a 49% limited partnership interest in Diamond A Financial, L.P.
Jeremy B. Ford is the son of Gerald J. Ford. Mr. Prestidge is the son-in-law of Gerald J. Ford. Accordingly,
Messrs. Jeremy B. Ford and Prestidge are brothers-in-law.
Employment of Certain Family Members
We currently employ certain family members of our officers and/or directors in the following capacities: Corey G. Prestidge, the
brother-in-law of Jeremy B. Ford, our President and Co-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, our Vice Chairman and Co-Chief Executive Officer, serves as the Senior Vice President, Director of Public Relations
of PlainsCapital; Logan Passmore, the son-in-law of Mr. White, serves as Commercial Relationship Manager of the Bank; Kale
Salmans, the son of Todd Salmans, Chief Executive Officer of PrimeLending, serves as Manager, Strategic Sales of PrimeLending;
and Ty Tucker, the son-in-law of Mr. Salmans, serves as Project Manager, Joint Venture Strategy of PrimeLending. Pursuant to our
employment arrangements with these individuals, during 2017, these individuals received total compensation for their respective
services as employees as follows: Corey G. Prestidge $950,059, Lee Ann White $135,714, Logan Passmore $86,658, Kale Salmans
$663,810 and Ty Tucker $97,713.
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, the 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.
54
2018 PROXY STATEMENT
Branch Renovation and Construction
During 2017, the Bank utilized a company owned by Mr. Lewis, Lee Lewis Construction, to renovate one of the Bank’s branches
and to construct another branch for the Bank. The Bank awarded these contracts to Lee Lewis Construction following a bid process.
During 2017, the Bank paid Lewis Construction $315,641 to renovate the Bank branch and $830,856 to construct a Bank branch.
Construction on the branch will continue into 2018.
Leases at The Star
In 2016, the Bank contracted with Frisco HQ Operations, L.P. and Bluestar Frisco Retail L.P., each of which is affiliated with the
employer of Ms. Anderson and beneficially owned by Ms. Anderson and certain of her immediate family members, for the 10-year
lease of office space and a Bank branch. Following an initial rent abatement period, the leases provide for annual base rent of an
aggregate of approximately $383,000, which increases on a yearly basis thereafter to a maximum annual base rent of an aggregate of
approximately $433,000.
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, our prior or current 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.
55
2018 PROXY STATEMENT
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 “Management – Compensation Discussion and Analysis” and “Management – Executive
Compensation” sections of this Proxy Statement. At our 2017 annual meeting of stockholders, our stockholders voted in favor of a
proposal to hold an advisory vote on executive compensation each year. 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. An advisory vote to
determine the frequency of future advisory votes on executive compensation will be conducted at our annual meeting held in 2023.
We believe that our executive compensation programs effectively align 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 26 of this Proxy Statement by voting FOR, on an advisory basis, the following resolution:
“NOW, THEREFORE, BE IT RESOLVED, that the stockholders approve, on an advisory basis, the compensation paid to
the named executive officers of the Company, as disclosed pursuant to Item 402 of Regulation S-K, including the
Compensation Discussion and Analysis, the compensation tables and the narrative discussion related thereto.”
Vote Necessary to Approve, on an Advisory Basis, Executive Compensation
The affirmative vote of a majority of the votes cast on the matter is required to approve, on an advisory basis, our 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,
although they will be considered present for purposes of determining a quorum.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
56
2018 PROXY STATEMENT
PROPOSAL THREE — RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP served as our independent registered public accounting firm during 2017 and has been selected to
serve in that capacity for 2018, 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 PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP is expected to be at our Annual Meeting to respond to appropriate questions
and, if PricewaterhouseCoopers LLP desires, to make a statement.
Vote Necessary to Ratify the Appointment
The appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2018 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, although they will be considered
present for purposes of determining a quorum. Under applicable rules, a broker will have the authority to vote on this proposal in the
absence of instructions from the beneficial owner of the relevant shares.
Report of the Audit Committee
The Audit Committee of the Board of Directors of Hilltop Holdings Inc. currently consists of three directors and operates under a
written charter adopted by the Board of Directors. Hilltop considers all members of the Audit Committee 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, Hilltop’s independent registered public accounting firm, is responsible for
performing an independent audit of Hilltop’s consolidated financial statements in accordance with generally accepted auditing
standards. The Audit Committee’s responsibility is to monitor and oversee the financial reporting process.
In this context, the Audit Committee reviewed and discussed with management and PricewaterhouseCoopers LLP the audited
financial statements for the year ended December 31, 2017, management’s assessment of the effectiveness of the Company’s internal
control over financial reporting and PricewaterhouseCoopers LLP’s evaluation of the Company’s internal control over financial
reporting. The Audit Committee has discussed with PricewaterhouseCoopers LLP the matters that are required to be discussed by
Auditing Standard No. 1301, Communications with Audit Committees, issued by the Public Company Accounting Oversight Board.
The Audit Committee received from PricewaterhouseCoopers LLP the written disclosures and the letter required by the Public
Company Accounting Oversight Board in Rule 3526, and has discussed with PricewaterhouseCoopers LLP the issue of its
independence from the Company. The Audit Committee also concluded that PricewaterhouseCoopers LLP’s provision of audit and
non-audit services to the Company and its affiliates is compatible with PricewaterhouseCoopers LLP’s independence.
Based upon the Audit Committee’s review of the audited consolidated financial statements and its discussion with management
and PricewaterhouseCoopers LLP 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, 2017.
This report has been furnished by the members of the Audit Committee.
Charles R. Cummings (Chairman)
Tracy A. Bolt
J. Markham Green
57
Independent Auditor’s Fees
For the fiscal years ended December 31, 2017 and 2016, the total fees paid to our independent registered public accounting firm,
PricewaterhouseCoopers LLP, were as follows:
2018 PROXY STATEMENT
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
Audit Fees
Fiscal Year Ended
2017
5,160,100 $
261,000
—
2,700
5,423,800 $
2016
5,686,070
251,400
—
1,800
5,939,270
$
$
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, 2017 and 2016, 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
In 2017 and 2016 these fees primarily related to attestation reports required under various services agreements.
Tax Fees
No tax fees were incurred during 2017 or 2016.
All Other Fees
In 2017 and 2016, 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 2017
and 2016.
The pre-approval 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 2017 or 2016 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 2018.
58
2018 PROXY STATEMENT
STOCKHOLDER PROPOSALS FOR 2019
Stockholder proposals intended to be presented at our 2019 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 local time, on January
24, 2019 and must otherwise comply with the requirements of Rule 14a-8 in order to be considered for inclusion in the 2019 Proxy
Statement and proxy. However, pursuant to such rule, if the 2019 Annual Meeting is not held within 30 days of July 25, 2019, then a
stockholder proposal submitted for inclusion in our Proxy Statement for the 2019 Annual Meeting must be received by us a reasonable
time before we begin to print and mail our Proxy Statement for the 2019 Annual Meeting.
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 March 27, 2019, and not later than
5:00 p.m. Dallas, Texas local time, on April 26, 2019; provided, however, that in the event that the date of the 2019 annual meeting is
advanced by more than 30 days or advanced by more than 60 days from July 25, 2019, notice by the stockholder in order to be timely
must be received no earlier than the 120th day prior to the date of the 2019 annual meeting and not later than 5:00 p.m. Dallas, Texas
local time, on the later of the 90th day prior to the date of the 2019 annual meeting or, if the first public announcement of the 2019
Annual Meeting is less than 100 days prior to the date of the 2019 Annual Meeting, the 10th day following the day on which public
announcement of the date of the 2019 annual meeting is first made. 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.
OTHER MATTERS
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.
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., 2323 Victory Avenue, Suite 1400, Dallas, Texas 75219, 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, 2017 ALSO IS AVAILABLE WITHOUT CHARGE FROM OUR COMPANY
WEBSITE AT WWW.HILLTOP-HOLDINGS.COM OR UPON WRITTEN REQUEST TO: INVESTOR RELATIONS, HILLTOP
HOLDINGS INC., 2323 VICTORY AVENUE, SUITE 1400, DALAS, TEXAS 75219.
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.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
You may also call us at (214) 855-2177. We also invite you to visit our website at www.hilltop-holdings.com.
59
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
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, 2017
(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)
2323 Victory Avenue, Suite 1400
Dallas, TX
(Address of principal executive offices)
84-1477939
(I.R.S. Employer
Identification No.)
75219
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(214) 855-2177
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:134) Yes (cid:59) 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:59) 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:59) 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:59) 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:59)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
(cid:59)
(cid:133) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:134)
(cid:134)
(cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(cid:134) Yes (cid:59) 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, 2017, was approximately $1.95 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 15, 2018 was 95,987,840.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement pertaining to the 2018 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
31
53
54
54
54
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
55
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
57
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
59
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . 110
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . 112
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
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 “PCC” refer to PlainsCapital Corporation (a wholly owned
subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned
subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of
Securities Holdings), references to “HTS Independent Network” refer to Hilltop Securities Independent Network Inc. (a
wholly owned subsidiary of Securities Holdings), references to the “Bank” refer to PlainsCapital Bank (a wholly owned
subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS
Group, Inc., references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of
Securities Holdings) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, LLC (a
former 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, references to “NLC”
refer to National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole, references to
“NLIC” refer to National Lloyds Insurance Company (a wholly owned subsidiary of NLC) and references to “ASIC”
refer to American Summit Insurance Company (a wholly owned subsidiary of NLC).
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,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these
words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our
efforts to make strategic acquisitions, our revenue, our liquidity and sources of funding, market trends, operations and
business, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations
concerning mortgage loan origination volume and interest rate compression, expected losses on covered loans and related
reimbursements from or to the Federal Deposit Insurance Corporation (“FDIC”), anticipated amortization of the value of
the receivable under our loss-share agreements with the FDIC (“FDIC Indemnification Asset”), expected levels of
refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, loss estimates
related to natural disasters, anticipated changes in our revenues or earnings, taxes, the effects of government regulation
applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, anticipated
investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans
and the outcome of litigation 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:
•
•
•
•
•
•
•
the credit risks of lending activities, including our ability to estimate loan losses as well as the effects of changes
in the level of, and trends in, loan delinquencies and write-offs;
changes in general economic, market and business conditions in areas or markets where we compete, including
changes in the price of crude oil;
changes in the interest rate environment;
risks associated with our concentration in real estate related loans;
risks associated with merger and acquisition integration;
severe catastrophic events in Texas and other areas of the southern United States;
effectiveness of our data security controls in the face of cyber attacks;
3
•
•
•
•
•
•
•
•
•
the effects of our indebtedness on our ability to manage our business successfully, including the restrictions
imposed by the indenture governing our indebtedness;
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”);
changes in key management;
competition in our banking, broker-dealer, mortgage origination and insurance segments from other banks and
financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based
non-bank lenders, government agencies and insurance companies;
legal and regulatory proceedings;
our obligations under loss-share agreements with the FDIC, including the possibility that we may be required to
make a “true-up” payment to the FDIC;
failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; and
our ability to use excess cash in an effective manner.
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
Item 1. Business.
General
PART I
Hilltop Holdings Inc. is a diversified, Texas-based financial holding company registered under the Bank Holding
Company Act of 1956, as amended (the “Bank Holding Company Act”). 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. We
endeavor to build and maintain a strong financial services company through organic growth as well as acquisitions, which
we may make using available cash, excess liquidity and, if necessary or appropriate, additional equity or debt financing
sources.
Following our acquisition of PlainsCapital Corporation in November 2012 (the “PlainsCapital Merger”), we further
expanded our operations through our assumption of substantially all of the liabilities and acquisition of substantially all of
the assets of FNB, including former FNB branches, in an FDIC-assisted transaction on September 13, 2013 (the “FNB
Transaction”) and our acquisition by merger of SWS for stock and cash consideration on January 1, 2015 (the “SWS
Merger”). As a result of the SWS Merger, SWS’s broker-dealer subsidiaries, including Hilltop Securities, became
subsidiaries of Securities Holdings, a wholly owned subsidiary of Hilltop, and SWS’s banking subsidiary was merged into
the Bank.
On January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop
Securities” name. We use the term “Hilltop Broker-Dealers” to refer to FSC, Hilltop Securities and HTS Independent
Network prior to such date and Hilltop Securities and HTS Independent Network after such date.
The following includes additional details regarding the financial products and services provided by each of our primary
business units.
PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth,
investment and treasury management services primarily in Texas and residential mortgage loans throughout the United
States.
Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment
banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and
tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage
services throughout the United States.
NLC. 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.
At December 31, 2017, on a consolidated basis, we had total assets of $13.4 billion, total deposits of $8.0 billion, total
loans, including loans held for sale, of $8.1 billion and stockholders’ equity of $1.9 billion.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HTH.”
Our principal office is located at 2323 Victory Avenue, Suite 1400, Dallas, Texas 75219, 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.
5
Organizational Structure
Our organizational structure is comprised of three primary business units: PCC (banking and mortgage origination);
Securities Holdings (broker-dealer); and NLC (insurance). The following provides additional details regarding our current
organizational structure.
Geographic Dispersion of our Businesses
The Bank provides traditional banking and wealth, investment and treasury management services. The Bank has a
presence in every major market in Texas and conducts substantially all of its banking operations in Texas.
Our broker-dealer services are provided through Hilltop Securities and HTS Independent Network, which conduct
business nationwide. Public finance financial advisory net revenues represented 21% of total net broker-dealer revenues
during 2017, and 74% of such public finance financial advisory revenues were from entities located in Texas.
Additionally, retail brokerage service net revenues represented 25% of total broker-dealer net revenues during 2017, and
90% of such retail brokerage service revenues were generated through locations in Texas, California and Oklahoma.
PrimeLending provides residential mortgage origination products and services from over 330 locations in 45 states.
During 2017, an aggregate of 64.2% of PrimeLending’s origination volume was concentrated in ten states. None of the
other states in which PrimeLending operated during 2017 had origination volume of 3% or more.
The following table is a summary of the mortgage loan origination volume by state for the periods shown (dollars in
thousands).
Texas
California
Florida
Ohio
Arizona
South Carolina
Washington
Missouri
North Carolina
Maryland
All other states
2017
Year Ended December 31,
2016
Volume
$ 3,129,008
1,846,172
853,727
634,142
554,463
472,935
465,501
448,565
440,456
430,668
5,182,276
$ 14,457,913
Volume
% of
Total
21.6 % $ 3,352,469
2,235,915
12.8 %
797,578
5.9 %
637,435
4.4 %
527,055
3.8 %
446,221
3.3 %
538,857
3.2 %
441,125
3.1 %
512,087
3.1 %
521,686
3.0 %
35.8 %
5,449,785
100.0 % $ 15,460,213
% of
Total
2015
Volume
% of
Total
21.7 % $ 2,967,740
1,965,039
14.4 %
644,090
5.2 %
555,106
4.1 %
415,215
3.4 %
385,347
2.9 %
451,277
3.5 %
379,621
2.9 %
492,879
3.3 %
3.4 %
452,280
35.2 %
4,643,525
100.0 % $ 13,352,119
22.2 %
14.7 %
4.8 %
4.2 %
3.1 %
2.9 %
3.4 %
2.8 %
3.7 %
3.4 %
34.8 %
100.0 %
6
Our insurance products are distributed through a broad network of independent agents. During 2017, total gross written
premiums were concentrated in five states, with Texas insureds representing 68.8% of the aggregate. None of the other
states in which we operated during 2017 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).
2017
Year Ended December 31,
2016
2015
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
$
$
102,629
16,389
9,201
8,853
5,070
7,098
149,240
68.8 % $
11.0 %
6.2 %
5.9 %
3.4 %
4.7 %
100.0 % $
115,108
16,714
9,823
10,258
5,434
6,971
70.1 % $
10.2 %
6.0 %
6.2 %
3.3 %
4.2 %
164,308 100.0 % $
125,264
17,117
10,575
11,660
6,050
7,072
70.5 %
9.6 %
5.9 %
6.6 %
3.4 %
4.0 %
177,738 100.0 %
Texas
Arizona
Tennessee
Oklahoma
Georgia
All other states
Total
Business Segments
Under accounting principles generally accepted in the United States (“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. 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 our President and Co-Chief
Executive Officer and our Vice Chairman and Co-Chief Executive Officer.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities, and management and administrative
services to support the overall operations of the Company including, but not limited to, certain executive management,
corporate relations, legal, finance, and acquisition costs. Hilltop’s merchant banking investment activities include the
identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through
its increasingly active merchant bank subsidiary, PlainsCapital Equity, LLC.
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, which, at December 31, 2017, had $9.6 billion in assets and
total deposits of $7.6 billion. The primary sources of our deposits are residents and businesses located in Texas. At
December 31, 2017, the Bank employed approximately 1,200 people.
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 our business banking customers lines of credit, equipment loans and leases, letters of credit,
agricultural loans, commercial real estate loans and other loan products.
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 tables
below set 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, 2017 (dollars in thousands). PCI loans showed evidence of credit deterioration at the time
of acquisition that made it probable that all contractually required principal and interest payments would not be collected.
The commercial and industrial non-covered loans category includes a $2.2 billion warehouse line of credit extended to
7
PrimeLending, of which $1.5 billion was drawn at December 31, 2017. Amounts advanced against the warehouse line of
credit are included in the table below, but are eliminated from net loans on our consolidated balance sheets.
Non-covered loans
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
Total non-covered loans
Covered loans
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
Total covered loans
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Non-Covered
Loans
$
3,089,402 $
122,889
6,099 $ 3,095,501
122,889
—
2,217,723
766,016
19,675
9,865
2,237,398
775,881
42.8 %
1.7 %
30.9 %
10.6 %
177,252
—
177,252
2.5 %
783,915
40,319
7,197,516 $
1,438
127
785,353
40,446
37,204 $ 7,234,720
$
10.9 %
0.6 %
100.0 %
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
% of Total
Covered
Loans
$
$
861
—
$
194
—
1,055
—
0.6 %
— %
11,794
80,650
23,559
63,356
35,353
144,006
19.4 %
79.1 %
—
—
—
— %
1,711
95,016
$
4
87,113
1,715
182,129
$
0.9 %
100.0 %
$
Our lending policies seek to establish 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.
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 real estate 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,
8
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 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) maintain 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 also 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, the Bank 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. The Bank generally requires that the subject property of a construction loan for
commercial real estate be pre-leased, because 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, 2017, the Bank had $569.7 million in one-to-four family residential loans, which
represented 9.7% of its total loans held for investment.
Personal Banking. The Bank offers a broad range of personal banking products and services for individuals. Similar to its
business banking operations, the Bank also provides its personal banking customers with a variety of add-on features such
as check cards, safe deposit boxes, Internet banking, bill pay, overdraft privilege services and access to automated teller
machine (ATM) facilities throughout the United States. The Bank offers a variety of deposit accounts to its personal
banking customers including savings, checking, interest-bearing checking, money market and certificates of deposit.
The Bank loans to individuals for personal, family and household purposes, including lines of credit, home improvement
loans, home equity loans, and loans for purchasing and carrying securities. At December 31, 2017, the Bank had $40.4
million of loans for these purposes, which are shown in the non-covered loans table above as “Consumer.”
Wealth and Investment Management. The Bank’s 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. The
Bank offers trust and asset management services in order to assist these customers in managing, and ultimately
transferring, their wealth.
The Bank’s 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.
9
Broker-Dealer
We conduct operations through Hilltop Securities and HTS Independent Network. From the date of the SWS Merger until
January 22, 2016, when we merged FSC into Hilltop Securities to form a combined firm operating under the “Hilltop
Securities” name, our broker-dealer segment was operated through FSC, Hilltop Securities and HTS Independent
Network as separate broker-dealers under coordinated leadership. At December 31, 2017, the Hilltop Broker-Dealers
employed approximately 900 people and maintained 48 locations in 19 states.
The Hilltop Broker-Dealers include the operations of Hilltop Securities, a clearing broker-dealer subsidiary registered
with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the NYSE, HTS Independent
Network, an introducing broker-dealer subsidiary that is also registered with the SEC and FINRA, and First Southwest
Asset Management, LLC, a wholly-owned subsidiary of Hilltop Securities. Hilltop Securities and HTS Independent
Network are both registered with the Commodity Futures Trading Commission (“CFTC”) as non-guaranteed introducing
brokers and as members of the National Futures Association (“NFA”). At December 31, 2017, Hilltop Securities had
consolidated assets of $3.4 billion and net capital of $186.8 million, which was $176.3 million in excess of its minimum
net capital requirement of $10.5 million.
Our broker-dealer segment has six primary lines of business: (i) public finance, (ii) capital markets, (iii) retail,
(iv) structured finance, (v) clearing services, and (vi) securities lending.
Public Finance. The public finance group assists public bodies nationwide, including cities, counties, school districts,
utility districts, tax increment zones, special districts, state agencies and other governmental entities, in originating,
syndicating and distributing securities of municipalities and political subdivisions. 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, Hilltop Securities and HTS Independent Network are investment
advisers registered under the Investment Advisers Act of 1940 and provide state and local governments with advice and
assistance with respect to arbitrage rebate compliance, portfolio management and local government investment pool
administration.
Capital Markets. The capital markets group 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 to support sales and other customer activities, and trades equities and option orders on
an agency basis on behalf of its retail and institutional clients, including corporations, insurance companies, banks, mutual
funds, money managers and other clients. In addition, the capital markets group provides asset and liability management
advisory services to community banks.
Additionally, the equity trading department focuses on executing equity and option orders on an agency basis for clients,
while the 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 the sales of allotments to institutional clients and to
other broker-dealers.
Retail. The retail group 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 our
employee-registered representatives or independent contractor arrangements. Through our retail group, 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 Hilltop Securities and
HTS Independent Network advisors to retail clients. We retain no underwriting risk related to these insurance and annuity
products. In addition, through our investment management group, the retail group provides a number of advisory
programs that offer advisors a wide array of products and services for their advisory businesses. In most cases, we charge
commissions to our clients in accordance with an established commission schedule, subject to certain discounts based
upon the client’s level of business, the trade size and other relevant factors. The HTS Independent Network advisors may
also contract directly with third party carriers to sell specified insurance products to their customers. The commissions
received from these third party carriers are paid directly to the advisor. Hilltop Securities is also a fully disclosed client of
10
two of the largest futures commission merchants in the United States. At December 31, 2017, we employed 120 registered
representatives in 16 retail brokerage offices and had contracts with 218 independent retail representatives for the
administration of their securities business.
Structured Finance. The structured finance group provides structured asset and liability services and commodity hedging
advisory services to facilitate balance sheet management primarily to public finance clients. In addition, the structured
finance group participates in programs in which it issues forward purchase commitments of mortgage-backed securities to
certain non-profit housing clients and sells U.S. Agency to-be-announced (“TBA”) mortgage-backed securities.
Clearing Services. The clearing services group offers fully disclosed clearing services to FINRA- and SEC-registered
member firms for trade execution and clearance as well as 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, 2017, we provided services to 162 financial organizations, including correspondent firms,
correspondent broker-dealers, registered investment advisers, discount and full-service brokerage firms, and institutional
firms.
Securities Lending. The securities lending group performs 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, a residential
mortgage banker licensed to originate and close loans in all 50 states and the District of Columbia. PrimeLending
primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business
arrangements (“ABAs”). During 2017, funded loan volume through ABAs was less than 5% of the mortgage origination
segment’s total loan volume. At December 31, 2017, our mortgage origination segment operated from over 330 locations
in 45 states, originating 21.6% and 12.8%, respectively, of its mortgage loans (by dollar volume) from its Texas and
California locations. 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 loan origination volume from
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 of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things,
changes in mortgage interest rates, and refinancing and market activity. PrimeLending 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. 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
PrimeLending had a staff of approximately 3,000 people as of December 31, 2017 that produced $14.5 billion in closed
mortgage loan volume during 2017, 83% of which 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”), Veteran Affairs (“VA”), and United States Department of Agriculture (“USDA”) 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 conventional and government loans that are ineligible for sale to the
Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) or
Government National Mortgage Association (“GNMA”), or that do not comply with applicable 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 southern,
southeastern and southwestern United States through its subsidiaries, NLIC and ASIC. 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 primarily located in five states.
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 May
2017. An “A” rating is the third highest of 16 rating categories used by A.M. Best. 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.
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
12
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.
Additionally, NLC further reduces its exposure to liability through an underlying excess of loss contract that provides
aggregate coverage in excess of NLC’s per event retention and aggregate retention for sub-catastrophic events.
Competition
We face significant competition in 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 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 deposits are convenient office locations, interest rates and fee
structures of products offered. Direct competition for 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 is based on factors such 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. 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
investment banking, advisory and other related financial brokerage services.
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, closing process and duration, 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, 2017, we employed approximately 5,500 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.
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. Changes in leadership at various federal banking agencies, including the Federal
Reserve, can also change the policy direction of these agencies. 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 requires many new rules to be issued by federal regulatory agencies, which
profoundly affect how financial institutions will be regulated in the future. The ultimate effect of the Dodd-Frank Act and
its implementing regulations (or any amendments thereto) 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.
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•
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 regulator 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.
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 PCC 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 (“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
15
stock. Furthermore, these laws may discourage potential acquisition proposals and may delay, deter or prevent change of
control transactions, including those that some or all of our stockholders might consider to be desirable.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The
policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank
holding company’s ability to serve as a source of strength to its banking subsidiaries. The Dodd-Frank Act requires the
regulatory agencies to issue regulations requiring that all bank and savings and loan holding companies serve as a source
of financial and managerial strength to their subsidiary depository institutions by providing capital, liquidity and other
support in times of financial stress; however, no such proposed regulations 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 PCC 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.
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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 or reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as $1.92 million for each day the activity
continues. In addition, the Dodd-Frank Act authorizes the Federal Reserve Board to require reports from and examine
bank holding companies and their subsidiaries, and to regulate functionally regulated subsidiaries of bank holding
companies.
Anti-tying Restrictions. Subject to various exceptions, bank holding companies and their affiliates are generally prohibited
from tying the provision of certain services, such as extensions of credit, to certain other services offered by a bank
holding company or its affiliates.
Capital Adequacy Requirements and BASEL III. Hilltop and PlainsCapital are subject to capital adequacy requirements
under the recently adopted comprehensive capital framework for U.S. banking organizations known as “Basel III”. Basel
III, which reformed the existing frameworks under which U.S. banking organizations historically operated, became
effective January 1, 2015 but will not be fully phased-in until January 1, 2019. Basel III was developed by the Basel
Committee on Banking Supervision and adopted by the Federal Reserve, the FDIC, and the Office of the Comptroller of
the Currency.
The federal banking agencies’ risk-based capital 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.
Final rules published by the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency implemented
the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Among other things, Basel III
increased minimum capital requirements, introduced a new minimum leverage ratio and implemented a capital
conservation buffer. 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 PlainsCapital, 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. Under the guidelines in effect beginning January 1, 2015, a risk weight factor of 0% to 1250% 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.
Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital consists of common equity
Tier 1 capital and additional Tier 1 capital. Below is a list of certain significant components that comprise the tiers of
capital for Hilltop and PlainsCapital under Basel III.
Common equity Tier 1 capital:
•
•
•
includes common stockholders’ equity (such as qualifying 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) and treasury stock);
includes certain minority interests in the equity capital accounts of consolidated subsidiaries; and
excludes goodwill and various intangible assets.
Additional Tier 1 capital:
•
includes certain qualifying minority interests not included in common equity Tier 1 capital;
17
•
•
•
includes certain preferred stock and related surplus;
includes certain subordinated debt; and
excludes 50% of the insurance underwriting deduction.
Tier 2 capital:
•
•
•
•
includes allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets;
includes minority interests not included in Tier 1 capital;
includes certain unrealized holding gains on equity securities; and
excludes 50% of the insurance underwriting deduction.
Hilltop and PlainsCapital began transitioning to the Basel III final rules on January 1, 2015. The capital conservation
buffer and certain deductions from common equity Tier 1 capital will be phased-in through 2019.
The following table summarizes the Basel III phase-in schedule for periods beginning January 1, 2017.
Year (as of January 1)
Minimum common equity Tier 1 capital ratio
Common equity Tier 1 capital conservation buffer
Minimum common equity Tier 1 capital ratio plus capital conservation buffer
Minimum Tier 1 capital ratio
Minimum Tier 1 capital ratio plus capital conservation buffer
Minimum total capital ratio
Minimum total capital ratio plus capital conservation buffer
Phase-in of certain capital deductions (1)
2017
4.5 %
2019
2018
4.5 %
4.5 %
2.5 %
1.25 % 1.875 %
7.0 %
5.75 % 6.375 %
6.0 %
6.0 %
6.0 %
8.5 %
7.25 % 7.875 %
8.0 %
8.0 %
8.0 %
9.25 % 9.875 %
10.5 %
80.0 % 100.0 % 100.0 %
(1) On November 21, 2017, the regulatory agencies proposed an amendment that extends the phase-in schedule for certain capital deductions,
including 10 percent and 15 percent common equity Tier 1 threshold deduction items that are over the limits, minority interest and significant and
non-significant investments in the capital of unconsolidated financial institutions. Other capital deductions, such as intangible assets and deferred
tax assets arising from net operating losses, are subject to the original phase-in schedule.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain
discretionary bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which
requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer helps to
ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of
economic stress. The buffer is measured relative to risk-weighted assets.
The 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. 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. 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 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. During 2017, our eligible
retained income was positive and our capital conservation buffer was greater than 2.5 percent, and therefore, we were not
subject to limits on capital distributions or discretionary bonus payments. We anticipate similar results during 2018.
At December 31, 2017, Hilltop had a total capital to risk-weighted assets ratio of 18.78%, Tier 1 capital to risk-weighted
assets ratio of 18.24% and a common equity Tier 1 capital to risk-weighted assets ratio of 17.71%. Hilltop’s actual capital
amounts and ratios in accordance with Basel III exceeded the regulatory capital requirements including conservation
buffer in effect at the end of the period and on a fully phased-in basis as if such requirements were currently in effect.
At December 31, 2017, PlainsCapital had a total capital to risk-weighted assets ratio of 15.29%, Tier 1 capital to risk-
weighted assets ratio of 14.47% and a common equity Tier 1 capital to risk-weighted assets ratio of 14.47%.
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Accordingly, PlainsCapital’s actual capital amounts and ratios in accordance with Basel III resulted in it being considered
“well-capitalized” and exceeded the regulatory capital requirements including conservation buffer in effect at the end of
the period and on a fully phased-in basis as if such requirements were currently in effect.
Volcker Rule. Provisions of the Volcker Rule and the final rules implementing the Volcker Rule restrict certain activities
provided by the Company, including proprietary trading and sponsoring or investing in “covered funds,” which include
many venture capital, private equity and hedge funds. 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: (i) underwriting; (ii) market making;
(iii) risk mitigating hedging; (iv) trading in certain government securities; (v) employee compensation plans and
(vi) 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 covered funds activities and we believe we are currently
complying with the provisions of the Volcker Rule. 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.
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.
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, 2017, the
Bank’s total assets were $9.6 billion. If the Bank’s total assets were to increase, either organically or through an
acquisition, merger or combination, to over $10.0 billion (as measured on four consecutive quarterly call reports of the
Bank and any institutions it acquires), the Bank would become subject to the CFPB’s supervisory and enforcement
authority with respect to federal consumer financial laws beginning in the following quarter.
The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the Federal
Reserve Board is the Bank’s primary federal regulator. The Federal Reserve Board, the Texas Department of Banking, the
CFPB and the FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such
19
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 PCC, 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
adviser.”
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain
transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as
those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal
Reserve has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal
Reserve Act and interpretive guidance with respect to affiliate transactions.
Loans to Insiders. The restrictions on loans to directors, executive officers, principal stockholders and their related
interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These restrictions include conditions that must be met
before insider loans can be made, limits on loans to an individual insider and 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 PCC’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to
PCC will continue to be PCC’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 PCC and Hilltop) or any
stockholder or creditor thereof.
Branching. The establishment of a bank 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. 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.
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Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) 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. PlainsCapital was classified as “well capitalized” at
December 31, 2017.
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.
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.
The FDIC is required to maintain a designated reserve ratio of the deposit insurance fund (“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
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assessments, which could have a significant adverse impact on our financial condition and results of operations. Accruals
for DIF assessments were $2.4 million during 2017.
In March 2016, the FDIC published final rules to increase the DIF to the statutorily required minimum level of 1.35% by
imposing on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after
making certain adjustments. If the Bank reaches an asset size of more than $10 billion, the Bank will be subject to this
surcharge.
The Dodd-Frank Act permanently increased the standard maximum deposit insurance amount 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 third quarter of 2015, the Bank received a “satisfactory” CRA rating in connection with its most recent CRA
performance evaluation. A CRA rating of less than “satisfactory” adversely affects a bank’s ability to establish new
branches and impairs a bank’s ability to commence new activities that are “financial in nature” or acquire companies
engaged in these activities. See “Risk factors — We are subject to extensive supervision and regulation that could restrict
our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to
generate income.”
Privacy. Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting
and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic
personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing
of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with
a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to
any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. The Bank
and all of its subsidiaries have established policies and procedures to comply with the privacy provisions of the Gramm-
Leach-Bliley Act.
Federal Laws Applicable to Credit Transactions. The loan operations of the Bank are also subject to federal laws 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 established 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
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• 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 subpoenas of financial records, among other requests;
• 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
PlainsCapital by using a combination of risk-based guidelines and leverage ratios. The agencies consider PlainsCapital’s
capital levels when taking action on various types of applications and when conducting supervisory activities related to
the safety and soundness of individual banks and the banking system.
Under the regulatory capital guidelines within the Basel III capital rules, PlainsCapital 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 6.0%, a
common equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, 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, 2017, PlainsCapital’s ratio of total risk-
based capital to risk-weighted assets was 15.29%, PlainsCapital’s ratio of Tier 1 capital to risk-weighted assets was
14.47%, PlainsCapital’s common equity Tier 1 capital to risk-weighted assets ratio was 14.47%, and PlainsCapital’s ratio
of Tier 1 capital to average total assets was 12.32%.
On January 1, 2015, PlainsCapital 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 — Capital Adequacy Requirements and Basel III” earlier
in this Item 1.
The FDIC Improvement Act. 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, 2017, PlainsCapital was “well
capitalized” and therefore not subject to any limitations with respect to its brokered deposits.
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Check Clearing for the 21st Century Act. The Check Clearing for the 21st Century Act gives “substitute checks,” such as
a digital image of a check and copies made from that image, the same legal standing as the original paper check.
Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system, of which the Bank is a member,
consists of 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.
Fixing America’s Surface Transportation Act (FAST Act). The FAST Act, signed by President Obama on December 4,
2015, provides for funding highways and infrastructure in the United States. Part of the funding for this law comes from a
reduction of the dividends paid by the Federal Reserve to its stockholders with total consolidated assets of more than $10
billion, effective January 1, 2016. On that date, the annual dividend on paid-in capital stock for stockholders with total
consolidated assets of more than $10 billion shall be the lesser of: (i) the rate equal to the high yield of the 10-year
Treasury note auctioned at the last auction held prior to the payment of such dividend and (ii) 6 percent. The Federal
Reserve Board published a final rule implementing these requirements on November 23, 2016. On February 24, 2017, the
Federal Reserve published its annual adjustment to the consolidated asset threshold, increasing it from $10 billion to
$10.122 billion through December 31, 2017. As of December 31, 2017, the Bank’s total assets were $9.6 billion.
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, as amended (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
The Hilltop Broker-Dealers are broker-dealers registered with the SEC, FINRA, all 50 U.S. states and the District of
Columbia. Hilltop Securities is 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 federal securities
laws and SEC rules, as well as 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, securities exchanges, or self-regulatory
organizations or changes in the interpretation or enforcement of existing laws and rules often directly affect the method of
operation and profitability of broker-dealers. The SEC, securities exchanges, self-regulatory organizations and states may
conduct administrative and enforcement proceedings that can result in censure, fine, suspension or expulsion of 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.
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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, 2017, 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.
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 and other rules and
regulations, including FINRA requirements, 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. Hilltop Securities and HTS Independent Network 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. 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.
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Investment Advisory Activity. First Southwest Asset Management, LLC, Hilltop Securities and HTS Independent Network
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 also restrict certain
activities provided by the Hilltop Broker-Dealers, including proprietary trading and sponsoring or investing in “covered
funds.”
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
and 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.
Mortgage Origination
PrimeLending and the Bank are subject to the rules and regulations of the CFPB, FHA, VA, FNMA, FHLMC and GNMA
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, Fair Housing 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.
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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.
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.
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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
became 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 (“TDI”) 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 TDI.
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 TDI
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 TDI 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, 2017, NLIC and ASIC capital
and surplus levels exceeded the minimum RBC requirements that would trigger regulatory attention. In their 2017
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
2017, 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 1.4% and ASIC at 0.8%, due to the concentration in cash
at each company. We expect improvement in the yields at both companies as appropriate investment opportunities are
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identified. Both NLIC and ASIC also fell below the bottom of the gross change in policyholder surplus and change in
adjusted policyholder surplus range of -10%, with NLIC at -29% and ASIC at -25%. This is a result of $43.0 million of
aggregate dividends paid from NLIC and ASIC in June 2017. Surplus levels remain within acceptable premium to surplus
ranges.
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.
Federal Office of Insurance. The Dodd-Frank Act established within the Treasury Department a Federal Office of
Insurance (“FIO”) and vested FIO with the authority to monitor all aspects of the insurance sector, monitor the extent to
which traditionally underserved communities and consumers have access to affordable non-health insurance products, and
to represent the United States on prudential aspects of international insurance matters. Management is monitoring the
activities of the FIO for any possible federal regulation of the insurance industry.
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 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 $0.6 million for 2017 and is
estimated to be $0.6 million in 2018. 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 2017.
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.
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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 during 2013. 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 TDI 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.
In June 2017, the TDI delivered an examination report of NLIC and ASIC through December 31, 2015. 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 TDI 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, 2017, the extraordinary dividend limit for NLIC and ASIC was
$13.1 million and $3.1 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.
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 from guaranty associations in 2017, 2016 or 2015. 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 subsidiary, NLIC, has entered into a production agreement with
Wright National Flood Insurance Services, LLC (“Wright Flood Services”), a managing general underwriter and agency,
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that services flood insurance programs, including but not limited to Write Your Own flood insurance in the National
Flood Insurance Program administered by the Federal Insurance and Mitigation Administration on behalf of the Federal
Emergency Management Agency. NLIC produces and submits flood insurance business with Wright Flood Services.
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. To address a 2016 deficit and losses resulting from Hurricane
Harvey in 2017, the Texas FAIR Plan Association recently levied an assessment on participating companies totaling
$64.6 million, of which NLC’s insurance subsidiaries’ share is estimated to be $0.8 million. For comparative purposes, in
2005, following Hurricanes Katrina and Rita, NLC’s insurance subsidiaries were levied collective assessments by the
above plans totaling $10.4 million. 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 state 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.
Risks Related to our Business
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 (collectively, the “Bank Transactions”) as
of the applicable acquisition date and write down the recorded value of each such acquired portfolio to the applicable
estimate. For most loans, this process was accomplished by computing the net present value of estimated cash flows to be
received from borrowers of such loans. The allowance for loan losses that had been maintained by PCC, FNB or SWS, as
applicable, prior to their respective transactions, 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 applicable acquisition date in the estimate of cash flows to be
received from the loans acquired in the Bank Transactions.
The estimates of fair value as of the consummation of each of the Bank Transactions 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.
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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.
Further, the measure of our allowance for loan losses is also dependent on the adoption of new accounting standards. On
June 16, 2016, the Financial Accounting Standards Board issued the Current Expected Credit Loss (“CECL”) standard,
which will require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime
of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model,
credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with
changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the
expectation changes. Accordingly, the CECL model could require financial institutions, such as the Bank, to increase their
allowance for loan losses. Moreover, the CECL model could create more volatility in the Bank’s level of allowance for
loan losses.
While Bank management will endeavor to estimate the allowance to cover anticipated losses in our loan portfolio, 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 our 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 Bank management. 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.
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;
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 loan charge-offs and provision for
loan losses, the carrying value of our deferred tax assets, the investment portfolio of our insurance segment, our capital
levels and liquidity, our securities underwriting business and our results of operations.
Several factors could pose risks to the financial services industry, including international political unrest, increases in
interest rates, regulatory uncertainty, continued infrastructure deterioration and low oil prices. 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.
Over the last several years, there have been several instances where there has been uncertainty regarding the ability of
Congress and the President collectively to reach agreement on federal budgetary and spending matters. A period of failure
to reach agreement on these matters, particularly if accompanied by an actual or threatened government shutdown, may
have an adverse impact on the U.S. economy. Additionally, a prolonged government shutdown may inhibit our ability to
evaluate borrower creditworthiness and originate certain government-backed loans.
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We are heavily reliant on technology, and a failure to effectively implement new technological solutions or
enhancements to existing systems or platforms could adversely affect our business operations and the financial results
of our operations.
Like most financial services companies, we significantly depend on technology to deliver our products and services and to
otherwise conduct business. To remain technologically competitive and operationally efficient, we have either begun the
significant investment in or have plans to invest in new technological solutions, substantial system upgrades and other
technology enhancements. Many of these solutions and enhancements have a significant duration, include phased
implementation schedules, are tied to critical systems, and require substantial internal and external resources for design
and implementation. Such external resources may be relied upon to provide expertise and support to help implement,
maintain and/or service certain of our core technology solutions.
Although we take steps to mitigate the risks and uncertainties associated with these solutions and initiatives, we may
encounter significant adverse developments in the completion and implementation of these initiatives. These may include
significant time delays, cost overruns, loss of key personnel, technological problems, processing failures, distraction of
management and other adverse developments. Further, our ability to maintain an adequate control environment may be
impacted.
The ultimate effect of any adverse development could damage our reputation, result in a loss of customer business,
subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which
could materially affect us, including our control environment, operating efficiency, and results of operations.
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, 2017, substantially all of the real estate loans in
our loan portfolio were secured by properties located in our four largest markets within Texas, with 36%, 24%, 12% and
11% secured by properties located in the Dallas/Fort Worth, Austin/San Antonio, Houston/Coastal Bend and Rio Grande
Valley/South Texas markets, respectively. Substantially all of these loans 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 of the collateral securing loans, our ability to sell the collateral upon any foreclosure,
and the stability of the Bank’s deposit funding sources. Further, low crude oil prices may have a more profound effect on
the economy of energy-dominant states such as Texas. At December 31, 2017, energy loans, including those within the
exploration and production, oilfield services, pipeline construction, distribution and transportation sectors, comprised
2.6% of the Bank’s loan portfolio. The Bank also has loans extended to businesses that depend on the energy industry. If
crude oil prices decrease and remain depressed for an extended period, the Bank could experience weaker energy loan
demand and increased losses within its energy and Texas-related loan portfolios. Moreover, natural disasters, such as
Hurricane Harvey in 2017, may also have an adverse impact on local economic conditions.
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 2017, 21.6% and 12.8% of our mortgage loans originated (by
dollar volume) were collateralized by properties located in Texas and California, respectively. Further, Texas insureds
accounted for 68.8% and 70.1% of our insurance segment’s gross premiums written in 2017 and 2016, respectively. Also,
in our broker-dealer segment, 74% of public finance financial advisory revenues were from entities located in Texas, and
90% of retail brokerage service revenues were generated through locations in Texas, California and Oklahoma. Any
regional or local economic downturn that affects Texas or, to a lesser extent, California or Oklahoma, whether caused by
recession, inflation, unemployment, changing oil prices, natural disasters 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 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. Between December 2016 and December 2017, the Federal Open Market Committee of the Federal Reserve
Board raised its target range for short-term interest rates by 100 basis points, and further increases to the target rate are
projected to occur in 2018. 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
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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. Moreover, increases in
interest rates could also lead to increases in our loan losses.
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 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.
At December 31, 2017, over 80% of our insurance segment’s invested assets were invested in fixed maturity assets such
as bonds and mortgage-backed securities. 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 are typically 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 are typically prepaid more slowly, which may result in our insurance segment receiving
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. Such securities are classified
as available for sale and are carried at estimated fair value, which may fluctuate with changes in market interest rates. The
effects of an increase in market interest rates may result in a decrease in the value of our available for sale investment
portfolio.
Market interest rates are affected by many factors outside of our control, including inflation, recession, unemployment,
money supply, international disorder and instability in domestic and foreign financial markets. We may not be able to
accurately predict the likelihood, nature and magnitude of such changes or how and to what extent such changes may
affect our business. We also may not be able to adequately prepare for, or compensate for, the consequences of such
changes. Any failure to predict and prepare for changes in interest rates, or adjust for the consequences of these changes,
may adversely affect our earnings and capital levels and overall results of operations and financial condition.
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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, 2017, 43% 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 specifically, could impair the value of the collateral underlying a significant portion of the Bank’s
loan portfolio 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.
Our mortgage origination and insurance businesses are subject to fluctuations based upon seasonal and other factors
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.
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. As a result of Hurricanes Harvey and Irma in the third quarter of
2017, for example, our insurance segment recorded a loss, excluding reinstatement premium, of $4.4 million after
reinsurance.
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.
We may be forced to make a “true-up” or reimbursement payment to the FDIC if we continue to experience favorable
resolutions within our covered assets portfolio.
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 amounts with respect to the covered assets (including covered loans):
(i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up
to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses
incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less
subsequent recoveries. The loss-share agreements also provide that we may be obligated to reimburse the FDIC under
certain circumstances. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that
are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any
book value charge-offs incurred prior to September 13, 2013 (the “Bank Closing Date”). There is no limit on the amount
of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The
loss-share agreements for commercial and single family residential assets are in effect for five years and ten years,
respectively, and the loss recovery provisions to the FDIC are in effect for eight years and ten 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 our actual net realized losses over the
life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. 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. The initial estimate of the FDIC Indemnification Asset at the Bank
Closing Date was recorded at the present value of 80% of $240.4 million. As of December 31, 2017, the Bank projects
that the sum of actual plus projected covered losses and reimbursable expenses subject to the loss-share agreements will
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be less than $240.4 million. As a result, the Bank has recorded, and expects that it will continue to record, amortization
associated with its FDIC Indemnification Asset. While the ultimate amount of any “true-up” payment is unknown at this
time and will vary based upon the amount of future losses or recoveries within our covered loan portfolio, the Bank has
recorded a related “true-up” payment accrual of $16.3 million at December 31, 2017 based on the current estimate of
aggregate realized losses on covered assets over the life of the loss-share agreements. Additionally, as estimates of
realized losses on covered assets change, the value of the receivable under the loss-share agreements with the FDIC
(“FDIC Indemnification Asset”) will be adjusted and therefore may not be realized. As noted above, if the Bank continues
to experience favorable resolutions within its covered assets portfolio and covered losses, the Bank may be required to
increase its “true-up” payment accrual and recognize amortization on the FDIC Indemnification Asset. If such changes
occur, our financial position and results of operations may be adversely affected.
Our geographic concentration may 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. The catastrophe
models utilized by our insurance segment to assess its probable maximum insurance losses have, in the past, failed to
adequately project the financial impact of 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, Arizona, Tennessee, Oklahoma and Georgia. In
2017, Texas accounted for 68.8%, Arizona accounted for 11.0%, Tennessee accounted for 6.2%, Oklahoma accounted for
5.9% and Georgia accounted for 3.4% of our gross premiums written. 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 $105.0 million, our
insurance segment’s losses would exceed the limits of its reinsurance coverage.
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,
our risk management techniques and strategies (as well as 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 observed historical market behavior. We apply statistical and other tools to these observations to quantify our risk
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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, although our qualitative approach to
managing those risks could also prove insufficient, exposing us to material unanticipated losses.
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. Further, 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, or increases in their
rates of default, together with insufficient collateral and reserves, could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
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, 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. We also utilize relationships with third
parties to aid in a significant portion of our information systems, communications, data management and transaction
processing. These third parties with which we do business may also be sources of cybersecurity or other technological
risks, including operational errors, system interruptions or breaches, unauthorized disclosure of confidential information
and misuse of intellectual property. If our third-party service providers encounter any of these issues, we could be
exposed to disruption of service, reputation damages, and litigation risk that could be material to our business.
Although we devote significant resources to maintain and regularly upgrade our systems and networks 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. In addition, we
cannot provide assurance that these measures will promptly detect intrusions, and that we will not experience losses or
incur costs or other damage related to intrusions that go undetected, at levels that adversely affect our financial results or
reputation. 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 or customer information, damage to our reputation with our clients,
customers 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 maintain cyber risk
insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our system.
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FINRA and the SEC’s Office of Compliance Inspections and Examinations have issued guidance, including risk alerts,
relating to principles, effective practices, summary examination findings and compliance issues with respect to
cybersecurity policies and procedures and preparedness. In 2017, Securities Holdings evaluated its cybersecurity program
by participating in various internal and external, independent information security assessments based on the Critical
Security Controls (CSCs) standards established by the Center for Internet Security. Nonetheless, these assessments may
be insufficient and may fail to identify particular vulnerabilities and risks associated with our cybersecurity policies,
procedures and preparedness.
We continue to evaluate our cybersecurity program and will consider incorporating new practices as necessary to meet the
expectations of such regulatory agencies in light of such cybersecurity guidance and regulatory actions and settlements for
cybersecurity-related failures and violations by other industry participants. Such procedures include management-level
engagement and corporate governance, risk management and assessment, technical controls, incident response planning,
vendor management and staff training. Even if we implement these procedures, however, we cannot assure you that we
will be fully protected from a cybersecurity incident, the occurrence of which could adversely affect our reputation and
financial condition.
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 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.
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 Securities Holdings and its subsidiaries. We conduct no material business or other activity other than activities
incidental to holding stock in the Bank, NLC and Securities Holdings. As a result, we rely substantially on the
profitability of, and dividends from, these subsidiaries to pay our operating expenses and to pay interest on our debt
obligations. Each of the Bank, NLC and Securities Holdings is subject to significant regulatory restrictions limiting its
ability to declare and pay dividends to us. Accordingly, if the Bank, NLC or Securities Holdings are unable to make cash
distributions to us, then we may be unable to satisfy our obligations or make interest payments on our debt obligations.
NLIC and ASIC are also subject to limitations under debt agreements limiting their ability to declare and pay dividends,
including the surplus indentures governing NLIC’s two London Interbank Offered Rate (“LIBOR”) plus 4.10% and
4.05% notes due May and September 2033, respectively, and ASIC’s LIBOR plus 4.05% notes due April 2034.
Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our
financial condition and results of operations. We may incur additional indebtedness, including secured indebtedness.
At December 31, 2017, on a consolidated basis, we had total deposits of $8.0 billion and other indebtedness of $1.5
billion, including $150.0 million in aggregate principal amount of 5% senior notes due 2025 (the “Senior Notes”). Our
significant amount of indebtedness could have important consequences, such as:
•
limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital
expenditures or other debt service requirements or for other purposes;
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•
•
•
•
•
•
•
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a
substantial portion of these funds to service debt;
limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable
of responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or pursuing business opportunities;
restricting the way in which we conduct our business because of financial and operating covenants in the
agreements governing our and certain of our subsidiaries’ existing and future indebtedness, including, in the case
of certain indebtedness of subsidiaries, certain covenants that restrict the ability of such subsidiaries to pay
dividends or make other distributions to us;
exposing us to potential events of default (if not cured or waived) under financial and operating covenants
contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business,
financial condition and operating results;
increasing our vulnerability to a downturn in general economic conditions or a decrease in pricing of our
products; and
limiting our ability to react to changing market conditions in our industry and in our customers’ industries.
In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our
ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital
and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to
provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is
subject to prevailing economic conditions and financial, business, competitive, legal and other factors.
Subject to the restrictions in the indenture governing the Senior Notes, we may incur significant additional indebtedness,
including secured indebtedness. If new debt is added to our current debt levels, the risks described above could increase.
We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior Notes, and may
be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to satisfy our debt obligations will depend upon, among other things:
•
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our future financial and operating performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, many of which are beyond our control; and
our future ability to refinance the Senior Notes, which depends on, among other things, our compliance with the
covenants in the indenture governing the Senior Notes.
We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to
obtain financing in an amount sufficient to fund our liquidity needs.
If our cash flows and capital resources are insufficient to service our indebtedness, including the Senior Notes, we may be
forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our
indebtedness, including the Senior Notes. These alternative measures may not be successful and may not permit us to
meet our scheduled debt service obligations, including our obligations under the Senior Notes. Our ability to restructure
or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any
refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations. In addition, the terms of existing or future debt agreements may
restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material assets or operations, sell equity and/or
negotiate with our lenders and other creditors to restructure the applicable debt in order to meet our debt service and other
obligations. We may not be able to consummate those dispositions for fair market value or at all. The indenture governing
the Senior Notes may restrict, or market or business conditions may limit, our ability to avail ourselves of some or all of
these options. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet
our debt service obligations then due.
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A reduction in our credit rating could adversely affect us or the holders of our securities.
The credit rating agencies rating our indebtedness regularly evaluate the Company, and credit ratings are based on a
number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within
our control, including conditions affecting the financial services industry and the economy and changes in rating
methodologies. There can be no assurance that we will maintain our current credit rating. A downgrade of our credit
rating could adversely affect our access to liquidity and capital, and could significantly increase our cost of funds, trigger
additional collateral or funding requirements and decrease the number of investors and counterparties willing to lend to us
or purchase our securities. This could affect our growth, profitability and financial condition, including liquidity.
The indenture governing the Senior Notes contains, and any instruments governing future indebtedness would likely
contain, restrictions that limit our flexibility in operating our business.
The indenture governing the Senior Notes contains, and any instruments governing future indebtedness would likely
contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on
our ability to, among other things:
•
•
dispose of, or issue voting stock of, certain subsidiaries; or
incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain
subsidiaries.
Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict
corporate activities. Any failure to comply with these covenants could result in a default under the indenture governing
the Senior Notes. Upon a default, holders of the Senior Notes have the ability ultimately to force us into bankruptcy or
liquidation, subject to the indenture governing the Senior Notes. In addition, a default under the indenture governing the
Senior Notes could trigger a cross default under the agreements governing our existing and future indebtedness. Our
operating results may not be sufficient to service our indebtedness or to fund our other expenditures and we may not be
able to obtain financing to meet these requirements.
The financial services industry is characterized by rapid technological change, and if we fail to keep pace, our business
may suffer.
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 and avoid interruptions, errors and delays
could have a material adverse impact on our business, financial condition, results of operations or cash flows.
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 TDI, 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, dividends 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 on or suspensions of 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 rules 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.
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The U.S. Congress, state legislatures, and federal and state 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 altered 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, potential federal oversight of
the insurance industry 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 third quarter of 2015, 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. These changes become less predictable, yet more
likely to occur, following the transition of power from one presidential administration to another, especially as in 2017,
when it involves a change in political party. Any 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 PlainsCapital. 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 PlainsCapital on January 1, 2015, and refines the definition of
what constitutes “capital” for purposes of calculating these ratios. 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%. As of January 1, 2018, the capital conservation buffer requirement is currently being phased in at 1.875%
of risk-weighted assets and will increase each year until fully implemented in January 2019. Based on the Basel III phase-
in schedule, as of January 1, 2018, the minimum capital requirements including the capital conservation buffer
requirement are: (i) a common equity Tier 1 capital ratio of 6.375% (increased from 5.75%); (ii) a Tier 1 to risk-based
assets capital ratio of 7.875% (increased from 7.25%); (iii) a total capital ratio of 9.875% (increased from 9.25%); and
(iv) a Tier 1 leverage ratio of 4%. 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 PlainsCapital could, among other things, adversely affect our results of
operations and growth, require the raising of additional capital, restrict our ability to pay dividends or repurchase shares
and result in regulatory actions if we were to be unable to comply with such requirements.
In addition, the Federal Reserve Board adopted 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. At December 31, 2017,
Hilltop and PlainsCapital had $13.4 billion and $9.6 billion, respectively, in total consolidated assets and their average of
total consolidated assets for the four most recent consecutive quarters was $13.1 billion and $9.6 billion, respectively. In
addition, banks with $10.0 billion in total consolidated assets are primarily examined by the CFPB with respect to various
consumer financial protection laws and regulations. As a relatively new agency with evolving regulations and practices,
there is uncertainty as to how the CFPB’s examination and regulatory authority might impact the Company’s and
PlainsCapital’s businesses. As a result of the SWS Merger, Hilltop has more than $10.0 billion in assets. Accordingly, the
Dodd-Frank Act Stress Testing program requires Hilltop to submit its annual company-run stress test to the Federal
Reserve Board using our capital planning tools. Hilltop is required to publicly disclose a summary of the results of these
41
forward looking, company-run stress tests that assess the impact of hypothetical macroeconomic baseline, adverse and
severely adverse economic scenarios provided by the Federal Reserve Board. If we are deemed to have inadequate capital
under the hypothetical economic scenarios, then our regulator may, among other things, require us to limit any dividend
or other capital distributions we may make to stockholders or increase our capital levels, modify our business and growth
strategies or decrease our exposure to various asset classes, any of which could have a material adverse effect on our
financial condition or results of operations. Our regulators may also consider preparation for compliance with these
regulatory requirements when examining our operations generally or considering any request for regulatory approval the
Company may make, including requests for approvals on unrelated matters.
Compliance with these capital planning and stress testing requirements has increased our cost of regulatory compliance
and necessitated the hiring of additional compliance and other personnel, the design and implementation of additional
internal controls and processes, and attention from management. We cannot assure you that our efforts will be deemed
sufficient or that we will be deemed to have adequate capital under the hypothetical economic stress scenarios which
would affect our ability to take certain capital actions in the future. Compliance with the annual stress testing
requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our
customers and, as a result, may adversely affect our stock price or our ability to retain our customers or effectively
compete for new business opportunities.
Periodically, the SEC adopts amendments to Rules 15c3-1 and 15c3-3 under the Exchange Act related to our broker-
dealer segment. The implementation of any new requirements from these amendments may increase our cost of regulatory
compliance.
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 are 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. Any 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.
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
42
competitors in the securities industry. In addition, the Hilltop Broker-Dealers are operating subsidiaries of Hilltop, which
means that their activities are limited to those that are permissible for subsidiaries of a financial holding company.
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, may affect 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, which 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. National municipal issuances surged in the fourth
quarter of 2017 due to the anticipated effects of the Tax Cuts and Jobs Act. A number of national municipal issuers
elected to accelerate certain capital raising initiatives before these changes were enacted. As a result, we anticipate lower
43
municipal issuance volume in 2018, which could negatively impact our broker-dealer segment’s public finance 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, and unless, we are able to find a buyer for such
loan. In addition, in the event of a breach of any representation or warranty concerning a loan, an agency, investor or other
third party could, among other things, require us to repurchase the full amount of the loan or seek indemnification for
losses from us, even if the loan is not in default. Further, 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 may choose to hold mortgage loans when the
identified purchasers have declined to purchase such loans because we may 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. Moreover, if a property securing a mortgage
loan on which we own the servicing rights is damaged, we may be responsible for repairs for uninsured damage.
Changes in interest rates may change the value of our mortgage servicing rights portfolio which may increase the
volatility of our earnings.
As a result of our mortgage servicing business, which we may expand in the future, 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. The mortgage origination
segment uses derivative financial instruments, including interest rate swaps and swaptions, and U.S. Treasury bond
futures and options 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, 2017, the mortgage origination segment’s MSR asset had a fair value of $55.8 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 Bank
Transactions 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 Bank Transactions, we acquired loans at an aggregate discount of $523.2 million. The Bank
Transactions have each been accounted for under the acquisition method of accounting. Accordingly, the respective
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
44
removed from our books, the related discount will no longer be available for accretion into income. Aggregate accretion
of $58.4 million on loans purchased at a discount in the Bank Transactions was recorded as interest income during 2017.
As of December 31, 2017, the balance of our discount on loans in the aggregate was $120.7 million.
We ultimately may write-off goodwill and other intangible assets resulting from business combinations.
As a result of purchase accounting in connection with our acquisition of NLC, the PlainsCapital Merger, the FNB
Transaction and the SWS Merger, our consolidated balance sheet at December 31, 2017, included goodwill of $251.8
million and other intangible assets, net of accumulated amortization, of $36.4 million. On an ongoing basis, we evaluate
whether facts and circumstances indicate any impairment of value of intangible assets. As circumstances change, we may
not realize the value of these intangible assets. 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.
Based on the results of our annual quantitative analysis as of October 1, 2017, the fair values of each of our reporting
units indicated no impairment of goodwill. This analysis and the resulting estimated fair value of our insurance reporting
unit exceeded the carrying value by approximately 12%, which represented a decline in estimated excess fair value over
carrying value from recent annual goodwill assessments. This decrease in the excess fair value over carrying value from
our 2016 assessment to our 2017 assessment was primarily a result of a reduction in projected discounted cash flows
driven by the insurance reporting unit’s current operating performance being below expectations, which was primarily
attributable to catastrophic and sub-catastrophic weather-related events which occurred in 2017. In the event future
operating performance is below our forecasted projections, there are negative changes to long-term growth rates or
discount rates increase, the fair value of the insurance reporting unit may decline and we may be required to record a
goodwill impairment charge.
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 we consider “critical” 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. 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 the public finance group serves can be subject to significant fluctuations based on
factors such as changes in interest rates, property tax bases, budget pressures on certain issuers caused by uncertain
economic times and other factors. A decline in the market for municipal advisory services due to the factors listed above
could have an adverse effect on our business and results of operations.
45
We are subject to losses due to fraudulent and negligent acts.
Our banking and mortgage origination businesses expose us to fraud risk from our loan and deposit customers and the
parties they do business with, as well as from our employees, contractors and vendors. We rely heavily upon information
supplied by third parties, including the information contained in credit applications, property appraisals, title information,
equipment pricing and valuation, and employment and income documentation, in deciding which loans to originate and
the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or
negligently, and the misrepresentation is not detected prior to funding, the value of the collateral may be significantly
lower than expected, the source of repayment may not exist or may be significantly impaired, or we may fund a loan that
we would not have funded or on terms we would not have extended. While we have underwriting and operational controls
in place to help detect and prevent such fraud, no such controls are effective to detect or prevent all fraud, and we have
experienced losses resulting from fraud in the past. Whether a misrepresentation is made by the applicant, another third
party or one of our own employees, we may bear the risk of loss associated with the misrepresentation. A loan subject to a
material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the
misrepresentation.
Our broker-dealer and insurance underwriting activities also expose us to fraud risks. When acting as an underwriter, our
broker-dealer segment may be liable jointly and severally under federal, state and foreign securities laws for false and
misleading statements concerning the securities, or the issuer of the securities, that it underwrites. We are sometimes
brought into lawsuits in connection with our correspondent clearing business based on actions of our correspondents. In
addition, we may act as a fiduciary in other capacities that could expose us to liability under such laws or under common
law fiduciary principles. Furthermore, our insurance segment’s success also depends, in part, on its ability to detect and
respond to fraudulent or inflated claims.
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
and 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 in the past 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 we hold collateral that cannot be realized or is liquidated at prices not sufficient to recover the
full amount of the receivable due to us. Any such losses could be material and could materially and adversely affect 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,
such negative perceptions 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
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.
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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 segment primarily competes with national, regional and community banks within various markets where the
Bank operates. The Bank also faces competition from many other types of 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 and investment banking firms, consumer finance companies, pension trusts, 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 remained competitive over the past several years, and we expect the level of competition we face to further
increase. 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
is based on factors such as interest rates, loan origination fees and the range of services offered by the provider. We seek
to distinguish ourselves from our competitors through our commitment to personalized customer service and
responsiveness to customer needs while providing a range of competitive loan and deposit products and other services.
Our 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. 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.
Our mortgage origination business faces vigorous competition from banks and other financial institutions, including 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, closing process and duration, 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.
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 that 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.
47
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.
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 (“LAE”) 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”). LAE represent expenses incurred to
investigate and settle claims. To the extent that losses and LAE 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. 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 LAE
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 LAE is an inherently uncertain process. Accordingly, actual
loss and LAE 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 LAE, which could have a material adverse effect on its financial condition and results of operations.
If our insurance segment cannot obtain adequate reinsurance protection for the risks it underwrites or its reinsurers
do not pay losses in a timely fashion, or at all, our insurance segment will suffer greater losses from these risks or may
reduce the amount of business it underwrites, which may materially adversely affect its financial condition and results
of operations.
Our insurance segment purchases reinsurance to protect itself from certain risks and to share certain risks it underwrites.
During 2017, our insurance segment’s personal lines ceded 8.3% of its direct insurance premiums written (primarily
through excess of loss, quota share and catastrophe reinsurance treaties) and its commercial lines ceded 6.2% 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, increased 13.7% during 2017, compared with 2016, which was
primarily attributable to reinstatement premium associated with Hurricane Harvey, offset by lower premium rates.
Reinsurance cost generally fluctuates as a result of storm costs or any changes in capacity within the reinsurance market.
48
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, 2017, our insurance segment had $13.1 million in reinsurance recoverables and receivables, including
ceded paid loss recoverables, ceded losses and LAE 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.
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.
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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 surplus indentures governing NLIC’s two LIBOR plus 4.10% and 4.05% notes due May and September 2033,
respectively, and ASIC’s LIBOR plus 4.05% notes due April 2034 contain restrictions on the ability to, among other
things, declare and pay dividends and merge or consolidate. 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 may 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 attract, retain and motivate
key personnel and to retain customers and clients of targets. 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 Bank of River Oaks pending acquisition or any other
acquisitions we make, 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. 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.
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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.
Subject to the restrictions imposed upon us as a regulated financial holding company, we may also use available cash to
make investments in companies engaged in non-financial activities. These investments could decline in value and are
likely to be substantially less liquid than exchange-listed securities, if we are able to sell them at all. If we are required to
sell these investments quickly, we may receive significantly less value than if we could have otherwise have sold them.
Losses on these investments could have an adverse impact on our profitability, results of operations and financial
condition.
There can be no assurance that we will continue to declare cash dividends or repurchase stock.
In October 2016, we announced that our board of directors authorized a dividend program under which we intend to pay
quarterly dividends on our common stock, subject to quarterly declarations by our board of directors. During 2017, we
declared and paid cash dividends of $0.24 per common share. In January 2017, our board of directors reauthorized the
stock repurchase program originally approved during the second quarter of 2016 through January 2018, under which it
authorized us to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock. During 2017, we paid
$27.4 million to repurchase an aggregate of 1,057,656 shares of our common stock at an average price of $25.87 per
share. In January 2018, our board of directors authorized a stock repurchase program through January 2019. Pursuant to
the stock repurchase program, we are authorized to repurchase, in the aggregate, up to $50.0 million of our outstanding
common stock.
Any future declarations, amount and timing of any dividends and/or the amount and timing of such stock repurchases are
subject to capital availability and the discretion of our board of directors, which must evaluate, among other things,
whether cash dividends and/or stock repurchases are in the best interest of our stockholders and are in compliance with all
applicable laws and any agreements containing provisions that limit our ability to declare and pay cash dividends and/or
repurchase stock. Our ability to pay dividends and/or repurchase stock will depend upon, among other factors, our cash
balances and potential future capital requirements for strategic transactions, including acquisitions, the ability of our
subsidiaries to pay dividends to Hilltop, capital adequacy requirements and other regulatory restrictions on us and our
subsidiaries, policies of the Federal Reserve Board, equity and debt service requirements senior to our common stock,
earnings, financial condition, the general economic and regulatory climate and other factors beyond our control that our
board of directors may deem relevant. In addition, the amount we spend and the number of shares we are able to
repurchase under our stock repurchase program may further be affected by a number of other factors, including the stock
price and blackout periods in which we are restricted from repurchasing shares. Our dividend payments and/or stock
repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends
and/or repurchase stock in any particular amounts or at all. A reduction in or elimination of our dividend payments, our
dividend program and/or stock repurchases could have a negative effect on our stock price.
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 recently experienced 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. There can be no assurance that we will receive any significant yield on our available cash or 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;
51
• 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 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.
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.
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.
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.
Our charter and bylaws 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
52
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, 2017, no shares of preferred stock were 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 TDI. 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
TDI 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;
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 (as defined under FINRA rules) 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 holders that do not or have not owned, continuously for at least one year as of the record date of such
proposed meeting, capital stock representing at least 15% of the shares entitled to be voted at such 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 TDI 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.
53
Item 2. Properties.
We lease office space through PCC for our principal executive offices in Dallas, Texas. In addition to our principal office,
our various business segments conduct business at various locations. We have options to renew leases at most locations
that we do not own.
Banking. At December 31, 2017, our banking segment conducted business at 71 locations throughout Texas, including
seven support facilities. We lease 34 banking locations, including our principal offices, and we own the remaining 37
banking locations.
Broker-Dealer. At December 31, 2017, our broker-dealer segment conducted business from 48 locations in 19 states.
Each of these locations is leased by Hilltop Securities.
Mortgage Origination. At December 31, 2017, our mortgage origination segment conducted business from over 330
locations in 45 states. Each of these locations is leased by PrimeLending.
Insurance. At December 31, 2017, our insurance segment leases office space for its corporate, claims and customer
service operations. Our insurance segment’s principal office is leased from an affiliate, Hilltop Securities.
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.
54
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 closed at
$25.33 on February 15, 2018. At February 15, 2018, there were 95,987,840 shares of our common stock outstanding with
468 stockholders of record.
In October 2016, we announced that our board of directors authorized a dividend program under which we pay quarterly
dividends on our common stock, subject to quarterly declarations by our board of directors. During 2017, we declared and
paid cash dividends of $0.24 per common share. On January 25, 2018, we announced that our board of directors increased
our quarterly dividend to $0.07 per common share. Although we expect to continue to pay dividends, we may elect not to
pay dividends. Any declarations of dividends, and the amount and timing thereof, will be at the discretion of our board of
directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders and
are in compliance with all applicable laws and any agreements containing provisions that limit our ability to declare and
pay cash dividends. Our ability to pay dividends will depend upon, among other factors, our cash balances and potential
future capital requirements for strategic transactions, including acquisitions, equity and debt service requirements senior
to our common stock, earnings, financial condition, the general economic and regulatory climate and other factors beyond
our control that our board of directors may deem relevant. Our dividend payments may change from time to time, and we
cannot provide assurance that we will continue to declare dividends in any particular amounts or at all. A reduction in or
elimination of our dividend payments and/or our dividend program could have a negative effect on our stock price. See
Item 1A, “Risk Factors — Risks Related to our Substantial Cash Position and Related Strategies for its Use — There can
be no assurance that we will continue to declare cash dividends or repurchase stock.”
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, the federal bank regulatory
agencies have issued policy statements providing that FDIC-insured depository institutions and their holding companies
should generally pay dividends only out of their current operating earnings. See Part I, Item I, “Business — Government
Supervision and Regulation — Corporate — Capital Adequacy Requirements and BASEL III” for more information on
regulatory capital requirements limiting our and our banking segment’s ability to declare and pay dividends.
If required payments on our outstanding junior subordinated debentures held by our unconsolidated subsidiary trusts are
not made or are suspended, we may be prohibited from paying dividends on our common stock. Regulatory authorities
could also 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 — Regulatory
Capital.”
The following table discloses for each quarter of 2017 and 2016 the high and low sales prices for our common stock and
the cash dividends declared per share. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Year Ended December 31,
2017
Cash Dividends
Per Share
2016
Cash Dividends
High
Low
Per Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
High
$ 30.60 $ 25.86 $
$ 28.86 $ 24.65 $
$ 26.98 $ 21.47 $
$ 26.55 $ 21.96 $
0.06 $ 19.21 $ 14.28 $
0.06 $ 22.05 $ 17.91 $
0.06 $ 22.94 $ 19.97 $
0.06 $ 30.24 $ 22.21 $
—
—
—
0.06
55
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2017 with respect to compensation plans under which shares
of our common stock may be issued. Additional information concerning our stock-based compensation plans is presented
in Note 20, Stock-Based Compensation, in the notes to our consolidated financial statements.
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
Weighted-average
exercise price of
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
Plan Category
Equity compensation plans approved by security holders*
Total
outstanding options, outstanding options,
warrants and rights warrants and rights reflected in first column)
1,634,804
1,634,804
— $
— $
—
—
*
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. In the aggregate, 4,000,000 shares of common
stock may be delivered pursuant to awards granted under the 2012 Plan. At December 31, 2017, 2,517,316 awards had been granted pursuant to the
2012 Plan, while 222,696 awards were forfeited and are eligible for reissuance. All shares outstanding under the 2012 Plan, whether vested or
unvested, are entitled to receive dividends and to vote, unless forfeited. No participant in our 2012 Plan may be granted awards in any fiscal year
covering more than 1,250,000 shares of our common stock.
Issuer Repurchases of Equity Securities
The following table details our repurchases of shares of common stock during the three months ended December 31,
2017.
Period
October 1 - October 31, 2017
November 1 - November 30, 2017
December 1 - December 31, 2017
Total
Total Number
of Shares
Purchased
Average Price
Paid per
Share
— $
—
—
—
$
—
—
—
—
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
— $
—
—
—
22,610,603
22,610,603
22,610,603
(1) On June 13, 2016, we announced a stock repurchase program which authorized us to repurchase, in the aggregate, up to $50.0 million of our
outstanding common stock. On January 26, 2017, we announced that our board of directors reauthorized this stock repurchase program through
January 2018. As of December 31, 2017, we had repurchased an aggregate of $27.4 million of our outstanding common stock under this stock
repurchase program. On January 25, 2018, we announced that our board of directors authorized a new stock repurchase program under which we
may repurchase, in the aggregate, up to $50.0 million of our outstanding common stock through January 2019.
Recent Sales of Unregistered Securities
On October 5, 2017, we issued an aggregate of 4,900 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 2017. The shares
were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.
56
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2017 and 2016 and our consolidated statements of
operations data for the years ended December 31, 2017, 2016 and 2015 have been derived from our 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. The operations acquired in the FNB Transaction and SWS Merger are included in our operating
results beginning September 14, 2013 and January 1, 2015, respectively (dollars in thousands, except per share data and
weighted average shares outstanding).
2017
2016
2015
2014
2013
Statement of Operations Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling interest
Income attributable to Hilltop
Dividends on preferred stock (1)
Income applicable to Hilltop common stockholders
Per Share Data:
Net income - basic
Weighted average shares outstanding - basic
Net income - diluted
Weighted average shares outstanding - diluted
Book value per common share
Tangible book value per common share
Cash dividends declared per common share
Dividend payout ratio (2)
Balance Sheet Data:
Total assets
Cash and due from banks
Securities
Investment in SWS common stock (3)
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 (4):
Return on average stockholders’ equity (5)
Return on average assets (5)
Net interest margin (6) (7)
Net interest margin (taxable equivalent) (7) (8)
Asset Quality Ratios (4):
Total nonperforming assets to total loans and other real estate
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
Net charge-offs to average loans outstanding
Capital Ratios:
Equity to assets ratio
Tangible common equity to tangible assets
$
$
$
$
$
$
$
$
507,156
85,408
421,748
14,271
407,477
1,205,064
1,369,255
243,286
110,142
133,144
600
132,544
—
132,544
1.36
97,137
1.36
97,353
19.92
16.92
0.24
$
$
$
$
$
$
$
17.59 %
$
13,365,786
486,977
1,852,094
—
1,715,357
6,273,669
182,129
(63,686)
288,240
7,978,119
208,809
67,012
1,914,807
455,954
58,423
397,531
40,620
356,911
1,286,965
1,412,471
231,405
83,461
147,944
2,050
145,894
—
145,894
$
$
469,838
61,255
408,583
12,715
395,868
1,227,642
1,340,016
283,494
70,915
212,579
1,606
210,973
1,854
209,119
$
$
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
105,947
$
$
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
121,015
1.48
98,404
1.48
98,629
18.98
15.97
0.06
4.05 %
$
$
$
$
$
2.10
99,074
2.09
99,962
17.56
14.46
—
— %
$
$
$
$
$
$
1.18
89,710
1.17
90,573
14.93
11.47
—
— %
$
$
$
$
1.43
84,382
1.40
90,331
13.27
9.70
—
— %
$
12,738,062
669,357
1,215,372
—
1,795,463
5,843,499
256,127
(54,599)
296,503
7,063,811
317,912
67,012
1,874,520
$
11,867,001
652,036
1,219,874
—
1,533,678
5,207,617
380,294
(46,947)
306,676
6,952,683
238,716
67,012
1,738,125
$
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
7.00 %
1.03 %
3.61 %
3.63 %
8.13 %
1.21 %
3.68 %
3.71 %
12.32 %
1.70 %
3.71 %
3.74 %
1.33 %
139.58 %
0.99 %
0.08 %
1.39 %
193.05 %
0.90 %
0.57 %
2.34 %
137.99 %
0.84 %
0.14 %
8.01 %
1.26 %
4.71 %
4.74 %
4.14 %
74.01 %
0.91 %
0.21 %
10.48 %
1.66 %
4.44 %
4.47 %
3.70 %
136.39 %
0.76 %
0.18 %
14.31 %
12.42 %
14.68 %
12.65 %
14.64 %
12.37 %
15.80 %
11.59 %
14.73 %
10.19 %
57
18.53 %
19.13 %
9.29 %
13.38 %
14.00 %
42.58 %
1.78 %
5.12 %
5.17 %
2017
2016
2015
2014
2013
Regulatory Capital Ratios (3):
Hilltop - Leverage ratio
Hilltop - Common equity Tier 1 risk-based capital ratio (9)
Hilltop - Tier 1 risk-based capital ratio
Hilltop - Total risk-based capital ratio
PlainsCapital - Leverage ratio
PlainsCapital - Common equity Tier 1 risk-based capital ratio (9)
PlainsCapital - Tier 1 risk-based capital ratio
PlainsCapital - Total risk-based capital ratio
12.94 %
17.71 %
18.24 %
18.78 %
12.32 %
14.47 %
14.47 %
15.29 %
13.51 %
18.30 %
18.87 %
19.34 %
12.35 %
14.64 %
14.64 %
15.38 %
12.65 %
17.87 %
18.48 %
18.89 %
13.22 %
16.23 %
16.25 %
16.99 %
19.02 %
19.69 %
10.31 %
13.74 %
14.45 %
14.17 %
12.81 %
Other Data:
Banking Segment:
Efficiency ratio (10)
Return on average assets (5)
Net interest margin (6)
Net interest margin (taxable equivalent) (8)
Broker-Dealer Segment:
Net revenue (11)
Compensation as a % of net revenue
Mortgage Origination Segment:
Mortgage loan originations volume - Home purchases
Mortgage loan originations volume - Refinancings
Mortgage loan originations volume - Total
Mortgage loan sales volume
Insurance Segment:
Net loss and LAE ratio
Expense ratio
Combined ratio
Statutory surplus (12)
Statutory premiums to surplus ratio
58.24 %
0.85 %
4.31 %
4.33 %
58.87 %
0.94 %
4.65 %
4.68 %
56.45 %
1.36 %
5.05 %
5.08 %
61.17 %
1.20 %
4.97 %
5.00 %
$
$
$
412,156
$
60.8 %
416,938
$
60.6 %
367,466
$
69.6 %
131,595
$
59.7 %
114,778
59.5 %
11,974,571
2,483,342
14,457,913
14,454,260
$
11,276,378
4,183,835
15,460,213
15,155,340
$
9,891,792
3,460,327
13,352,119
13,129,069
$
8,295,994
2,067,854
10,363,848
10,164,350
$
8,178,970
3,613,592
11,792,562
12,045,842
66.6 %
39.9 %
106.5 %
$
117.5 %
116,590
57.4 %
33.5 %
90.9 %
$
92.3 %
161,790
61.1 %
33.8 %
94.9 %
$
105.4 %
152,342
57.4 %
31.9 %
89.3 %
$
115.8 %
141,987
70.3 %
32.3 %
102.6 %
125,054
130.7 %
(1) Series B preferred stock was redeemed in April 2015.
(2) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.
(3) For periods prior to 2014, Hilltop’s investment in SWS common stock was accounted for and included within its available for sale securities
portfolio.
(4) Noted measures are typically used for measuring the performance of banking and financial institutions.
(5) Noted measures during 2017 include estimated non-cash, non-recurring charges to Hilltop consolidated and banking segment results of $28.4
million and $25.7 million, respectively, primarily attributable to the revaluation of deferred tax assets as a result of the enactment of the Tax
Legislation. Certain Tax Legislation amounts are considered reasonable estimates as of December 31, 2017 and could be adjusted during the
measurement period, which will end in December 2018, as a result of further refinement our calculations, changes in interpretations and
assumptions made, guidance that may be issued and actions we may take as a result of the Tax Legislation.
(6) Net interest margin is defined as net interest income divided by average interest-earning assets
(7) Noted measures during 2016 and 2015 reflect certain asset category reclassifications within the detailed calculations to conform with the current
period presentation.
(8) Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-
earning assets. Taxable equivalent adjustments are based on a 35% federal income tax rate. The interest income earned on certain earning assets is
completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable
investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-
equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to
interest income earned on taxable investments. For the periods presented, the taxable equivalent adjustments to interest income for Hilltop
consolidated were $2.2 million, $2.4 million, $3.0 million, $2.3 million and $2.4 million, respectively, and for the banking segment were $1.6
million, $1.5 million, $1.8 million, $2.0 million and $2.0 million, respectively.
(9) Common equity Tier 1 risk-based capital ratio applicable for reporting periods beginning after January 1, 2015.
(10) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(11) Net revenue is defined as the sum of total broker-dealer net interest income plus total broker-dealer noninterest income.
(12) 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.
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.
58
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).
2017
2016
December 31,
2015
2014
2013
Book value per common share
Effect of goodwill and intangible
$
19.92
assets per share
$
(3.00)
Tangible book value per common
share
$
16.92
$
$
$
18.98
(3.01)
15.97
$
$
$
17.56
(3.10)
14.46
$
$
$
14.93
(3.46)
11.47
$
$
$
13.27
(3.57)
9.70
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
$ 1,912,081
—
$ 1,870,509
—
$ 1,736,954
—
$ 1,460,452
114,068
$ 1,311,141
114,068
288,240
1,623,841
296,503
1,574,006
306,676
1,430,278
311,591
1,034,793
322,729
874,344
13,365,786
12,738,062
11,867,001
9,242,416
8,904,122
288,240
13,077,546
296,503
12,441,559
306,676
11,560,325
311,591
8,930,825
322,729
8,581,393
14.31 %
14.68 %
14.64 %
15.80 %
14.73 %
12.42 %
12.65 %
12.37 %
11.59 %
10.19 %
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.”
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 “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop),
references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop),
references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings),
references to “HTS Independent Network” refer to Hilltop Securities Independent Network Inc. (a wholly owned
subsidiary of Securities Holdings), references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of
PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc.,
references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of Securities
Holdings) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, LLC (a former 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, references to “NLC” refer to National Lloyds
Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole, references to “NLIC” refer to
National Lloyds Insurance Company (a wholly owned subsidiary of NLC) and references to “ASIC” refer to American
Summit Insurance Company (a wholly owned subsidiary of NLC).
59
OVERVIEW
We are a financial holding company registered under the Bank Holding Company Act of 1956. 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. The following includes additional details regarding the financial products and services provided by each of our
primary business units.
PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth,
investment and treasury management services primarily in Texas and residential mortgage loans throughout the United
States.
Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment
banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and
tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage
services throughout the United States.
NLC. 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.
During 2017, our net income to common stockholders was $132.5 million, or $1.36 per diluted share. We declared and
paid total common dividends of $0.24 per share, or $23.1 million, during 2017, which resulted in a dividend payout ratio
of 17.59%. Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per
common share. We also paid an aggregate of $27.4 million to repurchase our common stock during 2017.
We reported $243.3 million of consolidated income before income taxes during 2017, including the following
contributions from our four reportable business segments.
• The banking segment contributed $164.0 million of income before income taxes during 2017;
• The broker-dealer segment contributed $64.6 million of income before income taxes during 2017;
• The mortgage origination segment contributed $49.6 million of income before income taxes during 2017; and
• The insurance segment incurred a loss before income taxes of $4.1 million during 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted. The Tax Legislation significantly
revises the U.S. corporate income tax by lowering corporate income tax rates. Our results during 2017 include the
estimated impact of a non-recurring, non-cash charge of $28.4 million as a result of the enactment of the Tax Legislation.
The charge was primarily due to the revaluation of deferred tax assets as a result of the reduction in the corporate tax rate
from 35% to 21%, and other anticipated impacts associated with the Tax Legislation. Certain Tax Legislation amounts are
considered reasonable estimates as of December 31, 2017 and could be adjusted during the measurement period, which
will end in December 2018, as a result of further refinement of our calculations, changes in interpretations and
assumptions made, guidance that may be issued and actions we may take as a result of the Tax Legislation. The charge
resulting from the Tax Legislation is expected to be recovered through lower projected effective tax rates due to reduction
of the corporate tax rate to 21%, which we expect to be partially offset by the loss of deductions for certain expenses. In
addition, the Tax Legislation eliminates our ability to carryback any net operating losses against prior period taxable
income in future years, which impacts the amount of the allowable deferred tax assets included in our common equity
Tier 1 capital in our capital calculations, starting in 2018.
During August and September 2017, Hurricanes Harvey and Irma affected both the Company and its customers. The
estimated pre-tax earnings impact from these hurricanes on our 2017 operating results was $8.2 million. Specifically,
within our insurance segment, the total estimated loss and loss adjustment expenses (“LAE”) incurred associated with the
hurricanes was $19.3 million at December 31, 2017, down from $19.5 million at September 30, 2017. However, since the
losses exceeded excess of loss retention coverage, net exposure to the insurance segment was $4.4 million retention and
$1.4 million in reinstatement premiums, down from a combined $6.0 million at September 30, 2017. The effect on our
broker-dealer segment’s operating results were limited to $0.3 million associated with waived customer fees. While the
mortgage origination and banking segments did not identify any immediate losses based on client interactions and the
60
review of collateral domiciled in the affected areas, each recorded loss estimates within its third quarter 2017 operating
results. As of December 31, 2017, the mortgage origination segment held a $0.1 million indemnification liability reserve
associated with loss exposures related to funded loans, not yet sold into the secondary markets, as well as loans upon
which it owns the mortgage servicing rights, a decrease from the $1.5 million reserve that was originally recorded as of
September 30, 2017. This decrease in indemnification liability reserve was due to a reduction in the estimated number of
loans with loss exposures from September 30, 2017 to December 31, 2017. The banking segment has reflected $2.0
million associated with estimated hurricane loss exposures within the qualitative factors used to determine its allowance
for loan losses during the year ended December 31, 2017. Loan balances in the affected areas represented approximately
12% of total bank loans as of December 31, 2017 and are summarized by portfolio segment in the following table (dollars
in millions).
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Total loans in affected areas
$
$
100
576
—
1
—
677
Additionally, during 2017, our consolidated income before taxes included the recognition within corporate of a pre-tax net
increase to other noninterest income of $11.6 million related to the resolution of the appraisal proceedings from the SWS
Merger (as defined below) as discussed in detail in Note 18, Commitments and Contingencies.
During 2016, the Bank discovered irregularities with respect to a non-covered loan that was in default, including the
genuineness of certain underlying documents that supported the loan and the operations of the borrower’s business. As a
result of the payment default and other irregularities, the Bank increased its provision for loan losses and recorded a $24.5
million charge-off during the second quarter of 2016, representing the entire outstanding principal balance of the loan.
The banking segment’s financial results for 2016 reflect this charge-off. During the second quarter of 2017, the bank
recorded other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery of a
document delivered in connection with this loan. The Bank is actively pursuing legal remedies to recover losses arising
from this isolated incident, including litigation against the borrower and guarantors. The Bank cannot currently estimate
the amount of any future recoveries or additional expenses related to this charged-off loan.
As a financial institution providing products and services through our banking, broker-dealer, mortgage origination and
insurance segments, we are directly affected by general economic and market conditions, many of which are beyond our
control and unpredictable. A key factor impacting our financial position includes changes in the level of interest rates in
addition to twists in the shape of the yield curve with the magnitude and direction of the impact varying across the
different lines of business. Other factors include, but are not limited to, fluctuations in volume and price levels of
securities, inflation, political events, weather-related events, investor confidence, investor participation levels, legal and
regulatory, and compliance requirements and competition. All of these factors have the potential to impact on our
financial position, operating results and liquidity. In addition, the recent economic and political environment has led to
legislative and regulatory initiatives, both enacted and proposed, that could substantially change the regulation of the
financial services industry and may significantly impact us.
At December 31, 2017, on a consolidated basis, we had total assets of $13.4 billion, total deposits of $8.0 billion, total
loans, including loans held for sale, of $8.1 billion and stockholders’ equity of $1.9 billion.
On January 25, 2018, our board of directors declared a quarterly cash dividend of $0.07 per common share, payable on
February 28, 2018 to all common stockholders of record as of the close of business on February 15, 2018.
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, NLIC and ASIC.
61
On November 30, 2012, we acquired PlainsCapital Corporation pursuant to a plan of merger whereby PlainsCapital
Corporation merged with and into our wholly owned subsidiary (the “PlainsCapital Merger”), which continued as the
surviving entity under the name “PlainsCapital Corporation”. Concurrent with the consummation of the PlainsCapital
Merger, Hilltop became a financial holding company registered under the Bank Holding Company Act of 1956.
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.
On January 1, 2015, we acquired SWS in a stock and cash transaction (the “SWS Merger”), whereby SWS’s broker-
dealer subsidiaries, Southwest Securities, Inc. and SWS Financial Services, Inc., became subsidiaries of Securities
Holdings and SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was merged into the Bank, an indirect
wholly owned subsidiary of Hilltop. On October 5, 2015, Southwest Securities, Inc. and SWS Financial Services, Inc.
were renamed “Hilltop Securities Inc.” and “Hilltop Securities Independent Network Inc.”, respectively. 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 $349.1 million, consisting of 10.1 million shares of common stock,
$78.2 million in cash and $70.3 million associated with our existing investment in SWS common stock. Based on
purchase date valuations, the fair value of the assets acquired was $3.3 billion, including $707.5 million in securities,
$863.8 million in non-covered loans and $1.2 billion in broker-dealer and clearing organization receivables. The fair value
of liabilities assumed was $2.9 billion, consisting primarily of deposits of $1.3 billion and $1.1 billion in broker-dealer
and clearing organization payables. The operations acquired in the SWS Merger, including a bargain purchase gain of
$81.3 million, are included in our operating results beginning January 1, 2015.
On January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop
Securities” name. We use the term “Hilltop Broker-Dealers” to refer to FSC, Hilltop Securities and HTS Independent
Network prior to such date and Hilltop Securities and HTS Independent Network after such date.
Segment Information
We have three primary business units, PCC (banking and mortgage origination), Securities Holdings (broker-dealer) and
NLC (insurance). Under accounting principles generally accepted in the United States (“GAAP”), our business units are
comprised of four reportable business segments organized primarily by the core products offered to the segments’
respective customers: banking, broker-dealer, mortgage origination and insurance. Consistent with our historical segment
operating results, 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. Operating results for the
mortgage origination segment have historically been more volatile than operating results for the banking, broker-dealer
and insurance segments.
The banking segment includes the operations of the Bank, which primarily provides business and consumer banking
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 includes the operations of FSC through January 22, 2016, and since January 1, 2015, the
operations of Hilltop Securities and HTS Independent Network. The broker-dealer segment generates a majority of its
revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop
Securities is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and the Financial
Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), HTS Independent
Network is an introducing broker-dealer that is also registered with the SEC and FINRA, and First Southwest Asset
Management, LLC, a wholly-owned subsidiary of Securities Holdings, is a registered investment adviser under the
Investment Advisers Act of 1940.
62
The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products 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, in Texas and other areas of the southern United States. 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.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities, and management and administrative
services to support the overall operations of the Company including, but not limited to, certain executive management,
corporate relations, legal, finance, and acquisition costs.
The elimination of intercompany transactions are included in “All Other and Eliminations.” Additional information
concerning our reportable segments is presented in Note 30, Segment and Related Information, in the notes to our
consolidated financial statements. The following tables present certain information about the operating results of our
reportable segments (in thousands).
Year Ended December 31, 2017
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Year Ended December 31, 2016
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Year Ended December 31, 2015
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
How We Generate Revenue
Banking
366,581
14,073
59,904
248,404
164,008
$
$
Banking
$
$
363,083
40,673
52,579
244,715
130,274
Mortgage
$
$
Broker-Dealer Origination
(915)
—
632,388
581,899
49,574
43,735
198
368,421
347,314
64,644
$
$
Insurance
2,861
$
—
151,382
158,354
(4,111)
$
Mortgage
$
$
Broker-Dealer Origination
(11,589)
—
704,126
614,741
77,796
31,172
(53)
385,766
377,524
39,467
$
$
Insurance
3,164
$
—
164,841
146,601
21,404
$
Mortgage
Banking
369,493
12,795
62,639
243,926
175,411
$
$
$
$
Broker-Dealer Origination
(10,423)
—
597,163
539,257
47,483
32,971
(80)
334,495
367,812
(266)
$
$
Insurance
3,187
$
—
171,185
158,720
15,652
$
$
Corporate
(10,069)
—
12,798
33,983
(31,254)
$
$
All Other and Hilltop
Eliminations
19,555
—
(19,829)
(699)
425
Consolidated
421,748
14,271
1,205,064
1,369,255
243,286
$
$
$
$
Corporate
(7,257)
—
2
29,938
(37,193)
$
$
All Other and Hilltop
Eliminations
18,958
—
(20,349)
(1,048)
(343)
Consolidated
397,531
40,620
1,286,965
1,412,471
231,405
$
$
$
$
Corporate
(5,109)
—
81,289
31,926
44,254
$
$
All Other and Hilltop
Eliminations
18,464
—
(19,129)
(1,625)
960
Consolidated
408,583
12,715
1,227,642
1,340,016
283,494
$
$
$
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 $421.7 million in net interest
income during 2017, compared with net interest income of $397.5 million and $408.6 million during 2016 and 2015,
respectively. Changes in net interest income during 2017, compared with 2016, primarily included increases within our
banking, broker-dealer and mortgage origination segments. The decrease in net interest income during 2016, compared
with 2015, included decreases within our banking and broker-dealer segments, offset by an increase in interest expense
incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”) that were not
issued until the second quarter of 2015.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i)
Income from broker-dealer operations. Through Securities Holdings, we provide investment banking
and other related financial services that generated $266.3 million, $273.9 million and $276.6 million in
securities brokerage commissions and fees and investment advisory fees and commissions, and $91.1
million, $102.2 million and $56.8 million in gains on derivative and trading portfolio activities
(included within other noninterest income) during 2017, 2016 and 2015, respectively.
63
(ii)
(iii)
Income from mortgage operations. Through PrimeLending, we generate noninterest income by
originating and selling mortgage loans. During 2017, 2016 and 2015, we generated $632.4 million,
$703.3 million and $596.8 million, respectively, in net gains from sale of loans, other mortgage
production income (including income associated with retained mortgage servicing rights), and mortgage
loan origination fees.
Income from insurance operations. Through NLC, we provide fire and homeowners insurance for low
value dwellings and manufactured homes that generated $142.3 million, $155.5 million and $162.1
million in net insurance premiums earned during 2017, 2016 and 2015, respectively.
In the aggregate, we generated $1.2 billion, $1.3 billion and $1.2 billion in noninterest income during 2017, 2016 and
2015, respectively. Excluding the bargain purchase gain of $81.3 million related to the SWS Merger in 2015, our
noninterest income during 2015 was $1.1 billion. We are presenting this financial measure because certain investors may
use it to evaluate our business and financial results. The decrease in noninterest income during 2017, compared with 2016,
was predominantly attributable to decreases in noninterest income in our mortgage origination, broker-dealer and
insurance segments, partially offset by increases in noninterest income due to the previously mentioned increase in other
noninterest income of $15.0 million within the banking segment and the $11.6 million increase within corporate related to
the resolution of the appraisal proceedings from the SWS Merger. The increase in noninterest income during 2016,
compared with 2015, other than bargain purchase gain, was primarily due to increases in noninterest income in our
mortgage origination and broker-dealer segments.
We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities
and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.
Consolidated Operating Results
Net income applicable to common stockholders during 2017 was $132.5 million, or $1.36 per diluted share, compared
with net income applicable to common stockholders of $145.9 million, or $1.48 per diluted share, during 2016, and net
income applicable to common stockholders of $209.1 million, or $2.09 per diluted share, during 2015. The consolidated
operating results during 2017 included the previously mentioned $28.4 million estimated non-cash charge related to the
Tax Legislation, the previously mentioned estimated pre-tax earnings impact from the hurricanes of $8.2 million, the
previously mentioned increase to other noninterest income of $15.0 million from coverage provided by an insurance
policy for forgery of a document delivered in connection with a single, large loan charged off by the Bank in 2016 and the
pre-tax net increase to other noninterest income $11.6 million (or $14.2 million after income tax benefit of $2.6 million)
related to the resolution of the appraisal proceedings from the SWS Merger. The consolidated operating results during
2016 included the previously mentioned $24.5 million charge-off of a single large loan by the Bank and a specific legal
reserve of $16.0 million related to one matter involving Hilltop Securities that was settled in the first quarter of 2017. The
consolidated operating results during 2015 include the recognition of a bargain purchase gain related to the SWS Merger
of $81.3 million, or $0.81 per diluted share. Included in the bargain purchase gain is a reversal of a $33.4 million
valuation allowance against SWS deferred tax assets. This amount is based on our expected ability to realize these
acquired deferred tax assets through our consolidated core earnings, the implementation of certain tax planning strategies
and reversal of timing differences. SWS’s net operating loss carryforwards are subject to an annual limitation on their
usage because of the ownership change effected in connection with the SWS Merger. In addition, the bargain purchase
gain reflects our acquisition date fair value allocation to identifiable intangible assets of $7.5 million.
Our consolidated operating results during 2017 also included transaction costs related to the SWS Merger, while our
consolidated operating results during 2016 and 2015 included both transaction costs and integration-related costs
associated with employee expenses (such as severance and retention), professional fees (such as consulting and legal) and
contractual costs (such as vendor contract termination and lease), incurred as a result of the integration of the operations
and systems acquired in the SWS Merger.
During 2017, we incurred $2.1 million in pre-tax transaction costs related to the SWS Merger. During 2016, we incurred
$7.4 million in pre-tax transaction costs related to the SWS Merger, while pre-tax integration-related costs associated with
employee, professional fee and contractual expenses during this same period were $2.9 million, $2.9 million and $0.1
million, respectively. During 2015, we incurred $31.6 million in pre-tax transaction costs related to the SWS Merger,
while pre-tax integration-related costs associated with employee, professional fee, and contractual expenses during this
same period were $8.7 million, $6.5 million and $2.7 million, respectively. On January 22, 2016, we merged FSC and
Hilltop Securities into a combined firm operating under the “Hilltop Securities” name. The integration of FSC and Hilltop
64
Securities is complete and Hilltop Securities does not expect to incur any additional integration costs in relation to the
SWS Merger.
Certain items included in net income for 2017, 2016 and 2015 resulted from purchase accounting associated with the
PlainsCapital Merger, the FNB Transaction and the SWS Merger (collectively, the “Bank Transactions”). Income before
income taxes during 2017 includes net accretion of $5.3 million, $47.7 million and $3.1 million on earning assets and
liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization
of identifiable intangibles of $6.3 million, $0.6 million and $0.9 million, respectively. Income before income taxes during
2016 includes net accretion of $9.7 million, $50.7 million and $4.6 million on earning assets and liabilities acquired in the
PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles
of $7.9 million, $0.8 million and $1.0 million, respectively. Income before income taxes during 2015 includes net
accretion of $15.3 million, $60.4 million and $17.3 million on earning assets and liabilities acquired in the PlainsCapital
Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $8.7
million, $0.9 million and $1.0 million, respectively.
In addition, the Bank recorded “true-up” accruals with respect to the FNB Transaction loss-share agreements with the
FDIC of $2.1 million in 2017, compared to $8.7 million in 2016 and $5.5 million in 2015. The total true-up accrual at
December 31, 2017 was $16.3 million. This true-up accrual is based on a formula within the loss-share agreements,
pursuant to which we agreed to reimburse the FDIC if actual losses incurred and billed to the FDIC through loss sharing
are below a stated threshold. In 2017, the Bank also recorded $17.1 million of amortization of excess book value of its
receivables under the loss-share agreements (the “FDIC Indemnification Asset”) due to lower projected collections from
the FDIC than were initially estimated at the acquisition date.
We consider the ratios shown in the table below to be key indicators of our performance.
Performance Ratios:
Return on average stockholder's equity (1)
Return on average assets (1)
Net interest margin (2) (3) (4) (5)
Net interest margin (taxable equivalent) (3) (4) (5) (6)
2017
Year Ended December 31,
2016
2015
7.00 %
1.03 %
3.61 %
3.63 %
8.13 %
1.21 %
3.68 %
3.71 %
12.32 %
1.70 %
3.71 %
3.74 %
(1) Noted measures during 2017 include estimated non-cash, non-recurring charges of $28.4 million primarily attributable to the revaluation of
deferred tax assets as a result of the enactment of the Tax Legislation. Certain Tax Legislation amounts are considered reasonable estimates as of
December 31, 2017 and could be adjusted during the measurement period, which will end in December 2018, as a result of further refinement of
our calculations, changes in interpretations and assumptions made, guidance that may be issued and actions we may take as a result of the Tax
Legislation.
(2) Net interest margin is defined as net interest income divided by average interest-earning assets.
(3) Noted measures during 2016 and 2015 reflect certain asset category reclassifications within the detailed calculations to conform with the current
period presentation.
(4) Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest
earning assets. Taxable equivalent adjustments are based on a 35% federal income tax rate. The interest income earned on certain earning assets is
completely or partially exempt from federal income tax. See footnote 2 to the consolidated net interest income table below for the taxable
equivalent adjustments to interest income.
(5) The securities financing operations within our broker-dealer segment had the effect of lowering both net interest margin and taxable equivalent net
interest margin by 48 basis points, 55 basis points, and 81 basis points during 2017, 2016 and 2015, respectively.
(6) During 2017, 2016 and 2015, purchase accounting contributed 52 basis points, 66 basis points and 91 basis points, respectively, to net interest
margin and taxable equivalent net interest margin.
We present net interest margin in the previous table, and net interest margin and net interest income in the following
discussion and tables below, on a taxable equivalent basis. The interest income earned on certain earning assets is
completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower
returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets,
we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest
income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During 2017, purchase accounting contributed 52 basis points to our consolidated taxable equivalent net interest margin
of 3.63%, primarily related to accretion of discount on loans of $7.8 million, $47.7 million and $2.9 million associated
with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related
amortization of premium on acquired securities of $2.4 million. During 2016, purchase accounting contributed 66 basis
65
points to our consolidated taxable equivalent net interest margin of 3.71%, primarily related to accretion of discount on
loans of $12.9 million, $50.7 million and $4.2 million associated with the PlainsCapital Merger, FNB Transaction and
SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $3.1
million. During 2015, purchase accounting contributed 91 basis points to our consolidated taxable equivalent net interest
margin of 3.74%, primarily related to accretion of discount on loans of $19.0 million, $60.4 million and $16.7 million
associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-
related amortization of premium on acquired securities of $3.4 million.
The FNB Transaction-related accretion of discount on loans of $47.7 million, $50.7 million and $60.4 million during
2017, 2016 and 2015, respectively, included accretion of approximately $5 million, $16 million and $35 million,
respectively, due to better-than-expected resolution of covered purchased credit impaired (“PCI”) loans during the
respective periods. The performance of the covered PCI loan portfolio since 2014, which has exceeded our expectations at
the time of acquisition, has led to higher yields calculated as a result of the Bank’s quarterly cash flow recast process. The
recast process performed during 2017, 2016 and 2015 resulted in the reclassification of $9.1 million, $41.2 million and
$70.9 million, respectively, from nonaccretable difference to accretable yield.
The table below provides additional details regarding our consolidated net interest income (dollars in thousands). The
2016 and 2015 detailed calculations reflect certain asset category reclassifications to conform with the current period
presentation.
2017
Average
Interest
Outstanding Earned or Yield or
Balance
Rate
Paid
Annualized Average
Interest Annualized Average
Interest Annualized
Outstanding Earned or Yield or
Outstanding Earned or Yield or
Balance
Paid
Rate
Balance
Paid
Rate
Year Ended December 31,
2016
2015
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
financial institutions
Securities borrowed
Other
Interest-earning assets, gross (2)
Allowance for loan losses
Interest-earning assets, net
Noninterest-earning assets
Total assets
Liabilities and Stockholders'
Equity
Interest-bearing liabilities
Interest-bearing deposits
Securities loaned
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)
$ 7,718,933 $ 411,988
36,378
1,399,379
5.34 % $ 7,153,769 $ 389,637
25,129
1,038,838
2.60 %
5.45 % $ 6,550,164 $ 390,359
25,997
1,112,524
2.42 %
5.96 %
2.34 %
234,741
8,012
3.41 %
282,780
8,674
3.07 %
250,870
9,629
3.84 %
140,337
923
0.66 %
150,337
316
0.21 %
99,037
120
0.12 %
1,518,041
572,829
6,114
41,048
4,897
11,669,385 509,360
85,125
(59,153)
11,610,232
1,345,599
$ 12,955,831
2,886
29,518
2,247
458,407
574,777
1.07 %
1,523,195
2.70 %
5.75 %
66,088
4.36 % 10,789,784
(51,925)
10,737,859
1,457,945
$ 12,195,804
800,806
0.50 %
2,121,643
1.94 %
3.40 %
67,936
4.25 % 11,002,980
(42,924)
10,960,056
1,521,202
$ 12,481,258
2,005
41,051
3,678
472,839
0.25 %
1.93 %
5.41 %
4.30 %
$ 5,220,359 $ 24,695
32,337
1,378,748
0.47 % $ 4,824,374 $ 15,843
22,510
1,428,829
2.35 %
0.33 % $ 4,804,077 $ 15,523
29,893
2,025,107
1.58 %
1,515,874
8,114,981
28,376
85,408
1.87 %
1.05 %
1,237,609
7,490,812
20,070
58,423
1.62 %
0.78 %
1,103,045
7,932,229
15,839
61,255
0.32 %
1.48 %
1.44 %
0.77 %
2,309,776
634,630
11,059,387
1,894,009
2,435
$ 12,955,831
2,241,561
665,878
10,398,251
1,795,219
2,334
$ 12,195,804
2,187,336
647,985
10,767,550
1,713,030
678
$ 12,481,258
$ 423,952
$ 399,984
$ 411,584
3.31 %
3.63 %
3.47 %
3.71 %
3.53 %
3.74 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on a 35% federal income tax rate. The adjustment to interest
income was $2.2 million, $2.4 million and $3.0 million during 2017, 2016 and 2015, respectively.
66
The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated
net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our
banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields
and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer
segment, including items related to securities financing operations that particularly decrease net interest margin. In
addition, yields and costs on certain interest-earning assets, such as warehouse lines of credit extended to subsidiaries by
the banking segment, are eliminated from the consolidated financial statements.
On a consolidated basis, net interest income increased $24.2 million during 2017, compared with 2016, while net interest
income decreased $11.1 million during 2016, compared with 2015. The increase in net interest income during 2017,
compared with 2016, was primarily related to increases in the net interest earned on mortgage-backed securities and
increases in the average stock borrowing balances in our broker-dealer segment and net volume and yield changes on the
loan portfolio within our banking segment as a result of the changes in year-over-year accretion of discount on loans. The
change in net interest income during 2016, compared with 2015, was primarily related to a lower yield on the loan
portfolio within our banking segment, a decrease in average stock borrow/loan program balances in our broker-dealer
segment and an increase in interest expense at corporate on our outstanding Senior Notes, the offering of which was
completed during the second quarter of 2015.
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,
substantially all of which relates to the banking segment, was $14.3 million, $40.6 million and $12.7 million during 2017,
2016 and 2015, respectively. During 2017, the provision for loan losses was comprised of charges relating to newly
originated loans and acquired loans without credit impairment at acquisition of $12.5 million and charges on PCI loans of
$1.8 million. As previously mentioned, the consolidated provision for loan losses during 2016 included a $24.5 million
charge-off of a single large loan by the Bank. The provision for loan losses during 2016 and 2015 was comprised of
charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $41.6 million
and $13.8 million, respectively, partially offset by the recapture of PCI loans of $1.0 million and $1.1 million,
respectively.
Consolidated noninterest income decreased $81.9 million during 2017, compared with 2016, while consolidated
noninterest income increased $59.3 million during 2016, compared with 2015. Consolidated noninterest income during
2017 included the previously mentioned increase to other noninterest income of $15.0 million in our banking segment and
the pre-tax net increase to other noninterest income of $11.6 million within corporate related to the resolution of the
appraisal proceedings from the SWS Merger. The year-over-year changes in noninterest income, other than the previously
mentioned non-recurring items, during 2017, compared with 2016, were primarily driven by decreases in noninterest
income within our broker-dealer, mortgage origination, and insurance segments. Consolidated noninterest income during
2015 included the recognition of a bargain purchase gain related to the SWS Merger of $81.3 million. The increase in
noninterest income, other than bargain purchase gain, during 2016, compared with 2015, of $140.6 million was primarily
driven by an increase in noninterest income within our mortgage origination segment of $107.0 million and an increase in
income earned on derivative and trading portfolio activities within our broker-dealer segment of $45.5 million, partially
offset by decreases in noninterest income in our banking and insurance segments.
Consolidated noninterest expense during 2017 decreased $43.2 million, compared with 2016, while consolidated
noninterest expense during 2016 increased $72.5 million, compared with 2015. The decrease in noninterest expense
during 2017, compared with 2016, primarily included decreases in noninterest expense within our broker-dealer and
mortgage origination segments, partially offset by an increase within our banking segment and an increase within our
insurance segment due to the effects of hurricanes as well as other weather-related losses experienced during 2017.
During 2017, we incurred pre-tax transaction and integration costs related to the SWS Merger of $2.1 million, compared
with $13.3 million during 2016. The increase in noninterest expense during 2016, compared with 2015, primarily
included an increase in noninterest expense within our mortgage origination segment, as well as an increase within our
broker-dealer segment, partially offset by a decrease within our insurance segment. In addition to the previously
mentioned pre-tax transaction and integration costs incurred during 2016 related to the SWS Merger, changes between
2016 and 2015 within the major components of consolidated noninterest expense included increases of $68.2 million in
employees’ compensation and benefits, $27.0 million in other expenses primarily attributable to increases in our mortgage
origination and broker-dealer segments, as well as increased costs associated with regulatory compliance throughout the
67
organization, partially offset by a decrease of $7.5 million in occupancy and equipment, net, primarily related to our
broker-dealer segment.
Consolidated income tax expense during 2017, 2016 and 2015 was $110.1 million, $83.5 million and $70.9 million,
respectively, reflecting effective rates of 45.3%, 36.1% and 25.0%, respectively. The effective tax rate during 2017 was
higher than the statutory rate primarily due to the revaluation of deferred tax assets as a result of the estimated effects of
the Tax Legislation discussed above, partially offset by the previously discussed non-taxable gain recorded in the
resolution of the SWS appraisal proceedings as the SWS Merger was a tax-free reorganization. Our effective tax rate
during 2016 was relatively consistent with the statutory rate but did include gross effects related to non-deductible
transaction costs associated with the SWS Merger, offset by the reversal of a valuation allowance of $2.2 million
previously established on a deferred tax asset associated with the SWS Merger and the recognition of excess tax benefits
on share-based payment awards as a result of the adoption of Accounting Standards Update (“ASU”) 2016-09 as of
January 1, 2016. The lower effective tax rate during 2015 was primarily due to no income taxes being recorded during
2015 in connection with the bargain purchase gain of $81.3 million associated with the SWS Merger because the
acquisition was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In addition, during 2015, we
recorded an income tax benefit of $2.1 million as a result of the SWS Merger to reverse our deferred tax liability for the
difference between book and tax basis on Hilltop’s investment in SWS common stock and also reversed a valuation
allowance of $1.9 million previously established on a deferred tax asset for a capital loss carryforward.
Segment Results
Banking Segment
Income before income taxes in our banking segment during 2017, 2016 and 2015 was $164.0 million, $130.3 million and
$175.4 million, respectively. The increase in income before income taxes during 2017, compared with 2016, was
primarily due to the inclusion of the previously mentioned increase to other noninterest income of $15.0 million during
2017 and the $24.5 million charge-off within the provision for loan losses during 2016. Income before income taxes also
increased during 2017, compared with 2016, due to an increase in net interest income associated with net volume and
yield changes. See discussion in the Overview for the effect of recent hurricanes on the banking segment’s operating
results. The decrease in income before income taxes during 2016, compared with 2015, was primarily due to the increase
in the provision for loan losses associated with the previously mentioned $24.5 million charge-off of a single large loan
by the Bank during the second quarter of 2016, a decrease in net interest income associated with the decline in accretion
of discount on loans, and a decrease in noninterest income associated with the prior year recognition of gains on securities
acquired in the SWS Merger and subsequently sold.
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)
Return on average assets (2)
Net interest margin (3) (5)
Net interest margin (taxable equivalent) (4) (5)
2017
Year Ended December 31,
2016
2015
58.24 %
0.85 %
4.31 %
4.33 %
58.87 %
0.94 %
4.65 %
4.68 %
56.45 %
1.36 %
5.05 %
5.08 %
(1) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period.
(2) Return on average assets during 2017 includes estimated non-cash, non-recurring charges of $25.7 million primarily attributable to the revaluation
of deferred tax assets as a result of the enactment of the Tax Legislation. Certain Tax Legislation amounts are considered reasonable estimates as
of December 31, 2017 and could be adjusted during the measurement period, which will end in December 2018, as a result of further refinement of
our calculations, changes in interpretations and assumptions made, guidance that may be issued and actions we may take as a result of the Tax
Legislation.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets.
(4) Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest
earning assets. Taxable equivalent adjustments are based on a 35% federal income tax rate. The interest income earned on certain earning assets is
completely or partially exempt from federal income tax. See footnote 2 to the following tables for the taxable equivalent adjustments to interest
income.
(5) During 2017, 2016 and 2015, purchase accounting contributed 72 basis points, 93 basis points and 142 basis points, respectively, to net interest
margin and taxable equivalent net interest margin.
68
The banking segment presents net interest margin in the previous table, and net interest margin and net interest income in
the following discussion and tables below, on a taxable equivalent basis. The interest income earned on certain earning
assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield
lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning
assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest
income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During 2017, purchase accounting contributed 72 basis points to the banking segment’s taxable equivalent net interest
margin of 4.33%, primarily related to accretion of discount on loans of $7.8 million, $47.7 million and $2.9 million
associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-
related amortization of premium on acquired securities of $2.4 million. During 2016, purchase accounting contributed 93
basis points to the banking segment’s taxable equivalent net interest margin of 4.68%, primarily related to accretion of
discount on loans of $12.9 million, $50.7 million and $4.2 million associated with the PlainsCapital Merger, FNB
Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired
securities of $3.1 million. During 2015, purchase accounting contributed 142 basis points to the banking segment’s
taxable equivalent net interest margin of 5.08%, primarily related to accretion of discount on loans of $19.0 million, $60.4
million and $16.7 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and
PlainsCapital Merger-related amortization of premium on acquired securities of $3.4 million.
The FNB Transaction-related accretion of discount on loans of $47.7 million, $50.7 million and $60.4 million during
2017, 2016 and 2015, respectively, included accretion of approximately $5 million, $16 million and $35 million,
respectively, due to better-than-expected resolution of covered PCI loans during the respective periods. The performance
of the covered PCI loan portfolio since 2014, which has exceeded our expectations at the time of acquisition, has led to
higher yields calculated as a result of the Bank’s quarterly cash flow recast process. The recast process performed during
2017, 2016 and 2015 resulted in the reclassification of $9.1 million, $41.2 million and $70.9 million, respectively, from
nonaccretable difference to accretable yield.
69
The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
2017
Year Ended December 31,
2016
2015
Average
Outstanding Earned or Yield or
Balance
Rate
Paid
Interest Annualized Average
Interest Annualized Average
Outstanding Earned or Yield or
Interest Annualized
Outstanding Earned or Yield or
Balance
Paid
Rate
Balance
Paid
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
financial institutions
Other
Interest-earning assets, gross (2)
Allowance for loan losses
Interest-earning assets, net
Noninterest-earning assets
Total assets
$ 5,695,927 $ 326,906
5.74 % $ 5,301,117 $ 317,695
5.99 % $ 4,789,972 $ 328,384
6.86 %
1,436,401
851,066
54,701
16,275
3.81 % 1,261,016
714,096
1.91 %
49,075
13,911
3.89 % 1,055,525
791,994
1.95 %
37,772
17,241
3.58 %
2.18 %
123,969
4,747
3.83 %
136,141
4,998
3.67 %
141,186
5,295
3.75 %
5,947
50
0.85 %
28,297
155
0.55 %
21,821
65
0.30 %
3,499
2,412
408,590
316,186
70,123
8,499,619
(59,007)
8,440,612
947,484
$ 9,388,096
335,136
1.11 %
3.44 %
56,867
4.81 % 7,832,670
(51,706)
7,780,964
1,036,910
$ 8,817,874
1,823
2,075
389,732
484,553
0.54 %
3.65 %
49,988
4.98 % 7,335,039
(42,579)
7,292,460
1,125,974
$ 8,418,434
1,366
1,745
391,868
0.28 %
3.49 %
5.34 %
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
Notes payable and other
borrowings
Total interest-bearing liabilities (3)
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
equity
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 4,932,689 $ 33,420
0.68 % $ 4,523,079 $ 19,815
0.44 % $ 4,413,352 $ 16,992
0.39 %
741,561
5,674,250
6,953
40,373
675,011
0.94 %
0.71 % 5,198,090
3,633
23,448
585,732
0.54 %
0.45 % 4,999,084
2,118
19,110
0.36 %
0.38 %
2,297,390
48,303
8,019,943
1,368,153
$ 9,388,096
2,257,440
57,501
7,513,031
1,304,843
$ 8,817,874
2,144,282
49,388
7,192,754
1,225,680
$ 8,418,434
$ 368,217
$ 366,284
$ 372,758
4.10 %
4.33 %
4.52 %
4.68 %
4.96 %
5.08 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on a 35% federal income tax rate. The adjustment to interest
income was $1.6 million, $1.5 million and $1.8 million during 2017, 2016 and 2015, respectively.
(3) Only considers debt of PlainsCapital without the allocation of interest expense on PCC debt of $1.5 million and $1.4 million during 2016 and
2015, respectively. Interest expense on PCC debt was not allocated to PlainsCapital beginning January 1, 2017.
The banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest
margin includes certain items that are not reflected in the calculation of our net interest margin within our banking
segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs
associated with certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer segment,
including items related to securities financing operations that particularly decrease net interest margin. In addition, the
banking segment’s interest-earning assets include warehouse lines of credit extended to other subsidiaries, which are
eliminated from the consolidated financial statements.
70
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).
Year Ended December 31,
2017 vs. 2016
Change Due To (1)
2016 vs. 2015
Change Due To (1)
Volume Yield/Rate Change
Volume Yield/Rate Change
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
$ 23,649 $ (14,438) $ 9,211 $ 35,042 $ (45,731) $ (10,689)
11,303
(3,330)
(297)
7,353
(1,696)
(189)
3,950
(1,634)
(108)
(1,196)
(307)
196
5,626
2,364
(251)
6,822
2,671
(447)
(123)
18
(105)
19
71
90
(102)
484
32,954
1,778
(147)
(14,096)
1,676
337
18,858
(421)
240
40,348
878
90
(42,484)
457
330
(2,136)
$ 1,789 $ 11,816 $ 13,605 $
2,961
14,777
3,320
16,925
359
2,148
422 $
323
745
2,401 $
1,192
3,593
2,823
1,515
4,338
Net interest income (2)
$ 30,806 $ (28,873) $ 1,933 $ 39,603 $ (46,077) $ (6,474)
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Taxable equivalent.
Taxable equivalent net interest income increased $1.9 million during 2017, compared with 2016. Changes in the yields
earned on interest-earning assets decreased taxable equivalent net interest income by $14.1 million during 2017,
compared with 2016, primarily due to a decrease in accretion of discount on loans of $9.4 million. Accretion of discount
on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or
renewed. We experienced interest rate margin compression during 2017, which was driven by the rising interest rate
environment and the rate floors in effect for a portion of the Bank’s loan portfolio, thereby causing yields on our interest-
earning assets to rise more slowly than increases in market interest rates, which have also increased our borrowing costs.
Absent a decline in interest rates, we believe this interest rate compression will continue until contractual rate resets allow
our entire loan portfolio to reprice above applicable rate floors. Increases in the volume of interest-earning assets,
primarily on the loan portfolio and additional amounts drawn on the subsidiary warehouse lines of credit, increased
taxable equivalent net interest income by $33.0 million during 2017, compared with 2016. Changes in rates paid on
interest-bearing liabilities decreased taxable equivalent net interest income by $14.8 million during 2017, compared with
2016, due to increases in market interest rates. Taxable equivalent net interest income decreased $6.5 million during 2016,
compared with 2015. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest
income by $42.5 million during 2016, compared with 2015, primarily due to the net effects of lower yields on the loan
portfolio as a result of the decline in accretion of discount on loans, partially offset by the favorable change in yields on
warehouse lines of credit extended to other subsidiaries. Increases in the volume of interest-earning assets, primarily on
the loan portfolio and additional amounts drawn on the subsidiary warehouse lines of credit, increased taxable equivalent
net interest income by $40.3 million during 2016, compared with 2015.
The banking segment’s noninterest income was $59.9 million, $52.6 million and $62.6 million during 2017, 2016 and
2015, respectively. Other than the previously mentioned increase to other noninterest income of $15.0 million, the
changes in noninterest income during 2017, compared to 2016, were primarily driven by year-over-year decreases in
exchange fee income due to the impact of the Durbin amendment, which became applicable to the Bank on July 1, 2016,
and intercompany financing charges. The decrease during 2016, compared with 2015, was primarily due to $4.4 million
of realized gains on securities acquired in the SWS Merger and subsequently sold during 2015, that did not recur during
2016, as well as year-over-year decreases in subsidiary management fees, exchange fee income due to the impact of the
Durbin Act and OREO income.
71
The banking segment’s noninterest expenses were $248.4 million, $244.7 million and $243.9 million during 2017, 2016
and 2015, respectively. The change in noninterest expenses during 2017, compared with 2016, included increases in
employees’ compensation and benefits of $1.8 million primarily due to increased benefit costs, net expenses associated
with covered assets of $10.4 million, repossession and foreclosure expenses of $3.2 million, as well as legal expenses
associated with the Bank’s previously mentioned efforts to recover losses associated with a charged-off loan, partially
offset by a year-over-year decrease of $12.5 million associated with downward valuation adjustments on a significant
covered OREO property recorded during the first nine months of 2016, as well as decreases in occupancy expenses
associated with closed branches and expenses associated with organizational changes. The change in noninterest expenses
during 2016, compared with 2015, was relatively flat, but included an increase in compensation and benefits costs and a
year-over-year increase in the “true-up” payment accrual associated with covered assets of $3.3 million, offset by a $3.0
million decrease in pre-tax integration-related costs directly attributable to the integration of the former SWS FSB related
to employee expenses and a decrease in occupancy expenses associated with closed branches and related costs.
In addition, as discussed under the heading “— Financial Condition — Covered Loan Portfolio” that follows, the Bank
projects that the sum of actual plus projected covered losses and reimbursable expenses subject to the loss-share
agreements will be less than its initial estimate. As a result, the Bank has recorded, and expects that it will continue to
record, amortization associated with its FDIC Indemnification Asset. Changes to the FDIC Indemnification Asset are
recorded as adjustments to other noninterest income or expense, as appropriate, within the consolidated statements of
operations over the life of the loss-share agreements.
Broker-Dealer Segment
Income before income taxes in our broker-dealer segment was $64.6 million and $39.5 million during 2017 and 2016,
respectively, compared with a loss before income taxes during 2015 of $0.3 million. The increase in income before
income taxes during 2017, compared with 2016, was primarily the result of a specific legal reserve of $16.0 million
during the fourth quarter of 2016 related to one matter that was settled in the first quarter of 2017, a decrease in pre-tax
integration-related costs of $5.9 million, an increase in the federal funds rate during 2017, which led to an increase of
$12.3 million in fees earned on money market and FDIC insured bank deposits, and an increase in the interest earned on
mortgage-backed securities, offset by a decrease of $8.7 million in investment banking and advisory fees primarily earned
on the underwriting of municipal bond transactions and the secondary trading of these and other municipal securities
within our public finance and capital markets business lines. The change in income before income taxes during 2016,
compared with 2015, was primarily the result of increases in trading gains associated with the structured finance business
and the decrease in pre-tax transaction and integration-related costs of $9.3 million, partially offset by a specific legal
reserve of $16.0 million during the fourth quarter of 2016 related to one matter that was settled in the first quarter of 2017.
The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in
interest rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are
likely to have a meaningful impact on our overall financial performance. 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. Rapid or significant changes in interest rates could adversely affect the broker-
dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below.
The broker-dealer segment also receives administrative fees for providing money market and FDIC investment
alternatives to clients, which tend to be sensitive to short term interest rates. In addition, the profitability of the broker-
dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash
balances, and the interest expense paid on customer cash balances and other borrowings.
72
The following table provides additional details regarding our broker-dealer operating results (in thousands).
Net interest income:
Securities lending
Structured finance
Clearing
Other
Total net interest income
Noninterest income:
Securities commissions and fees by business line (1):
Capital markets
Retail
Clearing
Other
Investment banking and advisory fees by business line:
Public finance
Capital markets
Retail
Structured finance
Clearing
Other
Other:
Structured finance
Capital markets
Other
Total noninterest income
Net revenue (2)
Noninterest expense (3):
Compensation and benefits expenses
Other
Total noninterest expense
Year Ended December 31,
Variance
2017
2016
2015
2017 vs 2016
2016 vs 2015
$
$
8,711
9,597
2,199
23,228
43,735
$
7,008
3,319
278
20,567
31,172
11,158 $
1,549
6,307
13,957
32,971
1,703 $
6,278
1,921
2,661
12,563
45,915
81,075
34,008
4,475
165,473
86,075
707
16,306
5,675
1,152
5
109,920
66,233
24,878
1,917
93,028
368,421
412,156
250,614
96,898
347,512
54,992
75,271
27,850
3,698
161,811
90,851
4,621
14,635
5,369
515
1
115,992
81,352
20,813
5,798
107,963
385,766
416,938
252,772
124,699
377,471
56,570
78,470
20,840
6,150
162,030
92,308
2,384
15,258
5,678
48
256
115,932
38,738
17,903
(108)
56,533
334,495
367,466
255,629
112,103
367,732
(9,077)
5,804
6,158
777
3,662
(4,776)
(3,914)
1,671
306
637
4
(6,072)
(15,119)
4,065
(3,881)
(14,935)
(17,345)
(4,782)
(2,158)
(27,801)
(29,959)
(4,150)
1,770
(6,029)
6,610
(1,799)
(1,578)
(3,199)
7,010
(2,452)
(219)
(1,457)
2,237
(623)
(309)
467
(255)
60
42,614
2,910
5,906
51,430
51,271
49,472
(2,857)
12,596
9,739
Income before income taxes
$
64,644
$
39,467
$
(266) $
25,177 $
39,733
(1) Securities commissions and fees includes income of $9.1 million, $3.9 million, and $1.4 million during 2017, 2016, and 2015, respectively, that is
eliminated in consolidation.
(2) Net revenue is defined as the sum of total net interest income and total noninterest income.
(3) Noninterest expense includes provision for loan losses associated with the broker-dealer segment within other noninterest expenses.
The broker-dealer segment had net interest income of $43.7 million, $31.2 million and $33.0 million during 2017, 2016
and 2015, respectively. In the broker-dealer segment, interest is earned from securities lending activities, interest charged
on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and
other customer activities. The increase in net interest income during 2017, compared with 2016, was primarily due to an
increase in the net interest earned on mortgage-backed securities and an increase in the average stock borrowing balances
offset by an increase in repo interest expense and bank loans due to increased borrowing rates and daily balances. The
decrease in net interest income during 2016, compared with 2015 was primarily due to a decrease of 21% in the broker-
dealer segment’s average stock borrowing balances.
Noninterest income was $368.4 million, $385.8 million and $334.5 million during 2017, 2016 and 2015, respectively. The
decrease in noninterest income of $17.3 million during 2017, compared with 2016, was primarily due to a decrease of
$14.9 million in other noninterest income and a decrease of $6.1 million in investment banking and advisory fees. The
increase in noninterest income of $51.3 million during 2016, compared with 2015, was primarily due to an increase of
$51.4 million in other noninterest income.
Securities commissions and fees increased $3.7 million during 2017, compared with 2016. The increase was primarily
attributable to fees earned on money market accounts and FDIC insured bank deposits by the clearing and retail
businesses resulting from the 61-basis point increase in the federal funds rate during 2017. This increase was partially
offset by a reduction in securities commissions and fees earned in the capital markets business on the sale of over-the-
counter, municipal and mortgage backed security products. Although securities commissions and fees were relatively flat
between 2015 and 2016, the securities commissions and fees earned by our clearing business increased $7.0 million from
fees earned on money markets and FDIC insured bank deposits resulting from the 25-basis point increase in the federal
funds rate in December 2015, partially offset by a reduction in securities commissions and fees earned in our capital
markets and retail businesses of $4.8 million from decreases in municipal bond transactions and insurance product sales.
73
Investment banking and advisory fees decreased $6.1 million during 2017, compared with 2016, primarily due to
reductions in the number and the aggregate dollar amount of municipal bond transactions and the municipal finance and
underwriting fees associated with those and other taxable transactions. Although public finance revenues decreased in
2017 compared to 2016, national municipal issuances surged in the fourth quarter of 2017, due to the anticipated effects
of the Tax Legislation. A number of national municipal issuers elected to accelerate certain capital raising initiatives
before these changes were enacted. As a result, we anticipate lower municipal issuance volume in 2018. Investment
banking and advisory fees were relatively flat between 2015 and 2016.
The decrease in other noninterest income during 2017, compared with 2016, was primarily due to a decrease of $15.1
million in income earned from trading gains associated with the structured finance business and a decrease of $4.5 million
in the value of broker-dealer segment investments held at corporate, partially offset by increases of $4.1 million in income
earned from trading gains associated with the capital markets business from the sale of municipal bonds and $0.7 million
in the value of investments held in the broker-dealer segment’s deferred compensation plan. The increase in other
noninterest income during 2016, compared with 2015, was primarily due to an increase of $45.5 million in income earned
from trading gains associated with the structured finance and capital markets businesses and a $4.1 million increase in
other noninterest income due to a non-recurring reversal of a contingent liability associated with an investment.
Noninterest expenses were $347.5 million, $377.5 million and $367.8 million during 2017, 2016 and 2015, respectively.
The decrease in noninterest expenses of $30.0 million during 2017, compared with 2016, was primarily due to a decrease
of $24.4 million in legal expenses associated with settled litigation, a decrease in pre-tax integration-related professional
costs of $2.9 million and a decrease of $2.2 million in compensation and benefits expenses, which was in part a product of
the integration and merger of FSC and Hilltop Securities and in part due to the decrease in the variable compensation and
benefits expense components that are based on each business lines’ performance. The increase in noninterest expenses of
$9.7 million during 2016, compared with 2015, was primarily due to an increase in legal expenses associated with both
resolved and ongoing litigation matters, partially offset by a decrease of $2.9 million in compensation and benefits
expenses. This decrease in compensation and benefits expense was primarily as a result of a decrease in salaries and
benefits, which was in part a product of the integration and merger of FSC and Hilltop Securities, partially offset by an
increase in incentive pay given the improvement in year-over-year operating performance. During 2016, the broker-dealer
segment incurred pre-tax integration-related costs resulting from employee expenses, professional fees and contractual
expenses of $2.9 million, $2.9 million and $0.1 million, respectively, compared with pre-tax transaction costs of $0.8
million, and employee expenses, professional fees, and contractual expenses of $6.9 million, $5.6 million and $1.9
million, respectively, during 2015 directly attributable to the integration of the operations acquired in the SWS Merger.
Effective as of January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the
“Hilltop Securities” name. The integration is complete and Hilltop Securities does not expect to incur any additional
integration costs in relation to the SWS Merger.
74
Selected information concerning the broker-dealer segment follows (dollars in thousands).
Compensation as a % of net revenue
FDIC insured program balances at PlainsCapital Bank (end of period)
Other FDIC insured program balances (end of period)
Customer margin balances (end of period)
Customer funds on deposit, including short credits (end of period)
Public finance:
Number of issues
Aggregate amount of offerings
Capital markets:
Total volumes
Net inventory (end of period)
Retail:
Retail employee representatives (end of period)
Independent registered representatives (end of period)
Structured finance:
Lock production/TBA volume
Clearing:
Total tickets (1)
Correspondents (end of period)
Year Ended December 31,
2017
60.8 %
1,301,148
1,093,493
349,794
411,989
1,561
83,907,144
65,559,604
491,370
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
60.6 %
1,000,310
1,517,482
332,806
385,104
1,747
82,561,809
76,482,509
95,925
$
$
$
$
$
$
$
2015
69.6 %
845,569
1,380,030
414,013
474,773
1,655
70,021,094
76,737,890
62,879
120
218
117
224
118
234
$
5,938,788
$
6,088,319
$
3,848,214
1,325,760
162
1,669,856
175
2,396,478
205
Securities lending:
Interest-earning assets - stock borrowed (end of period)
Interest-bearing liabilities - stock loaned (end of period)
$
$
1,386,821
1,215,093
$
$
1,436,069
1,283,676
$
$
1,307,741
1,235,466
(1) Effective May 2016, a single correspondent began compressing multiple executions when delivering trades for processing, resulting in a decrease
in year-over-year ticket count for the broker-dealer segment’s clearing business line. This modification did not significantly impact the
correspondent’s clearing revenues.
Mortgage Origination Segment
Income before income taxes in our mortgage origination segment during 2017, 2016 and 2015 was $49.6 million, $77.8
million and $47.5 million, respectively. The year-over-year decrease in income before income taxes during 2017,
compared with 2016, was primarily due to a decrease in noninterest income, partially offset by decreases in noninterest
expense and net interest expense. The increase in income before income taxes during 2016, compared with 2015, was
primarily due to an increase in noninterest income, partially offset by an increase in noninterest expense. Net interest
expense of $0.9 million, $11.6 million and $10.4 million during 2017, 2016 and 2015, respectively, was primarily
comprised of 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 improvement in net interest expense during
2017 compared with 2016 included the effects of increased average hold periods and improved net yields on mortgage
loans held for sale.
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 loan origination volume from refinancings. During
2017, PrimeLending’s refinancing volume was $2.5 billion, a decrease from $4.2 billion during 2016. Due to increases in
mortgage interest rates since the fourth quarter of 2016, refinancing volume and refinancing volume as a percentage of
total loan origination volume decreased to 17.2% in 2017 as compared to 27.1% in 2016. We anticipate the percentage of
refinance volume relative to total loan origination volume will decrease slightly in 2018.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending
through its affiliated business relationships (“ABAs”). For 2017, funded loan volume through ABAs was less than 5% of
the mortgage origination segment’s total loan volume. Currently, PrimeLending owns a 51% membership interest in three
ABAs. We expect production within the ABA channel to represent approximately 5% of the total loan volume during
2018, a slight increase from 2017.
75
The following table provides certain details regarding our mortgage loan originations and sales for the periods indicated
below (dollars in thousands).
Mortgage Loan Originations - units
2017
Amount
% of
Total
62,058
Year Ended December 31,
2016
Amount
% of
Total
66,881
2015
Amount
% of
Total
59,621
Mortgage Loan Originations - volume
$ 14,457,913
$ 15,460,213
$ 13,352,119
Mortgage Loan Originations:
Conventional
Government
Jumbo
Other
Home purchases
Refinancings
Texas
California
Florida
Ohio
Arizona
South Carolina
Washington
Missouri
North Carolina
Maryland
All other states
$
8,666,935
3,440,264
1,415,682
935,032
$ 14,457,913
59.95 % $
23.80 %
9.79 %
6.46 %
9,897,230
3,595,219
1,312,800
654,964
100.00 % $ 15,460,213
64.02 % $
23.25 %
8.49 %
4.24 %
8,394,709
3,395,587
961,598
600,225
100.00 % $ 13,352,119
62.87 %
25.43 %
7.20 %
4.50 %
100.00 %
$ 11,974,571
2,483,342
$ 14,457,913
82.82 % $ 11,276,378
4,183,835
17.18 %
100.00 % $ 15,460,213
72.94 % $
27.06 %
9,891,792
3,460,327
100.00 % $ 13,352,119
74.08 %
25.92 %
100.00 %
$
3,129,008
1,846,172
853,727
634,142
554,463
472,935
465,501
448,565
440,456
430,668
5,182,276
$ 14,457,913
21.64 % $
12.77 %
5.90 %
4.39 %
3.84 %
3.27 %
3.22 %
3.10 %
3.05 %
2.98 %
35.84 %
3,352,469
2,235,915
797,578
637,435
527,055
446,221
538,857
441,125
512,087
521,686
5,449,785
100.00 % $ 15,460,213
21.69 % $
14.46 %
5.16 %
4.12 %
3.41 %
2.89 %
3.49 %
2.85 %
3.31 %
3.37 %
35.25 %
2,967,740
1,965,039
644,090
555,106
415,215
385,347
451,277
379,621
492,879
452,280
4,643,525
100.00 % $ 13,352,119
22.23 %
14.72 %
4.82 %
4.16 %
3.11 %
2.88 %
3.38 %
2.84 %
3.69 %
3.39 %
34.78 %
100.00 %
Mortgage Loan Sales - volume
$ 14,454,260
$ 15,155,340
$ 13,129,069
Refinancing volume decreased to $2.5 billion during 2017 from $4.2 billion during 2016 (representing 17.2% and 27.1%,
respectively, of total loan origination volume), while home purchases volume increased 6.2% to $12.0 billion during 2017
from $11.3 billion during 2016. Refinancing volume increased to $4.2 billion from $3.5 billion during 2016, compared
with 2015 (representing 27.1% and 25.9%, respectively, of total loan origination volume), while home purchases volume
increased 14.0% to $11.3 billion during 2016 from $9.9 billion during 2015.
The mortgage origination segment’s total loan origination volume during 2017 decreased 6.5%, compared with 2016,
while income before income taxes during 2017 decreased 36.3%, compared with 2016. The decrease in income before
income taxes during 2017 was primarily due to a decrease in net gains from sale of loans, in addition to a decrease in the
change in net fair value of interest rate lock commitments (“IRLCs”) and loans held for sale. These changes were partially
offset by decreases in compensation that varies with the volume of mortgage loan originations (“variable compensation”),
net interest expense, and lender paid closing costs. The mortgage origination segment’s total loan origination volume
increased 15.8% between 2016 and 2015, while income before income taxes during 2016 increased 63.8%, compared
with 2015. The increase in income before income taxes between 2016 and 2015 was primarily due to an increase in net
gains from sale of loans, partially offset by increases in variable compensation and segment operating costs.
76
Noninterest income was $632.4 million, $704.1 million and $597.2 million during 2017, 2016 and 2015, respectively, and
was comprised of the following (in thousands).
Net gains from sale of loans
Mortgage loan origination fees
Other mortgage production income:
Change in net fair value and related derivative
activity:
Interest rate lock commitments and loans held for
sale
Mortgage servicing rights asset
Servicing fees
$
$
2017
Year Ended December 31,
2016
577,003 $
536,007 $
94,244
96,267
2015
491,532 $
77,708
Variance
2017 vs 2016 2016 vs 2015
85,471
18,559
(40,996) $
(2,023)
(14,451)
(4,132)
20,720
632,388 $
13,357
(6,277)
23,776
704,126 $
13,796
(5,424)
19,551
597,163 $
(27,808)
2,145
(3,056)
(71,738) $
(439)
(853)
4,225
106,963
Net gains from sale of loans and mortgage origination fees decreased 7.1% and 2.1% during 2017, respectively, compared
with 2016, while net gains from sale of loans and mortgage origination fees increased 17.4% and 23.9% during 2016,
respectively, compared with 2015. The decrease in net gains from sale of loans during 2017, compared with 2016, was
primarily the result of a 4.6% decrease in total loan sales volume in addition to a decrease in average loan sales margin
during the same periods. The decrease in mortgage loan origination fees was primarily the result of a decrease in total
loan origination volume during 2017, compared with 2016, partially offset by an increase in average mortgage loan
origination fees during the same periods. The increase in net gains from sale of loans during 2016, compared with 2015,
was primarily the result of a 15.4% increase in total loan sales volume as well as a slight increase in average loan sales
margin. The increase in mortgage loan origination fees during 2016 was a result of increases in total loan origination
volume and average mortgage loan origination fees, compared with 2015.
Noninterest income included a decrease of $14.5 million during 2017, and increases of $13.4 million and $13.8 million
during 2016 and 2015, respectively, in the net fair value of the mortgage origination segment’s 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. The decrease during 2017, compared with
2016, was primarily the result of decreases in the total volume of individual IRLCs and mortgage loans and the average
value of individual IRLCs and mortgage loans at the end of these periods. The increase during 2016, compared with 2015,
was primarily the result of increases in the volume of IRLCs and mortgage loans held and the average value of individual
IRLCs and mortgage loans at the end of these periods.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary
market, the majority servicing released. During 2017, 2016 and 2015, the mortgage origination segment retained servicing
on approximately 11%, 16% and 18% of loans sold, respectively. The mortgage origination segment’s determination of
whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage
interest rates and refinancing and market activity. The related mortgage servicing rights (“MSR”) asset was valued at
$55.8 million on $4.9 billion of serviced loan volume at December 31, 2017, compared with a value of $63.3 million on
$5.6 billion of serviced loan volume at December 31, 2016. The mortgage origination segment may, from time to time,
manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing
released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on
certain loans sold to the banking segment. Gains and losses associated with such sales to the banking segment and the
related MSR asset are eliminated in consolidation. The mortgage origination segment uses derivative financial
instruments, including various combinations of interest rate swaps, swaptions, forward commitments to sell mortgage-
backed securities, and U.S. Treasury bond futures and options, as a means to mitigate interest rate risk associated with its
MSR asset. Changes in the net fair value of the MSR asset and the related derivatives associated with normal customer
payments, changes in discount rates, prepayment speed assumptions and customer payoffs resulted in net losses of $4.1
million, $6.3 million and $5.4 million during 2017, 2016 and 2015, respectively. Additionally, net servicing income was
$8.6 million, $10.2 million and $8.9 million during 2017, 2016 and 2015, respectively. In March 2017 and May 2016, the
mortgage origination segment sold MSR assets of $17.5 million and $7.6 million, respectively, which represented $1.7
billion and $917.4 million, respectively, of its serviced loan volume at the time.
77
Noninterest expense was $581.9 million, $614.7 million and $539.3 million during 2017, 2016 and 2015, respectively,
and was comprised of the following (in thousands).
Variable compensation
Segment operating costs
Lender paid closing costs
Servicing expense
$
$
2017
Year Ended December 31,
2016
266,373 $
299,733
35,061
13,574
614,741 $
244,333 $
299,453
26,031
12,082
581,899 $
2015
228,590 $
263,049
37,010
10,608
539,257 $
Variance
2017 vs 2016 2016 vs 2015
37,783
36,684
(1,949)
2,966
75,484
(22,040) $
(280)
(9,030)
(1,492)
(32,842) $
Employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods
presented. Variable compensation decreased $22.0 million during 2017, compared with 2016, and comprised 59.1% and
61.5% of the total employees’ compensation and benefits expenses during 2017 and 2016, respectively. Variable
compensation increased $37.8 million during 2016, compared with 2015, and comprised 62.2% of the total employees’
compensation and benefits expenses during 2015. Variable compensation, which is primarily driven by loan origination
volume, tends to fluctuate to a greater degree than loan origination volume because mortgage loan originator and
fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are
achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this
trend.
While total loan origination volumes decreased 6.5% during 2017, compared with 2016, the mortgage origination
segment’s operating costs remained relatively unchanged. The largest fluctuations in segment operating costs during
2017, compared with 2016, were an increase in costs resulting from an increase in the number of mortgage branch
locations and decreases in both corporate and loan processing headcount as a result of decreased loan volume. During
2016, operating costs increased 13.9%, compared with 2015, while total loan origination volumes increased 15.8%. The
increase in segment operating costs was primarily the result of increases in headcount related to loan processing, loan
fulfillment and technology functions. The increases in loan processing and fulfillment headcount levels were initiated
during 2015 primarily to address growth in loan origination volume that began in 2014 and to address October 2015
implementation of TILA RESPA Integrated Disclosures (“TRID”). Additional increases in segment operating costs
during 2016, compared with 2015, were primarily increases in costs associated with loan servicing, an increase in
mortgage branch locations, business development and administrative activities. Historically, segment operating costs tend
to fluctuate with, but at a lesser magnitude than, loan origination volume, as these costs are comprised of salaries,
benefits, occupancy and administrative costs, which are not normally highly sensitive to changes in loan origination
volume.
In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the
origination of their mortgage loan (“lender paid closing costs”). Fluctuations in lender paid closing costs are not always
aligned with fluctuations in loan origination volume. Other loan pricing conditions, including the mortgage loan interest
rate, loan origination fees paid by the customer, and a customer’s willingness to pay closing costs, may influence
fluctuations in lender paid closing costs.
Between January 1, 2008 and December 31, 2017, the mortgage origination segment sold mortgage loans totaling $101.5
billion. These loans were sold under sales contracts that generally include provisions that hold the mortgage origination
segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain
requirements, including representations as to underwriting standards and the validity of certain borrower representations
in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus
certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment
sold loans prior to 2008, it does not anticipate experiencing significant losses in the future on loans originated prior to
2008 because of investor claims under these provisions of its sales contracts.
When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination
segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other
deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with
the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or
reimbursement to the claimant for losses incurred on the loan.
78
Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between
January 1, 2008 and December 31, 2017 (dollars in thousands).
Original Loan Balance
Loss Recognized
Claims resolved with no payment
$
214,259 0.21% $
% of
Loans
Sold
Amount
% of
Loans
Amount
Sold
— 0.00%
Claims resolved because of a loan
repurchase or payment to an investor for
losses incurred (1)
$
241,529 0.24%
455,788 0.45% $
16,332 0.02%
16,332 0.02%
(1) Losses incurred include refunded purchased servicing rights.
The mortgage origination has established a specific claims indemnification liability reserve for each loan it concludes its
obligation to a claimant is both probable and reasonably estimable. An additional indemnification liability reserve has
been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to
the mortgage origination segment based upon a reasonable estimate of such losses.
At December 31, 2017 and 2016, the mortgage origination segment’s total indemnification liability reserve totaled $23.5
million and $18.2 million, respectively. The related provision for indemnification losses was $4.0 million, $4.6 million,
and $4.0 million during 2017, 2016 and 2015, respectively.
Insurance Segment
Losses before income taxes in our insurance segment were $4.1 million during 2017, compared with income before
income taxes of $21.4 million and $15.7 million during 2016 and 2015, respectively. These year-over-year changes
during 2017, compared with 2016 and 2015, were driven primarily by a decline in net insurance premiums earned, loss
and LAE effects of Hurricane Harvey, and other non-catastrophic weather-related losses experienced during 2017.
The insurance segment is subject to claims arising out of severe weather, the incidence and severity of which are
inherently unpredictable. Generally, the insurance segment’s insured risks exhibit higher losses in the second and third
calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although
weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second
calendar quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes,
however, are more likely to occur in the third calendar quarter of the year.
The insurance segment periodically reviews the pricing of its primary products in each state of operation utilizing a
consulting actuarial firm to supplement normal review processes resulting in filings to adjust rates as deemed necessary.
The benefit of these rate actions are not fully realized until all policies under the old rates expire, which typically occurs
one year from the date of rate change implementation. Concurrently, business concentrations are reviewed and actions
initiated, including cancellation of agents, non-renewal of policies and cessation of new business writing on certain
products in problematic geographic areas. The insurance segment has historically utilized rate actions to reduce the rate of
premium growth for targeted areas when compared with the patterns exhibited in prior quarters and years and reduce the
insurance segment’s exposure to volatile weather in these areas, but competition and customer response to rate increases
has negatively impacted customer retention and new business. The insurance segment aims to manage and diversify its
business concentrations and products to minimize the effects of future weather-related events.
The noted negative impact on premiums written and earned and the significance of the higher net loss and LAE incurred
due to current year weather-related events, including Hurricane Harvey, have had a negative impact on current year
operating results. In response, we continue to undertake initiatives to help grow net insurance premiums written and
earned, streamline business activities and expenses, mitigate the impact of future significant weather-related events, as
well as evaluate product offerings and pricing to improve the insurance segment’s long-term financial condition and
operating results. These initiatives, as well as other assumptions and conditions, were reflected in the insurance segment’s
annual impairment evaluation of goodwill and other intangible assets as of October 1, 2017, which indicated no
impairment of goodwill. This analysis and the resulting estimated fair value of our insurance reporting unit exceeded the
carrying value by approximately 12%, which represented a decline in estimated excess fair value over carrying value from
79
recent annual goodwill assessments. This decrease in the excess fair value over carrying value from our 2016 assessment
to our 2017 assessment was primarily a result of a reduction in projected discounted cash flows driven by the insurance
reporting unit’s current operating performance being below expectations, which was primarily attributable to catastrophic
and sub-catastrophic weather-related events that occurred in 2017. In the event future operating performance is below our
forecasted projections, there are negative changes to long-term growth rates or discount rates increase, the fair value of
the insurance reporting unit may decline and we may be required to record a goodwill impairment charge.
The changes experienced in operating results between periods were primarily a result of changes in claims loss experience
associated with the general severity of non-catastrophic and severe weather-related events, and declines in net insurance
premiums written and earned. Based on our estimates of the ultimate losses, claims associated with severe weather-related
events during 2017 totaled $38.1 million through December 31, 2017, with a net loss, after reinsurance, of $33.5 million
during 2017. During 2016, and based on our estimates of the ultimate losses, claims associated with severe weather-
related events during 2016 totaled $44.0 million through December 31, 2016, with a net loss, after reinsurance, of $34.0
million during 2016. During 2015, and based on our estimates of the ultimate losses, claims associated with severe
weather-related events totaled $35.3 million through December 31, 2015, with a net loss, after reinsurance, of $26.2
million during 2015.
The insurance segment’s operations resulted in a combined ratio of 106.5% during 2017, compared with 90.9% and
94.9% during 2016 and 2015, respectively. The increase in the combined ratio during 2017, compared with 2016,
included increases in the loss and LAE ratio and the underwriting expense ratio as previously discussed. The decrease in
the combined ratio during 2016, compared with 2015, was primarily due to the benefit of the current reinsurance structure
that has limited the insurance segment’s retention of claims losses associated with sub-catastrophic weather-related events
experienced through December 31, 2016. Additionally, premiums earned decreasing at a lower rate than loss and LAE
expense also contributed to the decline in the combined ratio during 2016, compared with 2015. The combined ratio is a
measure of overall insurance underwriting profitability, and represents the sum of loss and LAE and underwriting
expenses divided by net insurance premiums earned.
Noninterest income of $151.4 million, $164.8 million and $171.2 million during 2017, 2016 and 2015, respectively,
included net insurance premiums earned of $142.3 million, $155.5 million and $162.1 million, respectively. The
decreases in net insurance premiums earned during 2017 and 2016, compared with 2016 and 2015, respectively, were
primarily due to the effect of decreases in net insurance premiums written.
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,
2016
2017
2015
2017 vs 2016 2016 vs 2015
Variance
$
$
54,706
42,414
36,925
2,884
162
137,091
$
$
64,816
46,792
37,953
3,225
184
152,970
$
$
72,939
52,167
38,161
3,536
222
167,025
$
$
(10,110)
(4,378)
(1,028)
(341)
(22)
(15,879)
$
$
(8,123)
(5,375)
(208)
(311)
(38)
(14,055)
The total direct insurance premiums written for our three largest insurance product lines decreased by $15.5 million
during 2017, compared with 2016, and $13.7 million during 2016, compared with 2015, due primarily to the effects of
competitive pressures in our Texas market.
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,
2016
2017
2015
2017 vs 2016 2016 vs 2015
Variance
$
$
56,784
44,025
38,328
2,993
168
142,298
$
$
65,907
47,580
38,592
3,279
187
155,545
$
$
70,781
50,623
37,032
3,431
215
162,082
$
$
(9,123)
(3,555)
(264)
(286)
(19)
(13,247)
$
$
(4,874)
(3,043)
1,560
(152)
(28)
(6,537)
80
Net insurance premiums earned during 2017 and 2016 decreased, compared to 2016 and 2015, respectively, primarily due
to the decreases in net premiums written noted above.
Noninterest expenses of $158.4 million, $146.6 million and $158.7 million during 2017, 2016 and 2015, respectively,
included 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 2017 was $94.7 million, compared to $89.2 million and $99.1 million during 2016
and 2015, respectively, resulting in loss and LAE ratios during 2017, 2016 and 2015 of 66.6%, 57.4% and 61.1%,
respectively. The increase in the loss and LAE ratio during 2017, compared with 2016, was primarily driven by a 6.1%
increase in loss and LAE expense and a decrease in premiums earned of 8.5%. The increase in the loss and LAE ratio
during 2017 was attributable to non-catastrophic weather-related losses as well as Hurricane Harvey. The actual loss
related to Hurricanes Harvey and Irma, excluding reinstatement premium, was $4.4 million after reinsurance. The lower
claims loss experience during 2016, compared with 2015, was primarily driven by the benefit of the current reinsurance
structure previously discussed, the effects of premiums earned decreasing at a lower rate than loss and LAE expense, and
the decrease in claims loss reserves associated with prior period adverse development of $6.1 million.
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 2017, catastrophic events that did not
exceed reinsurance retention accounted for $33.5 million of the total loss and LAE, as compared to $34.0 million and
$26.2 million during 2016 and 2015, respectively. The inclusion of catastrophic events increased insurance segment
combined ratios by 23.5%, 21.9% and 16.2% during 2017, 2016 and 2015, 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 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
$
$
$
Variance
2017 vs 2016 2016 vs 2015
$
Year Ended December 31,
2016
38,502
16,998
55,500
(3,460)
52,040
155,545
2017
36,549
23,930
60,479
(3,745)
56,734
142,298
$
2015
40,258
17,609
57,867
(3,128)
54,739
162,082
$
$
39.9 %
$
$
33.5 %
$
$
33.8 %
$
$
(1,953)
6,932
4,979
(285)
4,694
(13,247)
$
$
6.4 %
(1,756)
(611)
(2,367)
(332)
(2,699)
(6,537)
(0.3) %
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities, and management and administrative
services to support the overall operations of the Company including, but not limited to, certain executive management,
corporate relations, legal, finance, and acquisition costs. Hilltop’s merchant banking investment activities include the
identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through
its increasingly active merchant bank subsidiary, PlainsCapital Equity, LLC (“PCE”).
As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and
to preserve capital to be deployed through acquisitions. Investment and interest income earned was $0.3 million during
2017, and $0.4 million during each of 2016 and 2015, respectively. Investment and interest income during 2016 and 2015
included $0.2 million and $0.3 million, respectively, of intercompany interest earned on notes receivable held with
Securities Holdings that were paid off in January 2016 and March 2016, respectively.
As a result of previously disclosed strategic leadership and organizational changes, certain interest expenses, headcount
and related noninterest expenses of PCC, which were previously allocated to the banking and mortgage origination
segments, are included within corporate effective January 1, 2017.
81
Interest expense was $10.4 million, $7.6 million and $5.5 million during 2017, 2016 and 2015, respectively. On April 9,
2015, as previously discussed, Hilltop completed its offering of $150.0 million aggregate principal amount of Senior
Notes and used the net proceeds of the offering to redeem all of its outstanding Non-Cumulative Perpetual Preferred
Stock, Series B (“Series B Preferred Stock”) at an aggregate liquidation value of $114.1 million, plus accrued but unpaid
dividends of $0.4 million. Consequently, recurring annual interest expense of $7.5 million is being incurred. In addition,
interest expense during 2017 of $3.0 million on junior subordinated debentures of $67.0 million issued by PCC (the
“Debentures”) was included within corporate as a result of the organizational changes noted above. During 2016, interest
expense on the Debentures of $2.7 million was reported within our operating segments.
Noninterest income during 2017 was primarily comprised of the previously mentioned pre-tax net increase to other
noninterest income of $11.6 million related to the resolution of the appraisal proceedings from the SWS Merger.
Noninterest income during 2016 was nominal, while noninterest income of $81.3 million during 2015 represented the
recognition of a bargain purchase gain related to the SWS Merger. Included in the bargain purchase gain was a reversal of
a $33.4 million valuation allowance against SWS deferred tax assets. This amount was based on our expected ability to
realize these acquired deferred tax assets through our consolidated core earnings, the implementation of certain tax
planning strategies and reversal of timing differences. SWS’s net operating loss carryforwards are subject to an annual
Section 382 limitation on their usage because of the ownership change.
Noninterest expenses of $34.0 million, $29.9 million and $31.9 million during 2017, 2016 and 2015, respectively, were
primarily comprised of employees’ compensation and benefits and professional fees, including corporate governance,
legal and transaction costs. During 2017, compared with 2016, the change in noninterest expenses primarily included
increases associated with the organizational changes noted above related to employees’ compensation and benefits costs
of $3.7 million, professional fees of $4.0 million, and occupancy and equipment expenses of $3.0 million, partially offset
by a decrease of $5.3 million in transaction-related costs directly attributable to the SWS Merger. Specifically, during
2017, Hilltop incurred pre-tax transaction costs related to the SWS Merger of $2.1 million, compared with $7.4 million
during 2016. During 2016, compared with 2015, noninterest expenses included a year-over-year decrease in transaction
and integration-related costs directly attributable to the SWS Merger, partially offset by increases in employees’
compensation and benefits costs of $2.3 million associated with increases in headcount and incentive compensation costs,
as well as other professional fees. During 2016, Hilltop incurred pre-tax transaction costs related to the SWS Merger of
$7.4 million, compared with pre-tax transaction costs related to the SWS merger of $12.9 million and pre-tax integration-
related costs associated with professional fees of $0.5 million during 2015.
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2017 as compared
to December 31, 2016 and 2015.
Securities Portfolio
At December 31, 2017, 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 may 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 the Hilltop Broker-Dealers. Securities that may be
sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand,
general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value,
with unrealized gains and losses recorded in accumulated other comprehensive income (loss). However, with the adoption
of Accounting Standards Update 2016-01 in January 2018, the Company will reclassify all equity investments out of
trading and available for sale securities, with all subsequent changes in fair value recognized in net income, leaving only
debt securities within these categories of investment securities. 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.
82
The table below summarizes our securities portfolio (in thousands).
Trading securities, at fair value
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Unit investment trusts
Private-label securitized product
Other
Securities available for sale, at fair value
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Commercial mortgage-backed securities
Equity securities
Securities held to maturity, at amortized cost
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Total securities portfolio
2017
December 31,
2016
2015
$
—
$
5,940
$
20,481
52,078
372,817
6,125
5,122
96,182
170,413
22,612
1,631
3,705
730,685
36,303
2,539
15,171
5,607
60,699
89,946
41,409
4,292
3,628
265,534
36,244
12,505
19,280
264
34,735
58,588
18,400
12,324
1,325
214,146
24,669
31,801
44,603
96,640
243,505
12,023
233,812
68,662
65,008
—
21,241
765,560
122,652
133,138
8,715
114,702
79,129
87,515
515
19,840
598,007
296,636
35,853
9,207
52,701
97,950
118,725
531
17,500
673,706
—
—
25,146
39,015
16,130
71,373
173,928
55,403
355,849
1,852,094
$
$
40,513
19,606
31,767
217,954
41,991
351,831
1,215,372
$
69,379
23,735
18,658
167,541
27,563
332,022
1,219,874
We had a net unrealized loss of $2.4 million related to the securities available for sale portfolio at December 31, 2017,
compared with a net unrealized loss of $0.2 million, and a net unrealized gain of $3.7 million at December 31, 2016 and
2015, respectively.
Our net unrealized losses associated with the securities held to maturity portfolio were $5.9 million, $6.7 million and $0.6
million at December 31, 2017, 2016 and 2015, respectively.
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, 2017, the banking segment’s securities portfolio of $993.0 million
was comprised of trading securities of $6.5 million, available for sale securities of $630.7 million and held to maturity
securities of $355.8 million.
83
Broker-Dealer Segment
The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate
risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions
and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair
value and record changes in the fair value of the portfolio in operations. Accordingly, the securities portfolio of the
Hilltop Broker-Dealers included trading securities of $724.2 million at December 31, 2017. In addition, the Hilltop
Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future
market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’
ultimate obligation may exceed the amount recognized in the financial statements. These securities, which are carried at
fair value and reported as securities sold, not yet purchased in the consolidated balance sheet, had a value of $232.8
million at December 31, 2017. The Hilltop Broker-Dealers continue to evaluate market opportunities and from time to
time will hold residential mortgage-backed securities in firm inventory which is sold to institutional clients and other
counterparties.
Insurance Segment
The 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, 2017, the insurance segment’s securities portfolio was comprised of $134.9 million in available for sale
securities and $5.8 million of other investments included in other assets within the consolidated balance sheet.
84
U.S. Treasury securities:
Amortized cost
Fair value
Weighted average yield
U.S. government agencies:
Bonds:
Amortized cost
Fair value
Weighted average yield
The following table sets forth the estimated maturities of our debt securities, excluding trading securities, at December 31,
2017. Contractual maturities may be different (dollars in thousands, yields are tax-equivalent).
One Year One Year to Five Years to Greater Than
Or Less
Ten Years
Five Years
Ten Years
Total
$ 16,106
$ 16,049
$
$
1.17 %
3,597
3,551
1.14 %
$
$
4,962
5,069
2.65 %
$
$
—
—
—
$
$
24,665
24,669
1.47 %
Residential mortgage-backed securities:
Amortized cost
Fair value
Weighted average yield
Commercial mortgage-backed
securities:
Amortized cost
Fair value
Weighted average yield
Collateralized mortgage obligations:
Amortized cost
Fair value
Weighted average yield
Corporate debt securities:
Amortized cost
Fair value
Weighted average yield
States and political subdivisions:
Amortized cost
Fair value
Weighted average yield
Total securities portfolio:
Amortized cost
Fair value
Weighted average yield
$ 52,951
$ 52,898
$
$
1.20 %
30,893
30,577
1.97 %
$
$
43
43
$
$
1.85 %
95
101
3.61 %
$
$
$
$
$
$
—
—
—
3,393
3,378
2.39 %
58
58
$
$
2.22 %
9,268
9,122
2.07 %
$
$
5,751
$
$
5,810
5.53 %
31,512
32,273
3.13 %
$
$
$
1,510
1,509
$
1.46 %
2,595
2,587
2.51 %
$
$
$
$
$
$
$
$
$
$
$
$
36,349
36,436
2.49 %
677
694
6.40 %
71,622
71,142
2.22 %
7,239
7,128
1.76 %
28,687
29,573
3.37 %
15,276
15,295
2.40 %
$ 76,419
$ 76,367
$
$
1.53 %
81,353
81,589
$
$
164,812
165,337
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14,999
14,556
$
$
135,192
134,467
1.99 %
1.81 %
262,022
258,841
$
$
262,837
259,679
2.22 %
2.23 %
8,324
8,382
3.14 %
$
$
83,339
82,902
2.31 %
395,211
387,482
$
$
411,776
403,790
1.97 %
1.97 %
918
1,006
6.24 %
$
$
66,868
68,662
3.48 %
100,046
100,698
$
$
119,427
120,089
2.71 %
2.65 %
781,520
770,965
$ 1,104,104
$ 1,094,258
2.43 %
2.50 %
2.17 %
2.19 %
85
Non-Covered Loan Portfolio
Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and
segregated between those considered to be PCI loans and all other originated or acquired loans (in thousands). PCI loans
showed evidence of credit deterioration on the date of acquisition that made it probable that all contractually required
principal and interest payments would not be collected.
December 31, 2017
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Non-covered loans, gross
Allowance for loan losses
Non-covered loans, net of allowance
December 31, 2016
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Non-covered loans, gross
Allowance for loan losses
Non-covered loans, net of allowance
December 31, 2015
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Non-covered loans, gross
Allowance for loan losses
Non-covered loans, net of allowance
December 31, 2014
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Non-covered loans, gross
Allowance for loan losses
Non-covered loans, net of allowance
December 31, 2013
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Non-covered loans, gross
Allowance for loan losses
Non-covered loans, net of allowance
86
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$ 1,675,106 $ 6,099 $ 1,681,205
3,011,524
962,605
40,446
577,889
6,273,669
(60,957)
$ 6,177,546 $ 35,166 $ 6,212,712
2,981,984
961,167
40,319
577,889
6,236,465
(58,919)
29,540
1,438
127
—
37,204
(2,038)
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$ 1,687,781 $ 8,672 $ 1,696,453
2,816,767
786,850
41,352
502,077
5,843,499
(54,186)
$ 5,740,978 $ 48,335 $ 5,789,313
2,777,768
783,383
41,058
502,077
5,792,067
(51,089)
38,999
3,467
294
—
51,432
(3,097)
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$ 1,539,455 $ 13,350 $ 1,552,805
2,313,239
705,356
45,672
590,545
5,207,617
(45,415)
$ 5,094,634 $ 67,568 $ 5,162,202
2,260,464
700,206
44,893
590,545
5,135,563
(40,929)
52,775
5,150
779
—
72,054
(4,486)
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$ 1,366,984 $ 13,442 $ 1,380,426
1,694,835
413,643
53,147
378,425
3,920,476
(37,041)
$ 3,839,845 $ 43,590 $ 3,883,435
1,670,684
404,465
51,009
378,425
3,871,567
(31,722)
24,151
9,178
2,138
—
48,909
(5,319)
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$ 1,318,737 $ 36,816 $ 1,355,553
1,457,253
364,551
55,576
281,713
3,514,646
(33,241)
$ 3,384,150 $ 97,255 $ 3,481,405
1,418,003
344,734
51,067
281,713
3,414,254
(30,104)
39,250
19,817
4,509
—
100,392
(3,137)
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
consists of the non-covered loan portfolio and the 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 and is discussed herein.
The banking segment’s total non-covered loans, net of the allowance for non-covered loan losses, were $7.2 billion, $6.9
billion and $5.9 billion at December 31, 2017, 2016 and 2015, respectively. The banking segment’s non-covered loan
portfolio includes a warehouse line of credit extended to PrimeLending, of which $1.5 billion, $1.6 billion and $1.4
billion was drawn at December 31, 2017, 2016 and 2015, respectively. Effective April 1, 2017, this warehouse line of
credit was increased to $2.2 billion to address seasonal fluctuations in loan origination volumes. Amounts advanced
against the warehouse line of credit 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.
At December 31, 2017, the banking segment had non-covered loan concentrations (loans to borrowers engaged in similar
activities) that exceeded 10% of total non-covered loans in its real estate portfolio. The areas of concentration within our
non-covered real estate portfolio were non-construction commercial real estate loans, non-construction residential real
estate loans, and construction and land development loans, which represented 35.6%, 12.4% and 15.3%, respectively, of
the banking segment’s total non-covered loans at December 31, 2017. The banking segment’s non-covered loan
concentrations were within regulatory guidelines at December 31, 2017.
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 the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s
total non-covered loans, net of the allowance for non-covered loan losses, were $577.5 million, $501.9 million and $590.3
million at December 31, 2017, 2016 and 2015, respectively. The increase during 2017, compared to 2016, was primarily
attributable to increases of $17.0 million in borrowings in margin accounts and $58.1 million in receivables from
customers. The decrease during 2016, compared to 2015, was primarily attributable to decreases of $81.2 million in
borrowings in margin accounts and $6.3 million in receivables from customers.
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 customers 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
2017
December 31,
2016
2015
$ 1,528,834
52,770
$ 1,581,604
$ 1,706,383
42,115
$ 1,748,498
$ 1,410,445
50,390
$ 1,460,835
$
$
850,850
18,851
869,701
$
$
944,550
23,269
967,819
$
$
944,942
23,762
968,704
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, 2017, 2016 and 2015 were
87
$2.0 billion, $2.1 billion and $2.0 billion, respectively, while the related estimated fair values were ($0.2) million, $8.5
million and $(1.2) million, respectively.
Covered Loan Portfolio
Banking Segment
Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as
“covered loans” and reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements,
the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets (including covered
loans): (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4
million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of
net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of
assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent
recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually
billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of
subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The
loss-share agreements for commercial and single family residential assets are in effect for five years and ten years,
respectively, and the loss recovery provisions to the FDIC are in effect for eight years and ten 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 our actual net realized losses over the
life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up”
payment is calculated using a defined formula set forth in the P&A Agreement. The initial estimate of the FDIC
Indemnification Asset at the Bank Closing Date was recorded at the present value of 80% of $240.4 million. As of
December 31, 2017, the Bank projects that the sum of actual plus projected covered losses and reimbursable expenses
subject to the loss-share agreements will be less than $240.4 million. As a result, the Bank has recorded, and expects that
it will continue to record, amortization associated with its FDIC Indemnification Asset. As of December 31, 2017, the
Bank had billed $184.7 million of covered net losses to the FDIC, of which 80%, or $147.8 million, were reimbursable
under the loss-share agreements. As of December 31, 2017, the Bank had received aggregate reimbursements of $145.8
million from the FDIC. While the ultimate amount of any “true-up” payment is unknown at this time and will vary based
upon the amount of future losses or recoveries within our covered loan portfolio, the Bank has recorded a related “true-
up” payment accrual of $16.3 million at December 31, 2017 based on the current estimate of aggregate realized losses on
covered assets over the life of the loss-share agreements. Additionally, as estimates of realized losses on covered assets
change, the value of the FDIC Indemnification Asset will be adjusted and therefore may not be realized. As noted above,
if the Bank continues to experience favorable resolutions within its covered assets portfolio and covered losses, the Bank
will be required to increase its “true-up” payment accrual and recognize amortization on the FDIC Indemnification Asset.
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.
Unless the banking segment acquires additional loans subject to loss-share agreements with the FDIC, the covered
portfolio will continue to decrease as covered loans are liquidated.
88
Covered loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).
December 31, 2017
Commercial and industrial
Real estate
Construction and land development
Covered loans, gross
Allowance for loan losses
Covered loans, net of allowance
December 31, 2016
Commercial and industrial
Real estate
Construction and land development
Covered loans, gross
Allowance for loan losses
Covered loans, net of allowance
December 31, 2015
Commercial and industrial
Real estate
Construction and land development
Covered loans, gross
Allowance for loan losses
Covered loans, net of allowance
December 31, 2014
Commercial and industrial
Real estate
Construction and land development
Covered loans, gross
Allowance for loan losses
Covered loans, net of allowance
December 31, 2013
Commercial and industrial
Real estate
Construction and land development
Covered loans, gross
Allowance for loan losses
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$
$
861 $
194 $
92,444
1,711
95,016
(32)
1,055
179,359
1,715
182,129
(2,729)
94,984 $ 84,416 $ 179,400
86,915
4
87,113
(2,697)
Loans, excluding
PCI Loans
1,185 $
PCI
Loans
1,512 $
Total
Loans
2,697
244,469
8,961
256,127
(413)
122,304 $ 133,410 $ 255,714
127,038
5,204
133,754
(344)
117,431
3,757
122,373
(69)
Loans, excluding
PCI Loans
1,294 $
PCI
Loans
7,507 $
Total
Loans
8,801
341,048
193,546
30,445
20,921
380,294
221,974
(1,532)
(1,500)
158,288 $ 220,474 $ 378,762
147,502
9,524
158,320
(32)
$
$
$
$
Loans, excluding
PCI Loans
PCI
Loans
Total
Loans
$
$
10,345 $ 20,435 $ 30,780
552,850
183,886
368,964
13,021
59,010
45,989
642,640
207,252
435,388
(4,611)
(77)
(4,534)
207,175 $ 430,854 $ 638,029
Loans, excluding
PCI Loans
$
PCI
Loans
Total
Loans
66,943
787,982
564,678
151,444
126,068
1,006,369
729,156
(1,061)
(882)
277,034 $ 728,274 $ 1,005,308
28,533 $ 38,410 $
223,304
25,376
277,213
(179)
Covered loans, net of allowance
$
At December 31, 2017, 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 non-construction residential real estate loans and non-construction commercial real
estate loans, which represented 79.1% and 19.4%, respectively, of the banking segment’s total covered loans at
December 31, 2017. The banking segment’s covered loan concentrations were within regulatory guidelines at
December 31, 2017.
89
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).
December 31, 2017
Commercial and industrial
Real estate (including construction and
land development)
Total
Fixed rate loans
Floating rate loans
Total
Due Within
One Year
$ 2,714,142 $
Due From One Due After
Five Years
To Five Years
Total
372,710 $
132,594 $ 3,219,446
1,087,957
2,269,534
$ 3,802,099 $ 2,642,244 $
799,467
4,156,958
932,061 $ 7,376,404
$ 2,791,110 $ 2,219,687 $
1,010,989
422,557
$ 3,802,099 $ 2,642,244 $
801,508 $ 5,812,305
130,553
1,564,099
932,061 $ 7,376,404
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 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. Estimated
credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of
the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion
thereof, is charged-off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against
the pool discount. Recoveries on charge-offs of loans acquired in the Bank Transactions that occurred prior to their
acquisition represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries
on acquired loans charged-off subsequent to their acquisition are credited to the allowance for loan loss, except for
recoveries on loans accounted for in pools, which are credited to the pool discount.
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 Receivables and Contingencies Topic. Estimates of loss for the Receivables and
Contingencies Topic are calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank
uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report
loan category, and further disaggregates commercial and industrial loans by collateral type. The analysis uses net charge-
off experience by considering charge-offs and recoveries in determining the loss rate. The historical loss calculation for
the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan
category balance. The Bank utilizes a weighted average loss rate to better represent recent trends.
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
90
qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to
differ from historical loss experience, including but not limited to:
•
•
•
•
•
•
•
changes in the volume and severity of past due, non-accrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, non-accrual and classified loans, as well as changes in the nature, volume
and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the
historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for
loan loss changes from quarter to quarter.
The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process,
requiring that timely and appropriate changes 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.
In connection with the Bank Transactions, we acquired loans both with and without evidence of credit quality
deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan
basis, while PCI loans acquired in each of the FNB Transaction and the SWS Merger are accounted for in pools as well as
on an individual loan basis. We have established under our PCI accounting policy a framework to aggregate certain
acquired loans into various loan pools based on a minimum of two layers of similar risk characteristics for the purpose of
determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and
measurement provisions for income accretion and impairment testing. The similar risk characteristics used for the pooling
of the FNB and SWS PCI loans are risk grade and loan collateral type. The loans acquired in the Bank Transactions were
initially recorded at fair value with no carryover of any allowance for loan losses.
An allowance for loan losses on PCI loans is calculated using the quarterly recast of cash flows expected to be collected
for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as
default rates, loss severity given default and prepayment speed assumptions (similar to those used for the initial fair value
estimate). Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or
pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If
expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any
remaining difference increases the accretable yield. This increase in accretable yield is taken into income over the
remaining life of the loan.
Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each
reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for
originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value
discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a
provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce
any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance
established for that loan.
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
91
other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking
segment, was $14.3 million, $40.6 million and $12.7 million during 2017, 2016 and 2015, respectively. The significant
changes in the provision for loan losses during 2017, compared with 2016, and during 2016, compared with 2015, were
primarily the result of the previously mentioned $24.5 million charge-off of a single large loan by the Bank during the
second quarter of 2016.
The allowance for loan losses is subject to regulatory examination, 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, 2017, additional provisions for losses on
existing loans may be necessary in the future.
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 year
Provisions charged to operations
Recoveries of non-covered loans previously charged
2017
$ 54,186
11,406
2016
$ 45,415
41,741
Year Ended December 31,
2015
$ 37,041
12,173
2014
$ 33,241
7,747
$
2013
3,409
36,093
off:
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Total recoveries
Non-covered loans charged off:
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer
Total charge-offs
Net charge-offs
Balance, end of year
Non-covered allowance for loan losses as a
percentage of gross non-covered loans
1,833
225
7
79
—
2,144
1,931
395
—
123
—
2,449
3,558
520
—
127
123
4,328
2,943
218
185
105
1
3,452
3,439
282
265
61
—
4,047
6,253
305
13
208
—
6,779
(4,635)
$ 60,957
33,776
1,439
—
203
1
35,419
(32,970)
$ 54,186
7,144
605
—
378
—
8,127
(3,799)
$ 45,415
6,926
114
—
359
—
7,399
(3,947)
$ 37,041
9,359
209
524
216
—
10,308
(6,261)
$ 33,241
0.97 %
0.93 %
0.87 %
0.94 %
0.95 %
92
Covered Portfolio
Balance, beginning of period
Provisions charged to (recapture from) operations
Recoveries of covered loans previously charged off:
Commercial and industrial
Real estate
Construction and land development
Total recoveries
Covered loans charged off:
Commercial and industrial
Real estate
Construction and land development
Total charge-offs
Net recoveries (charge-offs)
Balance, end of period
Covered allowance for loan losses as a percentage of
Year Ended December 31,
2017
$
413
2,865
2016
$ 1,532
(1,121)
$
2015
4,611
542
$
2014
1,061
9,186
$
2013
—
1,065
6
6
10
22
49
522
—
571
(549)
$ 2,729
$
—
17
104
121
6
62
51
119
2
413
222
120
—
342
—
—
—
—
915
2,869
179
3,963
(3,621)
1,532
$
90
5,399
147
5,636
(5,636)
4,611
$
$
—
—
—
—
4
—
—
4
(4)
1,061
gross covered loans
1.50 %
0.16 %
0.40 %
0.72 %
0.11 %
The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross
loans, excluding unearned income, within our non-covered and covered loan portfolios are presented in the tables below
(dollars in thousands).
2017
2016
December 31,
2015
% of
Gross
Non-
Covered
Loans
% of
Gross
Non-
Covered
Loans
% of
Gross
Non-
Covered
Loans
2014
2013
% of
Gross
Non-
Covered
Loans
Reserve
% of
Gross
Non-
Covered
Loans
Reserve
Reserve
$
23,674
Reserve
21,369
Reserve
19,845
26.80 % $
29.03 % $
29.82 % $ 18,833
35.21 % $ 16,717
38.57 %
36,619
311
353
63.35 %
0.64 %
9.21 %
60,957 100.00 % $
32,238
424
155
61.67 %
0.71 %
8.59 %
54,186 100.00 % $
$
25,047
314
209
51.84 %
1.58 %
8.01 %
45,415 100.00 % $ 37,041 100.00 % $ 33,241 100.00 %
57.96 %
0.88 %
11.34 %
53.78 %
1.36 %
9.65 %
16,288
88
148
17,581
461
166
2017
2016
December 31,
2015
2014
2013
% of
Gross
Covered
loans
% of
Gross
Covered
Loans
% of
Gross
Covered
Loans
Reserve
% of
Gross
Covered
Loans
% of
Gross
Covered
Loans
Reserve
Reserve
Reserve
0.58 % $
35
1.05 % $
758
2.31 % $
1,193
4.79 % $
1,053
6.65 %
Reserve
$
24
2,705
2,729
99.42 %
100.00 % $
$
378
413
98.95 %
100.00 % $
774
1,532
97.69 %
100.00 % $
3,418
4,611
95.21 %
100.00 % $
8
93.35 %
1,061 100.00 %
Non-
Covered Portfolio
Commercial and industrial
Real estate (including
construction and land
development)
Consumer
Broker-dealer
Total
Covered Portfolio
Commercial and industrial
Real estate (including
construction and land
development)
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. Potential problem loans are assigned a grade of special mention within our risk grading matrix. Potential
problem loans do not include PCI loans because PCI loans exhibited evidence of credit deterioration at acquisition that
made it probable that all contractually required principal payments would not be collected. Within our non-covered loan
portfolio, we had five credit relationships totaling $27.3 million of potential problem loans at December 31, 2017,
93
compared with four credit relationships totaling $3.8 million of potential problem loans at December 31, 2016 and two
credit relationships totaling $1.6 million of potential problem loans at December 31, 2015. Within our covered loan
portfolio, we had one credit relationship totaling $0.4 million of potential problem loans at December 31, 2017, compared
with one credit relationship totaling $0.5 million with potential problem loans at December 31, 2016 and December 31,
2015.
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
Broker-dealer
2017
2016
December 31,
2015
2014
2013
$
$
20,878
18,978
611
56
—
40,523
$
9,515
13,932
755
244
—
$ 24,446
$ 17,764
7,160
114
7
—
$ 25,045
$ 16,648
4,707
703
—
—
$ 22,058
$
$
16,730
6,511
112
—
—
23,353
Non-covered non-performing loans as a percentage of
total non-covered loans
0.51 %
0.32 %
0.37 %
0.42 %
0.51 %
Non-covered other real estate owned
$
3,883
$
4,507
$
394
$
808
$
4,805
Other repossessed assets
$
323
$
1,117
$
—
$
361
$
13
Non-covered non-performing assets
$
44,729
$ 30,070
$ 25,439
$ 23,227
$
28,171
Non-covered non-performing assets as a percentage of
total assets
Non-covered loans past due 90 days or more and still
0.33 %
0.24 %
0.21 %
0.25 %
0.32 %
accruing
$
85,113
$ 47,486
$ 50,776
$ 19,237
$
7,301
Troubled debt restructurings included in accruing non-
covered loans
$
1,150
$
1,196
$
1,418
$
2,901
$
1,055
At December 31, 2017, total non-covered non-performing assets increased $14.7 million to $44.7 million, compared with
$30.1 million at December 31, 2016. Total non-covered non-performing assets increased $4.7 million to $30.1 million,
compared with $25.4 million at December 31, 2015. Non-covered non-performing loans totaled $40.5 million, $24.4
million and $25.0 million at December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, non-covered non-
accrual loans included 19 commercial and industrial relationships with loans of $20.9 million secured by accounts
receivable, life insurance, oil and gas, livestock, and equipment. Non-covered non-accrual loans at December 31, 2017
also included $19.0 million characterized as real estate loans, including eight commercial real estate loan relationships
totaling $14.6 million and $4.4 million in loans secured by residential real estate, $2.7 million of which were classified as
loans held for sale, as well as construction and land development loans of $0.6 million. At December 31, 2016, non-
covered non-accrual loans included 19 commercial and industrial relationships with loans of $9.5 million secured by
accounts receivable, life insurance, livestock, oil and gas, and equipment. Non-covered non-accrual loans at December 31,
2016 also included $13.9 million characterized as real estate loans, including five commercial real estate loan
relationships of $11.0 million and loans secured by residential real estate of $2.9 million, $1.7 million of which were
classified as loans held for sale, as well as construction and land development loans of $0.8 million. The $16.1 million
increase in non-covered non-accrual loans from December 31, 2016 to December 31, 2017 was primarily due to $15.4
million in loans at the Bank (two commercial and industrial relationships and one real estate relationship) being moved to
non-accrual during 2017. At December 31, 2015, non-covered non-accrual loans included 20 commercial and industrial
relationships with loans of $17.4 million secured by accounts receivable, inventory, life insurance, livestock, ad oil and
gas, and a total of $0.3 million in lease financing receivables. Non-covered non-accrual loans at December 31, 2015 also
included $7.2 million characterized as real estate loans, including four commercial real estate loan relationships of $4.6
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million and loans secured by residential real estate of $2.6 million, $1.6 million 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 $0.6 million to $3.9 million at December 31, 2017, compared with $4.5 million at
December 31, 2016. Changes in non-covered OREO included the addition of six properties totaling $2.2 million, the
disposal of eight properties totaling $2.0 million and downward valuation adjustments of $0.8 million. At December 31,
2017, non-covered OREO included commercial properties of $3.6 million and other real estate properties of $0.3 million.
At December 31, 2016, non-covered OREO included commercial properties of $4.2 million and other real estate
properties of $0.3 million.
Non-covered non-PCI loans past due 90 days or more and still accruing were $85.1 million, $47.5 million and $50.8
million at December 31, 2017, 2016 and 2015, respectively, substantially all of which were loans held for sale and
guaranteed by U.S. Government agencies, including loans that are subject to repurchase, or have been repurchased, by
PrimeLending. The increase in non-covered loans past due 90 days or more and still accruing from December 31, 2016 to
December 31, 2017 was primarily due to an increase in Government National Mortgage Association related loans subject
to repurchase within our mortgage origination segment. This increase in loans subject to repurchase was partially due to
increased delinquencies resulting from the granting of forbearance by loan servicers to provide flexibility to borrowers
impacted by natural disasters during 2017.
At December 31, 2017, troubled debt restructurings (“TDRs”) on non-covered loans totaled $10.7 million. These TDRs
were comprised of $1.2 million of non-covered loans that were considered to be performing and non-covered non-
performing loans of $9.6 million reported in non-accrual loans. At December 31, 2016, TDRs on non-covered loans
totaled $6.4 million, consisting of $1.2 million related to non-covered loans that were considered to be performing and
non-covered non-performing loans of $5.2 million reported in non-accrual loans. At December 31, 2015, TDRs on non-
covered loans totaled $9.3 million, consisting of $1.4 million related to non-covered loans that were considered to be
performing and non-covered non-performing loans of $7.9 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
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
2017
2016
December 31,
2015
2014
2013
$
$
—
5,087
17
5,104
$
$
52
3,765
19
3,836
$
$
68
2,958
5,952
8,978
$
1,325
31,869
1,029
$ 34,223
$
$
973
249
575
1,797
2.80 %
1.50 %
2.36 %
5.33 %
0.18 %
$
2,433
6,933
4,667
22,711
$ 36,744
$
7,396
9,558
7,926
26,762
$ 51,642
$ 17,718
33,425
9,190
38,757
$ 99,090
$ 15,711
40,889
21,719
58,626
$ 136,945
$ 11,634
51,897
36,866
42,436
$ 142,833
Other repossessed assets
$
—
$
—
$
—
$
—
$
—
Covered non-performing assets
$ 41,848
$ 55,478
$ 108,068
$ 171,168
$ 144,630
Covered non-performing assets as a percentage of total
assets
0.31 %
0.44 %
0.91 %
1.85 %
1.62 %
Covered loans past due 90 days or more and still accruing
$
283
$
173
$
—
$
67
$
—
Troubled debt restructurings included in accruing covered
loans
$
283
$
503
$
515
$
326
$
—
95
At December 31, 2017, covered non-performing assets decreased by $13.6 million to $41.8 million, compared with $55.5
million at December 31, 2016, due to a decrease in covered other real estate owned of $14.9 million, partially offset by an
increase in covered non-accrual loans of $1.3 million. At December 31, 2016, covered non-performing assets decreased
by $52.6 million to $55.5 million, compared with $108.1 million at December 31, 2015, due to decreases in covered non-
accrual loans of $5.1 million and covered other real estate owned of $47.4 million. Covered non-performing loans totaled
$5.1 million, $3.8 million and $9.0 million at December 31, 2017, 2016 and 2015, respectively. At December 31, 2017,
covered non-performing loans included 53 residential real estate loan relationships of $5.1 million. At December 31,
2016, covered non-performing loans included one commercial and industrial relationship with loans of $0.1 million, three
commercial real estate loan relationships of $0.7 million and 31 residential real estate loan relationships of $3.0 million.
At December 31, 2015, covered non-performing loans included four commercial and industrial relationships with loans of
$0.1 million secured by accounts receivable and inventory, two commercial real estate loan relationships of $0.4 million,
25 residential real estate loan relationships of $2.5 million, as well as construction and land development loans of $6.0
million.
OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as “covered
OREO” and reported separately in our consolidated balance sheets. Covered OREO decreased $14.9 million to $36.7
million at December 31, 2017, compared with $51.6 million at December 31, 2016. The decrease was primarily due to the
disposal of 163 properties totaling $17.7 million and fair value valuation decreases of $3.7 million, partially offset by the
addition of 48 properties totaling $6.5 million. Covered OREO decreased $47.5 million to $51.6 million at December 31,
2016, compared with $99.1 million at December 31, 2015. The decrease was primarily due to the disposal of 212
properties totaling $42.9 million and fair value valuation decreases of $18.5 million, partially offset by the addition of 124
properties totaling $13.9 million.
Covered non-PCI loans past due 90 days or more and still accruing totaled $0.3 million at December 31, 2017 and
included four residential real estate loans. Covered non-PCI loans past due 90 days or more and still accruing totaled $0.2
million at December 31, 2016 and included one residential real estate loan and one commercial and industrial loan. There
were no covered non-PCI loans past due 90 days or more and still accruing at December 31, 2015.
At December 31, 2017, 2016 and 2015, TDRs on covered loans totaled $1.2 million, $1.4 million, and $1.5 million,
respectively. At December 31, 2017, TDRs on covered loans consisted of $0.3 million related to covered loans that were
considered to be performing and covered non-performing loans of $0.9 million included in non-accrual loans. At
December 31, 2016, TDRs on covered loans consisted of $0.5 million related to covered loans that were considered to be
performing and covered non-performing loans of $0.9 million included in non-accrual loans. At December 31, 2015,
TDRs on covered loans consisted of $0.5 million related to covered loans that were considered to be performing and
covered non-performing loans of $1.0 million included in non-accrual loans.
Insurance Losses and Loss Adjustment Expenses
At December 31, 2017, 2016 and 2015, our gross reserve for unpaid losses and LAE was $30.2 million, $35.8 million,
and $44.4 million, respectively, including estimated recoveries from reinsurance of $11.5 million, $9.4 million, and $13.5
million, respectively. The liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all
losses incurred, including losses for claims that have not yet been reported, 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.
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
96
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, 2017, this
equates to approximately plus or minus $1.9 million, or 1.6% of insurance segment equity, and 2.0% of calendar year
2017 insurance losses.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its
investments 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. Average
deposits totaled $7.5 billion during 2017 and were higher than average deposits of $7.1 billion during 2016 and $7.0
billion during 2015. For the periods presented in the table below, the average rates paid associated with time deposits
include the effects of amortization of the deposit premiums booked as a part of the Bank Transactions.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
2017
Average
Balance
$ 2,309,776
3,671,521
234,420
1,314,418
$ 7,530,135
Year Ended December 31,
2016
Average
Balance
Average
Rate Paid
2015
Average
Balance
Average
Rate Paid
Average
Rate Paid
0.00 % $ 2,241,561
0.29 % 3,185,006
0.10 %
301,877
1.05 % 1,337,491
0.33 % $ 7,065,935
0.00 % $ 2,187,336
0.14 % 3,011,647
0.15 %
297,857
0.81 % 1,494,573
0.22 % $ 6,991,413
0.00 %
0.13 %
0.15 %
0.74 %
0.22 %
97
The maturity of consolidated interest-bearing time deposits of $100,000 or more at December 31, 2017 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
$
$
200,474
178,623
212,491
498,772
1,090,360
The banking segment experienced an increase of $192.6 million in interest-bearing time deposits of $100,000 or more at
December 31, 2017, compared to December 31, 2016. This is compared to an increase of $125.8 million in interest-
bearing time deposits of $100,000 or more at December 31, 2016, compared to December 31, 2015. The increases during
both periods were primarily due to our strategic decision to offer more aggressive time deposit rate options. At December
31, 2017, there were $791.7 million in interest-bearing time deposits scheduled to mature within one year.
Borrowings
Our borrowings are shown in the table below (dollars in thousands).
2017
December 31,
2016
2015
Short-term borrowings
Notes payable
Junior subordinated debentures
Average
Rate Paid
Balance
Average
Rate Paid
Balance
$ 1,206,424
208,809
67,012
$ 1,482,245
1.20 % $ 1,417,289
317,912
3.65 %
4.50 %
67,012
1.84 % $ 1,802,213
Balance
947,373
0.65 % $
238,716
3.89 %
3.99 %
67,012
1.57 % $ 1,253,101
Average
Rate Paid
0.56 %
3.93 %
3.58 %
1.38 %
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 $210.9 million decrease in short-term
borrowings at December 31, 2017 compared with December 31, 2016 included a net decrease of $735.4 million in our
banking segment primarily associated with a decrease in FHLB notes, partially offset by an increase of $549.6 million in
short-term bank loans and securities sold under agreements to repurchase used by the Hilltop Broker-Dealers to finance
their activities. The $469.9 million increase in short-term borrowings at December 31, 2016 compared with December 31,
2015 included an increase in borrowings of $428.2 million in our banking segment primarily associated with an increase
in borrowings under the mortgage origination segment’s warehouse line of credit with the Bank and a net increase of
$34.5 million in short-term bank loans and securities sold under agreements to repurchase used by the Hilltop Broker-
Dealers to finance their activities. Notes payable at December 31, 2017 of $208.8 million was comprised of $148.4
million related to Senior Notes, net of loan origination fees, FHLB borrowings with an original maturity greater than one
within our banking segment of $19.4 million, insurance segment term notes of $28.5 million, and mortgage origination
segment borrowings of $12.5 million. Notes payable at December 31, 2016 of $317.9 million was comprised of $148.3
million related to Senior Notes, net of loan origination fees, associated with our debt offering in April 2015, FHLB
borrowings with an original maturity greater than one year held by the former SWS FSB within the banking segment of
$102.6 million, insurance segment term notes of $50.5 million, and mortgage origination segment borrowings of $16.5
million. The decrease in notes payable at December 31, 2017 compared to December 31, 2016 included the payoff by
NLC of its $20.0 million insurance company note payable due March 2035. Notes payable at December 31, 2015 of
$238.7 million was comprised of $148.2 million related to Senior Notes, net of loan origination fees, insurance segment
term notes of $54.5 million, and FHLB borrowings with an original maturity greater than one year held by the former
SWS FSB within the banking segment of $36.0 million. The average rate paid associated with notes payable includes the
effect of amortization of the premiums on FHLB borrowings booked as a part of the SWS Merger.
Liquidity and Capital Resources
Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets.
Hilltop’s primary investment objectives, as a holding company, are to support capital deployment for organic growth and
to preserve capital to be deployed through acquisitions. At December 31, 2017, Hilltop had $96.8 million in freely
available cash and cash equivalents, a decrease of $7.1 million from $103.9 million at December 31, 2016. This decrease
98
in available cash was primarily due to the net effects of Hilltop’s payment of $55.0 million related to the resolution of the
SWS appraisal proceeding, $27.4 million associated with our stock repurchase program, $23.1 million in cash dividends
declared and paid, a $10.0 million capital contribution to PCE and other general corporate expenses, partially offset by
Hilltop’s receipt of $94.5 million in dividends from its subsidiaries and receipt of $20.6 million from PCC due to
organizational changes. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or
debt issuances. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from
its subsidiaries. We believe that Hilltop’s liquidity is sufficient for the foreseeable future, with current short-term liquidity
needs including operating expenses, interest on debt obligations, dividend payments to stockholders and potential stock
repurchases.
Dividend Program and Declaration
In October 2016, we announced that our board of directors authorized a dividend program under which we intend pay
quarterly dividends on our common stock, subject to quarterly declarations by our board of directors. During 2017, we
declared and paid cash dividends of $0.24 per common share, or $23.1 million.
On January 25, 2018, our board of directors declared a quarterly cash dividend of $0.07 per common share, payable on
February 28, 2018 to all common stockholders of record as of the close of business on February 15, 2018.
Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation
of 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.
Pending Acquisition
On February 13, 2018, we entered into a definitive agreement to acquire privately-held, Houston-based The Bank of River
Oaks (“BORO”) in an all-cash transaction. Under the terms of the definitive agreement, we have agreed to pay cash in the
aggregate amount of $85 million to the shareholders and option holders of BORO. As of December 31, 2017, BORO had
unaudited total assets, gross loans and deposits of approximately $454 million, $344 million and $406 million,
respectively. The transaction is subject to customary closing conditions, including regulatory approvals and approval by
shareholders of BORO, and is expected to close during the third quarter of 2018.
Senior Notes due 2025
On April 9, 2015, we completed an offering of $150.0 million aggregate principal amount of our 5% senior notes due 2025
(“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the Securities Act.
The Senior Unregistered Notes were offered within the United States only to qualified institutional buyers pursuant to Rule
144A under the Securities Act, and to persons outside of the United States under Regulation S under the Securities Act. The
Senior Unregistered Notes were issued pursuant to an indenture, dated as of April 9, 2015 (the “indenture”), by and between
Hilltop and U.S. Bank National Association, as trustee. The net proceeds from the offering, after deducting estimated fees
and expenses and the initial purchasers’ discounts, were approximately $148 million. We used the net proceeds of the
offering to redeem all of our outstanding Series B Preferred Stock at an aggregate liquidation value of $114.1 million, plus
accrued but unpaid dividends of $0.4 million, and Hilltop utilized the remainder for general corporate purposes.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, we entered into a registration rights
agreement with the initial purchasers of the Senior Unregistered Notes. Under the terms of the registration rights
agreement, we agreed to offer to exchange the Senior Unregistered Notes for notes registered under the Securities Act (the
“Senior Registered Notes”). The terms of the Senior Registered Notes are substantially identical to the Senior
Unregistered Notes for which they were exchanged (including principal amount, interest rate, maturity and redemption
rights), except that the Senior Registered Notes generally are not subject to transfer restrictions. On May 22, 2015, and
subject to the terms and conditions set forth in the Senior Registered Notes prospectus, we commenced an offer to
exchange the outstanding Senior Unregistered Notes for Senior Registered Notes. Substantially all of the Senior
Unregistered Notes were tendered for exchange, and on June 22, 2015, we fulfilled all of the requirements of the
registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes in exchange for the
tendered Senior Unregistered Notes. We refer to the Senior Registered Notes and the Senior Unregistered Notes that
remain outstanding collectively as the “Senior Notes.”
99
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October
15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem
the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the
maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the
Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At December 31,
2017, $150.0 million of our Senior Notes was outstanding.
The indenture contains covenants that limit our ability to, among other things and subject to certain significant exceptions:
(i) dispose of or issue voting stock of certain of our bank subsidiaries or subsidiaries that own voting stock of our bank
subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of
certain of our bank subsidiaries or subsidiaries that own capital stock of our bank subsidiaries and (iii) sell all or
substantially all of our assets or merge or consolidate with or into other companies. The indenture also provides for
certain events of default, which, if any of them occurs, would permit or require the principal amount, premium, if any, and
accrued and unpaid interest on the then outstanding Senior Notes to be declared immediately due and payable.
Stock Repurchase Program
In January 2017, our board of directors reauthorized the stock repurchase program originally approved during the second
quarter of 2016 through January 2018. In January 2018, our board of directors authorized a stock repurchase program
through January 2019. Pursuant to the stock repurchase program, we are authorized to repurchase, in the aggregate, up to
$50.0 million of our outstanding common stock. Under the stock repurchase program authorized, we may repurchase
shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated
under the Exchange Act. The extent to which we repurchase our shares and the timing of such repurchases depends upon
market conditions and other corporate considerations, as determined by Hilltop’s management team. Repurchased shares
will be returned to our pool of authorized but unissued shares of common stock. During 2017, the Company paid $27.4
million to repurchase an aggregate of 1,057,656 shares of common stock at an average price of $25.87 per share. The
purchases were funded from available cash balances.
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 net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of
$240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7
million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the
resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of
subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses
actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount
of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family assets. The loss-share
agreements for commercial and single family residential loans are in effect for five years and ten years, respectively, from
the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for eight years and ten 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 our actual net realized
losses over the life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The
“true-up” payment is calculated using a defined formula set forth in the P&A Agreement. While the ultimate amount of
any “true-up” payment is unknown at this time and will vary based upon the amount of future losses or recoveries within
our covered loan portfolio, the Bank has recorded a related “true-up” payment accrual of $16.3 million at December 31,
2017 based on the current estimate of aggregate realized losses on covered assets over the life of the loss-share
agreements.
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-
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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 January 2015, the comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for
PlainsCapital and Hilltop for reporting periods beginning after January 1, 2015 (subject to a phase-in period through
January 2019). Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further
composed of common equity Tier 1 capital and additional Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier
2 capital. We perform reviews of the classification and calculation of risk-weighted assets to ensure accuracy and
compliance with the Basel III regulatory capital requirements. Our capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain
discretionary bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which
requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer helps to
ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of
economic stress. The buffer is measured relative to risk-weighted assets. The phase-in of the capital conservation buffer
requirements began on January 1, 2016 for Hilltop and PlainsCapital. Based on the actual ratios as noted below, Hilltop
and PlainsCapital exceed each of the capital conservation buffer requirements in effect as of December 31, 2017, as well
as the fully phased-in requirements through 2019.
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are
allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if
an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion
in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier
2 capital. All of the debentures issued to the 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, 2017, under guidance issued by the Board of Governors of the
Federal Reserve System.
At December 31, 2017, Hilltop had a total capital to risk weighted assets ratio of 18.78%, Tier 1 capital to risk weighted
assets ratio of 18.24%, common equity Tier 1 capital to risk weighted assets ratio of 17.71% and a Tier 1 capital to
average assets, or leverage, ratio of 12.94%. Accordingly, Hilltop’s actual capital amounts and ratios in accordance with
Basel III exceeded the regulatory capital requirements including conservation buffer in effect at the end of the period and
on a fully phased-in basis as if such requirements were currently in effect.
At December 31, 2017, PlainsCapital had a total capital to risk weighted assets ratio of 15.29%, Tier 1 capital to risk
weighted assets ratio of 14.47%, common equity Tier 1 capital to risk weighted assets ratio of 14.47%, and a Tier 1
capital to average assets, or leverage, ratio of 12.32%. Accordingly, PlainsCapital’s actual capital amounts and ratios in
accordance with Basel III resulted in it being considered “well-capitalized” and exceeded the regulatory capital
requirements including conservation buffer in effect at the end of the period and on a fully phased-in basis as if such
requirements were currently in effect.
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 — Corporate — Capital Adequacy Requirements and
BASEL III” set forth in Part I, Item I. of our Annual Report on Form 10-K.
Banking Segment
Within our banking segment, our primary uses of cash are for customer withdrawals and extensions of credit as well as
our borrowing costs and other operating expenses. Our asset and liability group is responsible for continuously
monitoring our liquidity position to ensure that our assets and liabilities are managed in a manner that will meet our short-
term and long-term cash requirements. Our goal is to manage our liquidity position in a manner such that we can meet our
customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand
without penalizing earnings. 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
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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 time deposits, term loans at the
FHLB and borrowings under lines of credit with other financial institutions.
We had deposits of $8.0 billion at December 31, 2017, an increase of $914.3 million from $7.1 billion at December 31,
2016. 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. The Bank regularly evaluates its deposit products and
pricing structures relative to the market to maintain competitiveness over time. At December 31, 2017, money market
deposits, including brokered deposits, were $2.3 billion; time deposits, including brokered deposits, were $1.4 billion; and
noninterest bearing demand deposits were $2.4 billion. Money market deposits, including brokered deposits, increased by
$572.7 million from $1.8 billion and time deposits, including brokered deposits, increased $213.5 million from $1.2
billion at December 31, 2016.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 8.47% of the
Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively
accounted for 4.45% of the Bank’s total deposits at December 31, 2017. 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.
Broker-Dealer Segment
The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and non-interest-
bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financings
and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net
capital and customer protection rules. At December 31, 2017, Hilltop Securities had credit arrangements with five
unaffiliated banks of up to $725.0 million. These credit arrangements are used to finance securities owned, securities held
for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit
arrangements are provided on an “as offered” basis and are not committed lines of credit. In addition, Hilltop Securities
has a committed revolving credit facility with an unaffiliated bank of up to $50.0 million. At December 31, 2017, Hilltop
Securities had borrowed $315.5 million under its credit arrangements and had no borrowings under its credit facility.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank. At
December 31, 2017, PrimeLending had outstanding borrowings of $1.5 billion against the warehouse line of credit.
Effective April 1, 2017, this warehouse line of credit was increased to $2.2 billion to address seasonal fluctuations in loan
origination volumes. 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 an unaffiliated bank of up to $1.0 million, of which no borrowings were outstanding at December 31, 2017.
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures
Management”) which holds an ownership interest in and is the managing member of certain ABAs. At December 31,
2017, these ABAs have combined available lines of credit totaling $70.0 million, $30.0 million of which was with a
single unaffiliated bank, while $40.0 million was with the Bank. At December 31, 2017, Ventures Management had
outstanding borrowings of $12.5 million with a single unaffiliated bank.
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 $176.9 million, or 86.8%, equity investments of $21.2 million and other investments of $5.8
million comprised NLC’s $203.9 million in total cash and investments at December 31, 2017. 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 an unaffiliated bank and an investment management agreement with DTF
Holdings, LLC.
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Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2017 (in thousands). Our
reserve for losses and LAE 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.
Payments Due by Period
More than 1 3 Years or
1 year
or Less
Year but Less More but Less
than 3 Years
than 5 Years
5 Years
or More
Reserve for losses and LAE
Short-term borrowings
Long-term debt obligations
Capital lease obligations
Operating lease obligations
FDIC loss-share obligation (1)
Total
$
18,702 $
1,224,567
38,591
1,444
36,602
—
$ 1,319,906 $
9,064 $
—
28,145
3,019
54,588
—
94,816 $
392 $
2,055 $
—
25,240
2,578
30,735
—
Total
30,213
—
1,224,567
327,040
419,016
4,125
11,166
31,422
153,347
16,325
16,325
60,608 $ 379,304 $ 1,854,634
(1) 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 our actual net realized losses over the life of the loss-share agreements are less than the FDIC’s initial estimate
of losses on covered assets. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement. While the ultimate
amount of any “true-up” payment is unknown at this time and will vary based upon the amount of future losses or recoveries within our covered
loan portfolio, the Bank has recorded the noted “true-up” payment accrual at December 31, 2017 based on the current estimate of aggregate realized
losses on covered assets over the life of the loss-share agreements.
Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently
require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative
value of money due to inflation or recession are generally not considered. The primary effect of inflation on our
operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly
influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the
inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the
expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of
the U.S. government, its agencies and various other governmental regulatory authorities.
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in
our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These
transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses,
at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon
customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under
these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated
with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated
financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to
a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third
party, we would be required to fund the commitment. The maximum potential amount of future payments we could be
required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be
103
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 $1.9 billion at December 31, 2017
and outstanding financial and performance standby letters of credit of $24.4 million at December 31, 2017.
In the normal course of business, the Hilltop Broker-Dealers execute, settle and finance various securities transactions that
may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not
fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by
customers or for the account of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing
organization clients, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-
dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase
commitments.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of
operations and financial condition. Our significant accounting policies are presented in Note 1 to our consolidated
financial statements, which are included in this Annual Report. We have identified certain significant accounting policies
which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect
amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the
most critical in preparing our consolidated financial statements relate to allowance for loan losses, FDIC Indemnification
Asset, reserve for losses and LAE, goodwill and identifiable intangible assets, mortgage loan indemnification liability,
mortgage servicing rights asset 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.
FDIC Indemnification Asset
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 the accretion
rate is adjusted for changes in the timing of cash flows expected to be collected from the FDIC. Cumulative net losses
over the life of the loss-share agreements of less than $240.4 million will reduce the value of the FDIC Indemnification
Asset. Any amortization of changes in value of the FDIC Indemnification Asset is limited to the contractual terms of the
loss-share agreements. Changes to the FDIC Indemnification Asset are recorded as adjustments to other noninterest
income or expense, as appropriate, within the consolidated statements of operations over the life of the loss-share
agreements.
104
Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and LAE represents our best estimate of our ultimate liability for losses and LAE 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 LAE 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 LAE 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.
As of January 1, 2017, we adopted the provisions of ASU 2017-04 which removes Step 2 from the goodwill impairment
test and eliminates the determination of goodwill impairment through calculation of the implied fair value when the
carrying amount of a reporting unit exceeds its fair value. The goodwill impairment test requires us to make judgments in
determining what assumptions to use in the calculation. The process consists of estimating the fair value of each reporting
unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent
industry transaction and trading multiples of 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, we will recognize an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that
reporting unit.
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.
Mortgage Loan Indemnification Liability
The mortgage origination segment may be responsible for errors or omissions relating to its representations and
warranties that the mortgage loans sold meet certain requirements, including representations as to underwriting standards
and the validity of certain borrower representations in connection with the mortgage loan. If determined to be at fault, the
mortgage origination segment either repurchases the mortgage loans from the investors or reimburses the investors’ losses
(a “make-whole” payment). The mortgage origination segment has established an indemnification liability for such
105
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 over time 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 Asset
The Company measures its residential mortgage servicing rights asset using the fair value method. Under the fair value
method, the retained MSR assets 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 assets 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 asset, 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 asset fair value estimates are compared to observable trades of similar portfolios as
well as to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from
management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of
management’s estimates would negatively impact the recorded value of the MSR asset. The value of the MSR asset is
also dependent upon the discount rate used in the model, which is based on current market rates. 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 asset.
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. Changes to provisional amounts identified during this measurement period are
recognized in the reporting period in which the adjustment amounts are determined. 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, 2017, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and
unamortized debt issuance costs and premiums, were $276.9 million, and were comprised of $169.0 million in debt
obligations subject to fixed interest rates, with the remainder of indebtedness subject to variable interest rates. If LIBOR
106
and the prime rate were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable
rate debt would not have a significant impact on our future consolidated earnings or cash flows.
Banking Segment
The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in
interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest
rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference
between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that
our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to
interest rate risk and corresponding fluctuations in net interest income.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact
on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities.
Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher
rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the
same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers
to unequal movements in interest rates across a full range of maturities.
We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-
bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable
levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet
decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the
asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge
specified assets and liabilities.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an
interest rate change in line with general market interest rates. The management of interest rate risk is performed by
analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at
specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific
periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A
company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets
maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing
within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the
amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-
earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP
would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income,
while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively
balanced so that changes in rates do not have a significant impact on earnings.
107
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
Interest sensitive liabilities:
Interest bearing checking
Savings
Time deposits
Notes payable and other borrowings
Total interest sensitive liabilities
3 Months or > 3 Months to > 1 Year to > 3 Years to
Less
1 Year
3 Years
5 Years
> 5 Years
Total
December 31, 2017
$ 4,405,211
118,943
$
1,067,238
139,268
$ 1,421,347
227,719
$
330,929
106,494
$
192,123
403,055
$
7,416,848
995,479
405
265,294
4,789,853
—
—
1,206,506
—
—
1,649,066
—
—
437,423
—
29,160
624,338
405
294,454
8,707,186
$
$ 3,614,991
218,812
311,800
483,756
4,629,359
$
—
—
510,904
11,992
522,896
$
—
—
562,597
4,955
567,552
$
—
—
13,657
1,271
14,928
—
—
9,797
6,115
15,912
$
3,614,991
218,812
1,408,755
508,089
5,750,647
Interest sensitivity gap
$
160,494
$
683,610
$ 1,081,514
$
422,495
$
608,426
$
2,956,539
Cumulative interest sensitivity gap
$
160,494
$
844,104
$ 1,925,618
$ 2,348,113
$
2,956,539
Percentage of cumulative gap to total interest sensitive assets
1.84 %
9.69 %
22.12 %
26.97 %
33.96 %
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, 2017 (dollars in
thousands).
Change in
Interest Rates
(basis points)
+300
+200
+100
-50
Changes in
Net Interest Income
Amount
Percent
$
$
$
$
64,266
42,744
10,365
(4,260)
20.34 %
13.53 %
6.86 %
(1.35)%
$
$
$
$
Percent
Changes in
Economic Value of Equity
Amount
275,309
192,592
98,511
(48,774)
14.92 %
10.44 %
5.34 %
(2.64)%
The projected changes in net interest income and economic value of equity to changes in interest rates at December 31,
2017 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 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 contractual
rate resets allow our entire loan portfolio to reprice above applicable rate floors.
108
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.
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.
The following table categorizes the broker-dealer segment’s net trading securities which are subject to interest rate and
market price risk (dollars in thousands):
Trading securities, at fair value
Municipal obligations
U.S. government and government agency obligations
Corporate obligations
Total debt securities
Corporate equity securities
Other
Weighted average yield
Municipal obligations
U.S. government and government agency obligations
Corporate obligations
1 Year
or Less
> 1 Year
to 5 Years
December 31, 2017
> 5 Years
to 10 Years
> 10 Years
Total
$
$
532 $
3,092
(4,138)
(514)
(8,945)
26,315
16,856 $
10,264 $
(28,224)
(1,631)
(19,591)
-
-
(19,591) $
9,435 $
(60,684)
10,409
(40,840)
-
-
(40,840) $
150,182 $
356,624
28,139
534,945
-
-
534,945 $
170,413
270,808
32,779
474,000
(8,945)
26,315
491,370
1.46 %
1.69 %
2.35 %
2.25 %
1.96 %
3.45 %
2.51 %
2.43 %
4.22 %
3.36 %
3.95 %
5.26 %
3.24 %
3.36 %
4.02 %
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
109
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 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 and swaptions, U.S. Treasury bond futures and options,
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.
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 Co-Principal Executive Officers 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 Co-Principal Executive Officers 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 Co-
Principal Executive Officers and Principal Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
110
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2017
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process
designed by, or under the supervision of, our Co-Principal Executive Officers and Principal Financial Officer and effected
by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal control over financial reporting at December 31, 2017. 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, 2017, our internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of December 31, 2017, has been audited by
PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in its report below, which
expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31,
2017.
Item 9B. Other Information.
None.
111
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 2018 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 2018 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 2018 Annual Meeting of
Stockholders, 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 2018 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 2018 Annual Meeting of
Stockholders, and is incorporated herein by reference.
112
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Financial Statement Schedules.
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment
Expenses, Net of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-82
All other financial statement schedules have been omitted because they are not required,
not applicable or the information has been included in our consolidated financial statements.
3. Exhibits. See the Exhibit Index preceding the signature page hereto.
Item 16. Form 10-K Summary.
None.
113
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
4.3.1
4.3.2
4.3.3
4.3.4
Description of Exhibit
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 and
Restatement, dated March 31, 2014 (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2014 (File No. 001-31987) and incorporated herein by reference).
Third Amended and Restated Bylaws of Hilltop Holdings Inc. (filed as Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K filed on January 31, 2018 (File No. 001-31987) and incorporated herein by
reference).
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).
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, and the Administrators party thereto from
time to time (filed as Exhibit 4.2 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and
between PlainsCapital Corporation and U.S. Bank National Association, as Institutional Trustee (filed as
Exhibit 4.3 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009
(File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation and U.S. Bank National
Association (successor in interest to State Street Bank and Trust Company of Connecticut, National
Association), as Trustee (filed as Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation and
U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10
filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by
reference).
114
4.3.5
4.3.6
4.3.7
4.3.8
4.4.1
4.4.2
4.4.3
4.4.4
4.4.5
4.5.1
4.5.2
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 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 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 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, and the Administrators party thereto from
time to time (filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S. Bank National
Association, as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
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 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 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, and the Administrators party
thereto from time to time (filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
115
4.5.3
4.5.4
4.5.5
4.6.1
4.6.2
4.6.3
4.6.4
4.6.5
4.7
10.1.1†
10.1.2†
10.1.3†
First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National
Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital
Corporation. (filed as Exhibit 4.7.3 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of
September 17, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as
Institutional Trustee for PCC Statutory Trust III (filed as Exhibit 4.15 to the Registration Statement on
Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein
by reference).
Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S.
Bank National Association, as Guarantee Trustee (filed as Exhibit 4.16 to the Registration Statement on
Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein
by reference).
Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital
Corporation, Wells Fargo Bank, N.A., as Property Trustee, Wells Fargo Delaware Trust Company, as
Delaware Trustee, and the Administrators party thereto from time to time (filed as Exhibit 4.17 to the
Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-
53629) and incorporated herein by reference).
Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation
and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.18 to the Registration Statement on Form 10 filed
by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital Corporation
(f/k/a Meadow Corporation) and Wells Fargo Bank, National Association, as Trustee. (filed as Exhibit 4.8.3
to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15,
2013 (File No. 001-31987) and incorporated herein by reference).
Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008,
by PlainsCapital Corporation in favor of Wells Fargo Bank, N.A., as Property Trustee of PCC Statutory
Trust IV (filed as Exhibit 4.19 to the Registration Statement on Form 10 filed by PlainsCapital Corporation
on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation and Wells
Fargo Bank, N.A., as Guarantee Trustee (filed as Exhibit 4.20 to the Registration Statement on Form 10 filed
by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of April 9, 2015, by and between Hilltop Holdings, Inc. and U.S. Bank National
Association, as Trustee, including form of notes (filed as Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K filed on April 9, 2015 (File No. 001-31987) and incorporated herein by reference).
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).
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).
116
10.1.4†
10.1.5†
10.1.6†
10.1.7†
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) (filed as Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated
herein by reference).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in
2016 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on April 28, 2016 (File
No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards
beginning in 2016 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April
28, 2016 (File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for
awards beginning in 2016 (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on
April 28, 2016 (File No. 001-31987) and incorporated herein by reference).
10.1.8†*
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in
2018.
10.1.9†*
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards
beginning in 2018.
10.1.10†*
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for
awards beginning in 2018.
10.2†
10.3.1†
10.3.2†
10.4.1†
10.4.2†
10.5†
10.5.1†
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).
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).
First Amendment to Retention Agreement and Assignment and Assumption Agreement by and among
Hilltop Holdings Inc., PlainsCapital Corporation and Alan B. White, dated as of September 12, 2016 (filed
as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (File No. 001-
31987) and incorporated herein by reference).
Employment Agreement, dated as of December 4, 2014, by and between James R. Huffines and Hilltop
Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 9,
2014 (File No. 001-31987) and incorporated herein by reference).
First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and James R. Huffines,
dated as of September 12, 2016 (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed
on September 13, 2016 (File No. 001-31987) and incorporated herein by reference).
Employment Agreement, dated as of December 4, 2014, by and between Todd Salmans and Hilltop
Holdings Inc. (filed as Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2014 (File No. 001-31987) and incorporated herein by reference).
First Amendment to Employment Agreement, dated as of November 8, 2017, by and between Todd Salmans
and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
November 13, 2017 (File No. 001-31987) and incorporated herein by reference).
10.6†
Compensation arrangement of Jeremy B. Ford (filed as Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on March 2, 2015 (File No. 001-31987) and incorporated herein by reference).
117
10.7†
10.8†
10.9.1†
10.9.2†
Compensation arrangement with Darren Parmenter (filed as Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K filed on March 2, 2015 (File No. 001-31987) and incorporated herein by reference).
Employment Agreement, dated as of September 1, 2016, by and between William Furr and Hilltop Holdings
Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A (Amendment No. 1) filed on
September 7, 2016 (File No. 001-31987) and incorporated herein by reference).
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).
21.1*
List of subsidiaries of the Registrant.
23.1*
Consent of PricewaterhouseCoopers LLP.
31.1*
31.2*
31.3*
32.1*
Certification of Co-Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
Certification of Co-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 Co-Principal Executive Officers and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.
† Exhibit is a management contract or compensatory plan.
118
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 15, 2018
HILLTOP HOLDINGS INC.
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
119
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/ Alan B. White
Alan B. White
/s/ William B. Furr
William B. Furr
/s/ Keith E. Bornemann
Keith E. Bornemann
Charlotte Jones Anderson
/s/ Rhodes Bobbitt
Rhodes Bobbitt
/s/ Tracy A. Bolt
Tracy A. Bolt
W. Joris Brinkerhoff
/s/ J. Taylor Crandall
J. Taylor Crandall
/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
/s/ William T. Hill, Jr.
William T. Hill, Jr.
/s/ Lee Lewis
Lee Lewis
/s/ Andrew J. Littlefair
Andrew J. Littlefair
/s/ W. Robert Nichols, III
W. Robert Nichols, III
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
President, Co-Chief Executive Officer and Director February 15, 2018
(Co-Principal Executive Officer)
Co-Chief Executive Officer and Director
February 15, 2018
(Co-Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
February 15, 2018
Executive Vice President, Corporate Controller
February 15, 2018
(Principal Accounting Officer)
Director
Director
February 15, 2018
Director and Audit Committee Member
February 15, 2018
Director
Director
February 15, 2018
Director and Chairman of Audit Committee
February 15, 2018
Director
Director
February 15, 2018
February 15, 2018
Director and Audit Committee Member
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
120
Index to Consolidated Financial Statements and Financial Statement Schedule
Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
F-3
F-4
F-5
F-6
F-7
F-8
Net of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-82
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hilltop Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hilltop Holdings Inc. and its subsidiaries (the “Company”) as of December 31, 2017
and 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2017, including the related notes, as listed in the index appearing under Item 15(a)(1), and the financial statement schedule
listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 15, 2018
We have served as the Company’s auditor since 1998.
F-2
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2017
2016
Assets
Cash and due from banks
Federal funds sold
Securities purchased under agreements to resell
Assets segregated for regulatory purposes
Securities:
Trading, at fair value
Available for sale, at fair value (amortized cost of $767,946 and $598,198, respectively)
Held to maturity, at amortized cost (fair value of $349,939 and $345,088, respectively)
Loans held for sale
Non-covered loans, net of unearned income
Allowance for non-covered loan losses
Non-covered loans, net
Covered loans, net of allowance of $2,729 and $413, respectively
Broker-dealer and clearing organization receivables
Premises and equipment, net
FDIC indemnification asset
Covered other real estate owned
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
Short-term borrowings
Securities sold, not yet purchased, at fair value
Notes payable
Junior subordinated debentures
Other liabilities
Total liabilities
Commitments and contingencies (see Notes 18 and 19)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 95,982,184 and 98,543,774 shares issued
and outstanding at December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Deferred compensation employee stock trust, net
Employee stock trust (11,672 and 15,492 shares, at cost, respectively)
Total Hilltop stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
486,977
405
186,537
186,578
730,685
765,560
355,849
1,852,094
1,715,357
6,273,669
(60,957)
6,212,712
179,400
1,464,378
177,577
29,340
36,744
549,447
251,808
36,432
13,365,786
2,411,849
5,566,270
7,978,119
1,287,563
1,206,424
232,821
208,809
67,012
470,231
11,450,979
960
1,526,369
(394)
384,545
848
(247)
1,912,081
2,726
1,914,807
13,365,786
$
$
$
669,357
21,407
89,430
180,993
265,534
598,007
351,831
1,215,372
1,795,463
5,843,499
(54,186)
5,789,313
255,714
1,497,741
190,361
71,313
51,642
613,453
251,808
44,695
12,738,062
2,199,483
4,864,328
7,063,811
1,347,128
1,417,289
153,889
317,912
67,012
496,501
10,863,542
985
1,572,877
485
295,568
903
(309)
1,870,509
4,011
1,874,520
12,738,062
See accompanying notes.
F-3
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2017
Year Ended December 31,
2016
2015
Interest income:
Loans, including fees
Securities borrowed
Securities:
Taxable
Tax-exempt
Other
Total interest income
Interest expense:
Deposits
Securities loaned
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 gains from sale of loans and other mortgage production income
Mortgage loan origination fees
Securities commissions and fees
Investment and securities advisory fees and commissions
Net insurance premiums earned
Bargain purchase gain
Other
Total noninterest income
Noninterest expense:
Employees' compensation and benefits
Occupancy and equipment, net
Professional services
Loss and loss adjustment expenses
Other
Total noninterest expense
Income before income taxes
Income tax expense
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
Cash dividends declared per common share
Weighted average share information:
Basic
Diluted
$
411,988
41,048
$
389,637
29,518
$
36,472
5,807
11,841
507,156
24,695
32,337
13,751
10,931
3,016
678
85,408
421,748
14,271
407,477
538,468
93,944
156,464
109,920
142,298
—
163,970
1,205,064
816,994
113,943
101,521
94,701
242,096
1,369,255
243,286
110,142
133,144
600
132,544
—
132,544
1.36
1.36
$
$
$
$
26,233
6,222
4,344
455,954
15,843
22,510
5,803
10,849
2,676
742
58,423
397,531
40,620
356,911
606,991
96,267
157,906
115,992
155,545
—
154,264
1,286,965
834,113
109,418
128,176
89,243
251,521
1,412,471
231,405
83,461
147,944
2,050
145,894
—
145,894
1.48
1.48
$
$
$
$
0.24
$
0.06
$
$
$
$
$
$
390,359
41,051
26,584
6,628
5,216
469,838
15,523
29,893
4,574
8,143
2,401
721
61,255
408,583
12,715
395,868
519,103
77,708
160,660
115,932
162,082
81,289
110,868
1,227,642
765,887
119,653
107,107
99,066
248,303
1,340,016
283,494
70,915
212,579
1,606
210,973
1,854
209,119
2.10
2.09
—
97,137
97,353
98,404
98,629
99,074
99,962
See accompanying notes.
F-4
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
2017
133,144 $
Year Ended December 31,
2016
147,944 $
2015
212,579
$
Net unrealized gains (losses) on securities available for sale, net of
tax of $(565), $1,264 and $2,761, respectively
Reclassification adjustment for gains (losses) included in net
income, net of tax of $(6), $0 and $(1,589), respectively
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
(869)
(2,144)
4,792
(10)
132,265
600
—
145,800
2,050
(2,814)
214,557
1,606
Comprehensive income applicable to Hilltop
$
131,665 $
143,750 $
212,951
See accompanying notes.
F-5
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F-6
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
2017
Year Ended December 31,
2016
2015
$
133,144 $
147,944 $
212,579
Provision for loan losses
Depreciation, amortization and accretion, net
Net realized gains on securities
Bargain purchase gain
Deferred income taxes
Other, net
Net change in securities purchased under agreements to resell
Net change in assets segregated for regulatory purposes
Net change in trading securities
Net change in broker-dealer and clearing organization receivables
Net change in FDIC indemnification asset
Net change in other assets
Net change in broker-dealer and clearing organization payables
Net change in other liabilities
Net change in securities sold, not yet purchased
Proceeds from sale of mortgage servicing rights asset
Net gains from sales 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
Proceeds from redemption of bank owned life insurance
Net cash received from (paid for) Federal Home Loan Bank and Federal Reserve Bank stock
Net cash from acquisition
Net cash provided by (used in) investing activities
Financing Activities
Net change in deposits
Net change in short-term borrowings
Proceeds from notes payable
Payments on notes payable
Redemption of preferred stock
Proceeds from issuance of common stock
Payments to repurchase common stock
Dividends paid on common stock
Dividends paid on preferred stock
Net cash distributed (to) from noncontrolling interest
Taxes paid on employee stock awards netting activity
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 loans to other real estate owned
Common stock issued in acquisition
Additions to mortgage servicing rights
14,271
(13,869)
(16)
—
40,933
12,085
(97,107)
(5,585)
(465,151)
(42,449)
24,890
(47,352)
(2,412)
(55,557)
78,932
17,499
(538,468)
(15,014,118)
15,634,027
(326,303)
56,359
298,737
(60,939)
(471,047)
(216,562)
(31,152)
32,297
—
34,346
—
(357,961)
857,155
(210,865)
403,136
(512,193)
—
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(23,140)
—
(1,885)
(3,264)
(674)
480,882
40,620
(49,765)
—
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16,564
16,230
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(51,388)
(46,775)
20,577
41,315
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11,752
23,845
7,586
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(16,026,911)
16,337,299
(183,348)
166,522
396,572
(186,875)
(326,810)
(555,040)
(41,941)
73,032
—
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—
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153,131
469,916
296,993
(217,630)
—
4,139
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—
790
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(868)
698,228
(203,382)
690,764
487,382 $
21,319
669,445
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84,309 $
85,840 $
8,853 $
— $
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58,429 $
88,899 $
20,184 $
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12,715
(83,360)
(4,403)
(81,289)
17,376
7,995
(60,919)
99,010
117,639
73,344
39,936
(59,142)
(54,048)
(104,897)
129,996
—
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(13,871,473)
14,163,781
35,737
88,070
673,950
(230,404)
(48,121)
(150,605)
(31,270)
110,922
822
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41,097
442,289
(601,386)
20,437
150,078
(42,571)
(114,068)
—
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—
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(1,222)
(75)
718
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(143,630)
813,075
669,445
59,700
112,459
57,838
200,626
24,974
See accompanying notes.
F-7
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company
registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide
business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the
“Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer,
mortgage origination and insurance subsidiaries.
The Company, headquartered in Dallas, Texas, provides its products and services through three primary business units,
PlainsCapital Corporation (“PCC”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds
Corporation (“NLC”). PCC is a financial holding company, that provides, through its subsidiaries, traditional banking,
wealth and investment management and treasury management services primarily in Texas and residential mortgage
lending throughout the United States. Securities Holdings is a holding company, that provides, through its subsidiaries,
investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of
taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail
brokerage services throughout the United States. NLC is a property and casualty insurance holding company, that
provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes
primarily in Texas and other areas of the southern United States.
On January 1, 2015, Hilltop completed its acquisition of SWS Group, Inc. (“SWS”) in a stock and cash transaction (the
"SWS Merger"), whereby SWS’s broker-dealer subsidiaries, Southwest Securities, Inc. and SWS Financial Services,
Inc., became subsidiaries of Securities Holdings, and SWS’s banking subsidiary, Southwest Securities, FSB (“SWS
FSB”), was merged into the Bank. On October 5, 2015, Southwest Securities, Inc. and SWS Financial Services, Inc.
were renamed “Hilltop Securities Inc.” (“Hilltop Securities”) and “Hilltop Securities Independent Network Inc.” (“HTS
Independent Network”), respectively. On October 22, 2015, the Financial Industry Regulatory Authority (“FINRA”)
granted approval to combine First Southwest Company, LLC (“FSC”) and Hilltop Securities, subject to customary
conditions. FSC, Hilltop Securities and HTS Independent Network operated as separate broker-dealers, under
coordinated leadership from the date of the SWS Merger until January 22, 2016, when FSC was merged into Hilltop
Securities to form a combined firm operating under the “Hilltop Securities” name. The term “Hilltop Broker-Dealers” is
used to refer to FSC, Hilltop Securities and HTS Independent Network prior to January 22, 2016 and Hilltop Securities
and HTS Independent Network after such date.
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 from
the Federal Deposit Insurance Corporation (the “FDIC”) under loss-share agreements (the “FDIC Indemnification
Asset”), reserves for losses and loss adjustment expenses (“LAE”), the mortgage loan indemnification liability, and the
potential impairment of assets are particularly subject to change. The Company has applied its critical accounting
policies and estimation methods consistently in all periods presented in these consolidated financial statements.
Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of
the membership interest in PlainsCapital Equity, LLC, a merchant bank utilized to facilitate investments in companies
engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital
Company (“PrimeLending”).
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures
Management”), which holds an ownership interest in and is the managing member of certain affiliated business
arrangements (“ABAs”).
F-8
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
PCC also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”),
which are not included in the consolidated financial statements under the requirements of the Variable Interest Entities
Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”),
because the primary beneficiaries of the Trusts are not within the consolidated group.
Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries,
Hilltop Securities, HTS Independent Network and First Southwest Asset Management, LLC. Hilltop Securities is a
broker-dealer registered with the Securities and Exchange Commission (“SEC”) and FINRA and a member of the New
York Stock Exchange (“NYSE”), HTS Independent Network is an introducing broker-dealer that is also registered with
the SEC and FINRA, and First Southwest Asset Management, LLC, a wholly-owned subsidiary of First Southwest
Holdings, LLC (“First Southwest”), is a registered investment adviser under the Investment Advisers Act of 1940. As
discussed above, prior to January 22, 2016, Securities Holdings’ subsidiaries also included FSC, First Southwest’s
principal subsidiary and formerly a broker-dealer registered with the SEC and FINRA and a member of the NYSE.
Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance
Company (“NLIC”) and American Summit Insurance Company (“ASIC”).
The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and
balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are
not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary
Subsections of the ASC.
Certain reclassifications have been made to the prior period consolidated financial statements to conform with the
current period presentation. In preparing these consolidated financial statements, subsequent events were evaluated
through the time the financial statements were issued. Financial statements are considered issued when they are widely
distributed to all stockholders and other financial statement users, or filed with the SEC.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable
intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of
net assets purchased exceeds the consideration given, a bargain purchase gain is recognized. If the consideration given
exceeds the fair value of the net assets received, goodwill is recognized.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as
collateralized financings and are carried at the amounts at which the securities will subsequently be resold as specified in
the agreements. The Company is in possession of collateral with a fair value equal to or in excess of the contract
amounts.
Securities
Management classifies securities at the time of purchase and reassesses such designation at each balance sheet
date. Securities held for resale to facilitate principal transactions with customers are classified as trading, and are carried
at fair value, with changes in fair value reflected in the consolidated statements of operations. Hilltop reports interest
income on trading securities as interest income on securities and other changes in fair value as other noninterest income.
Securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale.
Securities included in this category are those that management intends to use as part of its asset/liability management
strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors related
to interest rate and resultant prepayment risk changes. Securities available for sale are carried at fair value. Unrealized
holding gains and losses on securities available for sale, net of taxes, are reported in other comprehensive income (loss)
until realized. Premiums and discounts are recognized in interest income using the effective interest method and consider
any optionality that may be embedded in the security.
F-9
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 between 30 and 45 days. Substantially all mortgage loans originated by
PrimeLending are sold to various investors in the secondary market, the majority with servicing released. Mortgage
loans held for sale are carried at fair value in accordance with the provisions of the Fair Value Option Subsections of the
ASC (the “Fair Value Option”). Changes in the fair value of the loans held for sale are recognized in earnings and fees
and costs associated with origination are recognized as incurred. The specific identification method is used to determine
realized gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are
subject to certain indemnification provisions with investors, including the repurchase of loans sold and repayment of
certain sales proceeds to investors under certain conditions. In addition, certain mortgage loans guaranteed by U.S.
Government agencies and sold into Government National Mortgage Association (“GNMA”) pools may, under certain
conditions specified in the government programs, become subject to repurchase by PrimeLending. 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
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated
at the amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for loan
losses. Unearned income on installment loans and interest on other loans is recognized using the effective interest
method. Net fees received for providing loan commitments and letters of credit that result in loans are deferred and
amortized to interest income over the life of the related loan, beginning with the initial borrowing. Net fees on
commitments and letters of credit that are not expected to be funded are amortized to noninterest income over the
commitment period. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of
return on the outstanding investment.
Impaired loans include non-accrual loans, troubled debt restructurings, purchased credit impaired (“PCI”) loans and
partially charged-off loans. The accrual of interest on impaired loans is discontinued when, in management’s opinion,
there is a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments,
which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection.
When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income. If the
ultimate collectability of principal, wholly or partially, is in doubt, any payment received on a loan on which the accrual
of interest has been suspended is applied to reduce principal to the extent necessary to eliminate such doubt. Once the
collection of the remaining recorded loan balance is fully expected, interest income is recognized on a cash basis.
The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing
portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their
contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its
debtors operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade.
PrimeLending originates mortgage loans to customers in its offices, which are located throughout the United States.
Substantially all mortgage loans originated by PrimeLending are sold to various investors in the secondary market, the
majority with servicing released, although PrimeLending does retain servicing in certain circumstances. The Hilltop
Broker-Dealers make loans to customers and correspondents through margin transactions originated by both employees
and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control or controlled
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-10
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Management has defined the loans acquired in a business combination as acquired loans. Acquired loans are recorded at
estimated fair value on their purchase date with no carryover of the related allowance for loan losses. At acquisition,
acquired loans are segregated between those considered to be credit impaired and those without credit impairment at
acquisition. To make this determination, management considered such factors as past due status, non-accrual status and
credit risk ratings. The fair value of acquired performing loans was determined by discounting expected cash flows, both
principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances
due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan.
Loans acquired in the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities
of Edinburg, Texas-based First National Bank (“FNB”) on September 13, 2013 (the “FNB Transaction”) 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. Covered
loans are discussed in more detail within Note 6 to the consolidated financial statements.
PCI loans acquired by the Company upon completion of the merger with PCC (the “PlainsCapital Merger”) are
accounted for on an individual loan basis, while PCI loans acquired in each of the FNB Transaction and SWS Merger are
accounted for in pools as well as 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
similar risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for
applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The
similar risk characteristics used for the pooling of the FNB and SWS 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. The excess of total contractual cash flows over the cash flows expected to be
received at acquisition is referred to as the nonaccretable difference. Subsequent to acquisition, management must update
these estimates of cash flows expected to be collected at each reporting date. These updates require the continued use of
key assumptions and estimates, similar to those used in the initial estimate of fair value.
The Bank accretes the discount for PCI loans for which it can predict the timing and amount of cash flows. PCI loans for
which a discount is accreted are reported as performing loans.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which
represents management’s best estimate of probable losses inherent in the existing portfolio of loans at the balance sheet
date. The allowance for loan losses includes allowance allocations calculated in accordance with the regulatory
Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies
Topics of the ASC. The level of the allowance reflects management’s continuing evaluation of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory
conditions, and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for
specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be
charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors beyond 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 individually impaired loans; (ii) general historical valuation allowances calculated based on historical
loan loss experience for homogenous loans with similar collateral; and (iii) valuation allowances to adjust general
reserves based on current economic conditions and other qualitative risk factors both internal and external to the Bank.
F-11
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Bank’s methodology regarding the calculation of the allowance for loan losses is discussed in more detail within
Note 5 to the consolidated financial statements.
Broker-Dealer and Clearing Organization Transactions
Amounts recorded in broker-dealer and clearing organization receivables and payables include securities lending
activities, as well as amounts related to securities transactions for either customers of the Hilltop Broker-Dealers or for
the accounts of the Hilltop Broker-Dealers. Securities-borrowed and securities-loaned transactions are generally reported
as collateralized financings. Securities-borrowed transactions require the Hilltop Broker-Dealers to deposit cash, letters
of credit, or other collateral with the lender. With respect to securities loaned, the Hilltop Broker-Dealers receive
collateral in the form of cash or other assets in an amount generally in excess of the market value of securities loaned.
The Hilltop Broker-Dealers monitor the market value of securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary. Interest income and interest expense associated with collateralized
financings is included in the accompanying consolidated statements of operations.
Insurance Premiums Receivable
Insurance premiums receivable include premiums written and not yet collected. NLC routinely evaluates the receivable
balance to determine if an allowance for uncollectible amounts is necessary. At December 31, 2017 and 2016, 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 LAE, unamortized
policy acquisition costs, and maintenance costs exceed related unearned insurance premiums and anticipated investment
income. At December 31, 2017 and 2016, there was no premium deficiency.
Reinsurance
In the normal course of business, NLC seeks to reduce the loss that may arise from catastrophes or other events that
could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy. NLC routinely evaluates the receivable balance to determine if any uncollectible balances exist.
Net insurance premiums earned, losses and LAE, and policy acquisition and other underwriting expenses are reported
net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the
portions of the liability for losses and LAE and unearned insurance premiums ceded to them are included in other assets
within the consolidated balance sheets. Reinsurance assumed from other companies, including assumed premiums
written and earned, and losses and LAE, is accounted for in the same manner as direct insurance written.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the
straight-line method over the estimated useful lives of the assets, which range between 3 and 40 years. Gains or losses on
disposals of premises and equipment are included in results of operations.
F-12
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other Real Estate Owned
Real estate acquired through foreclosure (“OREO”) is included in other assets within the consolidated balance sheets and
is carried at management’s estimate of fair value, less estimated cost to sell. Any excess of recorded investment over fair
value, less cost to sell, is charged against either the allowance for loan losses or the related PCI pool discount when
property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments
are charged against earnings. Valuation adjustments, revenue and expenses from operations of the properties and
resulting gains or losses on sale are included within the consolidated statements of operations in other noninterest
income or expense, as appropriate.
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, while any recoveries of previous valuation decreases will be credited to noninterest expense.
FDIC Indemnification Asset
The Company has elected to account for the FDIC Indemnification Asset in accordance with the Business Combination
Topic of the ASC. 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 Bank expects to collect from the FDIC will be accreted into noninterest income or
amortized into noninterest expense within the consolidated statements of operations over the life of the FDIC
Indemnification Asset. The FDIC Indemnification Asset is reviewed quarterly and the accretion rate is adjusted for
changes in the timing of cash flows expected to be collected from the FDIC. Cumulative net losses over the life of the
loss-share agreements of less than $240.4 million will reduce the value of the FDIC Indemnification Asset. Any
amortization of changes in value of the FDIC Indemnification Asset is limited to the contractual term of the loss-share
agreements. Changes to the FDIC Indemnification Asset are recorded as adjustments to other noninterest income or
expense, as appropriate, within the consolidated statements of operations over the life of the loss-share agreements.
Debt Issuance Costs
The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized using the
effective interest method over the repayment term of the debt. Unamortized debt issuance costs are presented in the
consolidated balance sheets as a direct reduction from the associated debt liability. Debt issuance costs of $0.1 million,
$0.1 million, and $0.4 million during 2017, 2016 and 2015, respectively, were amortized and included in interest
expense within the consolidated statements of operations. In April 2015, debt issuance costs of $1.9 million were
capitalized in connection with Hilltop’s issuance of the 5% senior notes due 2025.
Goodwill
Goodwill, which represents the excess of cost over the fair value of the net assets acquired, is allocated to reporting units
and tested for impairment 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 as of October 1st for each of
its reporting units, which is one level below an operating segment. Goodwill is assigned to reporting units at the date the
goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with
a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are
available to support the value of the goodwill. As of January 1, 2017, the Company adopted the provisions of ASU 2017-
04 which removes Step 2 from the goodwill impairment test and eliminates the determination of goodwill impairment
through calculation of the implied fair value when the carrying amount of a reporting unit exceeds its fair value. The
goodwill impairment test requires the Company to make judgments in determining what assumptions to use in the
calculation. The process consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading
multiples of peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of the
F-13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, the
Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.
Additional information concerning the results of the Company’s impairment test of goodwill is included in Note 9 to the
consolidated financial statements.
Intangibles and Other Long-Lived Assets
Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in
combination with a related contract, asset or liability. The Company’s intangible assets primarily consist of core
deposits, trade names and customer relationships. Intangible assets with definite useful lives are generally amortized on
the straight-line method over their estimated lives, although certain intangibles, including core deposits, and customer
and agent relationships, are amortized on an accelerated basis. Amortization of intangible assets is recorded in other
noninterest expense within the consolidated statements of operations. Intangible assets with indefinite useful lives are
tested for impairment annually as of October 1st, or more often if events or circumstances indicate there may be
impairment, and not amortized until their lives are determined to be definite. Intangible assets with definite useful lives,
premises and equipment, and other long-lived assets are tested for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. 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.
The retained mortgage servicing rights (“MSR”) asset is measured at fair value as of the date of sale of the related
mortgage loan. Subsequent fair value measurements of the MSR asset are determined by valuing the projected net
servicing cash flows, which are then discounted to estimate fair value using a discounted cash flow model. Assumptions
used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee
income.
The model assumptions and the MSR asset fair value estimates are compared to observable trades of similar portfolios as
well as to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from
management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of
management’s estimates would negatively impact the recorded value of the MSR asset. The value of the MSR asset is
also dependent upon the discount rate used in the model, which is based on current market rates that are reviewed by
management on an ongoing basis. A significant increase in the discount rate would reduce the value of the MSR asset.
Derivative Financial Instruments
The Company’s hedging policies permit the use of various derivative financial instruments, including forward
commitments, interest rate swaps and swaptions, and U.S. Treasury bond futures and options to manage interest rate risk
or to hedge specified assets and liabilities. The Company’s derivative financial instruments also include interest rate lock
commitments (“IRLCs”) executed with its customers that allow those customers to obtain a mortgage loan on a future
date at an agreed-upon interest rate. The IRLCs, forward commitments, interest rate swaps and swaptions, and U.S.
Treasury bond futures and options 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
F-14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 (“IBNR”). Such liabilities are based on estimates and,
while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the
amounts provided. The methods for making such estimates and for establishing the resulting liability are continually
reviewed, and any adjustments are reflected in earnings currently. The liability for losses and LAE has not been reduced
for reinsurance recoverable.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stock-Based Compensation
Stock-based compensation expense for all share-based awards granted is based on the grant date fair value estimated in
accordance with the provisions of the Stock Compensation Topic of the ASC. The Company recognizes these
compensation costs for only those awards expected to vest over the service period of the award.
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled $4.7 million, $5.3 million and $4.6 million
during 2017, 2016 and 2015, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for
the estimated future tax effects of the temporary difference between the tax basis and book basis of assets and liabilities
reported in the accompanying consolidated balance sheets. The provision for income tax expense or benefit differs from
the amounts of income taxes currently payable because certain items of income and expense included in the consolidated
financial statements are recognized in different time periods by taxing authorities. Interest and penalties incurred related
to tax matters are charged to other interest expense or other noninterest expense, respectively. The revaluation of
deferred tax assets as a result of enacted tax rate changes, such as those found in the Tax Cuts and Jobs Act (“Tax
Legislation”), is recognized within income tax expense in continuing operations in the period of enactment.
Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely
than not that the tax position will be sustained upon examination by the appropriate taxing authority having full
knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is
measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are
recognized in the reporting period in which that threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not recognition threshold are derecognized in the reporting period in which that threshold is no
longer met. If the Company were to prevail on all uncertain tax positions, the effect would be a benefit to the Company’s
effective tax rate. Due to uncertainties in any tax audit outcome, estimates of the ultimate settlement of unrecognized tax
positions may change and the actual tax benefits may differ significantly from the estimate.
Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance
when, in the opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be
realized. Periodic reviews of the carrying amount of deferred tax assets are made when it is more likely than not that all
or a portion of a deferred tax asset will not be realized.
F-15
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 sheet captions “Cash and due from banks” and “Federal funds sold”. Cash
equivalents have original maturities of three months or less.
Repurchases of Common Stock
In accordance with Maryland law, the Company uses the par value method of accounting for its stock repurchases,
whereby the par value of the shares is deducted from common stock. The excess of the cost of shares acquired over the
par value is allocated to additional paid-in capital based on an estimated average sales price per issued share with the
excess amounts charged to retained earnings.
Basic and Diluted Net Income Per Share
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and are included in the computation of earnings per share pursuant to the two-class method
prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. Restricted Stock Awards, all of which were vested as
of September 30, 2017, were the only instruments issued by Hilltop which qualified as participating securities.
Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the
common stock and participating securities pursuant to the two-class method. Basic earnings per common share is
computed by dividing net earnings available to common stockholders by the weighted average number of common
shares outstanding during the period, excluding participating nonvested restricted shares.
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to
include the number of additional common shares that would have been outstanding if potentially dilutive common
shares, excluding the participating securities, were issued using the treasury stock method. During 2017, restricted stock
units (“RSUs”) were the only potentially dilutive non-participating instruments issued by Hilltop, while during 2016 and
2015, stock options and RSUs were the only potentially dilutive non-participating instruments. Next, the Company
determines and includes in the diluted earnings per common share calculation the more dilutive effect of the
participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to
the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are
not contractually obligated to share in the losses of the Company.
2. Acquisition
SWS Merger
On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash transaction, whereby 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 $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3
million associated with Hilltop’s existing investment in SWS common stock. The operations acquired in the SWS
Merger are included in the Company’s operating results beginning January 1, 2015. Such operating results include a
bargain purchase gain of $81.3 million and are not necessarily indicative of future operating results.
F-16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The SWS 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
Cash
Fair value of Hilltop’s existing investment in SWS
Total consideration paid
$
$
200,626
78,217
70,282
349,125
The resulting fair values of the identifiable assets acquired, and liabilities assumed, in the SWS Merger at January 1,
2015 are summarized in the following table (in thousands).
Cash and due from banks
Federal funds sold and securities purchased under 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
Securities sold, not yet purchased, at fair value
Notes payable
Other liabilities
Total liabilities assumed
Bargain purchase gain
Less Hilltop existing investment in SWS
Net identifiable assets acquired
$
$
119,314
44,741
181,610
707,476
863,819
1,221,793
159,906
3,298,659
(1,287,509)
(1,109,978)
(164,240)
(140,409)
(76,643)
(89,466)
(2,868,245)
(81,289)
349,125
(70,282)
278,843
The bargain purchase gain represents the excess of the estimated fair value of the underlying net tangible assets and
intangible assets over the merger consideration. The SWS Merger was a tax-free reorganization under Section 368(a) of
the Internal Revenue Code, therefore no income taxes were recorded in connection with the bargain purchase gain. The
Company used significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed.
The bargain purchase gain was primarily driven by the Company’s ability to realize acquired deferred tax assets through
its consolidated core earnings and the decline in the price of the Company’s common stock between the date the fixed
conversion ratio was agreed upon and the closing date.
Included within the fair value of other assets in the table above are identifiable intangible assets recorded in connection
with the SWS Merger. The allocation to intangible assets is as follows (in thousands).
Customer relationships
Core deposits
Estimated Useful Gross Intangible
Life (Years)
14
4
Assets
7,300
160
7,460
$
$
In connection with the SWS Merger, Hilltop acquired loans both with and without evidence of credit quality
deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any
allowance for loan losses. Acquired loans were segregated between those considered to be PCI loans and those without
F-17
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
credit impairment at acquisition. The following table presents details on acquired loans at the acquisition date (in
thousands).
Commercial and industrial
Real estate
Construction and land development
Consumer
Broker-dealer (1)
Total
$
$
Loans, excluding
PCI Loans
Total
Loans
PCI
Loans
178,603 $ 9,850 $ 188,453
386,695
62,218
324,477
16,099
1,391
14,708
3,216
—
3,216
269,356
269,356
—
790,360 $ 73,459 $ 863,819
(1) Acquired loans include margin loans to customers and correspondents of $269.4 million associated with acquired
broker-dealer operations, none of which are PCI loans.
The following table presents information about the PCI loans at acquisition (in thousands).
Contractually required principal and interest payments
Nonaccretable difference
Cash flows expected to be collected
Accretable difference
Fair value of loans acquired with a deterioration of credit quality
$
$
120,078
32,040
88,038
14,579
73,459
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
$
901,672
39,721
790,360
3. Fair Value Measurements
Fair Value Measurements and Disclosures
The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the
ASC (the “Fair Value Topic”). The Fair Value Topic defines fair value and establishes a framework for measuring fair
value in GAAP. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions
upon which fair value measurements are based occur in the principal market for the asset or liability being measured.
Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of
forced transactions.
The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used
in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs, as indicated below.
• Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company
can access at the measurement date.
• Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates,
yield curves, prepayment speeds, default rates, credit risks and loss severities), and inputs that are derived from
or corroborated by market data, among others.
F-18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
• Level 3 Inputs: Unobservable inputs that reflect an entity’s own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted
cash flow techniques, among others.
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained
MSR asset at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of
the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. At December 31, 2017 and 2016, the aggregate fair value of PrimeLending’s mortgage loans held for sale
accounted for under the Fair Value Option was $1.58 billion and $1.75 billion, respectively, and the unpaid principal
balance of those loans was $1.53 billion and $1.71 billion, respectively. The interest component of fair value is reported
as interest income on loans in the accompanying consolidated statements of operations.
The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the
application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are
determined primarily using Level 2 inputs, as further described below.
Trading Securities — Trading securities are reported at fair value primarily using either Level 1 or Level 2 inputs in the
same manner as discussed below for available for sale securities.
Available For Sale Securities — Most securities available for sale are reported at fair value using Level 2 inputs. The
Company obtains fair value measurements from independent pricing services. As the Company is responsible for the
determination of fair value, control processes are designed to ensure that the fair values received from independent
pricing services are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with
prevailing market conditions. The fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the financial instruments’ terms and conditions, among other things. For
public common and preferred equity stocks, the determination of fair value uses Level 1 inputs based on observable
market transactions.
Loans Held for Sale — Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs
that consist of commitments on hand from investors or prevailing market prices. These instruments are held for
relatively short periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a
significant component of the change in fair value. The fair value of certain loans held for sale that cannot be sold through
normal sale channels or are non-performing is measured using Level 3, or unobservable, inputs. The fair value of such
loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of
comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.
Derivatives — Derivatives, which are included in other assets and liabilities within the Company’s consolidated balance
sheets, are reported at fair value using either Level 2 or Level 3 inputs. PrimeLending and the Hilltop Broker-Dealers use
dealer quotes to value forward purchase commitments and forward sale commitments, respectively, executed for both
hedging and non-hedging purposes. PrimeLending also issues IRLCs to its customers and the Hilltop Broker-Dealers
issue forward purchase commitments to its clients that are valued based on the change in the fair value of the underlying
mortgage loan from inception of the IRLC or purchase commitment to the balance sheet date, adjusted for projected loan
closing rates. PrimeLending determines the value of the underlying mortgage loan as discussed in “Loans Held for Sale”,
above. The Hilltop Broker-Dealers determine the value of the underlying mortgage loan from prices of comparable
securities used to value forward sale commitments. Additionally, PrimeLending uses dealer quotes to value interest rate
swaps and swaptions executed to hedge its MSR asset.
MSR Asset — The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is
reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are
then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors.
Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 10 to the
consolidated financial statements.
F-19
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Securities Sold, Not Yet Purchased — Securities sold, not yet purchased are reported at fair value primarily using either
Level 1 or Level 2 inputs in the same manner as discussed above for trading and available for sale securities.
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring
basis (in thousands).
December 31, 2017
Trading securities
Available for sale securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
December 31, 2016
Trading securities
Available for sale securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
$ 3,329 $ 727,356 $
21,241
—
—
—
156,586
—
744,318
1,544,631
34,150
—
76,235
13,197
— $
—
36,972
—
54,714
—
—
730,685
765,559
1,581,603
34,150
54,714
232,821
13,197
Level 3
Inputs
Level 1
Inputs
$ 9,481 $
19,840
—
—
—
60,715
—
Level 2
Inputs
256,053 $
578,167
1,712,697
57,036
—
93,174
35,737
Total
Fair Value
265,534
598,007
1,748,498
57,036
61,968
153,889
35,737
— $
—
35,801
—
61,968
—
—
The following table includes a rollforward for those financial instruments measured at fair value using Level 3 inputs (in
thousands).
Balance at
Beginning of Purchases/
Sales/
Year
Additions
Reductions Net Income
Included in Comprehensive
Income (Loss)
Balance at
End of Year
Total Gains or Losses
(Realized or Unrealized)
Included in Other
Year ended December 31, 2017
Loans held for sale
MSR asset
Total
Year ended December 31, 2016
Trading securities
Loans held for sale
MSR asset
Total
Year ended December 31, 2015
Trading securities
Loans held for sale
MSR asset
Total
$
$
35,801 $
61,968
97,769 $
36,891 $
16,401
53,292 $
(26,773) $
(17,499)
(44,272) $
(8,947) $
(6,156)
(15,103) $
— $
—
— $
36,972
54,714
91,686
$
1 $
— $
— $
(1) $
25,880
52,285
78,166 $
60,999
23,381
84,380 $
(39,637)
(7,586)
(47,223) $
(11,441)
(6,112)
(17,554) $
— $
9,017
36,155
45,172 $
7,301 $
52,800
24,974
85,075 $
(3,397) $
(25,514)
—
(28,911) $
(3,903) $
(10,423)
(8,844)
(23,170) $
$
$
$
— $
—
—
— $
—
35,801
61,968
97,769
— $
—
—
— $
1
25,880
52,285
78,166
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial
statements. Excluding the trading securities activity noted above, the unrealized gains (losses) relate to financial
instruments still held at December 31, 2017.
F-20
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
For Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2017, the significant
unobservable inputs used in the fair value measurements were as follows.
Financial instrument
Loans held for sale
Valuation Technique
Unobservable Inputs
Range
(Weighted-Average)
Discounted cash flows / Market comparable Projected price
90 -
95 %
( 95 %)
MSR asset
Discounted cash flows
Constant prepayment rate
Discount rate
10.93 %
11.03 %
The Company had no transfers between Levels 1 and 2 during the periods presented.
The following table presents those changes in fair value of instruments recognized in the consolidated statements of
operations that are accounted for under the Fair Value Option (in thousands).
Year Ended December 31, 2017
Other
Total
Year Ended December 31, 2016
Other
Total
Year Ended December 31, 2015
Other
Total
Loans held for sale
MSR asset
Net
Gains (Losses)
$
10,655 $
(6,156)
Noninterest Changes in
Net
Noninterest Changes in
Net
Income
Fair Value Gains (Losses)
Income
Fair Value Gains (Losses)
— $
—
10,655 $
(6,156)
(8,275) $
(6,112)
— $
—
(8,275) $
(6,112)
(2,970) $
(8,844)
Income
Noninterest Changes in
Fair Value
(2,970)
(8,844)
— $
—
The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the
fair value of all assets acquired and liabilities assumed in an acquisition of a business are determined at their respective
acquisition date fair values. In addition, facts and circumstances may dictate a fair value measurement when there is
evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.
Impaired Loans — The Company reports individually impaired loans based on the underlying fair value of the
collateral through specific allowances within the allowance for loan losses. PCI loans with a fair value of $172.9 million,
$822.8 million and $73.5 million were acquired by the Company upon completion of the PlainsCapital Merger, the FNB
Transaction and the SWS Merger, respectively (collectively, the “Bank Transactions”). Substantially all PCI loans
acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was
determined using Level 3 inputs, including estimates of expected cash flows that incorporated significant unobservable
inputs regarding default rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for
in pools (“Pooled Loans”), and estimated collateral values.
At December 31, 2017, estimates for these significant unobservable inputs were as follows.
Weighted average default rate
Weighted average loss severity rate
Weighted average prepayment speed
PlainsCapital
Merger
PCI Loans
FNB
SWS
Transaction Merger
41 %
18 %
7 %
64 %
66 %
0 %
60 %
28 %
0 %
At December 31, 2017, the resulting weighted average expected loss on PCI loans associated with the PlainsCapital
Merger, FNB Transaction and SWS Merger was 42%, 7% and 17%, respectively.
The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at
least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a
quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company
orders an updated appraisal of the fair value of the collateral. Because the Company obtains updated appraisals when
evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.
Other Real Estate Owned — The Company determines fair value primarily using independent appraisals of OREO
properties. The resulting fair value measurements are classified as Level 2 inputs. 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, 2017 and
2016, the estimated fair value of covered OREO was $36.7 million and $51.6 million, respectively, and the underlying
fair value measurements utilize Level 2 inputs. The fair value of non-covered OREO at December 31, 2017 and 2016
F-21
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
was $3.9 million and $4.5 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 subsequent to initial recognition
utilized Level 2 inputs.
The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring
basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in
thousands).
December 31, 2017
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
Total Gains (Losses) for the
Year Ended December 31,
Fair Value
2017
2016
2015
— $
—
—
—
— $
—
29,063 $
83,849
29,063 $
83,849
(49) $
(2,353)
2,487 $
1,156
3,883
10,187
—
—
3,883
10,187
(704)
(3,732)
(555)
(18,481)
(126)
3,034
(28)
(16,555)
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.
Securities Purchased Under Agreements to Resell — Securities purchased under agreements to resell are carried at
the amounts at which the securities will subsequently be resold as specified in the agreements. The carrying amounts
approximate fair value due to their short-term nature.
Assets Segregated for Regulatory Purposes — Assets segregated for regulatory purposes may consist of cash and
securities with carrying amounts that approximate 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-22
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Broker-Dealer and Clearing Organization Receivables and Payables — 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.
Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase
agreements, Federal Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.
Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates
for similar types of borrowing arrangements.
Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance
policies and accrued interest receivable and payable with carrying amounts that approximate their fair values using
Level 2 inputs. The fair value of certain other receivables and investments is based on Level 3 inputs.
F-23
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2017
Financial assets:
Cash and cash equivalents
Securities purchased under agreements to
resell
Assets segregated for regulatory purposes
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, 2016
Financial assets:
Cash and cash equivalents
Securities purchased under agreements to
resell
Assets segregated for regulatory purposes
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
Carrying
Amount
Level 1
Inputs
Estimated Fair Value
Level 3
Inputs
Level 2
Inputs
Total
$
487,382 $ 487,382 $
— $
— $
487,382
186,537
186,578
355,849
133,754
6,212,712
179,400
1,464,378
29,340
64,862
—
186,578
—
—
—
—
186,537
—
349,939
133,754
577,889
—
—
—
—
—
5,828,868
269,386
186,537
186,578
349,939
133,754
6,406,757
269,386
—
—
—
1,464,378
—
59,053
—
20,122
5,809
1,464,378
20,122
64,862
7,978,119
—
7,973,101
—
7,973,101
1,287,563
1,206,424
275,821
4,795
—
—
—
—
1,287,563
1,206,424
289,719
4,795
—
—
—
—
1,287,563
1,206,424
289,719
4,795
Carrying
Amount
Level 1
Inputs
Estimated Fair Value
Level 3
Inputs
Level 2
Inputs
Total
$
690,764 $ 690,764 $
— $
— $
690,764
89,430
180,993
351,831
46,965
5,789,313
255,714
—
180,993
—
—
—
—
89,430
—
345,088
46,965
502,077
—
—
—
—
—
5,459,975
367,444
89,430
180,993
345,088
46,965
5,962,052
367,444
1,497,741
71,313
62,904
—
—
—
1,497,741
—
58,697
—
60,173
4,207
1,497,741
60,173
62,904
7,063,811
—
7,058,837
—
7,058,837
1,347,128
1,417,289
384,924
3,708
—
—
—
—
1,347,128
1,417,289
378,822
3,708
—
—
—
—
1,347,128
1,417,289
378,822
3,708
F-24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Securities
The fair value of trading securities are summarized as follows (in thousands).
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Unit investment trusts
Private-label securitized product
Other
Totals
December 31,
2017
2016
$
— $
5,940
52,078
372,817
6,125
5,122
96,182
170,413
22,612
1,631
3,705
730,685 $
36,303
2,539
15,171
5,607
60,699
89,946
41,409
4,292
3,628
265,534
$
The Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at
prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the
Hilltop Broker-Dealers’ ultimate obligation may exceed the amount recognized in the financial statements. These
securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance
sheets, had a value of $232.8 million and $153.9 million at December 31, 2017 and 2016, respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in
thousands).
December 31, 2017
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Commercial mortgage-backed securities
Equity securities
Totals
Available for Sale
Amortized
Unrealized
Unrealized
Cost
24,665 $
$
Gains
Losses
Fair Value
107 $
(103) $
24,669
96,177
246,707
11,966
237,848
66,868
64,024
—
19,691
$ 767,946 $
829
538
105
106
1,819
1,099
—
1,666
6,269 $
(366)
(3,740)
(48)
(4,142)
(25)
(115)
—
(116)
96,640
243,505
12,023
233,812
68,662
65,008
—
21,241
(8,655) $ 765,560
F-25
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Commercial mortgage-backed securities
Equity securities
Totals
December 31, 2017
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
December 31, 2016
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
Available for Sale
Amortized
Unrealized
Unrealized
Cost
31,701 $
$
Gains
Losses
Fair Value
144 $
(44) $
31,801
121,838
135,371
8,771
117,879
76,866
86,353
499
18,920
$ 598,198 $
881
708
2
29
2,354
1,498
16
1,263
6,895 $
(67)
(2,941)
(58)
(3,206)
(91)
(336)
—
(343)
122,652
133,138
8,715
114,702
79,129
87,515
515
19,840
(7,086) $ 598,007
Held to Maturity
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
39,015 $
16,130
71,373
173,928
55,403
$ 355,849 $
— $
44
241
19
437
741 $
(1,188) $
—
(735)
(3,969)
(759)
(6,651) $
37,827
16,174
70,879
169,978
55,081
349,939
Held to Maturity
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
40,513 $
19,606
31,767
217,954
41,991
$ 351,831 $
— $
13
102
128
70
313 $
(1,287) $
(6)
(593)
(3,372)
(1,798)
(7,056) $
39,226
19,613
31,276
214,710
40,263
345,088
F-26
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding available for sale and held to maturities securities that were in an unrealized loss position is
shown in the following tables (dollars in thousands).
December 31, 2017
December 31, 2016
Number of
Securities Fair Value Losses
Unrealized Number of
Securities Fair Value
Unrealized
Losses
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
Commercial 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
Equity securities:
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
6 $
1
7
15,449 $
4,150
19,599
69
34
103
7 $
—
7
21,694 $
—
21,694
10
—
10
15
11
26
1
—
1
16
17
33
1
—
1
9
9
18
1
1
2
83,476
—
83,476
121,968
93,358
215,326
5,048
—
5,048
90,886
80,492
171,378
5,073
—
5,073
6,981
2,876
9,857
944
6,800
7,744
367
—
367
820
2,920
3,740
48
—
48
819
3,323
4,142
25
—
25
97
18
115
13
102
115
1
—
1
12
—
12
2
—
2
11
8
19
3
—
3
32
1
33
—
2
2
14,908
—
14,908
109,398
—
109,398
7,127
—
7,127
91,144
19,320
110,464
5,899
—
5,899
17,549
450
17,999
—
11,107
11,107
44
—
44
67
—
67
2,941
—
2,941
58
—
58
2,340
866
3,206
91
—
91
322
14
336
—
343
343
329,825
187,676
59
39
98 $ 517,501 $
2,258
6,397
8,655
68
11
79 $
267,719
30,877
298,596 $
5,863
1,223
7,086
F-27
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2017
December 31, 2016
Number of
Unrealized Number of
Unrealized
Securities Fair Value Losses
Securities Fair Value
Losses
Held to Maturity
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months
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
Commercial 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
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
4 $
33,225 $
—
33,225
1,287
—
1,287
1 $
3
4
5,950 $
31,877
37,827
50
1,138
1,188
—
—
—
7
2
9
10
12
22
22
46
68
—
—
—
39,396
12,659
52,055
37,064
128,270
165,334
11,079
18,598
29,677
—
—
—
271
464
735
264
3,705
3,969
71
688
759
—
4
2
—
2
5
1
6
19
—
19
71
1
72
13,178
—
13,178
18,891
1,401
20,292
187,669
—
187,669
29,862
462
30,324
93,489
191,404
40
63
103 $ 284,893 $
656
5,995
6,651
101
2
282,825
1,863
103 $ 284,688 $
6
—
6
588
5
593
3,372
—
3,372
1,790
8
1,798
7,043
13
7,056
During 2017, 2016 and 2015, the Company did not record any OTTI. While some of the securities held in the investment
portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position
are not believed to be significant enough to warrant OTTI of the securities. Factors considered in the Company’s
analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position,
credit worthiness, and forecasted performance of the investee. The Company does not intend, nor is it likely that the
Company will be required to sell, these securities before the recovery of the cost basis.
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or
prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and
available for sale equity securities, at December 31, 2017 are shown by contractual maturity below (in thousands).
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities
Collateralized mortgage obligations
Commercial mortgage-backed securities
Available for Sale
Amortized
Cost
Fair Value
$ 101,815 $ 101,922 $
95,284
30,893
23,742
251,734
96,442
32,064
24,551
254,979
Held to Maturity
Amortized
Cost
3,245 $
2,847
27,051
61,275
94,418
Fair Value
3,242
2,843
26,289
60,534
92,908
246,707
237,848
11,966
16,174
169,978
70,879
$ 748,255 $ 744,319 $ 355,849 $ 349,939
243,505
233,812
12,023
16,130
173,928
71,373
During 2017, 2016 and 2015, the Company realized net gains from its trading portfolio of $20.2 million, $15.9 million
and $12.8 million, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product
trading activities of $62.8 million, $109.8 million and $0.3 million during 2017, 2016 and 2015, respectively. During
2017 and 2015, the Company had other net realized gains on securities of $16 thousand and $4.4 million, respectively.
There were no other net realized gains on securities during 2016. All such realized net gains (losses) are recorded as a
component of other noninterest income within the consolidated statements of operations.
F-28
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Securities with a carrying amount of $738.5 million and $695.1 million (with a fair value of $730.1 million and $688.1
million, respectively) at December 31, 2017 and 2016, respectively, were pledged to secure public and trust deposits,
federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or
permitted by law. Substantially all of these pledged securities were included in the Company’s available for sale and
held to maturity securities portfolios at December 31, 2017 and 2016.
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, 2017 and 2016, NLC had investments on deposit in custody for various state insurance departments
with carrying values of $9.3 million and $9.2 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
Broker-dealer (1)
Allowance for non-covered loan losses
Total non-covered loans, net of allowance
December 31,
2017
2016
$ 1,681,205 $ 1,696,453
2,816,767
3,011,524
786,850
962,605
40,446
41,352
502,077
577,889
5,843,499
6,273,669
(54,186)
(60,957)
$ 6,212,712 $ 5,789,313
(1)
Represents margin loans to customers and correspondents associated with broker-dealer segment operations.
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on
stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are
underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the
primary sources of repayment and any collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size and complexity of the credit. The financial
components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and
trends in appropriate balance sheet and statement of operations ratios. The Bank’s loan policy provides specific
underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land
development, and consumer loans. The guidelines for each individual portfolio segment set forth permissible and
impermissible loan types. With respect to each loan type, the guidelines within the Bank’s loan policy provide minimum
requirements for the underwriting factors listed above. The Bank’s underwriting procedures also include an analysis of
any collateral and guarantor. Collateral analysis includes a complete description of the collateral, as well as determined
values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information
relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow evaluation based on the
significance with which the guarantors are expected to serve as secondary repayment sources.
The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors
that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process
reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process
F-29
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel.
Results of these reviews are presented to management and the Bank’s board of directors.
In connection with the Bank Transactions, the Company acquired 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,
2017
37,204 $
51,064
2016
51,432
67,988
Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).
Balance, beginning of period
Additions
Reclassifications from nonaccretable difference, net(1)
Disposals of loans
Accretion
Balance, end of period
$
$
2017
Year Ended December 31,
2016
2015
13,116 $
—
3,836
(664)
(9,275)
7,013 $
17,744
—
6,168
—
(10,796)
13,116
$
$
12,814
14,579
19,759
(2,371)
(27,037)
17,744
(1) Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts.
Reclassifications to nonaccretable difference occur when accruing loans are moved to non-accrual and expected cash flows are no longer
predictable and the accretable yield is eliminated.
The remaining nonaccretable difference for non-covered PCI loans was $19.2 million and $22.8 million at December 31,
2017 and 2016, 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.
F-30
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The amounts shown in following tables include loans accounted for on an individual basis, as well as acquired Pooled
Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment
measured at the pool level. Non-covered impaired loans, segregated between those considered to be PCI loans and those
without credit impairment at acquisition, are summarized by class in the following tables (in thousands).
December 31, 2017
PCI
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
Broker-dealer
Non-PCI
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
Broker-dealer
December 31, 2016
PCI
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
Broker-dealer
Non-PCI
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
Broker-dealer
Unpaid
Contractual
Principal Balance No Allowance
Recorded
Investment with Investment with Recorded
Investment
Recorded
Allowance
Total
Related
Allowance
$
19,752 $
—
3,610 $
—
2,489 $
—
6,099 $
—
34,598
12,600
—
2,001
2,377
—
71,328
23,666
761
15,504
1,596
7,583
5,307
—
428
12
—
16,940
15,308
616
10,934
1,177
12,092
4,558
19,675
9,865
—
—
1,010
115
—
20,264
2,072
—
3,686
—
1,438
127
—
37,204
17,380
616
14,620
1,177
15
—
—
—
653
162
—
42,357
$
113,685 $
—
56
—
28,091
45,031 $
611
—
—
6,369
26,633 $
611
56
—
34,460
71,664 $
89
—
1,391
325
—
215
18
—
2,038
365
—
932
—
—
93
—
—
1,390
3,428
Unpaid
Recorded
Recorded
Investment with Investment with Recorded
Total
Related
Contractual
Principal Balance No Allowance
Allowance
Investment Allowance
$
25,354 $
—
3,234 $
—
5,438 $
—
8,672 $
—
38,005
13,606
11,097
7,401
17,413
3,088
28,510
10,489
—
—
—
—
5,780
3,223
—
85,968
6,311
946
10,134
1,344
1,391
237
—
23,360
3,313
925
10,000
1,116
28
28
738
246
—
19,747
$
105,715 $
48
244
—
15,674
39,034 $
2,076
57
—
28,072
1,372
—
—
—
—
679
—
—
2,051
30,123 $
3,467
294
—
51,432
4,685
925
10,000
1,116
28
727
244
—
17,725
69,157 $
557
—
1,907
200
—
377
56
—
3,097
115
—
—
—
—
167
—
—
282
3,379
F-31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Average investment in non-covered impaired loans is summarized by class in the following table (in thousands).
Year Ended December 31,
2016
2017
2015
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
Broker-dealer
$ 18,418 $ 19,730 $ 25,991
104
486
771
36,403
11,324
40,014
12,085
32,149
7,769
14
125
111
3,122
361
—
7,462
1,459
—
$ 70,413 $ 77,718 $ 75,045
4,619
659
—
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
Broker-dealer
December 31, December 31,
2017
2016
$
20,262 $
616
8,590
925
14,620
1,614
—
611
56
—
37,779 $
11,034
1,197
28
727
244
—
22,745
$
At December 31, 2017 and 2016, non-covered non-accrual loans included non-covered PCI loans of $3.3 million and
$5.0 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, $2.7 million and $1.7 million of real estate loans secured by residential properties and classified
as held for sale were in non-accrual status at December 31, 2017 and 2016, respectively.
Interest income, including recoveries and cash payments, recorded on non-covered impaired loans was $0.5 million, $0.2
million and $8.9 million during 2017, 2016 and 2015, respectively. Except as noted above, non-covered PCI loans are
considered to be performing due to the application of the accretion method.
The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and
that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable
payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates
and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans
(“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans,
the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is
not forgiven to the debtor.
F-32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding TDRs granted during 2017, 2016 and 2015, respectively, is shown in the following table (in
thousands). At December 31, 2017 and 2016, the Bank had nominal unadvanced commitments to borrowers whose loans
have been restructured in TDRs.
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Number of Balance at Balance at
Loans
Extension End of Period Loans
Number of Balance at Balance at Number of Balance at Balance at
Extension End of Period
Extension End of Period Loans
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
Broker-dealer
1
—
$ 1,357
—
$
1,186
—
1
—
$ 1,196
—
$
944
—
$
1
—
$
89
—
82
—
2
4,775
4,629
—
—
—
—
—
—
—
—
—
1
1,083
1,040
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
655
—
—
4 $ 6,787 $
611
—
—
6,426
—
—
—
—
—
—
1 $ 1,196 $
—
—
—
944
1
—
—
76
—
—
3 $ 1,248 $
—
—
—
1,122
All of the non-covered loan modifications included in the table above involved payment term extensions. The Bank did
not grant principal reductions on any restructured non-covered loans during 2017, 2016 or 2015.
The following table presents information regarding TDRs granted during the twelve months preceding December 31,
2017 and 2016, respectively, for which a payment was at least 30 days past due (dollars in thousands).
Twelve Months Preceding December 31, 2017 Twelve Months Preceding December 31, 2016
Number of
Balance at
End of Period
Number of
Loans
Balance at
Extension
Balance at
End of Period
Balance at
Extension
Loans
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
Broker-dealer
—
—
1
—
—
1
—
—
2
$
$
—
—
—
—
1,481
—
1,352
—
—
—
655
—
—
2,136
$
611
—
—
1,963
$
1
—
—
—
—
—
—
—
1
$
$
1,196
—
—
—
—
—
—
—
1,196
$
$
944
—
—
—
—
—
—
—
944
F-33
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
An analysis of the aging of the Company’s non-covered loan portfolio is shown in the following tables (in thousands).
December 31, 2017
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
Broker-dealer
December 31, 2016
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
Broker-dealer
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
30-59 Days
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
Past Due
90 Days or More
$
2,060 $
642
312 $
—
5,714 $
—
8,086 $ 1,544,131 $ 6,099 $ 1,558,316 $
642
122,247
—
122,889
442
—
2,195
2,637
2,213,331
19,675
2,235,643
1,490
1,290
418
3,198
762,818
9,865
775,881
315
—
—
315
176,937
—
177,252
1,370
194
—
6,513 $
101
20
—
1,723 $
—
—
—
8,327 $
1,471
214
—
782,444
40,105
577,889
1,438
127
—
785,353
40,446
577,889
16,563 $ 6,219,902 $ 37,204 $ 6,273,669 $
$
640
—
—
—
—
—
—
—
640
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
30-59 Days
90 Days or More Past Due Loans
Total
Current
Loans
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI)
Past Due
90 Days or More
$
4,727 $
596
704 $
1
6,770 $
909
12,201 $ 1,576,239 $ 8,672 $ 1,597,112 $
1,506
99,341
97,835
—
550
506
9,417
361
1,492
11,459
1,915,126
28,510
1,955,095
369
1,236
849,947
10,489
861,672
3,095
1
—
—
—
28
—
28
128,624
—
128,652
—
2,500
176
—
9,055 $
1,784
31
—
12,326 $
48
—
—
9,588 $
4,332
207
—
650,399
40,851
502,077
3,467
294
—
658,198
41,352
502,077
30,969 $ 5,761,098 $ 51,432 $ 5,843,499 $
—
—
—
3,096
$
In addition to the non-covered loans shown in the table above, PrimeLending had $84.5 million and $44.4 million of
loans included in loans held for sale (with an unpaid principal balance of $85.2 million and $44.9 million, respectively)
that were 90 days past due and accruing interest at December 31, 2017 and 2016, respectively. These loans are
guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by
PrimeLending.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset
levels, (iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets.
The Company utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio with the exception
of broker-dealer margin loans. A risk rating is assigned based on an assessment of the borrower’s management, collateral
position, financial capacity, and economic factors. The general characteristics of the various risk grades are described
below.
Pass — “Pass” loans present a range of acceptable risks to the Company. Loans that would be considered virtually risk-
free are rated Pass — low risk. Loans that exhibit sound standards based on the grading factors above and present a
reasonable risk to the Company are rated Pass — normal risk. Loans that exhibit a minor weakness in one or more of the
grading criteria but still present an acceptable risk to the Company are rated Pass — high risk.
F-34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Special Mention — “Special Mention” loans have potential weaknesses that deserve management’s close attention. If
left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and
weaken the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not
expose the Company to sufficient risk to require adverse classification.
Substandard — “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the
obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain
some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.
PCI — “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually
required principal payments would not be collected.
The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by
class (in thousands).
December 31, 2017
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
Broker-dealer
December 31, 2016
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
Broker-dealer
Allowance for Loan Losses
Pass
Special Mention Substandard
PCI
Total
$ 1,483,502 $
121,774
17,354 $ 51,361 $ 6,099 $ 1,558,316
122,889
1,115
—
—
2,154,595
756,091
7,647
—
53,726
9,925
19,675
9,865
2,235,643
775,881
177,252
—
—
—
177,252
780,905
40,211
577,889
$ 6,092,219 $
2,259
—
—
785,353
40,446
577,889
27,260 $ 116,986 $ 37,204 $ 6,273,669
1,438
127
—
751
108
—
Pass
Special Mention Substandard
PCI
Total
$ 1,531,895 $
97,646
72 $ 56,473 $ 8,672 $ 1,597,112
99,341
—
1,695
—
1,888,231
846,420
3,693
—
34,661
4,763
28,510
10,489
1,955,095
861,672
128,624
—
28
—
128,652
653,808
40,789
502,077
$ 5,689,490 $
—
6
—
658,198
41,352
502,077
3,771 $ 98,806 $ 51,432 $ 5,843,499
3,467
294
—
923
263
—
It is management’s responsibility to, at the end of each quarter, or more frequently as deemed necessary, analyze the
level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio.
Estimated credit losses are the probable current amount of loans that the Company will be unable to collect given facts
and circumstances as of the evaluation date. When management determines that a loan, or portion thereof is
uncollectible, the loan, or portion thereof, is charged-off against the allowance for loan losses, or for acquired loans
accounted for in pools, charged against either the pool discount or the post-acquisition allowance. Recoveries on charge-
offs of loans acquired in the Bank Transactions that occurred prior to their acquisition represent contractual cash flows
not expected to be collected and are recorded as accretion income. Recoveries on acquired loans charged-off subsequent
F-35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
to their acquisition are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools,
which are credited to the pool discount.
The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables
and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of
the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated using one
of three impairment measurement methods as of the evaluation date: (1) the present value of expected future cash flows
discounted at the loan’s effective rate, (2) the loan’s observable market price, or (3) the fair value of the collateral if the
loan is collateral dependent. Specific reserves are provided in the estimate of the allowance based on the measurement of
impairment under these three methods, except for collateral dependent loans, which require the fair value method. All
non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are
calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year
average net loss rate to calculate historical loss factors. The analysis is conducted by call report loan category, and
further disaggregates commercial and industrial loans by collateral type. The analysis uses net charge-off experience by
considering charge-offs and recoveries in determining the loss rate. The historical loss calculation for the quarter is
calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category
balance. The Bank utilizes a weighted average loss rate to better represent recent trends.
While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole
basis upon which the Company determines the appropriate level for the allowance for loan losses. Management
considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the
existing portfolio to differ from historical loss experience, including but not limited to:
•
•
•
•
•
•
•
changes in the volume and severity of past due, non-accrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, non-accrual and classified loans, as well as changes in the nature,
volume and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the
historical loss factors. The magnitude of the impact of these factors on the qualitative assessment of the allowance for
loan loss changes from quarter to quarter.
The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process,
requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the
information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired
status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and
in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the
loan review scope, or (iv) the loan is identified by the servicing officer as a problem.
In connection with the Bank Transactions, the Bank acquired loans both with and without evidence of credit quality
deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan
basis, while PCI loans acquired in each of the FNB Transaction and SWS Merger are accounted for in pools as well as
on an individual loan basis. Cash flows expected to be collected are recast quarterly for each loan or pool. These
evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity
given default and prepayment speed assumptions (similar to those used for the initial fair value estimate). Management
judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an
increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows
for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference
increases the accretable yield. This increase in accretable yield is taken into income over the remaining life of the loan.
F-36
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at
each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for
originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value
discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a
provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first
reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the
allowance established for that loan.
The allowance for loan losses is subject to regulatory examinations and determinations as to adequacy, which may take
into account such factors as the methodology used to calculate the allowance and the size of the allowance. While the
Company believes it has an appropriate allowance for the existing non-covered and covered portfolios at December 31,
2017, additional provisions for losses on existing loans may be necessary in the future.
During 2016, the Bank discovered irregularities in connection with a single loan that was in default. As a result, the
Bank increased its provision for loan losses and recorded a $24.5 million charge-off during the second quarter of 2016,
representing the entire outstanding principal balance of the loan. During the second quarter of 2017, the Bank recorded
other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery of a document
delivered in connection with this loan.
Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).
Year Ended December 31, 2017
Balance, beginning of year
Provision charged to operations
Loans charged off
Recoveries on charged off loans
Balance, end of year
Year Ended December 31, 2016
Balance, beginning of year
Provision charged to (recapture from) operations
Loans charged off
Recoveries on charged off loans
Balance, end of year
Year Ended December 31, 2015
Balance, beginning of year
Provision charged to (recapture from) operations
Loans charged off
Recoveries on charged off loans
Balance, end of year
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer Total
$
$
21,369 $
6,725
(6,253)
1,833
23,674 $
25,236 $
3,619
(305)
225
28,775 $
7,002 $
848
(13)
7
7,844 $
424 $
16
(208)
79
311 $
155 $ 54,186
198 11,406
(6,779)
—
2,144
—
353 $ 60,957
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer Total
$
$
19,845 $
33,369
(33,776)
1,931
21,369 $
18,983 $
7,297
(1,439)
395
25,236 $
6,064 $
938
—
—
7,002 $
314 $
190
(203)
123
424 $
209 $ 45,415
(53)
41,741
(1) (35,419)
—
2,449
155 $ 54,186
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer Total
$
$
18,833 $
4,598
(7,144)
3,558
19,845 $
11,131 $
7,937
(605)
520
18,983 $
6,450 $
(386)
—
—
6,064 $
461 $
104
(378)
127
314 $
166 $ 37,041
(80) 12,173
(8,127)
—
123
4,328
209 $ 45,415
F-37
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2017
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
December 31, 2016
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
Commercial and
Industrial
$
16,819 $
Construction and
Real Estate Land Development Consumer Broker-Dealer
611 $
13,782 $
— $
Total
1,658,287
6,099
2,968,202
29,540
960,556
1,438
40,319
127
$
1,681,205 $ 3,011,524 $
962,605 $ 40,446 $
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer
$
4,508 $
9,704 $
727 $
205 $
1,683,273
8,672
2,768,064
38,999
782,656
3,467
40,853
294
$
1,696,453 $ 2,816,767 $
786,850 $ 41,352 $
— $
577,889
—
31,212
6,205,253
37,204
577,889 $ 6,273,669
— $
Total
15,144
5,776,923
51,432
502,077 $ 5,843,499
502,077
—
The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown
below (in thousands).
December 31, 2017
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
December 31, 2016
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer Total
$
$
365 $
932 $
23,220
89
23,674 $
26,127
1,716
28,775 $
93 $
7,536
215
7,844 $
— $
293
18
311 $
— $ 1,390
57,529
353
2,038
—
353 $ 60,957
Commercial and
Industrial
Construction and
Real Estate Land Development Consumer Broker-Dealer Total
$
$
115 $
20,697
557
21,369 $
— $
23,129
2,107
25,236 $
167 $
6,458
377
7,002 $
— $
368
56
424 $
— $
155
—
282
50,807
3,097
155 $ 54,186
6. Covered Assets and Indemnification Asset
The Bank acquired certain assets and assumed certain liabilities of FNB in connection with an FDIC-assisted transaction
on September 13, 2013 (the “Bank Closing Date”). As part of the Purchase and Assumption Agreement by and among
the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A Agreement”), the Bank and the FDIC entered into
loss-share agreements covering future losses incurred on 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 net losses on the first $240.4 million of net losses incurred;
(ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80%
of net losses in excess of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain
defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for
commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited
to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing
Date. There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement
for single family residential assets. The loss-share agreements for commercial and single family residential assets are in
effect for five years and ten years, respectively, from the Bank Closing Date, and the loss recovery provisions to the
FDIC are in effect for eight years and ten years, respectively, from the Bank Closing Date. The asset arising from the
loss-share agreements, referred to as the “FDIC Indemnification Asset,” 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 its actual net realized losses over the life of the loss-share
F-38
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated
using a defined formula set forth in the P&A Agreement. At December 31, 2017, the Bank has recorded a related “true-
up” payment accrual of $16.3 million based on the current estimate of aggregate realized losses on covered assets over
the life of the loss-share agreements.
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 the accounting policies for 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 similar risk
characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying
the subsequent recognition and measurement provisions for income accretion and impairment testing.
The following table presents the carrying value of the covered loans summarized by portfolio segment (in thousands).
December 31,
2017
2016
Commercial and industrial
Real estate
Construction and land development
Allowance for covered loans
Total covered loans, net of allowance
$
$
1,055 $
179,359
1,715
182,129
(2,729)
179,400 $
2,697
244,469
8,961
256,127
(413)
255,714
The following table presents the carrying value and the outstanding contractual balance of the covered PCI loans (in
thousands).
Carrying amount
Outstanding balance
December 31,
$
2017
87,113 $
179,019
2016
133,754
266,098
Changes in the accretable yield for the covered PCI loans were as follows (in thousands).
Balance, beginning of period
Reclassifications from nonaccretable difference, net(1)
Transfer of loans to covered OREO(2)
Accretion
Balance, end of period
2017
Year Ended December 31,
2016
2015
$
$
143,731 $
9,110
(999)
(60,009)
91,833 $
176,719 $
41,239
(487)
(73,740)
143,731 $
193,493
70,884
(1,309)
(86,349)
176,719
(1) Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts, but may also
include the reclassification and immediate income recognition of nonaccretable difference due to the favorable resolution of loans accounted for
individually. Reclassifications to nonaccretable difference occur when accruing loans are moved to non-accrual and expected cash flows are no
longer predictable and the accretable yield is eliminated.
(2) Transfer of loans to covered OREO is the difference between the value removed from the pool and the expected cash flows for the loan.
F-39
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The remaining nonaccretable difference for covered PCI loans was $72.7 million and $94.5 million at December 31,
2017 and 2016, respectively. During 2017, 2016 and 2015, a combination of factors affecting the inputs to the Bank’s
quarterly recast process led to the reclassifications from nonaccretable difference to accretable yield. These transfers
resulted from revised cash flows that reflect better-than-expected performance of the covered PCI loan portfolio as a
result of the Bank’s strategic decision to dedicate resources to the liquidation of covered loans during the noted periods.
Covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. The amounts shown
in the 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, segregated between those considered to be PCI loans and those without credit impairment at
acquisition, are summarized by class in the following tables (in thousands).
December 31, 2017
PCI
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
Non-PCI
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
Unpaid
Contractual
Recorded
Recorded
Investment with Investment with Recorded
Total
Principal Balance No Allowance
Allowance
Related
Investment Allowance
$
3,783 $
5,732
— $
—
194 $
—
194 $
—
19
—
80,223
125,361
2,388
249
21,171
63,107
23,559
63,356
1,817
861
672
—
—
—
—
11,118
226,889
4
2,641
—
84,472
4
87,113
—
2,697
44
—
—
—
—
—
—
—
—
6,279
—
5,370
—
—
—
—
—
—
5,370
—
—
—
—
—
—
18
6,341
233,230 $
12
5,382
8,023 $
—
—
—
12
—
5,382
84,472 $ 92,495 $ 2,697
$
F-40
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
PCI
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
Non-PCI
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
Unpaid
Contractual
Recorded
Recorded
Investment with Investment with Recorded
Total
Principal Balance No Allowance
Allowance
Related
Investment Allowance
$
10,579 $
3,259
1,024 $
299
189 $
—
1,213 $
299
13
—
143,934
148,384
26,415
73,240
26,222
1,161
52,637
74,401
271
60
766
—
—
—
—
23,522
330,444
5,204
106,182
—
27,572
5,204
133,754
—
344
52
—
52
—
—
—
52
—
396
4,175
310
3,537
—
—
24
4,647
335,091 $
20
3,919
110,101 $
$
—
—
—
—
—
310
3,537
—
20
3,919
27,572 $ 137,673 $
—
—
—
—
—
—
—
344
Average investment in covered impaired loans is summarized by class in the following table (in thousands).
Year Ended December 31,
2016
2017
2015
$
730 $
150
3,530 $
1,040
9,934
4,293
38,253
73,332
75,159 162,812
88,794 121,069
—
2,620
1,017
33,278
$ 115,085 $ 181,921 $ 332,403
331
13,067
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
F-41
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Covered non-accrual loans 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
December 31,
2017
2016
$
— $
—
—
5,087
—
17
5,104 $
$
52
—
730
3,035
—
19
3,836
At December 31, 2016, covered non-accrual loans included covered PCI loans of $0.4 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. The amount of such loans included in covered non-accrual loans at December 31, 2017 was
nominal.
Interest income, including recoveries and cash payments, recorded on covered impaired loans was $1.3 million, $1.1
million, and $17.2 million during 2017, 2016 and 2015, respectively. 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. Information regarding TDRs granted in 2015 is shown in
the following table (in thousands). There were no TDRs granted during 2017 or 2016. Pooled Loans are not in the scope
of the disclosure requirements for TDRs. At December 31, 2017 and 2016, the Bank had nominal unadvanced
commitments to borrowers whose loans have been restructured in TDRs.
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
Year Ended December 31, 2015
Number of Balance at
Extension
Loans
Balance at
End of Period
— $
—
— $
—
1
7
—
573
860
—
—
8 $
—
1,433 $
—
—
—
824
—
—
824
During 2015, the covered loan modifications included in the table above included two loans involving payment term
extensions, six loans that involved an A/B Note restructure, and six loans that included interest rate adjustments. The
Bank did not grant principal reductions on any restructured covered loans.
There were no TDRs granted during the twelve months preceding December 31, 2017 or 2016 for which a payment was
at least 30 days past due.
F-42
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
An analysis of the aging of the Bank’s covered loan portfolio is shown in the following tables (in thousands).
December 31, 2017
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
December 31, 2016
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
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
30-59 Days
90 Days or More Past Due Loans Loans
Total
Current
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI) Past Due
90 Days or More
$
— $
—
— $
—
— $
—
— $
—
861 $
—
194 $ 1,055 $
—
—
209
113
—
322
11,472 23,559
35,353
5,624
1,211
3,226
10,061
70,589 63,356
144,006
—
—
—
—
—
—
—
$
38
5,871 $
—
1,324 $
—
3,226 $
38
1,673
4
1,715
10,421 $ 84,595 $ 87,113 $ 182,129 $
—
—
—
283
—
—
283
Loans Past Due Loans Past Due Loans Past Due
60-89 Days
Current
90 Days or More Past Due Loans Loans
30-59 Days
Total
PCI
Loans
Total
Loans
Accruing Loans
(Non-PCI) Past Due
90 Days or More
$
— $
—
6 $
—
96 $
—
102 $ 1,083 $ 1,213 $
—
—
299
2,398 $
299
96
229
—
325
19,132
52,637
72,094
3,511
1,345
1,479
6,335
91,639
74,401
172,375
—
—
—
—
—
—
—
$
15
3,622 $
—
1,580 $
—
1,575 $
15
3,742
5,204
8,961
6,777 $ 115,596 $ 133,754 $ 256,127 $
44
—
—
129
—
—
173
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, 2017
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
Pass
Special Mention Substandard
PCI
Total
$
429 $
—
— $
—
432 $
—
194 $
—
1,055
—
10,961
68,544
—
356
833
11,750
23,559
63,356
35,353
144,006
—
—
—
—
—
—
1,715
356 $ 13,077 $ 87,113 $ 182,129
62
4
1,649
$ 81,583 $
F-43
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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
Pass
Special Mention Substandard
PCI
Total
$
592 $
—
— $
—
593 $
—
1,213 $
299
2,398
299
17,996
90,563
—
461
1,461
6,950
52,637
74,401
72,094
172,375
—
—
—
—
—
2,281
$ 111,432 $
—
8,961
461 $ 10,480 $ 133,754 $ 256,127
1,476
5,204
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. This increase in accretable yield is 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).
Year Ended December 31, 2017
Balance, beginning of year
Provision charged to (recaptured from) operations
Loans charged off
Recoveries on charged off loans
Balance, end of year
Year Ended December 31, 2016
Balance, beginning of year
Provision recaptured from operations
Loans charged off
Recoveries on charged off loans
Balance, end of year
Year Ended December 31, 2015
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
Construction and
Land Development
Total
$
$
35 $
32
(49)
6
24 $
378 $
2,840
(522)
6
2,702 $
— $
(7)
—
10
3 $
413
2,865
(571)
22
2,729
Commercial and
Industrial
Real Estate
Construction and
Land Development
Total
$
$
758 $
(717)
(6)
—
35 $
774 $
(351)
(62)
17
378 $
— $
(53)
(51)
104
— $
1,532
(1,121)
(119)
121
413
Commercial and
Industrial
Real Estate
Construction and
Land Development
Total
$
$
1,193 $
258
(915)
222
758 $
3,334 $
189
(2,869)
120
774 $
84 $
95
(179)
—
— $
4,611
542
(3,963)
342
1,532
The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2017
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
Commercial and
Industrial
Real Estate
Construction and
Land Development
$
$
— $
861
194
1,055 $
— $
92,444
86,915
179,359 $
— $
1,711
4
1,715 $
Total
—
95,016
87,113
182,129
F-44
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
Commercial and
Industrial
Real Estate
Construction and
Land Development
$
$
— $
1,185
1,512
2,697 $
— $
117,431
127,038
244,469 $
— $
3,757
5,204
8,961 $
Total
—
122,373
133,754
256,127
The allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown
below (in thousands).
December 31, 2017
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
December 31, 2016
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
PCI Loans
Covered Other Real Estate Owned
Commercial and
Industrial
Real Estate
Construction and
Land Development
Total
$
$
— $
5
19
24 $
— $
24
2,678
2,702 $
— $
3
—
3 $
—
32
2,697
2,729
Commercial and
Industrial
Real Estate
Construction and
Land Development
Total
$
$
— $
22
13
35 $
— $
47
331
378 $
— $
—
—
— $
—
69
344
413
A summary of the activity in covered OREO is as follows (in thousands).
Balance, beginning of year
Additions to covered OREO
Dispositions of covered OREO
Valuation adjustments in the period
Balance, end of year
2017
Year Ended December 31,
2016
2015
51,642 $
6,700
(17,866)
(3,732)
36,744 $
99,090 $
13,876
(42,843)
(18,481)
51,642 $
136,945
50,465
(71,765)
(16,555)
99,090
$
$
During 2017, 2016 and 2015, the Bank wrote down certain covered OREO assets to fair value to reflect new appraisals
on certain OREO acquired in the FNB Transaction and OREO acquired from the foreclosure on certain FNB loans
acquired in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired assets upon
acquisition, in some cases additional downward valuations were required. The downward valuations recorded during the
periods presented above were related to covered assets subject to the loss-share agreements with the FDIC.
These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the
OREO, including in some cases the intended use of the OREO, due to the availability of more information as well as the
passage of time. The process of determining fair value is subjective in nature and requires the use of significant estimates
and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information
may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent
information, that its estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments
requires that the decreases to fair value be recorded at the time such new information is received, while increases to fair
value are recorded when the asset is subsequently sold.
F-45
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
FDIC Indemnification Asset
A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).
Balance, beginning of year
FDIC Indemnification Asset accretion (amortization)
Transfers to due from FDIC and other
Balance, end of year
$
$
71,313 $
(17,083)
(24,890)
29,340 $
91,648 $
242
(20,577)
71,313 $
130,437
1,147
(39,936)
91,648
2017
Year Ended December 31,
2016
2015
As of December 31, 2017, the Bank had billed $147.8 million to and collected $145.8 million from the FDIC, which
represented reimbursable covered losses and expenses through September 30, 2017. During 2017, the Bank recorded
$17.1 million of amortization related to the FDIC Indemnification Asset due to lower than projected collections from the
FDIC than originally estimated at the Bank Closing Date.
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,
2017
44,765 $
92,271
248,442
1,501
99,998
486,977 $
2016
49,152
78,328
354,948
4,237
182,692
669,357
$
$
The amounts above include interest-bearing deposits of $302.2 million and $479.3 million at December 31, 2017 and
2016, respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at
December 31, 2017.
8. Premises and Equipment
The components of premises and equipment are summarized as follows (in thousands).
December 31,
Land and premises
Furniture and equipment
Less accumulated depreciation and amortization
$
2017
111,203 $
207,552
318,755
(141,178)
$
177,577 $
2016
111,295
190,914
302,209
(111,848)
190,361
The amounts shown above include gross assets recorded under capital leases of $8.4 million and $8.4 million, with
accumulated amortization of $3.3 million and $2.5 million at December 31, 2017 and 2016, respectively.
Occupancy expense was reduced by rental income of $1.8 million, $2.0 million and $2.2 million during 2017, 2016 and
2015, respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of
capital leases, amounted to $34.6 million, $35.4 million and $37.2 million during 2017, 2016 and 2015, respectively.
F-46
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Goodwill and Other Intangible Assets
At both December 31, 2017 and 2016, the carrying amount of goodwill of $251.8 million was comprised of
$24.0 million recorded in connection with the acquisition of NLC and $227.8 million recorded in connection with the
PlainsCapital Merger.
Other intangible assets of $36.4 million and $44.7 million at December 31, 2017 and 2016, respectively, include an
indefinite lived intangible asset with an estimated fair value of $3.0 million related to state licenses acquired as a part of
the NLC acquisition in January 2007.
The Company performed required annual impairment tests of its goodwill and other intangible assets having an
st
indefinite useful life as of October 1
the estimated fair value of each of its reporting units exceeded its carrying value. The Company estimated the fair values
of its reporting units based on both a market and income approach using historical, normalized actual and forecasted
results. Based on this evaluation, the Company concluded that the goodwill and other identifiable intangible assets were
fully realizable.
for each of its reporting units. At October 1, 2017, the Company determined that
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.
Based on the results of the previously noted annual quantitative analysis as of October 1, 2017, the fair values of each of
the Company’s reporting units indicated no impairment of goodwill. This analysis and the resulting estimated fair value
of the insurance reporting unit exceeded the carrying value by approximately 12%, which represented a decline in the
estimated excess fair value over carrying value from recent annual goodwill assessments. This decrease in the excess fair
value over carrying value from the 2016 assessment to the 2017 assessment was primarily a result of a reduction in
projected discounted cash flows driven by the insurance reporting unit’s current operating performance being below
expectations, which was primarily attributable to catastrophic and sub-catastrophic weather-related events which
occurred in 2017. In the event future operating performance is below management’s forecasted projections, there are
negative changes to long-term growth rates or discount rates increase, the fair value of the insurance reporting unit may
decline and the Company may be required to record a goodwill impairment charge.
The carrying value of intangible assets subject to amortization was as follows (in thousands).
Estimated Gross
Useful Life Intangible Accumulated Intangible
Net
December 31, 2017
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
December 31, 2016
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
Assets
Amortization Assets
(Years)
4 - 12 $ 38,930 $ (26,381) $ 12,549
12,140
1,121
7,494
128
$ 95,580 $ (62,148) $ 33,432
(7,860)
(10,529)
(13,906)
(3,472)
20,000
11,650
21,400
3,600
15 - 20
4 - 6
12 - 14
13
Estimated Gross
Useful Life Intangible Accumulated Intangible
Net
Assets
Amortization Assets
(Years)
4 - 12 $ 38,930 $ (22,255) $ 16,675
13,123
2,344
9,303
250
$ 95,580 $ (53,885) $ 41,695
(6,877)
(9,306)
(12,097)
(3,350)
20,000
11,650
21,400
3,600
15 - 20
4 - 6
12 - 14
13
F-47
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Amortization expense related to intangible assets during 2017, 2016 and 2015 was $8.3 million, $10.2 million and $12.4
million, respectively.
The estimated aggregate future amortization expense for intangible assets at December 31, 2017 is as follows (in
thousands).
2018
2019
2020
2021
2022
Thereafter
$
$
7,289
5,142
4,352
3,607
3,222
9,820
33,432
10. Mortgage Servicing Rights
The following tables present the changes in fair value of the Company’s MSR asset, as included in other assets within
the consolidated balance sheets, and other information related to the serviced portfolio (dollars in thousands).
Balance, beginning of year
Additions
Sales
Changes in fair value:
Due to changes in model inputs or assumptions
Due to customer payoffs
(1)
Balance, end of year
Mortgage loans serviced for others
MSR asset as a percentage of serviced mortgage loans
2017
61,968
16,401
(17,499)
(1,722)
(4,434)
54,714
Year Ended December 31,
2016
2015
$
$
52,285
23,381
(7,586)
(153)
(5,959)
61,968
$
$
36,155
24,974
—
(2,150)
(6,694)
52,285
December 31,
2017
4,762,042
$
1.15 %
2016
5,480,943
1.13 %
$
$
$
(1) Primarily represents normal customer payments, changes in discount rates and prepayment speed assumptions, which are primarily affected by
changes in interest rates and the refinement of other MSR model assumptions.
The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.
Weighted average constant prepayment rate
Weighted average discount rate
Weighted average life (in years)
December 31,
2017
2016
10.93 %
11.03 %
6.9
10.47 %
10.95 %
6.9
A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the
following table (in thousands).
Constant prepayment rate:
Impact of 10% adverse change
Impact of 20% adverse change
Discount rate:
Impact of 10% adverse change
Impact of 20% adverse change
December 31,
2017
2016
$
(1,948) $
(3,839)
(2,297)
(4,471)
(2,135)
(4,103)
(2,539)
(4,882)
F-48
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR
asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of
the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the
analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other
assumptions. In reality, changes in one assumption may change another assumption.
Contractually specified servicing fees, late fees and ancillary fees earned of $20.7 million, $23.8 million and $19.6
million during 2017, 2016 and 2015, 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,
2017
2016
$ 2,411,849 $ 2,199,483
1,202,752
2,222,555
101,624
411,771
218,812
1,313,482
95,274
1,252,832
1,626,218
125,272
384,847
279,911
1,145,859
49,389
$ 7,978,119 $ 7,063,811
At December 31, 2017, deposits include $778.8 million of time deposit accounts that meet or exceed the FDIC insurance
limit of $250,000. Scheduled maturities of interest-bearing time deposits at December 31, 2017 are as follows (in
thousands).
2018
2019
2020
2021
2022 and thereafter
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
Short-term bank loans
$
791,721
509,244
82,839
15,155
9,797
$ 1,408,756
December 31,
$
2017
101,775 $
539,149
250,000
315,500
2016
87,125
195,164
1,000,000
135,000
$ 1,206,424 $ 1,417,289
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on
some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under
agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are
held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.
F-49
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the
following tables (dollars in thousands).
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
$
Year Ended December 31,
2017
588,847
$
1.06 %
904,704
2016
368,102
$
0.58 %
520,715
2015
315,904
0.33 %
514,776
Average interest rate at end of year
Securities underlying the agreements at end of year:
Carrying value
Estimated fair value
December 31,
2017
2016
1.21 %
0.42 %
$
$
581,636
598,300
$
$
209,877
206,641
FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock,
nonspecified real estate loans and certain specific commercial real estate loans. At December 31, 2017, the Bank had
available collateral of $3.3 billion, substantially all of which was blanket collateral. Other information regarding FHLB
short-term borrowings is shown in the following tables (dollars in thousands).
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
2017
390,616
Year Ended December 31,
2016
361,475
$
$
1.08 %
$
850,000
$
0.46 %
1,000,000
2015
294,959
0.27 %
600,000
$
$
Average interest rate at end of year
December 31,
2017
2016
1.30 %
0.55 %
The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to
customers and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate.
The weighted average interest rate on the borrowings at December 31, 2017 and 2016 was 2.27% and 1.59%,
respectively.
F-50
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Notes Payable
Notes payable consisted of the following (in thousands).
Senior Notes due April 2025, net of discount of $1,545 and $1,689, respectively
FHLB notes, net of premium of $436 and $948, respectively, with maturities
ranging from February 2018 to June 2030 and interest payable monthly
Insurance company note payable due March 2035, paid off in June 2017
NLIC note payable due May 2033, three-month LIBOR plus 4.10% (5.71% at
December 31, 2017) with interest payable quarterly
NLIC note payable due September 2033, three-month LIBOR plus 4.05% (5.66% at
December 31, 2017) with interest payable quarterly
ASIC note payable due April 2034, three-month LIBOR plus 4.05% (5.66% at
December 31, 2017) with interest payable quarterly
Insurance company line of credit due December 30, 2018, 3.25% plus a calculated
index rate (4.00% at December 31, 2017) with interest payable quarterly
Ventures Management lines of credit, with interest payable monthly
December 31,
$
2017
148,455 $
2016
148,311
19,402
—
102,596
20,000
10,000
10,000
10,000
10,000
7,500
7,500
1,000
12,452
208,809 $
3,000
16,505
317,912
$
Senior Notes
On April 9, 2015, Hilltop completed an offering of $150.0 million aggregate principal amount of its 5% senior notes due
2025 (“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”). The Senior Unregistered Notes were offered within the
United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to persons
outside of the United States under Regulation S under the Securities Act. The Senior Unregistered Notes were issued
pursuant to an indenture, dated as of April 9, 2015, by and between Hilltop and U.S. Bank National Association, as
trustee. The net proceeds from the offering, after deducting estimated fees and expenses and the initial purchasers’
discounts, were approximately $148 million. Hilltop used the net proceeds of the offering to redeem all of Hilltop’s
outstanding Non-Cumulative Perpetual Preferred Stock, Series B at an aggregate liquidation value of $114.1 million,
plus accrued but unpaid dividends of $0.4 million, and Hilltop utilized the remainder for general corporate purposes.
Unamortized debt issuance costs presented as a reduction from the Senior Notes are discussed further in Note 1 to the
consolidated financial statements.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, the Company entered into a
registration rights agreement with the initial purchasers of the Senior Unregistered Notes. Under the terms of the
registration rights agreement, the Company agreed to offer to exchange the Senior Unregistered Notes for notes
registered under the Securities Act (the “Senior Registered Notes”). The terms of the Senior Registered Notes are
substantially identical to the Senior Unregistered Notes for which they were exchanged (including principal amount,
interest rate, maturity and redemption rights), except that the Senior Registered Notes generally are not subject to
transfer restrictions. On May 22, 2015 and subject to the terms and conditions set forth in the Senior Registered Notes
prospectus, the Company commenced an offer to exchange the Senior Unregistered Notes for Senior Registered Notes.
Substantially all of the Senior Unregistered Notes were tendered in the exchange offer, and on June 22, 2015, the
Company fulfilled its requirements under the registration rights agreement for the Senior Unregistered Notes by issuing
Senior Registered Notes in exchange for the tendered Senior Unregistered Notes. The Senior Registered Notes and the
Senior Unregistered Notes that remain outstanding are collectively referred to as the “Senior Notes.”
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October
15 of each year. The Senior Notes will mature on April 15, 2025, unless Hilltop redeems the Senior Notes, in whole at
any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior
Notes) at its election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed
plus accrued and unpaid interest to, but excluding, the redemption date.
F-51
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The indenture contains covenants that limit the Company’s ability to, among other things and subject to certain
significant exceptions: (i) dispose of or issue voting stock of certain of the Company’s bank subsidiaries or subsidiaries
that own voting stock of the Company’s bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge,
encumbrance or lien or charge on the capital stock of certain of the Company’s bank subsidiaries or subsidiaries that
own capital stock of the Company’s bank subsidiaries and (iii) sell all or substantially all of the Company’s assets or
merge or consolidate with or into other companies. The indenture also provides for certain events of default, which, if
any of them occurs, would permit or require the principal amount, premium, if any, and accrued and unpaid interest on
the then outstanding Senior Notes to be declared immediately due and payable.
Federal Home Loan Bank notes
The FHLB notes, assumed by the Bank in the SWS Merger, have interest rates ranging from 1.19% to 5.70%, with a
weighted average interest rate of 2.10% at December 31, 2017. The FHLB notes, as well as other borrowings from the
FHLB, are collateralized by FHLB stock, a blanket lien on commercial and real estate loans, as well as by the amount of
securities that are in safekeeping at the FHLB, the value of which was $3.3 billion at December 31, 2017.
NLIC, ASIC and Insurance Company Notes Payable
On June 14, 2017, NLC paid off the $20.0 million insurance company note payable due March 2035.
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 and ASIC loan agreements relating to the notes payable contain various covenants pertaining to limitations on
additional debt, dividends, officer and director compensation, and minimum capital requirements. The Company was in
compliance with the covenants at December 31, 2017.
NLC has entered into an indenture relating to the NLIC and ASIC notes payable which provides that (i) if a person or
group becomes the beneficial owner directly or indirectly of 50% or more of its equity securities and (ii) if NLC’s
ratings are downgraded by a nationally recognized statistical rating organization (as defined in the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), then each holder of the notes governed by such indenture has the right to
require that NLC purchase such holder’s notes in whole or in part at a price equal to 100% of the outstanding principal
amount.
Insurance Company Line of Credit
The Company’s insurance subsidiary has a line of credit with a financial institution which allows for borrowings by NLC
of up to $7.5 million and is collateralized by substantially all of NLC’s assets. The loan agreements relating to the line of
credit contain various financial and other covenants which must be maintained until all indebtedness to the financial
institution is repaid. The Company was in compliance with the covenants at December 31, 2017.
Ventures Management Lines of Credit
At December 31, 2017, Ventures Management’s ABAs had combined available lines of credit totaling $70.0 million,
$30.0 million of which was with a single unaffiliated bank, while $40.0 million was with the Bank. At December 31,
2017, the outstanding balance of $12.5 million was related to a single line of credit with an unaffiliated bank with a
stated interest rate of the greater of a calculated index rate on mortgage notes or 2.75%. The calculated index rate on
mortgage notes held at December 31, 2017 was 3.09%. The Ventures Management lines of credit are collateralized by
mortgage notes, and the loan agreements relating to the lines of credit contain various financial and other covenants
which must be maintained until all indebtedness to the financial institution is repaid. The Company was in compliance
with the covenants at December 31, 2017.
F-52
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Scheduled Maturities
Scheduled maturities for notes payable outstanding at December 31, 2017 are as follows (in thousands).
2018
2019
2020
2021
2022
Thereafter
$
25,791
—
3,425
508
203
179,991
$ 209,918
14. Junior Subordinated Debentures and Trust Preferred Securities
PCC has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which,
PCC Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole
purpose of issuing and selling preferred securities and common securities, using the resulting proceeds to acquire junior
subordinated debentures issued by PCC (the “Debentures”). Accordingly, the Debentures are the sole assets of the
Trusts, and payments under the Debentures are the sole revenue of the Trusts. All of the common securities are owned
by PCC; however, PCC is not the primary beneficiary of the Trusts. Accordingly, the Trusts are not included in the
Company’s consolidated financial statements.
The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have
invested the proceeds from the securities in floating rate Debentures of PCC.
Information regarding the PCC 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
Amount
Issue Date
$
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, 2017 was
4.72%. The term, rate and other features of the preferred securities are the same as the Debentures. PCC’s obligations
under the Debentures and related documents, taken together, constitute a full and unconditional guarantee of the Trust’s
obligations under the preferred securities.
15. Income Taxes
The significant components of the income tax provision are as follows (in thousands).
Year Ended December 31,
2016
2015
2017
Current:
Federal
State
Deferred:
Federal
State
$
63,769 $
5,440
69,209
82,970 $ 49,570
3,969
10,181
53,539
93,151
40,176
757
40,933
$ 110,142 $
17,295
(6,732)
81
(2,958)
(9,690)
17,376
83,461 $ 70,915
F-53
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The income tax provision differs from the amount that would be computed by applying the statutory Federal income tax
rate of 35% to income before income taxes as a result of the following (in thousands).
Computed tax at federal statutory rate
Tax effect of:
Tax Legislation
Non-taxable acquisition gain
Nondeductible transaction costs
Nondeductible expenses
State income taxes
Tax-exempt income, net
Valuation allowance
Share-based compensation benefit
Other
Year Ended December 31,
2016
$ 85,150 $ 80,992 $ 99,223
2017
2015
28,363
(6,682)
774
3,089
4,028
(2,758)
—
(412)
(1,410)
—
(33,426)
3,969
3,215
2,632
(2,563)
(1,889)
—
(246)
$ 110,142 $ 83,461 $ 70,915
—
—
2,608
3,301
4,708
(2,850)
(2,094)
(2,391)
(813)
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).
$
Deferred tax assets:
Net operating and built-in loss carryforward
Covered loans
Purchase accounting adjustment - loans
Allowance for loan losses
Compensation and benefits
Legal and other reserves
Foreclosed property
Other
Deferred tax liabilities:
Premises and equipment
FDIC Indemnification Asset
Intangible assets
Derivatives
Loan servicing
Other
Net deferred tax asset
$
December 31,
2017
2016
11,697 $
20,024
4,859
15,105
15,860
4,359
6,400
11,961
90,265
10,288
3,502
8,994
4,527
13,184
8,156
48,651
41,614 $
21,381
43,512
10,682
20,703
44,368
15,985
16,486
19,297
192,414
21,013
21,600
17,392
8,581
23,187
18,868
110,641
81,773
The Tax Legislation enacted on December 22, 2017 significantly revises the U.S. corporate income tax by lowering
corporate income tax rates. The Company’s results during the fourth quarter and full year of 2017 include the estimated
impact of a non-recurring, non-cash charge of $28.4 million as a result of the enactment of the Tax Legislation. The
charge was primarily due to the revaluation of deferred tax assets as a result of the reduction in the corporate tax rate
from 35% to 21%, and other anticipated impacts associated with the Tax Legislation. Certain Tax Legislation amounts
are considered reasonable estimates as of December 31, 2017 and could be adjusted during the measurement period,
which will end in December 2018, as a result of further refinement of calculations, changes in interpretations and
assumptions made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation.
The Company’s effective tax rate was 45.3%, 36.1% and 25.0% during 2017, 2016 and 2015, respectively. The effective
tax rate during 2017 was higher than the statutory rate primarily due to the revaluation of deferred tax assets as a result
of the Tax Legislation, partially offset by a non-taxable gain recorded in the resolution of the SWS appraisal proceedings
as the SWS Merger was a tax-free reorganization. The effective tax rate during 2016 was relatively consistent with the
F-54
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
statutory rate, but did include effects related to non-deductible transaction costs associated with the SWS Merger, offset
by the reversal of a valuation allowance of $2.2 million previously established on a deferred tax asset associated with the
SWS Merger and the recognition of excess tax benefits on share-based payment awards as a result of the Company’s
adoption of the provisions of Accounting Standards Update (“ASU”) 2016-09 as of January 1, 2016 as discussed in Note
33 to the consolidated financial statements. The lower effective tax rate during 2015 was primarily due to no income
taxes being recorded during 2015 in connection with the bargain purchase gain of $81.3 million associated with the SWS
Merger. In addition, during 2015, the Company recorded an income tax benefit of $2.1 million as a result of the SWS
Merger to reverse the deferred tax liability for the difference between book and tax basis on Hilltop’s investment in SWS
common stock and also reversed a valuation allowance of $1.9 million previously established on a deferred tax asset for
a capital loss carryforward.
At December 31, 2017 and 2016, the Company had net operating loss carryforwards for Federal income tax purposes of
$29.9 million and $37.8 million, respectively (or $6.3 million and $13.2 million, respectively, on a tax effected basis at
applicable rates for respective tax years). The net operating loss carryforwards are subject to an annual Section 382
limitation on their usage. These net operating loss carryforwards expire in starting in 2032. The Company expects to
realize its current deferred tax asset for these net operating loss carryforwards through the implementation of certain tax
planning strategies, core earnings, and reversal of timing differences. At December 31, 2017, the Company also had a
recognized built-in loss (“RBIL”) carryover of $20.5 million from the ownership change resulting from the SWS
Merger. These RBILs, if recognized during a five year recognition period before January 1, 2020, are subject to the
annual Section 382 limitation rules similar to the Company’s net operating loss carryforwards. The RBIL’s are expected
to be fully realized prior to any expiration. The Company’s remaining net unrealized built-in loss of $9.8 million, if
recognized during a five year recognition period before January 1, 2020, would also be subject to the Section 382
limitation.
Based on the Company’s evaluation of its deferred tax assets, management determined that no valuation allowance
against its gross deferred tax assets was necessary at December 31, 2017 or 2016.
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, 2017 and 2016, the total amount of gross unrecognized tax benefits was $1.6 million and $1.7 million, respectively,
of which $1.2 million and $1.1 million, respectively, if recognized, would favorably impact the Company’s effective tax
rate. The aggregate changes in gross unrecognized tax benefits, which excludes interest and penalties, are as follows (in
thousands).
Balance, beginning of year
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Increases related to tax positions taken during the current year
Balance, end of year
Year Ended December 31,
2016
2015
2017
$
$
1,704 $
476
(1,273)
667
1,574 $
644 $
844
—
216
1,704 $
644
—
—
—
644
The Company believes that it is reasonably possible that certain state matters may be concluded in the next twelve
months. Specific positions that may be resolved include issues involving apportionment and various other matters. At
December 31, 2017, the unrecognized tax benefit is recorded as taxes receivable, which is included in other assets within
the consolidated balance sheet.
The Company files income tax returns in U.S. federal and numerous state jurisdictions. The Company is subject to tax
audits in numerous jurisdictions in the United States until the applicable statute of limitations expires. The Company is
no longer subject to U.S. federal tax examinations for tax years prior to 2014. The Company is open for various state tax
audits for tax years 2013 and later. The Company is currently under income tax examination by a state authority for tax
years 2013 through 2015. As of December 31, 2017, the state authority has not proposed any significant adjustments to
the Company’s tax positions for which the Company does not have adequate reserves.
F-55
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Employee Benefits
Hilltop and its subsidiaries have benefit plans that provide for elective deferrals by employees under Section 401(k) of
the Internal Revenue Code. Employee contributions are determined by the level of employee participation and related
salary levels per Internal Revenue Service regulations. Hilltop and its subsidiaries match a portion of employee
contributions based on the amount of eligible employees’ contributions and salaries. In addition, Hilltop, PCC and the
Bank made additional contributions to employees’ 401(k) accounts based on achievement of certain corporate objectives
through December 31, 2015. The amount charged to operating expense for these matching contributions totaled $13.9
million, $15.1 million and $12.6 million during 2017, 2016 and 2015, respectively.
Effective upon the completion of the PlainsCapital Merger, the Company recorded a liability of $8.9 million associated
with separate retention agreements entered into between Hilltop and two executive officers. At December 31, 2017 and
2016, the recorded liability, including interest, was $9.1 million and $9.0 million, respectively.
The Bank purchased $15.0 million of flexible premium universal life insurance in 2001 to help finance the annual
expense incurred in providing various employee benefits. At December 31, 2017 and 2016, the carrying value of the
policies included in other assets was $25.8 million and $24.8 million, respectively. During 2017, 2016 and 2015, the
Bank recorded income of $0.6 million, $0.6 million and $0.8 million, respectively, related to the policies that was
reported in other noninterest income within the consolidated statement of operations.
Deferred Compensation Plan
As a result of the SWS Merger, the Company assumed a deferred compensation plan (the “SWS Plan”) that allows
former SWS eligible officers and employees to defer a portion of their bonus compensation and commissions. The SWS
Plan matched 15% of the deferrals made by participants up to a predetermined limit through matching contributions that
vest ratably over four years. Pursuant to the terms of the SWS Plan, the trustee periodically purchased the former SWS
common stock in the open market. As a result of the SWS Merger, the former SWS common shares were converted into
Hilltop common stock based on the terms of the merger agreement. No further contributions can be made to this plan.
The assets of the SWS Plan are held in a rabbi trust and primarily include investments in company-owned life insurance
(“COLI”) and Hilltop common stock. These assets are consolidated with those of the Company. Investments in COLI are
carried at the cash surrender value of the insurance policies and recorded in other assets within the consolidated balance
sheet at December 31, 2017 and 2016, respectively. Investments in Hilltop common stock, which are carried at cost, and
the corresponding liability related to the deferred compensation plan are presented as components of stockholders’
equity as employee stock trust and deferred compensation employee stock trust, net, respectively, at December 31, 2017
and 2016, respectively.
17. Related Party Transactions
Pursuant to a Sublease Agreement, Diamond A Administration Company LLC (“Diamond A Admin”), an affiliate of
Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 16.2% of Hilltop common stock
at December 31, 2017, currently provides office space to Hilltop at a cost of $24 thousand 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 President and Co-Chief Executive Officer of Hilltop, is the beneficiary of a trust that
owns a 49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owned 16.2% of the
outstanding Hilltop common stock at December 31, 2017. He also is a director and the Secretary of Diamond A Admin,
which provides office space to Hilltop as described in the preceding paragraph. Diamond A Admin is owned by Hunter’s
Glen/Ford, Ltd., a limited partnership in which a trust for the benefit of Jeremy B. Ford is a 46% limited partner.
Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop’s General Counsel and Secretary, is the son-in-
law of Gerald J. Ford. Accordingly, Messrs. Jeremy Ford and Corey Prestidge are brothers-in-law.
In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and their affiliates
(collectively referred to as related parties) totaling $34.6 million and $27.3 million at December 31, 2017 and 2016,
respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those
F-56
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 2017, total principal additions were $12.0 million and total principal
payments were $4.7 million.
At December 31, 2017 and 2016, the Bank held deposits of related parties of $151.0 million and $154.8 million,
respectively.
A related party is the lessor in an operating lease with the Bank. The Bank’s minimum payment under the lease is $0.5
million annually through 2028, for an aggregate remaining obligation of $5.5 million at December 31, 2017.
The Bank purchases loans from a company for which a related party serves as a director, president and chief executive
officer. At December 31, 2017 and 2016, the outstanding balance of the purchased loans was $2.1 million and $3.0
million, respectively. 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 transaction.
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 $3.0 million and $19.0 million at December 31, 2017 and 2016, respectively.
Legal Matters
The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative
cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on
information currently available, including advice of counsel. The Company establishes accruals for those matters when a
loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically
reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss
contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates
of possible loss contingencies, the Company does not take into account the availability of insurance coverage, other than
that provided by reinsurers in the insurance segment. When it is practicable, the Company estimates loss contingencies
for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to
estimate such 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. As available information
changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves will be
adjusted, accordingly.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability.
Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified,
unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting
meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery
has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves
a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to
estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims
asserted against the Company.
Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock (the
“Petitioners”) filed petitions in the Court of Chancery of the State of Delaware (the “Court”) seeking appraisal for their
shares pursuant to Section 262 of the Delaware General Corporation Law. These petitions were consolidated as In re
SWS Group, Inc., C.A. No. 10554-VCG. On May 30, 2017, the Court issued its Memorandum Opinion in the matter.
The Court found the “fair value” of the shares of SWS common stock as of the date of the transaction was $6.38 per
share. Accordingly, Hilltop paid cash of $6.38 per share, plus statutory interest from the effective date of the merger
until the date of payment, to the Petitioners and the other stockholders of SWS who properly demanded appraisal rights
under Delaware law, collectively representing 7,438,453 shares. Each outstanding share of SWS common stock, other
than shares held by Hilltop, in treasury by SWS or by stockholders who properly demanded appraisal rights under
Delaware law, was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, the
aggregate value of which was $6.92 per share of SWS common stock as of the effective date of the merger. The
F-57
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
resolution of this matter resulted in 1,856,638 shares of HTH common stock, which had been held in escrow during the
pendency of the proceeding, being returned to the Company’s pool of authorized but unissued shares of common stock
and a pre-tax net increase to other noninterest income of $11.6 million during the second quarter of 2017. This change in
common stock is reflected in repurchases of common stock within the consolidated statements of stockholders’ equity.
Petitioners filed an appeal to the Court’s Memorandum Opinion. The Company also filed a cross-appeal in the matter
and intends to vigorously defend the Petitioners’ appeal.
The Company is involved in information-gathering requests and investigations (both formal and informal), as well as
reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law
enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as
well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In
connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information.
The Inquiries, including the Inquiry described below, could develop into administrative, civil or criminal proceedings or
enforcement actions that could result in consequences that have a material effect on the Company's consolidated
financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments,
findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices,
and could result in additional expenses and collateral costs, including reputational damage.
As a part of an industry-wide Inquiry, PrimeLending received a subpoena from the Office of Inspector General of the
U.S. Department of Housing and Urban Development (“HUD”) regarding mortgage-related practices, including those
relating to origination practices for loans insured by the Federal Housing Administration (the “FHA”). On August 20,
2014, PrimeLending received a Civil Investigative Demand from the 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. The DOJ has advised PrimeLending that, based upon its review of a
sample of loans for which an FHA insurance claim was paid by HUD, some of the loans do not meet FHA underwriting
guidelines. PrimeLending, based upon its own review of the loan sample, does not agree with the sampling methodology
and loan analysis employed by the DOJ. Remedies in these proceedings or settlements may include statutory damages,
indemnification, fines and/or penalties. Many institutions have settled these matters on terms that included large
monetary penalties. PrimeLending has fully cooperated with this Inquiry, continues to discuss this matter with the DOJ
and adjusts its indemnification reserve based upon such discussions.
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.
Indemnification Liability Reserve
The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions
relating to its representations and warranties that each loan sold meets certain requirements, including representations as
to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined
to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant
against loss. The mortgage origination segment has established an indemnification liability reserve for such probable
losses.
Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss
has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse
the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment
establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and
reasonably estimable.
An additional reserve has been established for probable agency, investor or other party losses that may have been
incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses.
F-58
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold
exclusive of specific claimant requests, actual claim settlements and the severity of estimated losses resulting from future
claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests. While
the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase
provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor
considered in the calculation of this reserve.
At December 31, 2017 and 2016, the mortgage origination segment’s indemnification liability reserve totaled $23.5
million and $18.2 million, respectively. The provision for indemnification losses was $4.0 million, $4.6 million and $4.0
million during 2017, 2016 and 2015, respectively.
The following tables provide for a roll-forward of claims activity for loans put-back to the mortgage origination segment
based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification
liability reserve activity (in thousands).
Representation and Warranty Specific Claims
Activity - Origination Loan Balance
Year Ended December 31,
2016
2017
2015
Balance, beginning of year
Claims made
Claims resolved with no payment
Repurchases
Indemnification payments
Balance, end of year
Balance, beginning of year
Additions for new sales
Repurchases
Early payment defaults
Indemnification payments
Change in reserves for loans sold in prior years
Balance, end of year
Reserve for Indemnification Liability:
Specific claims
Incurred but not reported claims
Total
$
$
$
$
$
$
40,669 $
42,330
(37,439)
(6,490)
(5,368)
33,702 $
57,298 $
21,410
(19,696)
(4,164)
(14,179)
40,669 $
53,906
71,783
(38,862)
(14,884)
(14,645)
57,298
Indemnification Liability Reserve Activity
Year Ended December 31,
2016
2017
2015
18,239 $
3,962
(466)
(228)
(713)
2,678
23,472 $
16,640 $
4,638
(392)
(241)
(2,482)
76
18,239 $
17,619
4,006
(1,420)
(64)
(3,027)
(474)
16,640
December 31,
2017
2016
646 $
22,826
23,472 $
1,661
16,578
18,239
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.
F-59
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other Contingencies
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 net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million
up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net
losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of
assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent
recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually
billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of
subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The
loss-share agreements for commercial and single family residential assets are in effect for five years and ten years,
respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for eight years and
ten years, respectively, from the Bank Closing Date. As part of the loss-share agreements, the Bank is subject to annual
FDIC compliance audits. As discussed in Note 6 to the consolidated financial statements, and 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 its actual net realized losses over the life of the loss-share agreements are less than
the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated using a defined formula set
forth in the P&A Agreement. While the ultimate amount of any “true-up” payment is unknown at this time and will vary
based upon the amount of future losses or recoveries within the covered loan portfolio, the Bank has recorded a related
“true-up” payment accrual of $16.3 million at December 31, 2017 based on the current estimate of aggregate realized
losses on covered assets over the life of the loss-share agreements. The initial estimate of the FDIC Indemnification
Asset at the Bank Closing Date was recorded at the present value of 80% of $240.4 million. As of December 31, 2017,
the Bank projects that the sum of actual plus projected covered losses and reimbursable expenses subject to the loss-
share agreements will be less than $240.4 million. As of December 31, 2017, the Bank had billed $184.7 million of
covered net losses to the FDIC, of which 80%, or $147.8 million, were reimbursable under the loss-share agreements. As
of December 31, 2017, the Bank had received aggregate reimbursements of $145.8 million from the FDIC, which
represented reimbursable covered losses and expenses through September 30, 2017.
As discussed in Note 16 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger,
Hilltop entered into separate retention agreements with two executive officers, one having an initial term of three years
(with automatic one-year renewals at the end of two years and each anniversary thereof) and the other having an initial
term of two years (with automatic one-year renewals at the end of the first year and each anniversary thereof). Each of
these retention agreements provides for severance pay benefits if the executive officer’s employment is terminated
without “cause”.
In addition to these retention agreements, Hilltop and its subsidiaries maintain employment contracts with certain
officers that provide for benefits in the event of a “change in control” as defined in these agreements.
Hilltop and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under
noncancelable operating leases with remaining terms, including renewal options, of 1 to 11 years and under capital
leases with remaining terms of 4 to 11 years. Rental expense under the operating leases was $43.5 million, $41.9 million
and $40.3 million in 2017, 2016 and 2015, respectively.
F-60
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Future minimum lease payments under these agreements follow (in thousands).
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Amount representing interest
Present value of minimum lease payments
Operating Leases
$
36,602 $
30,127
24,461
16,429
14,306
31,422
153,347
Capital Leases
1,444
1,491
1,528
1,451
1,127
4,125
11,166
(3,497)
7,669
$
$
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 $1.9 billion at December 31, 2017
and outstanding financial and performance standby letters of credit of $24.4 million at December 31, 2017.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance
sheet instruments. The amount of collateral obtained, if deemed necessary, in these transactions is based on
management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable,
marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.
In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions
that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does
not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by
customers or for the accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing
organization clients, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-
dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase
commitments.
20. Stock-Based Compensation
Pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”), the Company may grant
nonqualified stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent
rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. In the
aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At
December 31, 2017, 1,634,804 shares of common stock remain available for issuance pursuant to the 2012 Plan,
including shares that may be delivered pursuant to outstanding awards. Compensation expense related to the 2012 Plan
was $10.8 million, $10.5 million and $8.6 million during 2017, 2016 and 2015, respectively.
F-61
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2017, 2016 and 2015, Hilltop granted 16,859, 21,224 and 13,631 shares of common stock, respectively, to
certain non-employee members of the Company’s board of directors for services rendered to the Company pursuant to
the 2012 Plan.
Restricted Stock Awards and RSUs
The Compensation Committee of the board of directors of the Company issued restricted shares of Hilltop common
stock (“Restricted Stock Awards”) and RSUs pursuant to the 2012 Plan.
The Restricted Stock Awards generally cliff vested on the third anniversary of the grant date and were subject to service
conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective
vesting periods. The award agreements governing the Restricted Stock Awards provided for accelerated vesting under
certain conditions. As of September 30, 2017, all remaining Restricted Stock Awards had vested and none were
outstanding.
Certain RSUs are subject to time-based vesting conditions and generally provided for a cliff vest on the third anniversary
of the grant date, while other RSUs provided for vesting based upon the achievement of certain performance goals over a
three-year period subject to service conditions set forth in the award agreements, with associated costs generally
recognized on a straight-line basis over the respective vesting periods. The RSUs are not transferable, and the shares of
common stock issuable upon conversion of vested RSUs may be subject to transfer restrictions for a period of one year
following conversion, subject to certain exceptions. In addition, the applicable RSU award agreements provide for
accelerated vesting under certain conditions.
The following table summarizes information about Restricted Stock Award and RSU activity for the noted periods
(shares in thousands).
Restricted Stock Awards
RSUs
Weighted
Average
Weighted
Average
Outstanding
Grant Date
Fair Value Outstanding
Balance, December 31, 2014
Granted
Vested/Released
Forfeited
Balance, December 31, 2015
Granted
Vested/Released
Forfeited
Balance, December 31, 2016
Granted
Vested/Released
Forfeited
Balance, December 31, 2017
466 $
63 $
(54) $
(22) $
453 $
- $
(447) $
(2) $
4 $
- $
(4) $
- $
- $
13.32
19.95
19.58
13.25
13.50
-
13.41
19.72
19.95
-
19.95
-
-
Grant Date
Fair Value
23.14
19.61
22.45
21.93
21.22
17.78
22.22
20.70
19.83
26.37
22.48
22.41
20.89
435 $
491 $
(12) $
(39) $
875 $
598 $
(7) $
(10) $
1,456 $
450 $
(451) $
(137) $
1,318 $
Vested/Released Restricted Stock Awards and RSUs include an aggregate of 252,133 shares withheld to satisfy
employee statutory tax obligations during 2017, 2016 and 2015. Pursuant to certain RSU award agreements, an
aggregate of 35,685 vested RSUs at December 31, 2017 require deferral of the settlement in shares and statutory tax
obligations to a future date.
During 2017, the Compensation Committee of the board of directors of the Company awarded certain executives and
key employees an aggregate of 392,877 RSUs pursuant to the 2012 Plan. At December 31, 2017, 313,301 of these
outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the
F-62
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
grant date, and 79,576 of these outstanding RSUs will cliff vest based upon the achievement of certain performance
goals over a three-year period.
At December 31, 2017, in the aggregate, 1,035,199 of the outstanding RSUs are subject to time-based vesting conditions
and generally cliff vest on the third anniversary of the grant date, and 282,329 outstanding RSUs cliff vest based upon
the achievement of certain performance goals over a three-year period. At December 31, 2017, unrecognized
compensation expense related to outstanding RSUs of $12.6 million is expected to be recognized over a weighted
average period of 1.24 years.
21. Regulatory Matters
Banking and Hilltop
PlainsCapital and Hilltop are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional
discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the consolidated
financial statements. The regulations require PlainsCapital and Hilltop to meet specific capital adequacy guidelines that
involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.
In January 2015, the comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for
PlainsCapital and Hilltop for reporting periods beginning after January 1, 2015 (subject to a phase-in period through
January 2019). Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further
composed of common equity Tier 1 capital and additional Tier 1 capital. Total capital is the sum of Tier 1 capital and
Tier 2 capital. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure
accuracy and compliance with the Basel III regulatory capital requirements. The capital classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set
forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and
minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain
discretionary bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which
requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer will
help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather
periods of economic stress. The buffer is measured relative to risk-weighted assets. The phase-in of the capital
conservation buffer requirements began on January 1, 2016 for Hilltop and the Bank. Based on the actual ratios as shown
in the table below, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of
December 31, 2017, as well as the fully phased-in requirements through 2019.
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009
are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions.
However, if an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above
$15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1
and into Tier 2 capital (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, 2017, under guidance issued by the Board of
Governors of the Federal Reserve System.
F-63
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables show PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III
compared to the regulatory minimum capital requirements including conservation buffer in effect at the end of the period
and on a fully phased-in basis as if such requirements were currently in effect as measured at December 31, 2017 and
2016, respectively (dollars in thousands). Based on the actual capital amounts and ratios shown in the following table,
PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements.
December 31, 2017
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
Minimum Capital Requirements
Including Conservation Buffer
In Effect at
End of Period
Ratio
Fully
Phased In
Ratio
To Be Well
Capitalized
Ratio
Actual
Amount
Ratio
$ 1,147,527 12.32 %
1,688,358 12.94 %
4.0 %
4.0 %
4.0 %
4.0 %
5.0 %
N/A
Common equity Tier 1 capital (to risk-weighted
assets):
PlainsCapital
Hilltop
Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Total capital (to risk-weighted assets):
PlainsCapital
Hilltop
1,147,527 14.47 %
1,639,009 17.71 %
5.75 %
5.75 %
7.0 %
7.0 %
6.5 %
N/A
1,147,527 14.47 %
1,688,358 18.24 %
7.25 %
7.25 %
8.5 %
8.5 %
8.0 %
N/A
1,212,793 15.29 %
1,738,325 18.78 %
9.25 %
9.25 %
10.5 %
10.5 %
10.0 %
N/A
Minimum Capital Requirements
Including Conservation Buffer
In Effect at
End of Period
Ratio
Fully
Phased In
Ratio
To Be Well
Capitalized
Ratio
Actual
Amount
Ratio
December 31, 2016
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
$ 1,108,484 12.35 %
1,652,101 13.51 %
4.0 %
4.0 %
4.0 %
4.0 %
5.0 %
N/A
Common equity Tier 1 capital (to risk-weighted
assets):
PlainsCapital
Hilltop
Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Total capital (to risk-weighted assets):
PlainsCapital
Hilltop
1,108,484 14.64 %
1,602,400 18.30 %
5.125 %
5.125 %
7.0 %
7.0 %
6.5 %
N/A
1,108,484 14.64 %
1,652,101 18.87 %
6.625 %
6.625 %
8.5 %
8.5 %
8.0 %
N/A
1,164,767 15.38 %
1,693,240 19.34 %
8.625 %
8.625 %
10.5 %
10.5 %
10.0 %
N/A
F-64
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A reconciliation of equity capital to common equity Tier 1, Tier 1 and total capital (as defined) is as follows (in
thousands).
December 31, 2017
December 31, 2016
Total equity capital
Add:
Net unrealized holding losses (gains) on securities
available for sale and held in trust
Deduct:
Goodwill and other disallowed intangible assets
Common equity Tier 1 capital (as defined)
Add: Tier 1 capital
Trust preferred securities
Deduct:
Additional Tier 1 capital deductions
Tier 1 capital (as defined)
Add: Allowable Tier 2 capital
Allowance for loan losses
Deduct:
Additional Tier 2 capital deductions
Total capital (as defined)
Broker-Dealer
PlainsCapital
$ 1,379,402 $ 1,912,081 $ 1,337,746 $ 1,870,509
PlainsCapital
Hilltop
Hilltop
3,520
394
2,303
(485)
(235,395)
1,147,527
(273,466)
1,639,009
(231,565)
1,108,484
(267,624)
1,602,400
—
65,000
—
65,000
—
1,147,527
(15,651)
1,688,358
—
1,108,484
(15,299)
1,652,101
65,266
65,618
56,283
56,438
(15,299)
$ 1,212,793 $ 1,738,325 $ 1,164,767 $ 1,693,240
(15,651)
—
—
Pursuant to the net capital requirements of the Exchange Act, Hilltop Securities elected to determine its net capital
requirement using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital,
as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 and $1,000,000,
respectively, or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act.
Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid
if resulting net capital would be less than 5% of the aggregate debit items. HTS Independent Network follows the
primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which
requires the maintenance of the larger of minimum net capital of $250,000 or 1/15 of aggregate indebtedness.
At December 31, 2017, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).
Net capital
Less: required net capital
Excess net capital
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
HTS
Independent
Network
3,278
250
3,028
Hilltop
Securities
$
$
186,770 $
10,513
176,257 $
35.5 %
$
160,487
Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account
for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated under the
provisions of the Exchange Act are not available for general corporate purposes. At December 31, 2017 and 2016, the
Hilltop Broker-Dealers held cash of $186.6 million and $181.0 million, respectively, segregated in special reserve bank
accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash or securities in
special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at December 31, 2017 and
2016.
F-65
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Mortgage Origination
As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity
requirements established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries
submit audited financial statements to HUD and GNMA, as applicable, documenting their respective compliance with
minimum net worth and liquidity requirements. As of December 31, 2017, PrimeLending and its subsidiaries’ net worth
and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.
Insurance
The statutory financial statements of the Company’s insurance subsidiaries, which are domiciled in the State of Texas,
are presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas
has adopted the statutory accounting practices of the National Association of Insurance Commissioners (“NAIC”) as the
basis of its statutory accounting practices with certain differences that are not significant to the insurance company
subsidiaries’ statutory equity.
A summary of statutory capital and surplus and statutory net income of each insurance subsidiary is as follows (in
thousands).
Capital and surplus:
National Lloyds Insurance Company
American Summit Insurance Company
December 31,
2017
2016
$
93,812 $
22,778
131,328
30,462
Year Ended December 31,
2016
2015
2017
Statutory net income (loss):
National Lloyds Insurance Company
American Summit Insurance Company
$
(1,785) $
742
13,043 $
2,124
9,000
1,611
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, 2017, the Company’s
insurance subsidiaries had statutory surplus in excess of the minimum required.
The NAIC has adopted a risk based capital (“RBC”) formula for insurance companies that establishes minimum capital
requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset
credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance
regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. At
December 31, 2017, 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, 2017, $181.7 million of its earnings was available for dividend declaration without prior regulatory
approval.
At December 31, 2017, the maximum aggregate dividend that may be paid to NLC from its insurance company
subsidiaries without regulatory approval was $16.2 million.
Dividends
During 2017, the Company declared and paid cash dividends of $0.24 per common share, or $23.1 million. During 2016,
the Company declared and paid cash dividends of $0.06 per common share, or $5.8 million.
F-66
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On January 25, 2018, the Company announced that its board of directors declared a quarterly cash dividend of $0.07 per
common share, payable on February 28, 2018, to all common stockholders of record as of the close of business on
February 15, 2018.
Stock Repurchase Programs
The Company’s board of directors has periodically approved stock repurchase programs under which it authorized the
Company to repurchase its outstanding common stock. Under the respective stock repurchase program authorized, the
Company could repurchase shares in open-market purchases or through privately negotiated transactions as permitted
under Rule 10b-18 promulgated under the Exchange Act. The extent to which the Company repurchased its shares and
the timing of such repurchases depended upon market conditions and other corporate considerations, as determined by
Hilltop’s management team. Repurchased shares will be returned to the Company’s pool of authorized but unissued
shares of common stock.
During 2015, the Company paid $30.0 million to repurchase and retire an aggregate of 1,390,977 shares of common
stock at an average price of $21.56 per share. This stock repurchase program terminated effective December 2015. In
January 2017, the Company’s board of directors reauthorized the stock repurchase program originally approved during
the second quarter of 2016 through January 2018. During 2017, the Company paid $27.4 million to repurchase an
aggregate of 1,057,656 shares of common stock at an average price of $25.87 per share. This stock repurchase program
expired in January 2018. All purchases were funded from available cash balances.
In January 2018, the Company’s board of directors authorized a stock repurchase program through January 2019, under
which the Company may repurchase, in the aggregate, up to $50.0 million of its outstanding common stock.
Series B Preferred Stock
As a result of the PlainsCapital Merger, the outstanding shares of PCC’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 114,068 shares of
Hilltop Non-Cumulative Perpetual Preferred Stock, Series B (“Hilltop Series B Preferred Stock”). The terms of the
Hilltop Series B Preferred Stock provided 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 were
senior to shares of Hilltop common stock with respect to dividends and liquidation preference, and qualified as Tier 1
Capital for regulatory purposes.
The dividend rate on the Hilltop Series B Preferred Stock had been fixed at 5.0% since January 1, 2014, based upon the
level of QSBL at September 30, 2013. On April 28, 2015, as discussed in Note 13 to the consolidated financial
statements, Hilltop used the net proceeds of the offering of Senior Notes to redeem all shares of Hilltop Series B
Preferred Stock at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4 million.
F-67
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
23. Other Noninterest Income and Expense
The following table shows the components of other noninterest income and expense (in thousands).
Other noninterest income:
Net gains from Hilltop Broker-Dealer trading activities
Net gains from trading securities portfolio
Service charges on depositor accounts
SWS Merger appraisal proceeding
Trust fees
Insurance commissions
Insurance direct billing and other policy fees
Revenue from check and stored value cards
Rent and other income from other real estate owned
FDIC Indemnification Asset accretion
Other
Other noninterest expense:
Software and information technology
Brokerage commissions and fees
Mortgage origination and servicing
Unreimbursed loan closing costs
Business development
FDIC Indemnification Asset amortization
Travel, meals and entertainment
Funding fees
Amortization of intangible assets
Office supplies
OREO and repossessed assets
FDIC "true-up"
Other
24. Derivative Financial Instruments
2017
Year Ended December 31,
2016
2015
$
$
$
$
70,922 $
20,210
14,429
11,757
7,485
4,819
4,353
3,169
1,280
—
25,546
163,970 $
45,891 $
22,884
22,353
20,428
18,619
17,083
12,839
8,464
8,263
7,806
4,004
2,100
51,362
242,096 $
86,383 $
15,926
14,162
—
6,782
4,206
4,818
5,036
1,461
242
15,248
154,264 $
38,421 $
24,654
25,736
31,234
19,738
—
13,683
7,451
10,174
8,719
13,438
8,750
49,523
251,521 $
44,042
12,796
15,169
—
7,113
3,819
5,329
7,099
3,559
1,147
10,795
110,868
39,250
16,637
19,375
35,253
18,291
—
12,748
5,865
12,375
8,247
12,570
5,475
62,217
248,303
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 interest
rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest
rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”). Additionally,
PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including interest rate
swaps, swaptions, and U.S. Treasury bond futures and options to hedge this risk. The Hilltop Broker-Dealers use
forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related
exposure to interest rate risk in certain inventory positions.
F-68
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all
mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently
without applying complex hedge accounting provisions. The fair values of PrimeLending’s IRLCs, forward
commitments, and interest rate swaps and swaptions, and U.S. Treasury bond futures and options 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 $13.1 million during 2017 and increased $8.0 million and $17.3 million during 2016
and 2015, respectively. Changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held
for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market interest rates. Changes in
market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR asset,
which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on
PrimeLending’s loans held for sale and MSR asset is discussed in Note 3 to the consolidated financial statements. The
fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other
liabilities, as appropriate. The fair values of the Hilltop Broker-Dealers’ derivatives increased $8.1 million during 2017,
compared with a decrease of $23.4 million during 2016 and an increase of $43.7 million during 2015. The fair values of
the Bank’s derivatives increased $0.3 million during 2017 and $0.4 million during 2016, compared with a decrease of
$0.2 million during 2015. The changes in fair value were recorded as a component of other noninterest income.
Derivative positions are presented in the following table (in thousands).
December 31, 2017
December 31, 2016
Notional
Amount
Estimated Notional
Amount
Fair Value
Estimated
Fair Value
Derivative instruments:
IRLCs
Customer-based written options
Customer-based purchased options
Commitments to purchase MBSs
Commitments to sell MBSs
Interest rate swaps and swaptions
U.S. Treasury bond futures and options (1)
$
850,850 $ 18,851 $
21,637
21,637
2,831,635
4,963,498
25,971
214,500
38
(38)
(921)
2,972
51
—
944,550 $ 23,269
—
—
(1,155)
(532)
(283)
—
—
—
3,616,922
5,609,250
32,452
297,000
(1)
Changes in the fair value of these contracts are settled daily with PrimeLending’s counterparty.
PrimeLending has cash collateral advances totaling $0.8 million to offset net liability derivative positions on its
commitments to sell MBSs at December 31, 2017, compared to a payable totaling $19.1 million on its net liability
derivative position on its commitments to sell MBSs at December 31, 2016. In addition, PrimeLending advanced cash
collateral totaling $3.2 million and $3.2 million on its U.S. Treasury bond futures and options at December 31, 2017 and
2016, respectively. These amounts are included in other assets within the consolidated balance sheets.
F-69
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
25. Balance Sheet Offsetting
Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and
derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or
similar agreements. The following tables present the assets and liabilities subject to enforceable master netting
arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).
Net Amounts
Gross Amounts Not Offset in
the Balance Sheet
December 31, 2017
Securities borrowed:
of Recognized
Assets
Offset in the
Balance Sheet
Gross Amounts Gross Amounts
of Assets
Presented in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Institutional counterparties
$
1,386,821 $
— $
1,386,821 $
(1,327,536) $
— $
59,285
Interest rate options:
Customer counterparties
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2016
Securities borrowed:
38
—
38
—
186,537
—
186,537
(186,026)
—
—
38
511
3,576
1,576,972 $
$
—
— $
3,576
1,576,972 $
(3,576)
(1,517,138) $
—
— $
—
59,834
Institutional counterparties
$
1,436,069 $
— $
1,436,069 $
(1,385,664) $
— $
50,405
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
89,430
—
89,430
(89,369)
—
61
21,366
1,546,865 $
$
(3,893)
(3,893) $
17,473
1,542,972 $
(9,012)
(1,484,045) $
—
— $
8,461
58,927
Net Amounts
Gross Amounts Gross Amounts of Liabilities
Offset in the
of Recognized
Balance Sheet
Liabilities
Presented in the
Balance Sheet
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
December 31, 2017
Securities loaned:
Institutional counterparties
$
1,215,093 $
— $
1,215,093 $
(1,157,198) $
— $
57,895
Interest rate options:
Institutional counterparties
Interest rate swaps and swaptions:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2016
Securities loaned:
38
35
409,058
130,091
—
(86)
—
—
38
—
—
38
(51)
(1,059)
—
(1,110)
409,058
130,091
(409,058)
(130,091)
—
—
—
—
2,696
1,757,011 $
$
(1,171)
(1,257) $
1,525
1,755,754 $
(1,295)
(1,698,701) $
—
— $
230
57,053
Institutional counterparties
$
1,283,676 $
— $
1,283,676 $
(1,237,868) $
— $
45,808
Interest rate swaps and swaptions:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
297
(14)
283
(3,000)
—
(2,717)
39,970
155,194
—
—
39,970
155,194
(39,970)
(155,194)
—
—
—
—
19,159
1,498,296 $
$
—
(14) $
19,159
1,498,282 $
(19,159)
(1,455,191) $
—
— $
—
43,091
F-70
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Secured Borrowing Arrangements
Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold
under repurchase agreements, which are secured borrowings and generally mature one day from the transaction date or
involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the
amount of cash received in connection with the transactions. The Company may be required to provide additional
collateral based on the fair value of the underlying securities, which is monitored on a daily basis.
Securities Lending Activities — The Company’s securities lending activities include lending securities for other
broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities
to other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver
securities by the required settlement date and as a conduit for financing activities.
When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the
amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to
written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis.
The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities
loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or
refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses.
The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any
other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these
limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its
securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall
below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short
positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to
perform or if collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit
risk during the period between the execution of a trade and the settlement by the customer.
The following tables present the remaining contractual maturities of repurchase agreement and securities lending
transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity
transactions outstanding at both December 31, 2017 and 2016.
December 31, 2017
Repurchase agreement transactions:
U.S. Treasury and agency securities
Asset-backed securities
Securities lending transactions:
Corporate securities
Equity securities
Total
Overnight and
Continuous
Up to 30 Days
30-90 Days
Greater Than
90 Days
Total
Remaining Contractual Maturities
$
181,915 $
357,234
11,499
1,203,594
1,754,242 $
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
181,915
357,234
—
—
— $
11,499
1,203,594
1,754,242
$
$
1,754,242
—
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above
Amount related to agreements not included in offsetting disclosure above
December 31, 2016
Repurchase agreement transactions:
U.S. Treasury and agency securities
Securities lending transactions:
Corporate securities
Equity securities
Total
Overnight and
Continuous
Up to 30 Days
30-90 Days
Greater Than
90 Days
Total
Remaining Contractual Maturities
$
195,164 $
— $
— $
— $
195,164
14,816
1,268,860
1,478,840 $
$
—
—
— $
—
—
— $
—
—
— $
14,816
1,268,860
1,478,840
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above
Amount related to agreements not included in offsetting disclosure above
$
$
1,478,840
—
F-71
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
26. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
Receivables:
Securities borrowed
Securities failed to deliver
Trades in process of settlement
Other
Payables:
Securities loaned
Correspondents
Securities failed to receive
Other
December 31,
2017
2016
$
$
$
$
1,386,821 $
25,491
29,412
22,654
1,464,378 $
1,215,093 $
30,160
37,864
4,446
1,287,563 $
1,436,069
33,834
10,223
17,615
1,497,741
1,283,676
31,040
31,724
688
1,347,128
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
Acquisition expenses capitalized
Amortization charged to income
Balance, end of year
$
$
Year Ended December 31,
2016
19,874 $
37,231
(38,502)
18,603 $
2017
18,603 $
34,934
(36,549)
16,988 $
2015
20,416
39,716
(40,258)
19,874
Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated
statements of operations.
28. Reserve for Losses and Loss Adjustment Expenses
A summary of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated balance
sheets, is as follows (in thousands).
Reserve for unpaid losses and allocated LAE balance, net
$
Reinsurance recoverables on unpaid losses
Unallocated LAE
Reserve for unpaid losses and LAE balance, gross
$
December 31,
2017
17,470 $
11,495
1,248
30,213 $
2016
25,203
9,434
1,189
35,826
F-72
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of claims loss reserve development activity is presented in the following table (in thousands).
Accident
Year
2013
2014
2015
2016
2017
Total
Year Ended December 31, 2017
Paid
Incurred
110,813
83,346
85,507
81,682
77,855
439,203 $
111,121
84,074
87,262
85,189
88,079
455,725
December 31, 2017
Total of
IBNR Reserves
Plus Expected
Development on
Reported Claims
Cumulative
Number of
Reported Claims
8
119
591
2,622
4,282
15,687
13,099
15,016
21,277
20,927
$
948 All outstanding reserves prior to 2013, net of reinsurance
17,470 Reserve for unpaid losses and allocated LAE, net of reinsurance
29. Reinsurance Activity
NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring
(ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve
NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other
forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses
and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance
ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE
and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations
could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC
evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. At December 31, 2017, total reinsurance recoverables and receivables had a carrying value
of $13.1 million, which is included in other assets within the consolidated balance sheet. There was no allowance for
uncollectible accounts at December 31, 2017, based on NLC’s quality requirements.
Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2017
are listed below (in thousands).
Arch Reinsurance Co.
Partner Reinsurance Co.
Aspen Bermuda
R&V Versicherung AG
Everest Re
Lloyd's Syndicate #2001
Balances
Due From
A.M. Best
Reinsurers Rating
$ 1,115 N/A
A
A
1,947
865
1,927 N/A
767 A+
729
A+
$ 7,350
F-73
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).
Premiums from direct business
Reinsurance assumed
Reinsurance ceded
Net premiums
2017
Year Ended December 31,
2016
Earned
Earned
Written
Written
$ 137,091 $ 144,990 $ 152,970 $ 159,884 $ 167,025 $ 169,334
10,283
(17,535)
$ 136,961 $ 142,298 $ 149,346 $ 155,545 $ 160,569 $ 162,082
11,024
(15,363)
10,714
(17,170)
11,338
(14,962)
11,767
(14,459)
12,150
(12,280)
Written
2015
Earned
The effects of reinsurance on incurred losses are as follows (in thousands).
Losses and LAE incurred
Reinsurance recoverables
Net loss and LAE incurred
Catastrophic coverage
2017
Year Ended December 31,
2016
$ 138,358 $ 113,494 $ 123,017
(23,951)
89,243 $ 99,066
94,701 $
(24,251)
(43,657)
$
2015
NLC’s liabilities for losses and LAE include liabilities for reported losses, liabilities for IBNR losses and liabilities for
LAE less a reduction for reinsurance recoverables related to those liabilities. The amount of liabilities for reported
claims is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property
damage, and any other information considered relevant to estimating exposure presented by the claim. The amounts of
liabilities for IBNR losses and LAE are estimated on the basis of historical trends, adjusted for changes in loss costs,
underwriting standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and
LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are
intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such
claims. Based upon the contractual terms of the reinsurance agreements, reinsurance recoverables offset, in part, NLC’s
gross liabilities.
Effective July 1, 2017, NLC renewed its catastrophic excess of loss reinsurance coverage for a two year period. At
December 31, 2017, 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 three layers of protection: $17 million in excess of $8 million retention and/or loss; $30
million in excess of $25 million loss; and $50 million in excess of $55 million loss. NLIC and ASIC retain no
participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At December 31, 2017, total
retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.
Effective January 1, 2018, NLC renewed its underlying excess of loss contract that provides $10.0 million aggregate
coverage in excess of NLC’s per event retention of $1.0 million and aggregate retention of $17.5 million for sub-
catastrophic events. As of January 1, 2018, NLC retains 17.5% participation in this coverage, up from no participation
during 2017.
During August and September 2017, NLC experienced losses related to Hurricane Harvey in excess of retention. As of
December 31, 2017, the total gross losses and LAE incurred associated with Hurricane Harvey was $18.2 million.
However, because the losses exceeded retention, net exposure to NLC was $3.4 million retention and $1.4 million in
reinstatement premiums. During 2016 and 2015, NLC experienced no significant catastrophes that resulted in losses in
excess of retention at NLIC or ASIC.
There were 16 tornado, hail and wind storms during 2017 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
$38.1 million, which developed a reinsured recoverable of $4.6 million at the 100% subscription level. During 2016, the
15 tornado, hail and wind storms that exceeded retention had incurred losses of $44.0 million, which developed a
reinsured recoverable of $10.0 million at the 100% subscription level. During 2015, the 12 tornado, hail and wind storms
F-74
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
that exceeded retention had incurred losses of $35.3 million, which developed a reinsured recoverable of $9.1 million at
the 91% subscription level. These losses have no effect on net loss and LAE incurred beyond retention because the
catastrophic events exceeded retention levels and are fully recoverable. Any losses beyond the reinsurance coverage
limits of $10.0 million for 2016 and $9.1 million for 2015 are retained by the Company and have an effect on the net loss
and LAE incurred. The primary financial effect beyond the reinsurance retention is additional reinstatement premium
payable to the affected reinsurers. In addition to the $1.4 million in reinstatement premiums noted above related to
Hurricane Harvey in 2017, reinstatement premiums during 2017, 2016 and 2015 of $1.4 million, $0.6 million and $0.2
million, respectively, were 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 Company’s President and
Co-Chief Executive Officer and the Company’s Vice Chairman and Co-Chief Executive Officer.
The banking segment includes the operations of the Bank, the broker-dealer segment includes the operations of
Securities Holdings, the mortgage origination segment is composed of PrimeLending, and the insurance segment is
composed of NLC.
Corporate includes certain activities not allocated to specific business segments. These activities include holding
company financing and investing activities, merchant banking investment opportunities, and management and
administrative services to support the overall operations of the Company including, but not limited to, certain executive
management, corporate relations, legal, finance and acquisition costs.
Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All
Other and Eliminations.” The following tables present certain information about reportable business segment revenues,
operating results, goodwill and assets (in thousands).
Year Ended December 31, 2017
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
$
Year Ended December 31, 2016
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
$
Income (loss) before income taxes
$
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Banking
$
366,581 $
14,073
59,904
248,404
164,008 $
43,735 $
198
368,421
347,314
64,644 $
(915) $
—
632,388
581,899
49,574 $
2,861 $
—
151,382
158,354
(4,111) $
(10,069) $
—
12,798
33,983
(31,254) $
Banking
Broker-Dealer Origination
Insurance
Corporate
Mortgage
All Other and Hilltop
Eliminations
363,083 $
40,673
52,579
244,715
130,274 $
31,172 $
(53)
385,766
377,524
39,467 $
(11,589) $
—
704,126
614,741
77,796 $
3,164 $
—
164,841
146,601
21,404 $
(7,257) $
—
2
29,938
(37,193) $
19,555 $
—
(19,829)
(699)
425 $
Consolidated
421,748
14,271
1,205,064
1,369,255
243,286
18,958 $
—
(20,349)
(1,048)
(343) $
Consolidated
397,531
40,620
1,286,965
1,412,471
231,405
Year Ended December 31, 2015
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
$
Banking
$
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Consolidated
369,493 $
12,795
62,639
243,926
175,411 $
32,971 $
(80)
334,495
367,812
(266) $
(10,423) $
—
597,163
539,257
47,483 $
3,187 $
—
171,185
158,720
15,652 $
(5,109) $
—
81,289
31,926
44,254 $
18,464 $
—
(19,129)
(1,625)
960 $
408,583
12,715
1,227,642
1,340,016
283,494
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Consolidated
December 31, 2017
Goodwill
Total assets
December 31, 2016
Goodwill
Total assets
$
$
207,741 $
9,558,718 $
7,008 $
13,071 $
3,394,911 $ 1,937,327 $
$
$
207,741 $
9,527,518 $
7,008 $
13,071 $
2,777,849 $ 2,042,458 $
F-75
251,808
23,988 $
291,639 $ 2,106,978 $ (3,923,787) $ 13,365,786
— $
— $
251,808
23,988 $
347,252 $ 2,032,749 $ (3,989,764) $ 12,738,062
— $
— $
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
31. Earnings per Common Share
The following table presents the computation of basic and diluted earnings per common share (in thousands, except per
share data).
Year Ended December 31,
2016
2015
2017
Basic earnings per share:
Income attributable to Hilltop
Less: income applicable to participating shares
Net earnings available to Hilltop common stockholders
$
$
132,544 $
—
132,544 $
145,894 $
(6)
145,888 $
209,119
(952)
208,167
Weighted average shares outstanding - basic
97,137
98,404
99,074
Basic earnings per common share
$
1.36 $
1.48 $
2.10
Diluted earnings per share:
Income attributable to Hilltop
Weighted average shares outstanding - basic
Effect of potentially dilutive securities
Weighted average shares outstanding - diluted
$
132,544 $
145,894 $
209,119
97,137
216
97,353
98,404
225
98,629
99,074
888
99,962
Diluted earnings per common share
$
1.36 $
1.48 $
2.09
32. Condensed Financial Statements of Parent
Condensed financial statements of Hilltop (parent only) follow (in thousands). Investments in subsidiaries are
determined using the equity method of accounting.
Condensed Statements of Operations and Comprehensive Income
Year Ended December 31,
2017
2016
2015
Dividends from bank and bank holding company subsidiaries
Dividends from nonbank subsidiaries
Investment income
Interest expense
Bargain purchase gain
Other income
General and administrative expense
Income before income taxes, equity in undistributed earnings
of subsidiaries and preferred stock activity
Income tax benefit
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net
Comprehensive income
$
$
$
53,000 $
41,500
312
10,381
—
12,798
33,983
63,246
(15,577)
54,321
133,144 $
(879)
132,265 $
87,826 $
—
382
7,639
—
2
29,938
50,633
(10,077)
87,234
147,944 $
(2,144)
145,800 $
—
—
445
5,554
81,289
—
31,926
44,254
(9,562)
158,763
212,579
1,978
214,557
F-76
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Condensed Balance Sheets
Assets:
Cash and cash equivalents
Investment in subsidiaries:
Bank and bank holding company subsidiaries
Nonbank subsidiaries
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
2017
December 31,
2016
2015
$
96,764 $
118,290 $
55,542
1,340,093
603,631
66,490
2,106,978 $
1,304,917
609,539
3
2,032,749 $
46,442 $
148,455
1,912,081
2,106,978 $
13,929 $
148,311
1,870,509
2,032,749 $
$
$
$
1,271,581
545,502
32,922
1,905,547
20,419
148,174
1,736,954
1,905,547
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiaries
Bargain purchase gain
Deferred income taxes
Other, net
Net cash provided by (used in) operating activities
Investing Activities:
Reimbursement from nonbank subsidiaries
Capital contribution to bank and bank holding company subsidiaries
Capital contribution to nonbank subsidiaries
Cash paid for acquisition
Other, net
Net cash used in investing activities
Financing Activities:
Proceeds from issuance of common stock
Payments to repurchase common stock
Proceeds from issuance of notes payable
Dividends paid on common stock
Dividends paid on preferred stock
Redemption of preferred stock
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 Schedule of Non-Cash Activities:
Common stock issued in acquisition
Year Ended December 31,
2016
2015
2017
$
133,144 $
147,944 $
212,579
(54,321)
—
2,511
(57,380)
23,954
—
(10,000)
—
—
(4,241)
(14,241)
—
(27,388)
—
(23,140)
—
—
19,289
(31,239)
(87,234)
—
(2,063)
20,812
79,459
6,000
—
(20,000)
—
(98)
(14,098)
4,139
—
—
(5,801)
—
—
(951)
(2,613)
(158,763)
(81,289)
12,429
2,443
(12,601)
—
—
—
(78,217)
(31)
(78,248)
—
(30,028)
148,078
—
(3,539)
(114,068)
—
443
(21,526)
118,290
96,764 $
62,748
55,542
118,290 $
(90,406)
145,948
55,542
— $
— $
200,626
$
$
F-77
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2017, Hilltop used $47.1 million in cash to repurchase common stock associated with the resolution of the
contingency on appraisal proceedings from the SWS Merger. This activity is reflected in the other line item within
operating activities in the above condensed statement of cash flows of Hilltop. Additionally, certain assets and liabilities,
including $20.6 million of cash, were transferred from PCC to Hilltop in 2017 due to organizational changes. This
activity is reflected in the other line item within financing activities in the above condensed statement of cash flows of
Hilltop.
During 2015, as further discussed in Note 13 to the consolidated financial statements, Hilltop completed an offering of
$150.0 million aggregate principal amount of its 5% Senior Notes due 2025 and used the net proceeds of the offering to
redeem all Hilltop’s outstanding Series B Preferred Stock at an aggregate liquidation value of $114.1 million, plus
accrued but unpaid dividends of $0.4 million, and utilized the remainder for general corporate purposes.
33. Recently Issued Accounting Standards
In February 2018, FASB issued Accounting Standards Update (“ASU”) 2018-02 to help organizations address certain
stranded income tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Legislation.
The amendment provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to
retained earnings in each period in which the effect of the changes in the U.S. federal corporate income tax rate in the
Tax Legislation (or portion thereof) is recorded. The amendment also includes disclosure requirements regarding the
issuer’s accounting policy for releasing income tax effects from AOCI. The amendment is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and
organizations should apply the provisions of the amendment either in the period of adoption or retrospectively to each
period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Legislation
is recognized. The Company is currently evaluating the provisions of the amendment and the impact on its future
consolidated financial statements.
In May 2017, FASB issued ASU 2017-09 which provides clarity and reduces both diversity in practice and cost and
complexity associated with changes to the terms or conditions of a share-based payment award and, specifically, which
changes require an entity to apply modification accounting. The amendments in this update are effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company has adopted
the amendments as of January 1, 2018, which are expected to have a significant effect on the Company’s consolidated
financial statements.
In April 2017, FASB issued ASU 2017-08 which shortens the amortization period for the premium on certain purchased
callable debt securities to the earliest call date. The amendment is effective for annual periods, and interim reporting
periods within those annual periods, beginning after December 15, 2018, using the modified retrospective transition
method. As permitted within the amendment, the Company elected to early adopt and apply the provisions of this
amendment as of January 1, 2017. This adoption had no effect on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU 2017-01 which provides guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is effective
for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using
the prospective method. The Company has adopted the amendments as of January 1, 2018, and will prospectively apply
its provisions.
In October 2016, FASB issued ASU No. 2016-16 which addresses improvement in accounting for income tax
consequences of intra-equity transfers of assets other than inventory. The amendment requires that an entity recognize
the income tax consequences of the intra-equity transfer of an asset other than inventory when the transfer occurs. The
amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after
December 15, 2017, using the modified retrospective transition method. The Company has adopted the amendments as
of January 1, 2018, which are not expected to have a significant effect on the Company’s consolidated financial
statements.
In August 2016, FASB issued ASU 2016-15 to add or clarify guidance on the classification of certain cash receipts and
payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The
amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after
F-78
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 15, 2017 using a retrospective transition method. The Company has adopted the amendments as of January 1,
2018, which are not expected to have a significant effect on the Company’s consolidated financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model which
requires entities to measure all credit losses expected over the life of an exposure (or pool of exposures) for financial
instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on
financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The amendment also
requires enhanced disclosures to help financial statement users better understand significant estimates and judgments
used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The
amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after
December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period
of adoption. The Company does not intend to adopt the provisions of the amendment early. The Company has formed a
cross-functional implementation team to evaluate the provisions of the amendment and the impact on its future
consolidated financial statements through the identification of data requirements and determination of necessary
modifications to its existing credit loss estimation methodologies, systems and processes. The magnitude of the change
in allowance for loan losses will depend on, among other things, the portfolio composition and quality at the adoption
date, as well as economic conditions and forecasts at that time.
In February 2016, FASB issued ASU 2016-02 related to leases. The new standard is intended to increase transparency
and comparability among organizations and require lessees to record a right-to-use asset and liability representing the
obligation to make lease payments for long-term leases. Accounting by lessors will remain largely unchanged. The
amendments are effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2018. Adoption will require a modified retrospective transition where the lessees and lessors are required to
recognize and measure leases at the beginning of the earliest period presented. Early adoption is permitted, however, the
Company does not intend to adopt the provisions of the amendment early. The Company’s implementation efforts are
on-going, including the installation of a software solution, which will aid in determining the magnitude of the increases
in assets and liabilities and their impact on the consolidated financial statements. The Company expects to recognize
lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the future
minimum lease payments required under operating leases as disclosed in Note 18 to the consolidated financial
statements. However, the population of contracts subject to balance sheet recognition and their initial measurement
remains under evaluation.
In January 2016, FASB issued ASU 2016-01 related to financial instruments. This amendment requires that most equity
investments be measured at fair value, with subsequent changes in fair value recognized in net income. The amendment
also impacts financial liabilities under the Fair Value Option and the presentation and disclosure requirements for
financial instruments and modifies the required process used to evaluate deferred tax assets on available for sale
securities. The amendment is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. The Company has adopted the amendment as of January 1, 2018, which resulted in $21.2
million of available for sale equity securities being reclassified within the consolidated balance sheet consistent with the
provisions of the new amendment, while certain other equity investments of approximately $40 million will continue to
be included in other assets within the consolidated balance sheet. The adoption of the amendment resulted in
approximately $3 million being reclassified from accumulated other comprehensive income to retained earnings,
representing an increase to retained earnings as of January 1, 2018. All subsequent changes in fair value related to these
equity investments will be recognized in net income. Additionally, the enhanced disclosures required by the new
standard will be included in subsequent filings, including the disclosure of the fair value of the loan portfolio using and
exit price method instead of the current discounted cash flow method. These disclosure changes are not expected to have
a significant effect on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year, to clarify
the principles for recognizing revenue from contracts with customers. The FASB has subsequently issued several
amendments to the standard, including clarification of principal versus agent considerations, narrow scope improvements
and other technical corrections. The amendments outline 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 amendments also require additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
F-79
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments are
effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15,
2017 and may be adopted using either a full retrospective transition method or a modified, cumulative-effect approach
wherein the guidance is applied only to existing contracts as of the date of initial application and to new contracts
entered into thereafter. The Company has adopted the amendments as of January 1, 2018 using the cumulative-effect
approach. The Company gathered an inventory of contracts with customers and performed an in-depth assessment of
these contracts for evaluation under the amendments. A majority of the Company’s revenues are not subject to the new
guidance. The revenue recognition policies within the Company’s broker-dealer segment were the most affected upon
adoption. Specifically, the new guidance required changes to the principal versus agent conclusion for certain advisory
and underwriting revenues and expenses which, as of January 1, 2018, are recorded on a gross basis while legacy
guidance required recognizing these revenues net of the related expenses. Conversely, certain contract costs related to
clearing and retail operations are now netted against the revenues while the legacy guidance required recognizing these
revenues and expenses on a gross basis. As the measurement and timing of revenue recognition was not affected for any
of the Company’s revenue streams, the implementation of the new guidance had no impact on opening retained earnings
as of January 1, 2018. The enhanced disclosures required by the new standard are being developed and will be included
in subsequent filings in accordance with the new standard, but are not expected to have a significant effect on the
Company’s consolidated financial statements.
34. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information is summarized as follows (in thousands, except per share data).
Year Ended December 31, 2017
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling
interest
Income attributable to Hilltop
Earnings per common share:
Basic
Diluted
Fourth
Quarter
$ 133,665 $ 128,944 $ 136,306 $ 108,241 $
Second
Quarter
First
Quarter
Quarter
Third
24,973
108,692
5,453
290,456
328,670
65,025
51,350
13,675
23,964
104,980
1,260
298,477
353,842
48,355
18,003
30,352
20,330
115,976
5,853
344,692
366,251
88,564
25,754
62,810
16,141
92,100
1,705
271,439
320,492
41,342
15,035
26,307
Full
Year
507,156
85,408
421,748
14,271
1,205,064
1,369,255
243,286
110,142
133,144
247
146
334
$ 13,428 $ 30,206 $ 62,476 $
(127)
26,434 $
600
132,544
$
$
0.14 $
0.14 $
0.31 $
0.31 $
0.64 $
0.63 $
0.27 $
0.27 $
1.36
1.36
Cash dividends declared per common share
$
0.06 $
0.06 $
0.06 $
0.06 $
0.24
F-80
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling
interest
Income attributable to Hilltop
Earnings per common share:
Basic
Diluted
Second
Quarter
Year Ended December 31, 2016
Third
Quarter
Fourth
Quarter
$ 118,335 $ 115,263 $ 114,202 $
16,093
99,170
3,990
354,458
364,133
85,505
33,017
52,488
14,211
104,124
4,347
309,127
355,784
53,120
17,582
35,538
13,805
100,397
28,876
346,005
367,365
50,161
18,439
31,722
Full
Year
First
Quarter
108,154 $ 455,954
58,423
397,531
40,620
1,286,965
1,412,471
231,405
83,461
147,944
14,314
93,840
3,407
277,375
325,189
42,619
14,423
28,196
217
556
648
$ 35,321 $ 51,932 $ 31,074 $
629
2,050
27,567 $ 145,894
$
$
0.36 $
0.36 $
0.53 $
0.53 $
0.32 $
0.32 $
0.28 $
0.28 $
1.48
1.48
Cash dividends declared per common share
$
0.06 $
— $
— $
— $
0.06
35. Subsequent Event
On February 13, 2018, the Company entered into a definitive agreement to acquire privately-held, Houston-based The
Bank of River Oaks (“BORO”) in an all-cash transaction. Under the terms of the definitive agreement, the Company has
agreed to pay cash in the aggregate amount of $85 million to the shareholders and option holders of BORO. As of
December 31, 2017, BORO had unaudited total assets, gross loans and deposits of approximately $454 million, $344
million and $406 million, respectively. The transaction is subject to customary closing conditions, including regulatory
approvals and approval by shareholders of BORO, and is expected to close during the third quarter of 2018.
F-81
Schedule I – Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
(in thousands)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2017
Accident
Year
2013
Unaudited
2014
Unaudited
2015
Unaudited
2016
Unaudited
2017
Unaudited
December 31, 2017
Total of
Incurred
But Not
Reported
Reserves Plus
Development
On Reported
Claims
Cumulative
Number of
Reported
Claims
$
107,793 $
108,951 $
83,784
111,006 $
85,037
89,646
2013
2014
2015
2016
2017
84,221
88,477
84,771
111,011 $ 111,121 $
84,074
87,262
85,189
88,079
$ 455,725
8
119
591
2,622
4,282
15,687
13,099
15,016
21,277
20,927
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2017
Accident
Year
2013
Unaudited
2014
Unaudited
2015
Unaudited
2016
Unaudited
2017
Unaudited
$
94,238 $
104,938 $
70,831
2013
2014
2015
2016
2017
Total
All outstanding reserves prior to 2013, net of reinsurance
Reserve for unpaid losses and allocated loss adjustment expenses, net of
108,099 $
79,713
71,820
81,684
82,940
71,543
109,662 $ 110,813
83,346
85,507
81,682
77,855
$ 439,203
948
reinsurance
$ 17,470
F-82
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CORPORATE INFORMATION
Corporate Headquarters
Board of Directors
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
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.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
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 www.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.
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 Co-Chief Executive Officer
Alan B. White
Vice Chairman and Co-Chief Executive Officer
William B. Furr
Executive Vice President, Chief Financial Officer
Corey G. Prestidge
Executive Vice President, General Counsel and
Secretary
Darren E. Parmenter
Executive Vice President, Chief Administrative
Officer
Keith E. Bornemann
Executive Vice President, Corporate Controller and
Principal Accounting Officer
Jerry L. Schaffner
Chief Executive Officer of PlainsCapital Bank
Todd L. Salmans
Chief Executive Officer of PrimeLending
Hill A. Feinberg
Chief Executive Officer of Hilltop Securities Inc.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
Telephone: (214) 855-2177
Facsimile: (214) 855-2173