2018 Annual Report,
Notice of 2019 Annual Meeting &
Proxy Statement
To Our Stockholders, Customers and Employees:
2018 was a pivotal year for Hilltop, as we took large strides to position our franchise for the future, while
facing certain industry headwinds. Demonstrating our long-term commitment, we made significant
investments in our company and launched multiple, coordinated initiatives that we believe will make us more
competitive and efficient. As well, we consummated a strategic acquisition that provides the bank with
critical scale in all major Texas markets. Our financial results declined due to challenging conditions in our
mortgage and broker-dealer businesses. The bank, our cornerstone business, however, had a solid year that
enabled Hilltop to generate consolidated net income of $126 million in 2018 and illustrates the strength of
our diversified business model.
Because of the profitability generated by each of our operating companies, Hilltop was able to return $86
million of earnings to stockholders via dividends and share repurchases in 2018. This was in addition to the
capital deployed through the $85 million acquisition of The Bank of River Oaks. We remain focused on
maintaining an enduring balance sheet, while preserving excess capital to deploy via bank acquisitions. In
concert with our stated goal of acquisitive growth, Hilltop also launched Hilltop Opportunity Partners in
2018. This merchant banking platform provides Hilltop the ability to identify and execute on non-bank
investments through an in-house team with requisite expertise. Our prudent, long-term oriented capital
management will allow us to continue to seek out attractive opportunities for both organic and acquisitive
growth alongside our dividend and share repurchase programs.
To expand on The Bank of River Oaks transaction, this past year we announced and completed our all-cash
acquisition of the high quality institution. The combination was franchise enhancing, as it more than doubled
our banking presence in Houston, a key Texas market where PlainsCapital Bank lacked sufficient scale.
Further, The Bank of River Oaks provides a healthy foundation for growth from its experienced management
team and strong commercial relationships. We have worked hard to accomplish a seamless integration of
both operations and cultures. Although the transaction recently closed in August, results have thus far
exceeded expectations and put us on a projected growth trajectory in the Houston market. We welcome The
Bank of River Oaks employees and clients to our Hilltop family.
Operating Companies:
PlainsCapital Bank had a prosperous year and delivered pre-tax income of $152.4 million, driven by loan
and deposit growth, net interest margin expansion and sound credit quality. The bank offers commercial
banking, personal banking and wealth management products and services throughout Texas and ended
the year with $10.0 billion of assets, $8.2 billion of deposits and 64 branches. PlainsCapital continues to
focus on providing best in class service to our middle market business customers and individual retail
customers. The credit quality at the bank evidences a measured approach to profitable growth and a
long-term focus on relationship-based lending. The bank takes pride in its Texas roots and serves clients
with integrity and respect, and will continue to do so for many years to come. During 2018, the bank
grew loans by 8%, delivered a net interest margin of 4.23% and reported net charge-offs of only 0.14%.
PrimeLending is a nationwide mortgage originator operating 300 retail locations in 44 states. The
mortgage industry, as a whole, faced materially increased pressure on both volume and margin in 2018.
PrimeLending’s commitment to purchase mortgage originations, however, again proved to be a resilient
strategy as the company outperformed many of its peers. Additionally, PrimeLending quickly adapted to
the challenged marketplace and sustained profitability by maintaining pricing discipline, generating
additional fee income and reducing its expense base. In 2018, PrimeLending originated $13.7 billion
mortgage loans, 86% of which were home purchase loans, and contributed pre-tax income of $12.9
million.
HilltopSecurities provides a broad range of investment banking and related financial services to
corporate clients, individual and institutional investors, broker-dealers, government entities and financial
intermediaries. In the third year of integrated operations as one company, our institutional businesses
were adversely impacted by a decline in nationwide municipal issuances, tighter fixed income spreads
and intense competition. Our retail and clearing businesses, however, benefited from the rise in short-
term rates. Despite these challenges, HilltopSecurities delivered meaningful pre-tax income of $32.6
million in 2018 on net revenue of $352.6 million.
Importantly, we recently announced the hiring of Brad Winges as the new President and CEO of
HilltopSecurities. Brad succeeds Hill Feinberg, who remains with the company. We are extremely
grateful for the momentous contribution Hill has made to build HilltopSecurities into the quality
organization it is today, as well as for the contribution Hill will be making to support its continued
growth. Likewise, we are very excited to have Brad join the Hilltop family, as he is a high caliber leader
with deep expertise in our core businesses. We look forward to working with Brad and the
HilltopSecurities team to advance the capabilities of our firm.
National Lloyds is a niche property and casualty underwriter offering primarily fire and limited
homeowners insurance for low value dwellings and manufactured homes in Texas, Arizona and other
southern states. In 2018, we relocated National Lloyds’ headquarters from Waco to Dallas, which
enabled us to enhance talent, modernize our platform and focus on revenue growth in our core states.
Despite facing high storm frequency and severity in Texas and Arizona, in addition to the devastation
brought by Hurricane Michael in Georgia, National Lloyds delivered pre-tax income of $5.7 million in
2018. We are extremely grateful for the execution by our devoted employees during this transitional
year.
As introduced in 2018, we are currently executing on a broad set of initiatives to enhance our platform and
streamline operations with the goals of lowering operating costs and building a foundation for future organic
and acquisitive growth. At multiple businesses, we are investing in core systems to enhance customer
experience, increase the effectiveness of our sales teams and better manage risk. We also are implementing
integrated procurement and travel platforms to better leverage our collective scale with third-party vendors.
As well, we are instituting a shared services model of our functional departments across the organization to
better pool and utilize our talent and resources. Ultimately, we believe the long-term benefit of these
initiatives will drive positive operating leverage through a combination of expense reduction and revenue
augmentation. Substantial progress has already been made, and we feel confident in the roadmap ahead.
Finally, I would like to give a heartfelt thank you to our former Vice Chairman and Co-CEO Alan White for
his outstanding leadership over the past 31 years. Alan retired on April 1st and leaves behind a lasting legacy
of building relationships and a commitment to our distinct culture. In 1988, Alan founded PlainsCapital
Bank with one branch in Lubbock, Texas and $160 million in assets. Because of his steadfast commitment,
Hilltop had $13.5 billion in assets with four complementary businesses and 5,100 dedicated employees at
March 31, 2019. Alan has been a great partner, dear friend and mentor to me and so many others in our
organization. We wish him well in his retirement.
I am extremely proud of our organization and believe we are well positioned for the future. We have a solid
holding company with leadership capable of executing our platform for efficiency and growth initiatives. As
well, we have established businesses with quality producers that can continue to provide growth across our
franchise. On behalf of the Hilltop family, I’d like to thank our clients for their trust in us to deliver best in
class service, our regulators for their guidance, our Board of Directors for their stewardship, and our
stockholders for their continued support. 2018 was a foundation building year for Hilltop, and we look
forward to executing on our strategic plans in 2019 and beyond.
Sincerely,
Jeremy B. Ford
President & Chief Executive Officer
Hilltop Holdings Inc.
May 30, 2019
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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 2019 ANNUAL MEETING
AND PROXY STATEMENT
April 30, 2019
You are cordially invited to attend our 2019 Annual Meeting of Stockholders at 10:00 a.m., Dallas, Texas, local
time, on July 25, 2019. The meeting will be held at the offices of Haynes and Boone, LLP at 2323 Victory Avenue, 7th
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 does not have 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 2019 Annual Meeting of Stockholders and annual report for the year ended December 31, 2018 will
be provided to stockholders of record on or about June 13, 2019.
We look forward to seeing you at the meeting.
Very truly yours,
Jeremy B. Ford
President and Chief Executive Officer
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON JULY 25, 2019.
Our Proxy Statement and our annual report for the fiscal year ended December 31, 2018 are both available at
www.proxyvote.com.
(This page has been left blank intentionally.)
Notice of 2019 Annual Meeting of Stockholders
To Be Held on July 25, 2019
WHEN:
WHERE:
Thursday, July 25, 2019, at 10:00 a.m., Dallas, Texas local time
2323 Victory Avenue, 7th 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 2020 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 2019; 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 30, 2019.
ANNUAL REPORT: Our 2018 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, 2018, 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 the Annual Meeting 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, 2019
Dallas, Texas
Corey G. Prestidge
Executive Vice President, General Counsel & Secretary
PROXY STATEMENT
TABLE OF CONTENTS
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL ONE — ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominees for Election as Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meeting Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vote Necessary to Elect Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nomination Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . .
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities Authorized for Issuance under Equity Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL TWO — ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . .
Vote Necessary to Approve, on an Advisory Basis, Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL THREE — RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Vote Necessary to Ratify the Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of the Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Auditor’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDER PROPOSALS FOR 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2019 PROXY STATEMENT
HILLTOP HOLDINGS INC.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
PROXY STATEMENT
2019 Annual Meeting of Stockholders
To be Held on July 25, 2019
GENERAL INFORMATION
The Notice of Internet Availability of Proxy Materials, or this Proxy Statement and the accompanying proxy card, as applicable,
Notice of 2019 Annual Meeting of Stockholders and Annual Report for the year ended December 31, 2018 will be provided to
stockholders of record on or about June 13, 2019.
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 “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 2019 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, 2019, at 2323 Victory Avenue, 7th 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 June 13, 2019, 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:
view our proxy materials for the Annual Meeting on the Internet;
vote your shares after you have viewed our proxy materials;
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.
Copies of the proxy materials are available for viewing at www.proxyvote.com.
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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.
2019 PROXY STATEMENT
What am I voting on?
At the Annual Meeting, stockholders will be asked to:
Elect 20 directors to serve on our Board of Directors until the 2020 annual meeting of stockholders or until their
successors are duly elected and qualified;
Conduct an advisory vote to approve executive compensation;
Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2019;
and
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:
FOR each of our director candidates;
FOR the approval, on an advisory basis, of the compensation of our named executive officers; and
FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for 2019.
Who is entitled to vote?
Holders of record of our common stock at the close of business on May 30, 2019 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 30, 2019. 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:
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.
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.
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.
Via Mail. If you received or requested printed copies of the proxy materials by mail, you may vote by proxy by marking,
signing and dating the proxy card and sending it back in the envelope provided.
If you are the beneficial owner of shares held by a broker or other nominee, you may instruct your broker or nominee to vote your
shares by following the instructions that the broker or nominee provides to you. New York Stock Exchange, or NYSE, rules prohibit
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2019 PROXY STATEMENT
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 2019.
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 2019.
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
2019 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.
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What constitutes a quorum?
2019 PROXY STATEMENT
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 29, 2019, we had 93,983,247 shares of common stock outstanding.
How many votes are needed for approval?
Election of Directors
The 20 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 2019 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 30, 2019 (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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General
PROPOSAL ONE — ELECTION OF DIRECTORS
2019 PROXY STATEMENT
At the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has nominated the
director candidates named under “— Nominees for Election as Directors” below.
Our Board of Directors oversees our management on your behalf. The Board of Directors reviews our long-term strategic plans
and exercises direct decision-making authority on key issues, such as the approval of business combination transactions, the
authorization of dividends, the selection of the Chief Executive Officer, setting the scope of 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 19 persons currently serving
as directors whose terms are expiring at the Annual Meeting and one additional nominee.
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 52
Rhodes R. Bobbitt
Age 73
Tracy A. Bolt
Age 54
W. Joris Brinkerhoff
Age 67
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.
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.
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J. Taylor Crandall
Age 65
Charles R. Cummings
Age 82
Hill A. Feinberg
Age 72
2019 PROXY STATEMENT
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. Until the companies were sold in September 2018, he served
as the Co-Manager of 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 of Hilltop Securities, a continuation of Mr. Feinberg’s previous
role with First Southwest since 1991. Until February 20, 2019, he served as Chief Executive
Officer of Hilltop Securities, a position he had held since 1991 with First Southwest. 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.
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Gerald J. Ford
Age 74
Jeremy B. Ford
Age 44
J. Markham Green
Age 75
2019 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 44 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 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 is the Chief Executive Officer of Hilltop Holdings and has served as the Chief
Executive Officer or Co-Chief Executive Officer of Hilltop Holdings 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 22 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. He was a
general partner of Goldman, Sachs & Co. and co-head of its Financial Services Industry Group.
Mr. Green previously served on the board of directors of MENTOR/The National Mentoring
Partnership and as Chairman of the Board of PowerOne Media LLC. He is Chairman of the Board
of ORG Chemical Holdings, LLC, a portfolio company of Owner Resource Group.
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William T. Hill, Jr.
Age 76
Lee Lewis
Age 67
Andrew J. Littlefair
Age 58
W. Robert Nichols, III
Age 74
C. Clifton Robinson
Age 81
2019 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.
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.
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Kenneth D. Russell
Age 70
A. Haag Sherman
Age 53
Jonathan S. Sobel
Age 52
Robert C. Taylor, Jr.
Age 71
2019 PROXY STATEMENT
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.
Mr. Sobel has been nominated for election as a director of Hilltop at the Annual Meeting.
Mr. Sobel is a partner of Ford Management II, LP, the general partner of Ford Financial Fund II,
L.P., a Dallas-based private equity fund. He also is the Managing Member of DTF Holdings, LLC,
an investment manager to the Company and several other entities affiliated with Mr. Gerald J. Ford.
Prior to forming DTF Holdings, LLC, Mr. Sobel was an employee of Goldman Sachs & Co. from
1987 to 2008, and was a Partner Managing Director from 1998 to 2008. While at Goldman Sachs,
Mr. Sobel was Global Head of the Mortgage Department, Global Head of Money Markets, head of
the firm’s Global Bank Group, and the Chief Risk Officer for Goldman Sachs Asset Management.
Mr. Sobel also was a member of Goldman Sachs’ Capital, Risk and Finance Committees. He is a
trustee of the Hospital for Special Surgery and the Whitney Museum. He also is a member of the
Executive Committee of the Columbia College Alumni Association.
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.
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Carl B. Webb
Age 69
2019 PROXY STATEMENT
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.
Director Independence
Our Board of Directors has affirmatively determined that 13 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, C. Clifton Robinson, 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,
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 1.1% of the
outstanding shares of common stock of Clean Energy Fuels Corp. at March 25, 2019. From late 2011 through March 31, 2019, 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 five times during 2018. 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 2018. 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. Four directors or former directors, Messrs. Gerald J. Ford, Jeremy B. Ford, Alan B. White and Hill A.
Feinberg, attended the 2018 annual meeting of stockholders.
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Vote Necessary to Elect Directors
2019 PROXY STATEMENT
The 20 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 2018, 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
Merger and Acquisition Committee
Executive Committee (a)
Annual Fee
for Chairperson ($)
Annual Fee
for Other Members ($)
210,000
70,000
15,000
15,000
30,000
50,000
15,000
—
48,000
8,000
5,000
5,000
5,000
8,000
5,000
5,000
(a) During 2018, the chairman of the Executive Committee was Alan B. White, former Co-Chief Executive Officer of the Company. Subsequent to
Mr. White’s retirement on April 1, 2019, Jeremy B. Ford, President and Chief Executive Officer of the Company, was appointed chairman of the
Executive Committee. Because such persons is or were employees of the Company, no fee is or was paid to the chairman of the Executive
Committee.
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, 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 a director, 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.
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2019 PROXY STATEMENT
Political Action Committee Matching Program
The Hilltop Holdings Inc PAC and the NLASCO Political Action Committee, or the PACs, are separate segregated funds that
were formed to make political contributions. To encourage participation in the PACs by eligible participants, for each contribution
made to the PACs by an eligible individual contributor, Hilltop or NLC, as applicable, 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 PACs in a given calendar year. Under this program, no contributor to the PACs receives any financial, tax or other
tangible benefit or premium from either the recipient charities or us. This program is completely voluntary.
2018 Director Compensation
Director Compensation Table for 2018(a)
Fees Earned or Fees Earned or All Other
Paid in Cash
($)
29,032
88,000
51
53,000
68,000
123,000
—
68
—
69,000
31,547
53,000
26,558
68,000
48,000
56,000
34,014
29,032
55
—
Paid in Stock
Compensation
($)
28,968
—
110,949
—
—
—
—
214,932
—
—
31,453
—
26,442
—
—
—
33,986
28,968
52,945
—
($)
—
—
—
—
—
—
—
744,900 (c)
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
58,000
88,000
111,000
53,000
68,000
123,000
—
959,900
—
69,000
63,000
53,000
53,000
68,000
48,000
56,000
68,000
58,000
53,000
—
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.
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 (d)
(a) Fees earned for services performed in 2018 include annual retainers, meeting fees and chairperson remuneration. Aggregate fees paid to non-
employee directors for annual retainers and committee chairmanships were paid quarterly. 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. Gerald J. Ford held an aggregate 90,000 unvested RSUs as of December 31, 2018.
(c) Reflects grant date fair value of a stock award calculated in accordance with the provisions of the Stock Compensation Topic of the Accounting
Standards Codification (“ASC”). Such award represents a time-based RSU that will cliff vest upon the earlier of March 5, 2021 and a change of
control.
(d) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
As described above, the 2018 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 calendar days after the public release of quarterly or
annual financial information and continues until the close of business on the 10th calendar day of the last month of the fiscal quarter.
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The following numbers of shares of our common stock were issued to our directors as director fees for services performed during
2018:
2019 PROXY STATEMENT
Name
Charlotte Jones Anderson
Tracy A. Bolt
Gerald J. Ford
William T. Hill, Jr.
Andrew J. Littlefair
A. Haag Sherman
Robert C. Taylor, Jr.
Carl B. Webb
Number of
Shares
1,386
5,308
10,283
1,505
1,265
1,813
1,386
2,533
For further information about the stockholdings of these directors and our management, see “Security Ownership of Certain
Beneficial Owners and Management” commencing on page 20 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.
Committee Membership
The following table shows the current membership of, and the 2018 fiscal year meeting information for, each of the committees
of the Board of Directors.
Audit
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 2018
Compensation Nominating and Corporate Risk
Committee Committee
Chairman
9
Governance Committee
Chairman
Chairman
4
5
Merger and
Investment
Executive
Committee Committee Acquisition Committee Committee
Chairman
Chairman
4
Chairman
Chairman
1
5
6
* Denotes independent director.
† Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
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Audit Committee
2019 PROXY STATEMENT
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.
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 enterprise risk function.
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.
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Investment Committee
2019 PROXY STATEMENT
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 Chief Executive Officer and Chairman of the Board as a means of separating management of the
Company from our Board of Director’s oversight of management. Separating these roles also enables an orderly leadership transition
when necessary. We believe, at this time, that this structure provides desirable oversight of our management and affairs. We have in
the past appointed, and will continue to appoint, lead independent directors as circumstances require. No lead independent director is
appointed at this time.
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 its
enterprise risk function.
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.
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Board Performance
2019 PROXY STATEMENT
Our Board of Directors conducts an evaluation of performance with a view to improving 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.
Hill A. Feinberg
Gerald J. Ford
Jeremy B. Ford
J. Markham Green
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
44 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 has extensive executive officer experience and knowledge of our operations.
Additionally, he has been actively involved in numerous acquisitions, including those consummated
by Hilltop.
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.
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William T. Hill, Jr.
Lee Lewis
2019 PROXY STATEMENT
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
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.
Kenneth D. Russell
Mr. Russell’s extensive background in accounting and operating entities provides valuable insight to
our Board of Directors, including merger and acquisition activities.
A. Haag Sherman
Jonathan S. Sobel
Robert C. Taylor, Jr.
Mr. Sherman has significant experience concerning investing, legal and accounting matters that is
essential to our Board of Director’s oversight responsibilities.
Mr. Sobel has significant experience in the banking, mortgage and broker-dealer industries, as well
as risk management. Given his previous work with the Company, Mr. Sobel already possesses
extensive knowledge regarding the Company and its operations. Accordingly, this will make him a
valuable member of the Board of Directors.
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.
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 at each executive session
the independent directors select the independent director to preside over such 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, the non-management
directors or any group or committee 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.
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2019 PROXY STATEMENT
All communications received as set forth in the preceding paragraph will be opened by the office of our General Counsel for the
sole purpose of determining whether the contents represent a message to our directors. Any contents that are not in the nature of
advertising, promotions of a product or service or patently offensive material will be forwarded promptly to the addressee(s). In the
case of communications to the Board of Directors or any group or committee of directors, the General Counsel’s office will make
sufficient copies of the contents to send to each director who is a member of the group or committee to whom the communication is
addressed. If the amount of correspondence received through the foregoing process becomes excessive, our Board of Directors may
consider approving a process for review, organization and screening of the correspondence by the corporate Secretary or other
appropriate person.
Code of Business Conduct and Ethics
We have adopted a Senior Officer Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer and Principal
Accounting Officer. We also have adopted a General Code of Ethics and Business Conduct applicable to all officers, directors and
employees. Both codes are available on our website at ir.hilltop-holdings.com under the heading “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
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 2020,” 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;
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2019 PROXY STATEMENT
•
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 of potential director candidates 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 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.
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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 29, 2019 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.
2019 PROXY STATEMENT
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
FMR LLC (d)
245 Summer Street
Boston, Massachusetts 02210
Dimensional Fund Advisors LP (e)
Building One
6300 Bee Cave Road
Austin, Texas 78746
BlackRock, Inc. (f)
55 East 52nd Street
New York, New York 10055
Amount and Nature of Percent of
Class (a)
Beneficial Ownership
15,602,693
16.6 %
6,434,588
6.8 %
6,318,289
6.7 %
5,599,589
6.0 %
5,143,781
5.5 %
(a) Based on 93,983,247 shares of common stock outstanding on April 29, 2019. Shares issuable under instruments to purchase our common stock that are exercisable
within 60 days of April 29, 2019 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 50,153 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 member 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. Mr. Gerald J. Ford is 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 and Diamond HTH Stock Company GP, LLC may be deemed to have shared
voting and dispositive power of these shares. Excludes 90,000 restricted stock units, or RSUs, that will not vest within 60 days of April 29, 2019.
(c) Based on the Schedule 13G (Amendment No. 3) filed with the SEC by The Vanguard Group on February 12, 2019. According to the Schedule 13G (Amendment
No. 3), The Vanguard Group has sole voting power over 72,078 shares of our common stock, shared voting power over 9,980 shares of our common stock, sole
dispositive power over 6,360,865 shares of our common stock and shared dispositive power over 73,723 shares of our common stock. The Schedule 13G
(Amendment No. 3) reports that Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, is the beneficial owner of 63,743 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 18,315 shares of our common stock as a result of its serving as investment manager of Australian
investment offerings.
(d) Based on the Schedule 13G filed with the SEC by FMR LLC on February 13, 2019. According to the Schedule 13G, FMR LLC has sole voting power over 579
shares of our common stock and sole dispositive power over 6,318,289 shares of our common stock, and Abigail P. Johnson has sole dispositive power over
6,318,289 shares of 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.
(e) Based on the Schedule 13G (Amendment No. 2) filed with the SEC by Dimensional Fund Advisors LP on February 8, 2019. According to the Schedule 13G
(Amendment No. 2), Dimensional Fund Advisors LP has sole voting power over 5,480,559 shares of our common stock and sole dispositive power over 5,599,589
shares of our common stock. Dimensional Fund Advisors LP is 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 Hilltop that are owned by the Funds, and may be deemed to be the beneficial owner of the shares of Hilltop held by the Funds. However,
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2019 PROXY STATEMENT
according to the Schedule 13G (Amendment No. 2), all securities reported are owned by the Funds. Dimensional disclaims beneficial ownership of such
securities. In addition, the Schedule 13G (Amendment No. 2) disclaims that the reporting person or any of its affiliates is the beneficial owner of any securities
covered by the Schedule 13G (Amendment No. 2) for any purposes other than Section 13(d) of the Securities Exchange Act of 1934.
(f) Based on the Schedule 13G filed with the SEC by BlackRock, Inc. on February 8, 2019. According to the Schedule 13G, BlackRock, Inc. has sole voting power
over 4,969,437 shares of our common stock and sole dispositive power over 5,143,781 shares of our common stock. According to the Schedule 13G, BlackRock,
Inc. is a parent holding company or control person, and various persons have the right to receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of our common stock. However, no single subsidiary of BlackRock, Inc. holds an interest in our common stock that is more than five
percent of our total outstanding common shares.
Security Ownership of Management
The following table sets forth information regarding the number of shares of our common stock beneficially owned as of April 29,
2019, by:
•
•
•
each of our directors and director nominee;
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.
Common Stock
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.
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
C. Clifton Robinson
Kenneth D. Russell
Todd L. Salmans
Jerry L. Schaffner
A. Haag Sherman
Jonathan S. Sobel
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
All Directors and Executive Officers,
as a group (26 persons)
Amount and Nature of
Beneficial Ownership
11,243
126,059 (b)
26,188
25,228
— (c)
37,476
826,496 (d)
Percent of
Class (a)
*
*
*
*
*
*
*
15,602,693 (e) 16.6%
716,929 (f)
21,847 (g)
114,763
33,049 (h)
656,199 (i)
14,446
31,000 (j)
1,265,024
—
29,339 (k)
122,283 (l)
17,196
— (m)
36,708
116,143
1,519,553 (n)
*
*
*
*
*
*
*
1.3%
*
*
*
*
*
*
*
1.6%
19,928,781 (o)
21.2%
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2019 PROXY STATEMENT
* Represents less than 1% of the outstanding shares of such class.
(a) Based on 93,983,247 shares of common stock outstanding on April 29, 2019. Shares issuable under instruments to purchase our common stock that are exercisable
within 60 days of April 29, 2019 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 28,417 shares of common stock deliverable upon the vesting of
RSUs that will not vest within 60 days of April 29, 2019.
(e) The shares of common stock beneficially owned by Mr. Gerald J. Ford include 50,153 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 member 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. Mr. Gerald J. Ford is the sole member of Diamond HTH Stock Company, LP. Each of Mr. Gerald J.
Ford, Diamond A Financial, LP, Diamond HTH Stock Company, LP and Diamond HTH Stock Company GP, LLC may be deemed to have shared voting and
dispositive power of these shares. Excludes 90,000 RSUs that will not vest within 60 days of April 29, 2019.
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 209,346 shares of
common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 29, 2019 and 15,544,674 shares of common stock held by
Diamond A Financial, LP.
(f)
(g) Excludes 62,808 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 29, 2019.
(h)
(i)
Includes 14,550 shares of common stock held in a SEP IRA account for the benefit of Mr. Hill.
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.
(j)
(k) Excludes 47,053 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 29, 2019.
(l)
Includes 1,459 shares of common stock held in an IRA account for the benefit of Mr. Schaffner’s wife. Excludes 43,785 shares of common stock deliverable upon
the vesting of RSUs that will not vest within 60 days of April 27, 2019.
(m) Mr. Sobel is a director nominee at the Annual Meeting.
(n) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors. 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) 1,269,000 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 14,369 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of
April 29, 2019.
(o) Represents 26 persons. Excludes 644,122 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 29, 2019.
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Executive Officers
General
MANAGEMENT
2019 PROXY STATEMENT
We have identified the following officers as “executive officers,” consistent with the definition of that term as used by the SEC,
as of April 29, 2019:
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
M. Bradley Winges
Age
46
72
44
41
56
45
70
61
51
Position
Executive Vice President, Principal Accounting Officer and Corporate Controller
Chairman of Hilltop Securities
President and 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
President and Chief Executive Officer of Hilltop Securities
Officer
Since
2017
2012
2010
2016
2007
2008
2012
2012
2019
Business Experience of Executive Officers
Information concerning the business experience of Messrs. Hill A. Feinberg and Jeremy B. Ford 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 from February 2014 to
September 2016 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 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 41 years of experience in the mortgage
banking industry. Prior to joining PrimeLending, he served as regional executive vice president of CTX/Centex, regional senior vice
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2019 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.
M. Bradley Winges. Mr. Winges has served as the President and Chief Executive Officer of Hilltop Securities since February
2019. Prior to joining Hilltop Securities, Mr. Winges most recently served as Senior Executive Managing Director at Piper Jaffray,
where he has worked since February 1991. While at Piper Jaffray, he was a member of the firm’s leadership team and held the roles
of Head of Fixed Income Services and Firm Investments and Trading, President of Piper Jaffray Investment Management, Firm Risk
Management, Head of Hopewood Lane Trading, Co-Head of Piper Jaffray Financial Products, Head of Municipal Sales and Trading
and Institutional Municipal Sales Representative. Mr. Winges also is a member of the Board of the Bond Dealers of America and a
committee member of the Fixed Income Market Structure at the United States Securities and Exchange Commission.
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 23, (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, or
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, 2018.
For 2018, our NEOs were:
Named Executive Officer
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg (b)
Jerry L. Schaffner
Todd L. Salmans
Title/Role
President and Chief Executive Officer
Former Vice Chairman and Co-Chief Executive Officer
Executive Vice President, Chief Financial Officer
Chairman of Hilltop Securities
President and Chief Executive Officer of the Bank
Chief Executive Officer of PrimeLending
(a) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(b)
In February 2019, Mr. Feinberg was succeeded by M. Bradley Winges as President and Chief Executive Officer of Hilltop Securities. Mr. Feinberg continues to serve as Chairman
of Hilltop Securities.
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2019 PROXY STATEMENT
2018 Business and Financial Highlights
During 2018, we had the following key accomplishments:
• Consummated the acquisition of The Bank of River Oaks;
• Continued deployment of shared services among the enterprise;
• Successful exit of loss share agreements with the Federal Deposit Insurance Corporation;
• Favorable resolution of matter with the Department of Justice with respect to FHA loans; and
• Realized positive return on an investment through our merchant bank.
Financial highlights for fiscal year 2018 were as follows:
• Generated $121.4 million in income applicable to common stockholders, or $1.28 per diluted share, during 2018. Return on
average equity was 6.33% and return on average assets was 0.93% for 2018.
• Maintained strong asset quality compared to peers with non-performing assets as a percentage of total assets of 0.45% as of
December 31, 2018.
• Maintained strong capital ratios with a Tier 1 Leverage Ratio of 12.53% and a Common Equity Tier 1 Risk Based Capital
Ratio of 16.58% at December 31, 2018.
• Distributed $26.7 million, or $0.28 per common share, of capital to stockholders, equating to a dividend payout ratio of
21.90%.
These results contributed to an increase in our book value per share from $19.92 at December 31, 2017 to $20.83 at December 31,
2018. Additional detail regarding our results and achievements can be found in our Annual Report on Form 10-K for the year ended
December 31, 2018.
Leadership Succession
From October 2017 through April 2019, we transitioned key leadership with the departures of Messrs. White, Huffines and
Martin. With the departure of Mr. White, Mr. Jeremy Ford has become the sole Chief Executive Officer of the Company, and the
Chief Operating Officer role was eliminated upon the departure of Mr. Huffines. Mr. Furr continues to serve as Chief Financial
Officer, and an employee was promoted to Principal Accounting Officer. These changes have resulted, and are expected to continue
result, in a substantial reduction in executive compensation expense.
Summary of Compensation Changes
• Anticipate a limited number of employment agreements (current total of five);
• New employment agreements entered into since the beginning of 2013 do not contain gross-up provisions. The retention
agreement with Mr. Schaffner is the only employee-related agreement that contains gross-up provisions and such provisions
are not expected to be triggered in the event of a termination; and
• Beginning in 2019, all equity award agreements have “double trigger” change in control provisions, which require
termination without cause within the six months preceding or twelve months following a change in control in order to vest.
Our 2018 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.
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2019 PROXY STATEMENT
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 cumulative earnings per share calculated in accordance with generally accepted accounting principles, or
EPS, over the three-year vesting period, modified by total stockholder return. 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 total stockholder
return, or TSR, relative to members of the KBW Regional Banking Index 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.
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 July 2018, over 73% 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 slight increase from the
71% support received in 2017 and continued to seek to understand stockholder perspectives on our executive compensation program.
During 2018, 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.
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2019 PROXY STATEMENT
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 evaluated the suggestions received and made changes, including,
among others, the “double trigger” provision in equity awards. 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, Schaffner 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 retention agreements with Messrs. White and Schaffner that were negotiated based upon the pre-existing rights in their
employment agreements with PlainsCapital Corporation. All other existing employment agreements at PlainsCapital or its subsidiaries
were amended to terminate on November 30, 2014. Following the expiration of the employment agreement with Mr. Salmans, we
entered into a new employment agreement with him that is consistent with our current compensation philosophy. We 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 Messrs. White’s and Schaffner’s retention agreements, see
“Executive Compensation — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table —
Employment Contracts and Incentive Plans — Employment Contracts.”
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.
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Base Salary
2019 PROXY STATEMENT
We provide a base salary for each NEO commensurate with the services provided 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 and the Chief Financial Officer noted in the table below, the Committee
determined to maintain the current salaries of all NEOs for 2018, as they were found to be competitive with the Company’s peers. The
increase in the Co-Chief Executive Officers’ salaries was primarily the result of the departure of Mr. Huffines at the end of 2017 and
the elimination of that position. Accordingly, the Co-Chief Executive Officers assumed additional responsibilities due to the
elimination of that position. The following table lists the base salaries for our NEOs in 2017 and 2018:
Base Salary
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
2018
$ 750,000 (a)
$ 1,450,000 (b)
2017
$ 725,000
$ 1,400,000
$ 425,000 (c) $ 450,000
$ 500,000
$ 500,000
$ 575,000 (d)
$ 525,000
$ 750,000
$ 750,000
% Increase
3.4 %
3.6 %
5.9 %
—
9.5 %
—
(a) Mr. Jeremy B. Ford’s base salary increased to $750,000 on April 1, 2018.
(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, with a subsequent increase to
$1,450,000 which was approved and made effective on April 1, 2018. As previously discussed, Mr. White retired effective April 1, 2019, from all
positions with the Company, including as a member of the Board of Directors.
(c) Mr. Furr’s base salary increased to $450,000 on April 1, 2018.
(d) Mr. Schaffner’s base salary increased to $575,000 on April 1, 2018.
In March 2019, the Committee assessed base salaries of the NEOs and decided to provide the following increases beginning on
April 1, 2019: $35,000 for Mr. Furr (new salary $485,000) and $50,000 for Mr. Schaffner (new salary $625,000). These increases
were determined to be appropriate given performance by these individuals, as well as the increased responsibility for Mr. Schaffner
following the departure of Mr. White.
Annual Incentive Awards
Our NEOs and other employees are eligible to participate in the Annual Incentive Plan and receive annual cash incentive awards
based upon our financial performance and other factors, including individual performance. The Committee believes that this element
of compensation is important to focus management efforts on, and provide rewards for, annual financial and strategic results that are
aligned with creating value for our stockholders.
Target Annual Incentive Opportunities
Target incentive awards are defined at the start of the year in consideration of market data provided by the Committee’s
consultant, each NEO’s total compensation package and the entity’s budgetary considerations. The Committee increased annual
incentive targets (as a percent of salary) for Messrs. Furr, Feinberg and Schaffner following a review of market practices and in order
to place more emphasis on pay-for-performance. The following table sets for information concerning Annual Incentive Plan
opportunities for 2018:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Annual Incentive Value
Target
Threshold
($)
135,000
—
72,000
108,000
60,000
90,000
Amount
($)
750,000
1,450,000
400,000
900,000
500,000
750,000
% of Annual
Base Salary
100 %
100 %
89 %
180 %
87 %
100 %
Maximum
($) (b)
1,125,000
—
600,000
1,350,000
750,000
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.
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Performance Measures
2019 PROXY STATEMENT
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 2018 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 2018 are summarized in the following table:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Hilltop
Net Income
Business Unit
Net Income
Strategic/
Individual Goals
70 %
100 %
70 %
20 %
20 %
20 %
—
—
—
50 %
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 2018:
• Mr. Jeremy B. Ford: execute the Company’s 2018 strategic plan, active pursuit and integration of strategic acquisition
opportunities that complement the Company’s business mix and finalize our shared-services initiative.
• Mr. Furr: implementation of travel and expense programs and credit risk tools, execute our shared-services initiative,
completion of model documentation and complete successful second year Dodd-Frank Act Stress Test submission with
enhancements.
• Mr. Feinberg: support our shared-services initiative, select and finalize new broker-dealer technology and support system,
improve municipal underwriting, improve capital markets and products, improve retail production and execute on liquidity
facilities.
• Mr. Salmans: support our shared-services initiative, foster and drive organic growth in existing and new markets, oversee
transition to new loan operating system, succession planning and development and growth of key successors.
• Mr. Schaffner: support our shared-services initiative, loan and deposit growth to targets, focus on SBA and food and
agriculture loans and new deposit products, and branch optimization through multi-year plan
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, excluding Mr. White, 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.
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2019 PROXY STATEMENT
At the end of the fiscal year, the Committee determined a payout based on net income performance. 2018 performance goals and
actual net income performance were as follows (dollars in millions):
2018 Performance Goal
Hilltop Adjusted Net Income
PlainsCapital Pre-Tax Income
Hilltop Securities Pre-Tax Income
PrimeLending Pre-Tax Income
Threshold ($)
Target ($)
Stretch ($)
Actual ($)
Achievement
105.0
87.5
31.5
35.7
175.0
145.9
52.5
59.4
218.8
182.4
65.6
74.3
131.2
155.5
38.4
22.4
75 %
107 %
73 %
— %
Based upon evaluation of their respective individual performance in 2018, the Committee awarded the NEOs, other than
Mr. White scores ranging from 100% to 140% 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 2018 annual cash
incentive payments were awarded as follows relative to the 2018 target value:
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
2018 Annual
Incentive Payment ($)
% of 2018 Target
Annual Incentive
625,000
1,450,000
390,000
900,000
530,000
500,000
83 %
100 %
98 %
100 %
106 %
67 %
(a) The amount was 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.
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, 2018 through December 31,
2020.
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.
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In 2018, 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 March 5, 2018, to the following NEOs as set forth below:
2019 PROXY STATEMENT
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Performance-Based
Time-Based RSUs RSUs Awarded
Awarded
(at Target)
31,766
14,096
7,753
8,055
6,645
7,048
31,766
14,096
7,752
8,055
6,645
7,048
Total RSUs
Awarded
63,532
28,192
15,505
16,110
13,290
14,096
On February 27, 2019, the Committee continued the same mix of long-term incentive awards and approved a grant of RSUs to the
NEOs, as set forth below:
Performance-Based
Name
Jeremy B. Ford
Alan B. White (a)
William B. Furr
Hill A. Feinberg (b)
Jerry L. Schaffner
Todd L. Salmans
Time-Based RSUs RSUs Awarded
Awarded
(at Target)
45,173
—
11,358
—
10,325
10,325
Total RSUs
Awarded
90,346
—
22,716
—
20,650
20,650
45,173
—
11,358
—
10,325
10,325
(a) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(b)
In February 2019, Mr. Feinberg was succeeded by M. Bradley Winges as President and Chief Executive Officer of Hilltop Securities. Mr. Feinberg continues to serve as
Chairman of Hilltop Securities.
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.
Payout for 2016-2018 Performance-Based RSUs
The following table provides the calculation of the payout for performance-based RSUs granted in 2016. Payouts for the 2016
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 2016 are earned and cliff vest after three years based on EPS performance
multiplied by a modifier of the payout based on relative TSR.
Metric
Cumulative EPS
Relative TSR percentile
$
Threshold
2.63
25th
$
Target
3.50
50th
$
Maximum
4.38
75th
Actual Performance
$
4.12
10th
Our three-year cumulative EPS results generated an estimated payout of 135.4% of target, while our TSR results generated an
80% modifier to be applied to this estimated payout. Accordingly, the aggregate payout for the performance-based RSUs awarded in
2016 was 108.3% of target.
Perquisites and Other Benefits
We provide various perquisites and other benefits to certain NEOs. Mr. Jeremy B. Ford is, and Alan B. White was, provided
access to company aircraft. Messrs. White, Salmans and Schaffner are or were provided with a monthly car allowance and
reimbursement for country club membership dues. In addition, Mr. White was, and Mr. Schaffner 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.
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2019 PROXY STATEMENT
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 an employment agreement with Mr. Salmans. We
subsequently entered into a new employment agreement with Mr. Salmans in 2014 following the expiration of his previous agreement.
Mr. Salmans’ agreement was amended in November 2017 to extend the term of the agreement to December 31, 2019. A description of
this employment agreement 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 retention agreements with Messrs. White and
Schaffner, which were approved by shareholders of PlainsCapital in connection with our acquisition of PlainsCapital. The summary of
the severance terms for these retention agreements is set forth below:
Legacy White 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
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.
On February 21, 2019, the Company entered into a Separation and Release Agreement, or the Separation Agreement, with Mr.
White in connection with his termination of employment effective April 1, 2019, or the Retirement Date. Pursuant to the Separation
Agreement, effective as of the Retirement Date, Mr. White resigned from all positions with the Company and its subsidiaries,
including, without limitation, Vice-Chairman of the Board of Directors of the Company and Co-Chief Executive Officer of the
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2019 PROXY STATEMENT
Company. The Separation Agreement also provided that the Retention Agreement by and between the Company and Mr. White, as
amended, terminated on the Retirement Date, except for certain provisions that address, among other items, non-competition, non-
solicitation, confidential information and arbitration.
Pursuant to the Separation Agreement, and in accordance with the Retention Agreement, Mr. White is entitled to receive, subject
to any delay required under Section 409A of the Internal Revenue Code, the following:
• Salary up to and including the Retirement Date;
•
$1,450,000 as a cash bonus based upon the Company’s 2018 performance;
• Commencing 60 days following the Retirement Date, $5,770,000, which amounts to two times his annual base salary and
average three year bonus, in installments over the next two years in accordance with current payroll practices of the
Company;
•
$6,672,372 that constitutes the Prior Agreement Payment plus interest thereon, which has been held in a separate interest
bearing account since the acquisition of PlainsCapital Corporation by the Company;
$23,000 for COBRA assistance; and
•
• Continued payment of premiums with respect to a Split-Dollar Life Insurance Policy, which policy is for the benefit of
Mr. White and the Company.
In addition, the Separation Agreement provided that all of Mr. White’s unvested restricted stock units continued to vest, or remain
eligible for vesting on a pro rata basis, through April 1, 2019. The Separation Agreement also contained a mutual release between
Mr. White and the Company.
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 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.
Feinberg Retention Agreement
On February 19, 2019, the Company entered into a Retention Agreement with Hill A. Feinberg to set forth the terms of his
ongoing role with Hilltop Securities. The Company appointed M. Bradley Winges to succeed Mr. Feinberg as President and Chief
Executive Officer of Hilltop Securities, or HTS, effective February 20, 2019. The Retention Agreement provides that, as of
February 20, 2019, Mr. Feinberg resigned as President and Chief Executive Officer of HTS and from all other positions with the
Company and its subsidiaries, other than as Chairman of the Board of Directors of HTS, as a member of the Board of Directors of the
Company and a member of Executive Committee of the Board of Directors of the Company. Pursuant to the Retention Agreement,
Mr. Feinberg will continue to serve as the Chairman of the Board of Directors of HTS until June 30, 2019, at which time he will
become Chairman Emeritus of HTS and resign from his membership on the Executive Committee of the Board of Directors of the
Company.
For his services, Mr. Feinberg is entitled to receive an annual salary of $500,000 per year, plus the excess of commission payouts
over his annual salary in any given calendar year. Mr. Feinberg also is entitled to receive one-time payments of $900,000 on or before
March 15, 2019 and $500,000 on before March 15, 2020. Subject to the execution and delivery of a release, Mr. Feinberg would be
entitled to receive these one-time payments earlier upon his termination, resignation or death. Mr. Feinberg may resign or be
terminated at any time. Mr. Feinberg will no longer participate in the Annual Incentive Plan or be granted additional awards under the
2012 Equity Incentive Plan.
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Salmans Employment Agreement
2019 PROXY STATEMENT
Pursuant to our employment agreement with Mr. Salmans, upon termination of employment by us other than for cause,
Mr. Salmans 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. In November 2017, the term of Mr. Salmans’ employment agreement was
extended until December 31, 2019.
The definitions of “cause” and “disability” under such arrangement, 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.
Legacy Schaffner Retention Agreement
Pursuant to our retention agreement with Mr. Schaffner, the applicable executive is entitled to:
(1) $2,448,000, including interest thereon from November 30, 2012, in full satisfaction of Mr. Schaffner’s rights under
Section 6 (Termination Upon Change in Control) of his previous employment agreement with PlainsCapital, dated
January 1, 2009, payable in a cash lump-sum upon any termination of his employment;
(2) upon termination of his employment by us other than for cause or death or disability, cash severance of (i) the sum of
Mr. Schaffner’s annual base salary and the average of the annual bonus amounts paid to him for the three most recently
completed fiscal years ending immediately prior to the date of termination, Such severance is payable in equal
installments over a one-year period following the date of termination.
The foregoing cash amounts in subparagraph (1) represent “modified single trigger” benefits, payable assuming the termination of
employment for any reason, and the foregoing cash amounts in subparagraph (2) represent “double trigger” benefits, payable
assuming a qualifying termination of employment. With respect to the amounts described in subparagraph (1) that are paid in full
satisfaction of Section 6 of Mr. Schaffner’s previous employment agreement with PlainsCapital, such amounts are payable upon any
termination of employment at any time, subject to any delay required by Section 409A of the Internal Revenue Code and the execution
of a release of claims. The cash severance amounts described in subparagraph (2) are payable upon a termination of employment other
than for cause, death or disability, subject to any delay required by Section 409A of the Internal Revenue Code and the execution of a
release of claims.
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 originally 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. Commencing in 2019, all equity award agreements contain “double
trigger” provisions, which require termination without cause within the six months preceding or the twelve months following a change
in control in order for the equity awards to vest in connection with a change in control. 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. Further discussion of the potential change in control payments pursuant to
the 2012 Equity Incentive Plan may be found in the “Executive Compensation — Potential Payments Upon Termination or Change-
in-Control” section below.
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2019 PROXY STATEMENT
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 2018 give rise to risks that are reasonably likely to have a
material adverse effect on our Company. In reaching this conclusion for 2018, 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 Chief Executive Officer, as well as assessing his
individual performance.
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 Chief Executive Officer in Compensation Decisions
The Chief Executive Officer provides 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
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salary changes, annual incentive and long-term incentive opportunities and payouts, specific individual performance objectives, and
individual performance assessments. The Chief Executive Officer makes recommendations based on his assessment of the individual
officer’s performance, performance of the officer’s respective business or function and employee retention considerations. The
Committee reviews and considers the Chief Executive Officer’s recommendations when determining any compensation changes
affecting our officers or executives. The Chief Executive Officer does not play 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 2018, 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 2018, the Company paid Meridian fees totaling $8,262 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.
Benchmarking Compensation
The Committee regularly assesses the components of the executive compensation program with advice from its independent
compensation consultant. In October 2017, 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 2018 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. In July 2017, the Committee determined that the peer group remained appropriate.
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2019 PROXY STATEMENT
The following financial institutions were included in the compensation peer group:
Cullen/Frost Bankers, Inc.
Hancock Holding Company
LegacyTexas Financial Group, Inc.
Pinnacle Financial Partners, Inc.
South State Corporation
Trustmark Corporation
Union Bankshares Corporation
First Financial Bankshares, Inc.
IBERIABANK Corporation
MB Financial, Inc.
Prosperity Bancshares, Inc.
TCF Financial Corporation
UMB Financial Corporation
WesBanco, Inc.
First Midwest Bancorp, Inc.
International Bancshares Corporation
Old National Bancorp
Simmons First National Corporation
Texas Capital Bancshares, Inc.
Umpqua Holdings Corporation
Wintrust Financial Corporation
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 Chief Executive Officer; and
• Three times annual base salary for the other executive officers.
Under this policy, directors are expected to own shares with a value greater than five times their annual retainer for serving on the
Board of Directors of the Company, 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.
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 29, 2019, 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
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2019 PROXY STATEMENT
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, short sale and derivative 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
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Executive Compensation
2019 PROXY STATEMENT
The following tables set forth information concerning the compensation earned for services performed during 2018, 2017 and
2016 by the NEOs, who were either serving in such capacities on December 31, 2018, during 2018, or are reportable pursuant to
applicable SEC regulations.
Summary Compensation Table
Fiscal Years 2018, 2017 and 2016
Change in Pension
Value and
Nonqualified Deferred
Compensation
Earnings (d) ($)
All Other
Compensation (e)
($)
Non-Equity
Incentive Plan
Compensation (c)
($)
625,000
790,000
715,000
Name and principal position
Jeremy B. Ford
President and
Chief Executive Officer
Year
2018
2017
2016
Alan B. White
Former Vice Chairman and
Co-Chief Executive Officer (f)
William B. Furr
Executive Vice President and
Chief Financial Officer (g)
Hill A. Feinberg
Chairman and Former Chief Executive
Officer of Hilltop Securities
Jerry L. Schaffner
President and Chief Executive
Officer of the Bank
Todd L. Salmans
Chief Executive Officer of
PrimeLending
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
Salary
($)
Bonus (a)
($)
Stock
Awards (b)
729,327
718,500
700,000
—
—
—
1,409,615
1,387,500
1,350,000
1,450,000
1,450,000
1,400,000
435,096
425,000
143,438
490,385
500,000
500,000
551,442
525,000
525,000
735,577
750,000
750,000
—
—
518,000 (h)
—
—
—
—
—
—
—
—
—
Option
Awards
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
($)
1,576,229
1,582,502
699,996
699,444
702,209
699,996
384,679
351,119
939,528
399,689
351,119
299,994
329,725
280,878
280,002
349,722
351,119
349,998
—
—
—
390,000
425,000
—
900,000
900,000
750,000
530,000
500,000
450,000
500,000
825,000
1,100,000
—
—
—
77,795
44,519
29,392
—
—
—
—
—
—
27,069
16,431
11,203
—
—
—
91,923
70,310
60,534
173,225
170,383
126,848
11,230
117,270
31,562
11,582
25,176
18,177
55,462
54,381
51,227
47,318
43,095
55,122
Total ($)
3,022,479
3,161,312
2,175,530
3,810,079
3,754,611
3,606,236
1,221,005
1,318,389
1,632,528
1,801,656
1,776,295
1,568,171
1,493,698
1,376,690
1,317,432
1,632,617
1,969,214
2,255,120
(a) Represents bonuses paid for services during 2018, 2017 and 2016, as applicable.
(b) Reflects the grant date fair value calculated in accordance with the provisions of the Stock Compensation Topic of the ASC, in accordance with the assumptions
described in Note 20 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The value of
performance-based stock awards is based on the probable outcome of the applicable performance conditions. The following table presents the value of
performance-based awards included in the table above based on the achievement of both probable and maximum outcomes:
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Year
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
Performance-Based Stock Awards
(Probable Achievement) ($)
(Maximum Achievement) ($)
787,479
793,747
349,998
349,440
352,198
349,998
192,172
176,099
—
199,683
176,099
149,997
164,730
140,868
139,993
174,720
176,099
174,991
1,181,219
1,190,621
524,997
524,160
528,297
524,997
288,258
264,148
—
299,525
264,148
224,995
247,094
211,301
209,989
262,080
264,148
262,487
(c) For 2018, represents cash awards earned under the Annual Incentive Plan for services during 2018, but paid in March 2019. 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.
(d) Represents interest earned on non-qualified deferred compensation contributions to Mr. White during 2018, 2017 and 2016, as applicable. For additional
(e)
information, see “— Non-Qualified Deferred Compensation.”
Includes amounts paid during 2018, 2017 and 2016, 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 sets forth a breakdown of all other compensation
included in the “Summary Compensation Table” for the NEOs.
(f) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(g) Mr. Furr began serving as our Executive Vice President and Chief Financial Officer effective September 1, 2016.
(h)
Includes sign-on bonus of $143,000.
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Table of Contents
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
2019 PROXY STATEMENT
All Other Compensation
Gross-Ups or
Other
Amounts
Company
Reimbursed
Contributions
Perquisites
and Personal
Benefits (a) ($)
for the
Payment of
Taxes ($)
Year
to Defined
Contribution
Insurance
Plans ($)
Policies (b) ($)
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
81,893
60,164
50,754
98,163
95,699
105,275
1,200
71,659
19,572
—
—
—
40,130
39,090
37,987
22,000
22,000
32,000
—
366
—
—
80
—
—
36,161
9,730
—
108
—
—
237
—
—
2,189
4,216
9,250
9,000
9,000
9,250
9,000
9,000
9,250
9,000
2,125
4,167
9,000
8,271
9,250
9,000
9,000
9,250
9,000
9,000
780
780
780
65,812
65,604
12,573
780
450
135
7,415
16,068
9,906
6,082
6,054
4,240
16,068
9,906
9,906
Total All Other
Compensation ($)
91,923
70,310
60,534
173,225
170,383
126,848
11,230
117,270
31,562
11,582
25,176
18,177
55,462
54,381
51,227
47,318
43,095
55,122
(a) Year 2018: For Mr. Jeremy B. Ford, reflects $300 gym membership allowance and personal use of company airplane of $81,593. For Mr. White, reflects car
allowance of $36,000, club expenses of $23,818, personal use of company airplane of $37,057 and personal use of company automobile of $1,288. For Mr. Furr,
reflects a cellular phone reimbursement of $1,200. For Mr. Schaffner, reflects car allowance of $24,000, club expenses of $11,706, cellular phone reimbursement
of $1,200, and personal use of company automobile of $3,224. 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 and 2016, for Messrs. Ford, Furr, Feinberg and Salmans, as applicable. For Mr. Schaffner,
represents bank-owned life insurance of $934 and group term life insurance of $5,148. For Mr. White, represents bank-owned life insurance of $3,106, group term
life insurance of $9,906 and key man life insurance of $52,800. Group term life insurance was not included in “All Other Compensation” during 2018 as this is a
benefit that is available to all employees of the Company.
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Grants of Plan-Based Awards
Grants of Plan-Based Awards Table
Fiscal Year 2018
2019 PROXY STATEMENT
All Other
Stock Awards:
Number of
Shares of
Grant Date
Fair Value of
Share and
(c) (#)
31,766
(d) ($)
788,750
787,479
14,096
7,753
8,055
6,645
7,048
350,004
349,440
192,507
192,172
200,006
199,683
164,995
164,730
175,002
174,720
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
Jerry L. Schaffner
Todd L. Salmans
Grant Date
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
3/5/2018
135,000
750,000
1,125,000
15,883
31,766
47,649
—
1,450,000 (e)
—
14,096
14,096
14,096
72,000
400,000
600,000
3,876
7,752
11,628
108,000
900,000
1,350,000
4,028
8,055
12,083
60,000
500,000
750,000
3,323
6,645
9,968
90,000
750,000
1,125,000
3,524
7,048
10,572
(a) Represent the value of potential payments under the Annual Incentive Plan to the NEOs based on 2018 performance. Management incentive award amounts
shown above represent potential awards that may have been earned based on performance during 2018. The actual amounts earned pursuant to Annual Incentive
Plan awards for 2018 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, 2018
and ending December 31, 2020. 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. 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.
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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. Schaffner,
Furr 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-
Chief Executive Officer 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 was for three years, with automatic one-year renewals at the
end of the second year of the agreement and each anniversary thereof unless notice had been given otherwise. Pursuant to the
agreement, Mr. White’s annual base salary was at least $1,350,000. He was also entitled to an annual bonus that varied based upon the
performance of the Company. If Hilltop’s annual net income was less than or equal to $70,000,000 but greater than $15,000,000,
Mr. White was entitled to a bonus equal to the average of his annual bonus in the prior three calendar years. If Hilltop’s annual net
income exceeded $70,000,000, he was entitled to a bonus equal to 100% of his annual base salary. Additionally, in accordance with
the agreement, Mr. White was entitled to participate in all of the Company’s employee benefit plans and programs. Further, the
agreement provided that the Company would 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
continued 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 included, among other things, customary non-competition,
non-solicitation and confidentiality provisions. Mr. White’s non-competition and non-solicitation obligations would terminate thirty-
six (36) months after his termination. On February 21, 2019, we entered into a Separation and Release Agreement with Mr. White in
connection with his retirement effective April 1, 2019. For a description of the Separation and Release Agreement and the
compensation and benefits to which Mr. White would have been entitled in the event of his termination or a change in control under
his retention agreement, 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.
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Mr. Feinberg
2019 PROXY STATEMENT
On February 19, 2019, the Company entered into a Retention Agreement with Hill A. Feinberg to set forth the terms of his
ongoing role with Hilltop Securities. The Company appointed M. Bradley Winges to succeed Mr. Feinberg as President and Chief
Executive Officer of HTS effective February 20, 2019. The Retention Agreement provides that, as of February 20, 2019, Mr. Feinberg
resigned as President and Chief Executive Officer of HTS and from all other positions with the Company and its subsidiaries, other
than as Chairman of the Board of Directors of HTS, as a member of the Board of Directors of the Company and a member of
Executive Committee of the Board of Directors of the Company. Pursuant to the Retention Agreement, Mr. Feinberg will continue to
serve as the Chairman of the Board of Directors of HTS until June 30, 2019, at which time he will become Chairman Emeritus of HTS
and resign from his membership on the Executive Committee of the Board of Directors of the Company.
For his services, Mr. Feinberg is entitled to receive an annual salary of $500,000 per year, plus the excess of commission payouts
over his annual salary in any given calendar year. Mr. Feinberg also is entitled to receive one-time payments of $900,000 on or before
March 15, 2019 and $500,000 on before March 15, 2020. Subject to the execution and delivery of a release, Mr. Feinberg would be
entitled to receive these one-time payments earlier upon his termination, resignation or death. Mr. Feinberg may resign or be
terminated at any time.
Mr. Schaffner
On November 30, 2012, in connection with our acquisition of PlainsCapital, we entered into a retention agreement with
Mr. Schaffner. The retention agreement provides for an initial term of two years, with automatic one-year renewals at the end of the
first year of the agreement and each anniversary thereof unless notice has been given otherwise. Pursuant to the agreement,
Mr. Schaffner’s annual base salary is $525,000. He is also entitled to an annual bonus that varies based upon the performance of
PlainsCapital. If PlainsCapital’s annual net income is greater than $15,000,000, Mr. Schaffner is entitled to a bonus equal to the
average of his annual bonus in the prior three calendar years. Additionally, in accordance with the agreement, Mr. Schaffner is
entitled to participate in all of the Company’s employee benefit plans and programs. Further, the agreement provides that the
Company will provide Mr. Schaffner with the use of corporate aircraft and an automobile allowance, each at the same level that such
benefits were available to Mr. Schaffner immediately prior to our acquisition of PlainsCapital. He continues to have bank-owned life
insurance and access to the country club that was available to him through PlainsCapital’s membership prior to our acquisition of
PlainsCapital. For a description of compensation and benefits to which Mr. Schaffner is entitled in the event of his termination or a
change in control, see “Potential Payments Upon Termination or Change-in-Control” below.
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’ 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’ 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.
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2019 PROXY STATEMENT
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.
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 originally approved the Annual Incentive Plan. Our stockholders then reapproved the
Annual Incentive Plan on June 15, 2017. The Annual Incentive Plan 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
“performance-based compensation” 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 $10,000,000 per year. Except as otherwise
provided in a participant’s employment or other individual agreement, the payment of a cash bonus to a participant for a performance
period is conditioned upon the participant’s active employment on the date that the final awards are approved by the Compensation
Committee. We may amend or terminate the Annual Incentive Plan at any time.
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Outstanding Equity Awards at Fiscal Year End
The following table presents information pertaining to all outstanding equity awards held by the NEOs as of December 31, 2018.
2019 PROXY STATEMENT
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Stock Awards
Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(a) (#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
(a) ($)
Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
(a) ($)
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
21,971 (b)
27,734 (d)
31,766 (f)
45,173 (h)
21,971 (b)
12,307 (d)
14,096 (f)
13,922 (j)
8,965 (k)
6,154 (f)
7,753 (h)
9,416 (b)
6,154 (d)
8,055 (f)
8,789 (b)
4,923 (d)
6,645 (f)
10,325 (h)
10,986 (b)
6,154 (d)
7,048 (f)
10,325 (h)
391,743
494,497
566,388
805,435
391,743
219,434
251,332
248,225
159,846
109,726
138,236
167,887
109,726
143,621
156,708
87,777
118,480
184,095
195,880
109,726
125,666
184,095
21,971 (c)
27,734 (e)
31,766 (g)
45,173 (i)
21,971 (c)
12,306 (e)
14,096 (g)
—
—
6,153 (g)
7,752 (i)
9,416 (c)
6,153 (e)
8,055 (g)
8,788 (c)
4,922 (e)
6,645 (g)
10,325 (i)
10,985 (c)
6,153 (e)
7,048 (g)
10,325 (i)
391,743
494,497
566,388
805,435
391,743
219,416
251,332
—
—
109,708
138,218
167,887
109,708
143,621
156,690
87,759
118,480
184,095
195,863
109,708
125,666
184,095
(a) Value based upon the closing price of $17.83 for our common stock on December 31, 2018. With respect to performance-based RSUs, the number of shares
underlying each award was calculated based on the achievement of target level performance due to certain modifiers utilized in the performance calculation.
(b) Represents time-based RSUs that cliff vested on February 23, 2019.
(c) Represents shares underlying performance-based RSUs that vested on February 23, 2019 upon the achievement of certain performance goals during the three-year
period beginning January 1, 2016 and ending December 31, 2018. The amount disclosed in the table is based on applicable target performance during the noted
period. Actual shares issued under performance awards were 108.3% of unvested shares reported in the table above at December 31, 2018, as approved by the
Compensation Committee on January 24, 2019.
(d) Represents time-based RSUs that cliff vest upon the earlier of February 23, 2020 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, 2017 and
ending December 31, 2019.
(f) Represents time-based RSUs that cliff vest upon the earlier of March 5, 2021 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, 2018 and
ending December 31, 2020.
(h) Represents time-based RSUs that cliff on February 27, 2022.
(i) Represents performance-based RSUs that vest upon the achievement of certain performance goals during the three-year period beginning January 1, 2019 and
ending December 31, 2021.
(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.
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Option Exercises and Stock Vested in 2018
2019 PROXY STATEMENT
The following table presents information pertaining to any outstanding restricted stock unit awards held by the NEOs that vested
during 2018. There were no option awards outstanding during 2018.
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Stock Awards
Number of
Shares Acquired
on Vesting (#)
Value
Realized on
Vesting ($)
31,507
31,507
8,618
11,253
12,604
15,754
787,360 (a)
787,360 (a)
218,294 (b)
281,212 (a)
314,974 (a)
393,692 (a)
(a) Value based upon the closing price of $24.99 for our common stock on February 23, 2018 multiplied by the number of vested RSUs.
(b) Value based upon the closing price of $25.33 for our common stock on February 15, 2018 multiplied by the number of vested RSUs.
Non-Qualified Deferred Compensation
The following table shows the non-qualified deferred compensation activity for our NEOs during the fiscal year ended
December 31, 2018.
Name
Jeremy B. Ford
Alan B. White
William B. Furr
Hill A. Feinberg
Jerry L. Schaffner
Todd L. Salmans
Executive
Registrant
Contributions
in Last Fiscal
Year ($)
Contributions
in Last Fiscal
Year ($)
Aggregate
Earnings in
Last Fiscal
Year (a) ($)
Aggregate
Aggregate
Withdrawals/
Distributions
($)
Balance at Last
Fiscal Year End
End (b) ($)
—
—
—
—
—
—
—
—
—
77,795
—
—
—
—
—
27,069
—
—
—
—
—
—
—
—
—
6,672,372
—
—
2,536,685
—
(a) Represents interest earned on 2012 deferred compensation contributions of $6,430,890 for Mr. White and $2,448,000 for Mr. Schaffner. 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 agreements with Messrs. White and Schaffner.
Pursuant to these agreements, we agreed to contribute an amount in cash equal to $6,430,890 and $2,448,000 as deferred
compensation to Messrs. White and Schaffner, respectively, in satisfaction of their rights under Section 6 (Termination Upon Change
of Control) of their previous employment agreements with PlainsCapital. Such amounts accrue interest at the prevailing money market
rate and are payable to Messrs. White and Schaffner following termination of their employment, subject to any delay required by
Section 409A of the Internal Revenue Code. As of a result of the termination of Mr. White’s employment on April 1, 2019,
Mr. White will receive such amount on or about October 1, 2019.
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2019 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. Commencing in 2019, all equity award agreements contain “double trigger” provisions,
which require termination within the six months preceding or the twelve months following a change in control in order for the equity
awards to vest in connection with a change in control.
Employment Contracts
Mr. White
If Mr. White’s retention contract was 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, was entitled to:
(i)
(ii)
(iii)
(iv)
his annual base salary through the date of termination, to the extent not already paid and not deferred;
any annual bonus earned by him for a prior award period, to the extent not already paid and not deferred;
any business expenses he incurred that are not yet reimbursed as of the date of termination; and
any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or accrued to him,
required to be paid or provided or which he is eligible to receive under any plan, program, policy or practice or contract or
agreement, to the extent not already paid and not deferred, through the date of termination.
In addition, Mr. White or his estate, as applicable, was 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 was 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 were payable subject to Mr. White’s execution
of a release of claims.
On February 21, 2019, the Company entered into a Separation and Release Agreement, or the Separation Agreement, with
Mr. White in connection with his termination of employment effective April 1, 2019, or the Retirement Date. Pursuant to the
Separation Agreement, effective as of the Retirement Date, Mr. White resigned from all positions with the Company and its
subsidiaries, including, without limitation, Vice-Chairman of the Board of Directors of the Company and Co-Chief Executive Officer
of the Company. The Separation Agreement also provided that the Retention Agreement by and between the Company and
Mr. White, as amended, terminated on the Retirement Date, except for certain provisions that address, among other items, non-
competition, non-solicitation, confidential information and arbitration.
Pursuant to the Separation Agreement, and in accordance with the Retention Agreement, Mr. White is entitled to receive, subject
to any delay required under Section 409A of the Internal Revenue Code, the following:
• Salary up to and including the Retirement Date;
•
$1,450,000 as a cash bonus based upon the Company’s 2018 performance;
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2019 PROXY STATEMENT
• Commencing 60 days following the Retirement Date, $5,770,000, which amounts to two times his annual base salary and
average three year bonus, in installments over the next two years in accordance with current payroll practices of the
Company;
•
•
$6,672,372 that constitutes the Prior Agreement Payment plus interest thereon, which has been held in a separate interest
bearing account since the acquisition of PlainsCapital Corporation by the Company;
$23,000 for COBRA assistance; and
• Continued payment of premiums with respect to a Split-Dollar Life Insurance Policy, which policy is for the benefit of
Mr. White and the Company.
In addition, the Separation Agreement provided that all of Mr. White’s unvested restricted stock units continued to vest, or remain
eligible for vesting on a pro rata basis, through April 1, 2019. The Separation Agreement also contained a mutual release between
Mr. White and the Company.
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 granted to
him upon commencement of his employment will also vest.
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 made prior to 2019 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. Schaffner
With respect to Mr. Schaffner, if his employment contract is terminated by us for cause, by the executive or due to the executive’s
death or disability (as such terms are defined below), he or his estate, as applicable, is entitled to:
(i)
(ii)
(iii)
(iv)
his annual base salary through the date of termination, to the extent not already paid and not deferred;
any annual bonus earned by the executive for a prior award period, to the extent not already paid and not deferred;
any business expenses he incurred that are not yet reimbursed as of the date of termination; and
any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or accrued to him,
required to be paid or provided or which he is eligible to receive under any plan, program, policy or practice or contract or
agreement, to the extent not already paid and not deferred, through the date of termination.
In addition, Mr. Schaffner or his estate, as applicable, is entitled to a lump-sum cash payment equal to $2,448,000, which
represents the amount Mr. Schaffner 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 “Accrued Amounts.”
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2019 PROXY STATEMENT
If Mr. Schaffner’s employment is terminated by us other than for cause (as such term is defined below) or his death or disability,
he is entitled to the Accrued Amounts, including the lump-sum cash payment equal to $2,448,000 and interest thereon from
November 30, 2012, as well as payments generally equal to the sum of the average of Mr. Schaffner’s prior annual bonuses over the
preceding three years plus his annual base salary. Mr. Schaffner will retain the right to be grossed-up for any excise tax relating to
“excess parachute payments” (as defined in Section 280G of the Internal Revenue Code), which is set forth in his prior employment
agreement, provided that the gross-up will only relate to any excise taxes arising in connection with our acquisition of PlainsCapital.
These severance amounts are payable subject to Mr. Schaffner’s execution of a release of claims.
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”).
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 Messrs. White and Schaffner’s retention agreements and the employment agreements of Messrs. Furr 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 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 Messrs. White and Schaffner’s retention agreements, “disability” means he shall have been absent from full-
time performance of his duties for 180 consecutive days as a result of incapacity due to physical or mental illness that is determined to
be total and permanent by a physician. For the purposes of the employment agreement with Mr. Salmans, “disability” is defined in
accordance with our disability policy in effect at the time of the disability.
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Set forth below are the amounts that Messrs. Jeremy B. Ford, White, Furr, Feinberg, Salmans and Schaffner would have received
if the specified events had occurred on December 31, 2018:
2019 PROXY STATEMENT
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
$
$
— $
—
—
—
—
— $
— $
—
—
390,058
—
390,058 $
— $
—
—
390,058
—
—
—
—
2,905,256
—
390,058 $ 2,905,256
(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, 2018. 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, 2018. 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.”
Alan B. White
Accrued amounts (a)
Cash payment (b)
Cash severance (c)
Restricted stock units (d)
Welfare benefits
Total
$
Termination due
to Death or
Termination for
Cause
1,450,000 $
6,672,372
—
—
—
Disability or by
Executive for any
Reason
1,450,000 $
6,672,372
—
196,171
—
Termination
Without Cause
or Non-Renewal
of Retention
Agreement
1,450,000 $
6,672,372
5,700,000
196,171
—
—
—
—
1,724,999
—
8,318,543 $ 14,018,543 $ 1,724,999
Change of
Control
$
8,122,372 $
(a) Accrued amounts calculation based upon the sum of: (i) Mr. White’s annual base salary through December 31, 2018, 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, 2018. 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, 2018. 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 (a)
Restricted stock units (b)
Welfare benefits
Total
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
103,559
—
103,559 $
— $
—
850,000
103,559
—
—
—
1,700,000
627,504
—
953,559 $ 2,327,504
(a) Cash severance calculation if Mr. Furr is terminated without cause is based upon the sum of: (i) Mr. Furr’s annual base salary rate and (ii) an amount equal to
annual incentive cash bonus paid to Mr. Furr in respect of the calendar year immediately preceding the year of the date of termination. If his employment is
terminated upon a change of control, the cash severance calculation is based upon two times the sum of: (i) Mr. Furr’s annual base salary rate and (ii) an amount
equal to annual incentive cash bonus paid to Mr. Furr in respect of the calendar year immediately preceding the year of the date of termination.
(b) 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, 2018. 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, 2018. 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.”
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Hill A. Feinberg
Accrued amounts
Cash payment
Cash severance
Restricted stock units (a)
Welfare benefits
Total
2019 PROXY STATEMENT
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
105,096
—
105,096 $
— $
—
—
105,096
—
—
—
—
842,450
—
105,096 $ 842,450
(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, 2018. 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, 2018. 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.”
Todd L. Salmans
Accrued amounts
Cash payment
Cash severance (a)
Restricted stock units (b)
Welfare benefits
Total
Termination due
to Death or
Termination for
Cause
Disability or by
Executive for any
Reason
Termination
without cause
Change of
Control
$
$
— $
—
—
—
—
— $
— $
—
—
98,086
—
—
—
3,150,000
862,508
—
98,086 $ 1,673,086 $ 4,012,508
— $
—
1,575,000
98,086
—
(a) Cash severance calculation if Mr. Salmans is terminated without cause is based upon the sum of: (i) Mr. Salmans’ 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’ 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, 2018. 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, 2018. 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.”
Jerry L. Schaffner
Accrued amounts (a)
Cash payment (b)
Cash severance (c)
Restricted stock units (d)
Welfare benefits
Total
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
Termination for
Cause
575,000 $
$
575,000 $
575,000 $
—
—
2,536,685
—
—
725,895
88,439
—
—
$ 3,111,685 $ 3,200,124 $ 4,241,791 $ 725,895
2,536,685
—
—
—
2,536,685
1,041,667
88,439
—
(a) Accrued Amounts calculation based upon the sum of: (i) Mr. Schaffner’s annual base salary through December 31, 2018, to the extent not already paid and not
deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business expenses incurred that have not yet been reimbursed as of
the date of termination; and (iv) any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or accrued to Mr. Schaffner.
(b) Cash Payments refers to a lump-sum cash payment that represents the amount, including interest thereon, Mr. Schaffner would have been entitled to receive under
his prior employment agreement with PlainsCapital if his employment had been terminated.
(c) Cash Severance calculation based upon the sum of the average of Mr. Schaffner’s prior annual bonuses for each of the preceding three years plus his annual base
salary.
(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, 2018. 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, 2018. 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.”
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Incentive Plans
2019 PROXY STATEMENT
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.
Awards granted through 2018 under our 2012 Equity Incentive Plan were “single trigger” awards, 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. In 2019, the Compensation Committee of the Board of Directors
adopted new forms of award agreements that provide for a “double trigger”, which requires termination within the six months
preceding or twelve months following a change in control in order for the equity awards to vest in connection with a change in control.
We believe the “double trigger” is in line with current practices of public companies. We believe a “double 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 prior to 2019: (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.
For awards granted in 2019 and going forward, awards only vest upon a change in control if the grantee is terminated within the six
months preceding or the twelve months following a change in control. Accordingly, grantees will not receive any additional benefit if
their employment continues following a change in control.
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, 2018, along with their gross
income as reported on IRS form W-2 for 2018. 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 2018 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 2018 for Jeremy B. Ford, who served as our President and Co-Chief Executive Officer, was
$2,353,504. The annual compensation for 2018 for Alan B. White, our former Vice Chairman and Co-Chief Executive Officer, was
$3,714,553. The annual compensation for the median employee for 2018 was $60,960. The resulting ratios of Mr. Jeremy B. Ford’s
and Mr. White’s pay to that of our median employee for 2018 were 39:1 and 61:1, 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.
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2019 PROXY STATEMENT
Compensation Committee Interlocks and Insider Participation
During fiscal year 2018, 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 2018:
•
•
•
•
•
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 2018, each of Mr. Jeremy Ford, Hilltop’s then Co-Chief Executive Officer and President, Mr. White, Hilltop’s former
Vice Chairman and Co-Chief Executive Officer and Mr. Feinberg, Chairman and Chief Executive Officer of Hilltop Securities, 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2018 with respect to compensation plans under which shares of our
common stock may be issued.
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
—
—
—
$
$
—
—
—
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in first
column)
1,246,880
—
1,246,880
Plan Category
Equity compensation plans approved by security holders*
Equity compensation plans not approved by security holders
Total
* 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, 2018, 3,128,011 awards had been granted pursuant to the 2012 Equity Incentive Plan, while 374,891 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, 2018, applicable to our officers, directors and greater than ten
percent beneficial owners were timely satisfied, except that Mr. Bornemann, our Principal Accounting Officer, filed one late report
related to the vesting of one award and the corresponding withholding of shares to pay taxes.
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, 2018.
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General
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
2019 PROXY STATEMENT
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. Related party transactions that would be required to be disclosed pursuant to federal
securities laws must be reported to the Chief Executive Officer or General Counsel and are subject to approval by the Audit
Committee of the Board of Directors. 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 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 Plaza Investment
On July 31, 2018, HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) purchased approximately 1.7 acres of land in the
City of University Park, Texas for $38.5 million. Hillcrest Land LLC is owned equally between Hilltop Investments I, LLC, a wholly
owned entity of Hilltop, and Diamond Ground, LLC, an affiliate of Gerald J. Ford. Each of Hilltop Investments I, LLC and Diamond
Ground, LLC contributed $19.3 million to Hillcrest Land LLC to complete the purchase. Trusts for which Jeremy Ford and the wife of
Corey Prestidge are a beneficiary own 10.2% and 10.1%, respectively, of Diamond Ground, LLC.
In connection with the purchase of the land, Hillcrest Land LLC entered into a 99-year ground lease of the land with three
tenants-in-common: SPC Park Plaza Partners LLC (“Park Plaza LLC”), an unaffiliated entity which received an undivided 50%
leasehold interest; HTH Hillcrest Project LLC (“HTH Project LLC”), a wholly owned subsidiary of Hilltop, which received an
undivided 25% leasehold interest; and Diamond Hillcrest, LLC (“Diamond Hillcrest”), an entity owned by Mr. Gerald J. Ford, which
received an undivided 25% leasehold interest (collectively, the “Co-Owners”). The ground lease is triple net. The base rent from the
Co-Owners under the ground lease commences 18 months after the ground lease was signed at $1.8 million per year and increases
1.0% per year each January 1 thereafter.
Concurrent with the ground lease, the Co-Owners entered into an agreement to purchase the improvements currently being
constructed on the land, which is a mixed-use project containing a six-story building (“Hilltop Plaza”). HTH Project LLC and
Diamond Hillcrest each own an undivided 25% interest in Hilltop Plaza. Park Plaza LLC owns the remaining undivided 50% interest
in Hilltop Plaza. Park Plaza LLC has agreed to serve as the Co-Owner property manager under the Co-Owners Agreement; however,
certain actions require unanimous approval of all Co-Owners. Hilltop Plaza will be funded through a $41.0 million construction loan
from an unaffiliated third party bank, as well as cash contributions of $5.3 million from each of HTH Project LLC and Diamond
Hillcrest.
Hilltop and the Bank entered into leases for an aggregate of approximately 72,000 of the total 119,000 square feet of rentable
space in Hilltop Plaza to serve as the headquarters for both companies. The two separate 129-month office and retail leases have
combined total base rent of approximately $35 million with the first nine months of rent abated. Move-in is expected in the fourth
quarter of 2019.
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 29, 2019. 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 29, 2019. 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.
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2019 PROXY STATEMENT
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, or during 2018 employed, 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 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 former Vice Chairman and Co-Chief Executive Officer, formerly served 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; Ty Tucker, the son-in-law of Mr. Salmans, serves as Project Manager, Joint Venture
Strategy of PrimeLending; Robert Coke IV, the son-in-law of Mr. Salmans, serves as Manager, Appraisal Desk of PrimeLending.
Pursuant to our employment arrangements with these individuals, during 2018, these individuals received total compensation for their
respective services as employees as follows: Corey G. Prestidge $982,607, Lee Ann White $134,296, Logan Passmore $92,651, Kale
Salmans $618,867, Ty Tucker $149,792 and Robert Coke IV $80,903.
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.
Branch Construction
During 2018, the Bank utilized a company owned by Mr. Lewis, Lee Lewis Construction, to construct a branch for the Bank. The
Bank awarded this contract to Lee Lewis Construction following a bid process. During 2018, the Bank paid Lee Lewis Construction
$4,138,880 to construct the Bank branch. The project was completed in the second half of 2018, and the Company expects to pay
minimal trailing costs related to construction of the branch during 2019.
During 2018, the Bank contracted with Lee Lewis Construction to construct a branch in Lubbock, Texas. The Bank awarded this
contract to Lee Lewis Construction following a bid process. The contract provided for $1,585,000 in construction costs, and
construction is expected to completed in the third quarter or 2019.
During 2018, the Bank contracted with Lee Lewis Construction to install a standalone interactive teller machine in Lubbock,
Texas. The Bank awarded this contract to Lee Lewis Construction. The contract provided for $45,500 in construction costs.
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.
DTF Holdings, LLC
Mr. Sobel, a director nominee, is the managing member of DTF Holdings, LLC. DTF Holdings, LLC has provided investment
management services to the Company and its subsidiaries since June 2009 pursuant to an Investment Management Agreement. In
accordance with the Investment Management Services Agreement, DTF Holdings, LLC is paid an annual fee of $425,000 and
reimbursed for its out-of-pocket expenses related to such services. DTF Holdings, LLC also provides investment management
services to other entities related to Gerald J. Ford.
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.
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2019 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 24 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.
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2019 PROXY STATEMENT
PROPOSAL THREE — RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP served as our independent registered public accounting firm during 2018 and has been selected to
serve in that capacity for 2019, 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 2019 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, 2018, 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, 2018.
This report has been furnished by the members of the Audit Committee.
Charles R. Cummings (Chairman)
Tracy A. Bolt
J. Markham Green
57
Table of Contents
Independent Auditor’s Fees
2019 PROXY STATEMENT
For the fiscal years ended December 31, 2018 and 2017, the total fees paid to our independent registered public accounting firm,
PricewaterhouseCoopers LLP, were as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
Audit Fees
Fiscal Year Ended
2018
6,356,200
391,500
—
2,700
6,750,400
$
$
2017
5,160,100
261,000
—
2,700
5,423,800
$
$
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, 2018 and 2017, 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 2018 and 2017 these fees primarily related to attestation reports required under various services agreements.
Tax Fees
No tax fees were incurred during 2018 or 2017.
All Other Fees
In 2018 and 2017, 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 2018
and 2017.
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 2018 or 2017 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 2019.
58
Table of Contents
2019 PROXY STATEMENT
STOCKHOLDER PROPOSALS FOR 2020
Stockholder proposals intended to be presented at our 2020 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 26, 2020 and must otherwise comply with the requirements of Rule 14a-8 in order to be considered for inclusion in the 2020
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 January 2, 2020, and not later than 5:00 p.m. Dallas,
Texas local time, on February 1, 2020; provided, however, that in the event that the date of the 2020 annual meeting is advanced by
more than 30 days or delayed by more than 60 days from July 25, 2020, notice by the stockholder in order to be timely must be
received no earlier than the 120th day prior to the date of the 2020 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 2020 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 2020 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, 2018 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, DALLAS, 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
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-31987
Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)
Maryland
(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. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark 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.
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
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
Aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common stock was last
sold on the New York Stock Exchange on June 30, 2018, was approximately $1.58 billion. For the purposes of this computation, all officers, directors and 10%
stockholders are considered affiliates. The number of shares of the registrant’s common stock outstanding at February 14, 2019 was 93,611,624.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement pertaining to the 2019 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.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
29
51
51
52
52
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
52
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
56
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . 103
Item 9.
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . 105
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
106
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, and the timing of, strategic acquisitions, the costs of integrating the operations of acquired businesses, our
revenue, our liquidity and sources of funding, market trends, operations and business, taxes, information technology
expenses, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations
concerning mortgage loan origination volume and interest rate compression, expected levels of refinancing as a
percentage of total loan origination volume, projected losses on mortgage loans originated, projected municipal issuance
volume, loss estimates related to natural disasters, construction costs, total expenses and cost savings expected from
PrimeLending’s cost reduction efforts, the effects of government regulation applicable to our operations, the
appropriateness of, and changes in, 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,
cybersecurity incidents 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 the interest rate environment;
• changes in general economic, market and business conditions in areas or markets where we compete, including
changes in the price of crude oil;
risks associated with our concentration in real estate related loans;
effectiveness of our data security controls in the face of cyber attacks;
severe catastrophic events in Texas and other areas of the southern United States;
•
•
•
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;
failure of our insurance segment reinsurers to pay obligations under reinsurance contracts;
risks associated with merger and acquisition integration; and
our ability to use excess capital 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 capital, excess liquidity and, if necessary or appropriate, additional equity or debt financing
sources. 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.
On August 1, 2018, we acquired privately-held, Houston-based The Bank of River Oaks (“BORO”) in an all-cash
transaction (the “BORO Acquisition”). In connection with the acquisition, we merged BORO into the Bank, and all
customer accounts were converted to the PlainsCapital Bank platform.
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, 2018, on a consolidated basis, we had total assets of $13.7 billion, total deposits of $8.5 billion, total
loans, including loans held for sale, of $8.3 billion and stockholders’ equity of $2.0 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 graphic 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 department net revenues represented 13% of total broker-dealer net revenues during
2018, and 70% of such public finance net revenues were from entities located in Texas. Additionally, retail brokerage
service net revenues represented 30% of total broker-dealer net revenues during 2018, and 91% 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 300 locations in 44 states.
During 2018, an aggregate of 62.5% of PrimeLending’s origination volume was concentrated in ten states, with 37.5%
concentrated in Texas, California and Florida, collectively. Other than these ten states, none of the states in which
PrimeLending operated during 2018 represented more than 3% of PrimeLending’s origination volume.
Our insurance products are distributed through a broad network of independent agents. During 2018, total gross premiums
written were concentrated in five states (Texas, Arizona, Tennessee, Oklahoma and Georgia), with Texas insureds
representing 68.2% of the aggregate. None of the other states in which we operated during 2018 had gross premiums
written of 3% or more.
Business Segments
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. 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. Hilltop’s merchant banking investment activities include the
6
identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through
its merchant bank subsidiary, Hilltop Opportunity Partners LLC, formerly known as 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, 2018, had $10.0 billion in assets and
total deposits of $8.2 billion. The primary sources of our deposits are residents and businesses located in Texas. At
December 31, 2018, the Bank employed approximately 1,200 people.
The table below sets forth a distribution of the banking segment’s 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, 2018 (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 loans category includes $2.3 billion in warehouse lines of credit extended to PrimeLending, of
which $1.2 billion was drawn at December 31, 2018. 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.
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Total loans held for investment
Loans, excluding
PCI Loans
PCI
Loans
% of Total
Loans Held
Held for Investment for Investment
Total Loans
$
1,709,533 $ 13,089 $
1,202,874
2,695,408
932,445
623,400
243,806
47,537
14,624
6,559
464
58,327
—
9
$
7,455,003 $ 93,072 $
1,722,622
1,217,498
2,701,967
932,909
681,727
243,806
47,546
7,548,075
22.8 %
16.1 %
35.8 %
12.4 %
9.0 %
3.2 %
0.6 %
100.0 %
The loans acquired in the FDIC-assisted transaction in which we assumed substantially all of the liabilities and acquired
substantially all of the assets of FNB (the “FNB Transaction”) were previously subject to loss-share agreements with the
FDIC. At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC
expired, except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC
entered into a Termination Agreement pursuant to which all rights and obligations of the Bank and the FDIC under the
FDIC loss-share agreements have been resolved and terminated. Accordingly, loans which were previously referred to as
either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively
referred to as “loans held for investment.”
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.
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 online banking, business check cards and other add-on
7
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.
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,
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 that includes retail, office, multi-family, industrial and
warehouse properties. Commercial mortgage lending can involve high principal loan amounts, and the repayment of these
loans is dependent, in large part, on a borrower’s ongoing 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 projects 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
one-to-four 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 30 years. These loans are shown in the loans held for investment table above as “1-4 family residential.”
The Bank’s mortgage warehouse lending activities consist of asset-based lending in which the Bank provides short-term,
revolving lines of credit to independent mortgage bankers (“IMBs”). IMBs are generally small businesses, with mortgage
loan origination and servicing as their sole or primary business. IMBs use the funds from their lines of credit to provide
home loans to prospective and existing homeowners. When the IMBs subsequently sell the loans to institutional investors
8
in the secondary market—typically within 30 days of closing the transaction—they use the money received from the sale
of the mortgage to replenish their lines of credit.
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, online 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, 2018, the Bank had $47.5
million of loans for these purposes, which are shown in the loans held for investment 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.
Broker-Dealer
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 Hilltop Securities
Asset Management, LLC, formerly known as First Southwest Asset Management, LLC, a wholly-owned subsidiary of
First Southwest Holdings, LLC. 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”). Additionally, Hilltop Securities Asset Management, LLC, Hilltop Securities and
HTS Independent Network are investment advisers registered under the Investment Advisers Act of 1940. At
December 31, 2018, Hilltop Securities had consolidated assets of $3.2 billion and net capital of $194.0 million, which was
$183.1 million in excess of its minimum net capital requirement of $10.9 million. At December 31, 2018, the Hilltop
Broker-Dealers employed approximately 800 people and maintained 53 locations in 20 states.
Our broker-dealer segment has six primary lines of business: (i) public banking, (ii) capital markets, (iii) retail,
(iv) structured finance, (v) clearing services, and (vi) securities lending.
Public Banking. Through its public finance and continuing disclosure departments, the public banking line of business
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 public banking line of business 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. The public finance
and continuing disclosure departments generated 82% of the total public banking business line’s net revenues for the year-
ended December 31, 2018.
Additionally, through its arbitrage, treasury management and government investment pools management departments, the
public banking line of business provides 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 line of business 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
9
management advisory services to community banks. 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 line of business 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. We extend margin credit on a secured
basis to our retail customers in order to facilitate securities transactions. Through Southwest Insurance Agency, Inc. and
Southwest Financial Insurance Agency, Inc., 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 team, 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 two of the largest futures commission merchants in the United States. At
December 31, 2018, we employed 124 registered representatives in 17 retail brokerage offices and had contracts with 208
independent retail representatives for the administration of their securities business.
Structured Finance. The structured finance line of business provides structured asset and liability services and
commodity hedging advisory services to facilitate balance sheet management primarily to clients of the public finance
department. In addition, the structured finance line of business 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 line of business 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, 2018, we provided services to 152 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 line of business 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, which is 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 2018, funded loan volume through ABAs was approximately 6% of the
mortgage origination segment’s total loan volume. At December 31, 2018, our mortgage origination segment operated
from over 300 locations in 44 states, originating 19.0%, 11.0% and 7.5%, respectively, of its mortgage loans (by dollar
volume) from its Texas, California and Florida 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.
10
PrimeLending handles loan processing, underwriting and closings in-house. Mortgage loans originated by PrimeLending
are funded through warehouse lines 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
related mortgage servicing rights (“MSR”) assets 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 lines 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.
PrimeLending had a staff of approximately 2,650 people, including approximately 1,350 mortgage loan officers, as of
December 31, 2018 that produced $13.7 billion in closed mortgage loan volume during 2018, 86% 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”), Veterans 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 (i) are ineligible for sale to the Federal National Mortgage Association (“FNMA”), Federal Home
Loan Mortgage Corporation (“FHLMC”) or Government National Mortgage Association (“GNMA”), or (ii) do not
comply with approved 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 Texas, Arizona, Tennessee,
Oklahoma and Georgia.
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
June 2018. 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 focused on personal lines, specializing in low value dwellings and manufactured
housing. Personal lines offered include homeowners, dwelling fire, manufactured home and flood policies.
NLC specializes 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.
11
Underwriting and Pricing. NLC applies its regional expertise, underwriting discipline and a risk-adjusted, return-on-
equity-based approach to capital allocation to primarily offer short-tail insurance products in its target markets. NLC’s
underwriting process involves securing an adequate level of underwriting information from its independent agents,
identifying and evaluating risk exposures and then pricing the risks it chooses to accept. Management reviews pricing on
an ongoing basis to monitor any emerging issues on a specific coverage or geographic territory.
Catastrophe Exposure. NLC maintains a comprehensive risk management strategy, which includes actively monitoring
its catastrophe-prone territories by zip code to ensure a diversified book of risks. NLC utilizes software and risk support
from its reinsurance brokers to analyze its portfolio and catastrophe exposure. Biannually, NLC has its entire portfolio
analyzed by its reinsurance broker who utilizes hurricane and severe storm models to predict risk.
Reinsurance. NLC purchases reinsurance to reduce its exposure to liability on individual risks and claims and to protect
against catastrophe losses. NLC’s management believes that less volatile, yet reasonable returns are in the long-term
interest of NLC.
Reinsurance involves an insurance company transferring, or ceding, a portion of its risk to another insurer, the reinsurer.
The reinsurer assumes the exposure in return for a portion of the premium. The ceding of risk to a reinsurer does not
legally discharge the primary insurer from its liability for the full amount of the policies on which it obtains reinsurance.
Accordingly, the primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the
reinsurance agreement and, as a result, the primary insurer is exposed to the risk of non-payment by its reinsurers. In
formulating its reinsurance programs, NLC believes that it is selective in its choice of reinsurers and considers numerous
factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its
overall reputation.
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.
12
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.
Overall, competition among providers of financial products and services continues to increase as technological advances
have lowered the barriers to entry for financial technology companies, with consumers having the opportunity to select
from a growing variety of traditional and nontraditional alternatives, including online checking, savings and brokerage
accounts, online lending, online insurance underwriters, crowdfunding, digital wallets, and money transfer services. The
ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified
competition. Because non-banking financial institutions are not subject to many of the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.
Employees
At December 31, 2018, we employed approximately 5,200 people, substantially all of which are full-time. None of our
employees are represented by any collective bargaining unit or a party to any collective bargaining agreement.
Government Supervision and Regulation
General
We are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for
the protection of customers and clients, 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.
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 Consumer Financial
Protection Bureau (“CFPB”) and requires the CFPB and other federal agencies to implement many provisions of the
Dodd-Frank Act. Several aspects of the Dodd-Frank Act have affected 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 (the “Volcker Rule”), executive compensation restrictions,
potential federal oversight of the insurance industry and disclosure and reporting requirements.
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 May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection
Act (“EGRRCPA”), which included amendments to the Dodd-Frank Act and other statutes that provide the federal
banking agencies with the ability to tailor various provisions of the banking laws and eased the regulatory burden imposed
13
by the Dodd-Frank Act with respect to company-run stress testing, resolutions plans, Volcker Rule, high volatility
commercial real estate exposures, and real estate appraisals.
In July 2017, the Financial Conduct Authority (“FCA”) announced that it intends to cease compelling banks to submit
rates for the calculation of the London Interbank Offered Rate (“LIBOR”) after 2021. The Alternative Reference Rates
Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best
practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to
LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently
working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to
LIBOR.
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 acquisition of PlainsCapital Corporation (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
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
14
closely related to banking or managing and controlling banks as to be a proper incident thereto. In approving acquisitions
or the addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the
additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated the barriers to
affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank
holding companies to become financial holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. The Gramm-Leach-Bliley Act defines “financial in
nature” to include: securities underwriting; dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board
has determined to be closely related to banking. Prior to enactment of the Dodd-Frank Act, regulatory approval was not
required for a financial holding company to acquire a company, other than a bank or savings association, engaged in
activities that were financial in nature or incidental to activities that were financial in nature, as determined by the Federal
Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company by filing a
declaration with the Federal Reserve Board if each of its subsidiary banks is “well capitalized” under the Federal Deposit
Insurance Corporation Improvement Act prompt corrective action provisions, is “well managed”, and has at least a
“satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Dodd-Frank Act underscores the
criteria for becoming a financial holding company by amending the Bank Holding Company Act to require that bank
holding companies be “well capitalized” and “well managed” in order to become financial holding companies. Hilltop
became a financial holding company on December 1, 2012.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking
practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its equity securities, if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of
the company’s consolidated net worth. In addition, bank holding companies are required to consult with the Federal
Reserve Board prior to making any redemption or repurchase, even within the foregoing parameters. The Federal Reserve
Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or
would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the
position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking
subsidiaries that represent unsafe and unsound banking practices or that constitute violations of laws or regulations, and
can assess civil money penalties for certain activities conducted on a knowing or reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as $2.01 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, which includes the Bank and PrimeLending,
are subject to capital adequacy requirements under the 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 and is fully phased in as of 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
15
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 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;
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; 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 are fully phased in as of January 1, 2019.
The following table summarizes the Basel III phase-in schedule for periods beginning January 1, 2018.
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)
2018
2019
4.5 %
4.5 %
2.5 %
1.875 %
7.0 %
6.375 %
6.0 %
6.0 %
8.5 %
7.875 %
8.0 %
8.0 %
9.875 %
10.5 %
100.0 % 100.0 %
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(1)
In November 2017, the regulatory agencies finalized a rule that extends the phase-in schedule for certain capital deductions, including 10% and
15% 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. The rule became effective on January 1, 2018.
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%
at the beginning of the quarter. A banking organization with a buffer greater than 2.5% 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%
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 2018, our eligible
retained income was positive and our capital conservation buffer was greater than 2.5%, and therefore, we were not
subject to limits on capital distributions or discretionary bonus payments. We anticipate similar results during 2019.
At December 31, 2018, Hilltop had a total capital to risk-weighted assets ratio of 17.47%, Tier 1 capital to risk-weighted
assets ratio of 17.04% and a common equity Tier 1 capital to risk-weighted assets ratio of 16.58%. 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, 2018, PlainsCapital had a total capital to risk-weighted assets ratio of 14.63%, Tier 1 capital to risk-
weighted assets ratio of 13.90% and a common equity Tier 1 capital to risk-weighted assets ratio of 13.90%.
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.
Phase-in of Current Expected Credit Losses Accounting Standard. In June 2016, the Financial Accounting Standards
Board issued an update to the accounting standards for credit losses that included the Current Expected Credit Losses
(“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL
becomes effective January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule
modifying their regulatory capital rules and providing an option to phase-in, over a period of three years, the day-one
regulatory capital effects resulting from the implementation of CECL. The final rule also revises the agencies’ other rules
to reflect the update to the accounting standards.
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. On December 21, 2018, the federal banking agencies invited public comment on a proposal to
implement provisions of EGRRCPA that would exclude community banks with $10.0 billion or less in total consolidated
assets and total trading assets and liabilities of 5% or less of total consolidated assets from the restrictions of the Volcker
Rule. At this time the, we do not anticipate that the Bank would qualify for this proposed exclusion. 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
17
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 September 30, 2018 and
December 31, 2018, the Bank’s total assets were $9.9 billion and $10.0 billion, respectively. If the Bank’s total assets are
over $10.0 billion (as measured on four consecutive quarterly call reports of the Bank and any institutions it acquires), the
Bank will become subject to the CFPB’s supervisory and enforcement authority with respect to federal consumer
financial laws beginning in the following quarter.
The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the Federal
Reserve Board is the Bank’s primary federal regulator. The Federal Reserve Board, the Texas Department of Banking, the
CFPB and the FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such
requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and
amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments
and other activities of the Bank. In July 2010, the FDIC voted to revise its 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.”
18
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.
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,
19
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, 2018.
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.
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% by September 30, 2020. On November 28, 2018, the FDIC announced that the DIF reserve ratio
exceeded the statutorily required minimum reserve ratio of 1.35%, ahead of the September 30, 2020 deadline. FDIC
regulations provide for two changes to deposit insurance assessments upon reaching the minimum ratio: (1) surcharges on
insured depository institutions with total consolidated assets of $10.0 billion or more (large banks) will cease; and
(2) small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the
reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. 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 any assessment credits and the assessment rate that we will be charged for the assessment period. As a result
of the new regulations, we expect to incur lower annual deposit insurance assessments, which could have a positive
impact on our financial condition and results of operations. Accruals for DIF assessments were $2.5 million during 2018.
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.
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
20
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, the Home Mortgage
Disclosure Act of 1975, the Equal Credit Opportunity Act, the Fair Credit Reporting Act of 1978, the Fair Debt Collection
Practices Act, the Service Members Civil Relief Act, the Dodd-Frank Act and 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 the Right to Financial
Privacy Act, the Truth in Savings Act and the Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board and the CFPB to implement that act. 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, 2018, PlainsCapital’s ratio of total risk-
based capital to risk-weighted assets was 14.63%, PlainsCapital’s ratio of Tier 1 capital to risk-weighted assets was
13.90%, PlainsCapital’s common equity Tier 1 capital to risk-weighted assets ratio was 13.90%, and PlainsCapital’s ratio
of Tier 1 capital to average total assets was 12.47%.
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. Pursuant to a provision in EGRRCPA, the
FDIC proposed exempting certain reciprocal deposits from being considered as brokered deposits for certain insured
depository institutions. The FDIC also plans to seek comments on the FDIC’s overall brokered deposit regulations. At
December 31, 2018, PlainsCapital was “well capitalized” and therefore not subject to any limitations with respect to its
brokered deposits.
21
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 November 13, 2017,
the Federal Reserve published its annual adjustment to the consolidated asset threshold, increasing it to $10.283 billion
through December 31, 2018. As of December 31, 2018, the Bank’s total assets were $10.0 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.
Incentive Compensation Guidance. 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.
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.
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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.
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, 2018, 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 penalties and other
regulatory sanctions, including 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
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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.
Investment Advisory Activity. Hilltop Securities 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.
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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.
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.
Any additional regulatory requirements affecting our mortgage origination operations will result in increased compliance
costs and may impact revenue.
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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, 2018, NLIC and ASIC capital
and surplus levels exceeded the minimum RBC requirements that would trigger regulatory attention. In their 2018
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
2018, all ratios for both NLIC and ASIC were within the usual values with three exceptions. Both companies fell below
the indicated minimum investment yield range of 2%, with NLIC at 1.6% and ASIC at 0.6%, due to the concentration in
cash at each company and reductions in the fair value of equity investments in accordance with a recently adopted
accounting standard related to accounting for financial instruments. We expect improvement in the yields at both
companies as appropriate investment opportunities are 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 -16% and
ASIC at -21%. This is a result of $24.5 million of aggregate dividends paid from NLIC and ASIC during 2018. Surplus
levels remain within acceptable premium to surplus ranges. ASIC’s two-year overall operating ratio of 102% was higher
than the indicated ratio of 100% due primarily to decreases in premiums earned and increases in loss and loss adjustment
expenses (“LAE”) over the past two years.
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
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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.
The Terrorism Risk Insurance Program Reauthorization Act of 2015 extended a Federal Program designed to ensure the
availability of commercial insurance coverage for terrorist acts in the United States 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, 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 this Federal Program was $0.6 million for 2018 and is estimated to be $0.5 million in
2019. Potential future changes 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 2018.
State insurance regulations. State insurance authorities have broad powers to regulate U.S. insurance companies. The
primary purposes of these powers are to promote insurer solvency and to protect individual policyholders. The extent of
regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative power to
state insurance departments. These powers relate to, among other things, licensing to transact business, accreditation of
reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing actuarial
requirements and solvency standards, regulating investments and dividends, and regulating policy forms, related materials
and premium rates. State insurance laws and regulations require insurance companies to file financial statements prepared
in accordance with accounting principles prescribed by insurance departments in states in which they conduct insurance
business, and their operations are subject to examination by those departments.
As part of the broad authority that state insurance commissioners hold, they may impose periodic rules or regulations
related to local issues or events. An example is the State of Oklahoma’s prohibition on the cancellation of policies for
nonpayment of premium in the wake of severe tornadic activity 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, 2018, the extraordinary dividend limit for NLIC and ASIC was
$9.1 million and $1.8 million, respectively. In addition, NLC’s insurance companies may only pay dividends out of their
earned surplus.
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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 2018, 2017 or 2016. 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,
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 levied an assessment on participating companies totaling $55.0 million,
of which NLC’s insurance subsidiaries’ share was $0.6 million. In addition, the Texas Windstorm Insurance Agency
levied an assessment on participating companies totaling $175.0 million, of which NLC’s insurance subsidiaries’ share
was $1.6 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.
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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 business, 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, the January 2015 acquisition by merger of SWS for stock and
cash consideration (the “SWS Merger”) and the BORO Acquisition (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, SWS or BORO, 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.
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 may require the Bank to increase its 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.
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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 2018, the Federal Open Market Committee of the Federal Reserve
Board raised its target range for short-term interest rates by 200 basis points, and further increases to the target rate may
occur in 2019. Changes in interest rates may impact our net interest income in our banking segment as well as the
valuation of our assets and liabilities in each of our segments. Earnings in our banking segment are significantly
dependent on our net interest income, which is the difference between interest income on interest-earning assets, such as
loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect to
periodically experience “gaps” in the interest rate sensitivities of our banking segment’s assets and liabilities, meaning
that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-
earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may
work against us, and our results of operations and financial condition may be adversely affected. Moreover, increases in
interest rates could also lead to increases in our loan losses. Asymmetrical changes in interest rates, such as if short-term
rates increase at a faster rate than long-term rates, can affect the slope of the yield curve. A decline in the yield curve or a
flatter or inverted yield curve, which occurred at points during the fourth quarter of 2018 and the first quarter of 2019,
could adversely impact the net interest income of our banking segment because our liabilities tend to be more sensitive to
short-term rates while our assets tend to be more sensitive to long-term rates. In addition, it may take longer for our assets
to reprice to adjust to a new rate environment because fixed-rate loans do not fluctuate with interest rate changes and
adjustable rate loans often have a specified period of readjustment. As a result, a flattening or an inversion of the yield
curve is likely to have a negative impact on our net interest income and our net interest margin.
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, 2018, approximately 84% 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
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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.
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 slowing growth in emerging economies, trade
wars, 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 and sell certain government-backed loans.
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.
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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 core system upgrades and
other technology enhancements within each of our operating segments and corporate. 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, 2018, substantially all of the real estate loans in
our loan portfolio were secured by properties located in our four largest markets within Texas, with 39%, 23%, 17% and
5% 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. The Bank has loans extended to businesses that depend on the
energy industry including those within the exploration and production, oilfield services, pipeline construction, distribution
and transportation sectors. 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 2018, 19.0% and 11.0% of our mortgage loans originated (by
dollar volume) were collateralized by properties located in Texas and California, respectively. Further, Texas insureds
accounted for 68.2% and 68.8% of our insurance segment’s gross premiums written in 2018 and 2017, respectively. Also,
in our broker-dealer segment, 70% of public finance department net revenues were from entities located in Texas, and
91% 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.
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, 2018, 48% 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
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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 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, any of which could have a material adverse effect
on our business.
The recent occurrence of cybersecurity incidents across a range of industries has resulted in increased legislative and
regulatory scrutiny over cybersecurity and calls for additional data privacy laws and regulations. For example, in 2018,
the State of California adopted the California Consumer Privacy Act of 2018, which imposes requirements on companies
operating in California and provides consumers with a private right of action if covered companies suffer a data breach
related to their failure to implement reasonable security measures. These laws and regulations could result in increased
operating expenses or increase our exposure to the risk of litigation.
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, our
protective measures may not promptly detect intrusions, and we may experience losses or incur costs or other damage
related to intrusions that go undetected or go undetected for significant periods of time, at levels that adversely affect our
financial results or reputation. Further, because the methods used to cause cyber attacks change frequently, or in some
cases cannot be recognized until launched, we may be unable to implement preventative measures or proactively address
these methods until they are discovered. Cyber threats may derive from human error, fraud or malice on the part of
employees or third parties, or may result from accidental technological failure. For example, during the second quarter of
2018, we became the victim of a “spear phishing” attack on one of our employees in which we suffered a $4.0 million
wire fraud loss and sensitive customer information was stolen. As a result of this attack, we incurred costs to provide
identity protections services, including credit monitoring, to customers who may have been impacted and other legal and
professional services, and may also incur expenses in the future including legal and professional expenses and claims for
damages. 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, fines, remediation costs, 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 systems.
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,
vulnerability testing, vendor management and staff training. Even if we implement these procedures, however, we cannot
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assure you that we will be fully protected from a cybersecurity incident, the occurrence of which could adversely affect
our reputation and financial condition.
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, monsoons 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 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.
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
2018, Texas accounted for 68.2%, Arizona accounted for 11.4%, Tennessee accounted for 7.0%, Oklahoma accounted for
5.7% and Georgia accounted for 3.2% 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
any of these regions or significant portions of any of these regions could adversely affect our insurance segment’s
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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
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.
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.
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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.
Hilltop conducts limited material business other than activities incidental to holding stock in the Bank, Securities
Holdings and NLC. 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, Securities Holdings and NLC is
subject to significant regulatory restrictions limiting its ability to declare and pay dividends to us. Accordingly, if the
Bank, Securities Holdings or NLC are unable to make cash distributions to us, then we may be unable to satisfy our
operating expense 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, 2018, on a consolidated basis, we had total deposits of $8.5 billion and other indebtedness of $1.4
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:
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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;
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.
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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.
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:
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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.
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We are subject to extensive supervision and regulation that could restrict our activities and impose financial
requirements or limitations on the conduct of our business and limit our ability to generate income.
We are subject to extensive federal and state regulation and supervision, including that of the Federal Reserve Board, the
Texas Department of Banking, the 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 the SEC and FINRA
are primarily intended to protect the securities markets and 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.
The U.S. Congress, state legislatures, and federal and state regulatory agencies frequently revise banking and securities
laws, regulations and policies. For example, several aspects of the Dodd-Frank Act have affected 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. Although the recently
enacted EGRRCPA is intended to ease the regulatory burden imposed by the Dodd-Frank Act with respect to company-
run stress testing, resolution plans, the Volcker Rule, high volatility commercial real estate exposures, and real estate
appraisals, at this time, it remains difficult to predict the full extent to which the Dodd-Frank Act and the EGRRCPA or
the resulting rules and regulations will affect our business. Compliance with new laws and regulations has resulted and
likely will continue to result in additional costs, which could be significant and may adversely impact our results of
operations, financial condition, and liquidity.
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 from January 1, 2015 through January 1, 2019,
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. 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
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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.
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. At December 31, 2018, Hilltop and PlainsCapital had $13.7 billion
and $10.1 billion, respectively, in total consolidated assets and their average of total consolidated assets for the four most
recent consecutive quarters was $13.6 billion and $9.8 billion, respectively. 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.
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 banking 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 of such uncertainties, the revenues and operating results of our broker-dealer segment may vary significantly
from quarter to quarter and from year to year. Unfavorable financial or economic conditions could reduce the number and
size of transactions in which we provide financial advisory, underwriting and other services. Disruptions in fixed income
and equity markets could lead to a decline in the volume of transactions executed for customers and, therefore, to declines
in revenues from commissions and clearing services. Our broker-dealer business is much smaller and has much less
capital than many competitors in the securities industry. In addition, 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
39
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. For example, national municipal issuances surged
in the fourth quarter of 2017 due to the then-anticipated effects of the Tax Cuts and Jobs Act, and a number of national
municipal issuers elected to accelerate certain capital raising initiatives before these changes were enacted. As a result, we
experienced lower municipal issuance volume in 2018, which adversely impacted the financial condition, results of
operations and cash flows of our broker-dealer segment’s public finance department.
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
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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, including from flooding, 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 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, 2018, the mortgage origination segment’s MSR asset had a fair value of $67.9 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.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may
adversely affect interest income or expense.
Certain loans we originate bear interest at a floating rate based on LIBOR. We also pay interest on certain notes and are
counterparty to derivative agreements that are based on LIBOR.
As previously discussed, in July 2017, the FCA announced that it intends to cease compelling banks to submit rates for
the calculation of LIBOR after 2021. The ARRC has proposed that SOFR is the rate that represents best practice as the
alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has
proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-wide
and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.
It is unclear whether, or in what form, LIBOR will continue to exist after 2021. Any transition to an alternative
benchmark will require careful consideration and implementation so as not to disrupt the stability of financial markets. If
LIBOR ceases to exist, we may need to take a variety of actions, including negotiating certain of our agreements based on
an alternative benchmark that may be established, if any. There is no guarantee that a transition from LIBOR to an
alternative benchmark will not result in financial market disruptions, significant changes in benchmark rates or adverse
changes in the value of certain of our loans, and our income and expense.
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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 $540.5 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
removed from our books, the related discount will no longer be available for accretion into income. Aggregate accretion
of $39.1 million on loans purchased at a discount in the Bank Transactions was recorded as interest income during 2018.
As of December 31, 2018, the balance of our discount on loans in the aggregate was $99.8 million.
We ultimately may write-off goodwill and other intangible assets resulting from business combinations.
As a result of purchase accounting in connection with acquisitions, our consolidated balance sheet at December 31, 2018,
included goodwill of $291.4 million and other intangible assets, net of accumulated amortization, of $38.0 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, 2018, the fair values of each of our reporting
units indicated no impairment of goodwill. Any downward revisions to current year actual and future forecasted operating
performance, in conjunction with any changes to long-term growth rates or discount rates, may cause the fair value of the
respective reporting unit to decline. If the estimated fair value is less than the carrying value, we would be required to
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.
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.
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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 material 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 department 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.
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. For example,
during 2016, the Bank discovered irregularities with respect to a 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. A loan
subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the
misrepresentation. We maintain fraud insurance, but this insurance may not be sufficient to cover all of our losses from
any fraudulent acts.
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
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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.
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.
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The insurance industry also is highly competitive and has, historically, been characterized by periods of significant price
competition, alternating with periods of greater pricing discipline during which competitors focus on other factors,
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, industry developments also could increase competition in our insurance segment’s industry. These
developments include changes in practices and other effects caused by the Internet (including direct marketing campaigns
by our insurance segment’s competitors in established and new geographic markets), which have led to greater
competition in the insurance business and increased expectations for customer service. These developments could prevent
our insurance business from expanding its book of business. Our insurance business also faces competition from new
entrants into the insurance market. New entrants do not have historic claims or losses to address and, therefore, may be
able to price policies on a basis that is not favorable to our insurance business. New competition could reduce the demand
for our insurance segment’s insurance products, which could have a material adverse effect on our financial condition and
results of operations.
Overall, competition among providers of financial products and services continues to increase as technological advances
have lowered the barriers to entry for financial technology companies, with consumers having the opportunity to select
from a growing variety of traditional and nontraditional alternatives, including online checking, savings and brokerage
accounts, online lending, online insurance underwriters, crowdfunding, digital wallets, and money transfer services. The
ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified
competition. Because non-banking financial institutions are not subject to many of the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. This
competition could result in the loss of customer deposits and brokerage accounts, lower mortgage originations and lower
insurance premiums written which could have a material adverse affect 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 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
45
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 2018, our insurance segment’s personal lines ceded 6.8% of its direct insurance premiums written (primarily
through excess of loss, quota share and catastrophe reinsurance treaties) and its commercial lines ceded 1.5% of its direct
insurance premiums written (primarily through excess of loss and catastrophe reinsurance treaties). The total cost of
reinsurance, inclusive of per risk excess and catastrophe, decreased 1.3% during 2018, compared with 2017, which was
primarily attributable to reinstatement premiums 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.
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, 2018, our insurance segment had $5.4 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 reimbursing our insurance segment for losses paid, its liability
for these claims could materially and adversely affect its financial condition and results of operations.
If the states in which our insurance segment writes insurance increase the assessments that insurance companies are
required to pay, our insurance segment’s financial condition and results of operations will suffer.
NLIC and ASIC are subject to a variety of taxes, fines, levies, license fees, tariffs and other assessments that may, from
time to time, be material. These assessments are made by the states in which NLIC and ASIC operate and include
participation in residual market or involuntary risk plans in various states that provide insurance coverage to individuals
or entities that otherwise are unable to purchase such coverage from private insurers. 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. If these plans experience losses in excess of their capitalization,
they may assess participating insurers, including NLIC and ASIC, for proportionate shares of their financial deficit. For
example, to address a 2016 deficit and losses resulting from Hurricane Harvey in 2017, the Texas FAIR Plan Association
levied an assessment on participating companies totaling $64.6 million, of which NLC’s insurance subsidiaries’ share was
$0.6 million. In addition, the Texas Windstorm Insurance Agency levied an assessment on participating companies
46
totaling $175.0 million, of which NLC’s insurance subsidiaries’ share was $1.6 million. The ultimate impact hurricanes
have on state facilities cannot be predicted and future assessments can occur whenever the involuntary facilities
experience financial deficits.
NLIC and ASIC are also subject to assessments in the states in which they write insurance for various purposes, including
the provision of funds necessary to fund the operations of various insurance guaranty associations, which pay covered
claims under certain policies issued by impaired, insolvent or failed insurance companies. These assessments are
generally set based on an insurer’s percentage of the total premiums written in the relevant state within a particular line of
business for the relevant time period. For the years ended December 31, 2018, 2017 and 2016, our insurance segment paid
no assessments. We cannot, however, predict with certainty the amount of future assessments, because these assessments
depend on factors outside our control, such as the insolvencies of other insurance companies, the market shares of other
insurance companies writing in a particular state and the degree to which other companies write in coastal areas.
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.
Because we may use a substantial portion of our remaining excess capital 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 may make acquisitions or effect business combinations with a substantial portion of our remaining excess capital. 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 any 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
47
that may adversely affect a particular target business, and we may be forced to later write-down or write-off assets,
restructure our operations or incur impairment or other charges that could result in our reporting losses. Consequently, we
also may need to make further investments to support the acquired or combined company and may have difficulty
identifying and acquiring the appropriate resources.
We may enter, through acquisitions or a business combination, into new lines of business or initiate new service offerings
subject to the restrictions imposed upon us as a regulated financial holding company. Accordingly, there is no basis for
you to evaluate the possible merits or risks of the particular target business with which we may combine or that we may
ultimately acquire.
Subject to the restrictions imposed upon us as a regulated financial holding company, we may also use excess capital 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.
We may be subject to environmental liabilities in connection with the foreclosure on real estate assets securing the
loan portfolio of our banking segment.
Hazardous or toxic substances or other environmental hazards may be located on the real estate that secures our loans. If
we acquire such properties as a result of foreclosure, or otherwise, we could become subject to various environmental
liabilities. For example, we could be held liable for the cost of cleaning up or otherwise addressing contamination at or
from these properties. We could also be held liable to a governmental entity or third party for property damage, personal
injury or other claims relating to any environmental contamination at or from these properties. In addition, we could be
held liable for costs relating to environmental contamination at or from our current or former properties. We may not
detect all environmental hazards associated with these properties. If we ever became subject to significant environmental
liabilities, our business, financial condition, liquidity and results of operations could be harmed.
If we fail to maintain an effective system of internal control 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
adequate internal controls, our financial statements may not accurately reflect our financial condition. Inadequate internal
control 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 covenants 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.
48
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 business combination,
which would dilute the interests of our stockholders and likely present other risks.
The issuance of shares of preferred stock or additional shares of common stock:
• may significantly dilute the equity interest of our stockholders;
• may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those
afforded our common stock;
•
could cause a change in control if a substantial number of shares of common stock are issued, which may affect,
among other things, our ability to use our net operating loss carry forwards; and
• may adversely affect prevailing market prices for our common stock.
Our board of directors, in its sole discretion, may designate and issue one or more 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 he or she has,
or companies with which he or she is 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
49
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
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, 2018, 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 include 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.
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 2018, we
declared and paid cash dividends of $0.28 per common share. In January 2018, our board of directors reauthorized the
50
stock repurchase program, under which it authorized us to repurchase, in the aggregate, up to $50.0 million of our
outstanding common stock through January 2019. In July 2018, our board of directors increased the aggregate amount of
common stock that we may repurchase under this program to $100.0 million. During 2018, we paid $59.0 million to
repurchase an aggregate of 2,729,568 shares of our common stock at an average price of $21.61 per share. In
January 2019, our board of directors authorized a new stock repurchase program through January 2020, pursuant to which
we are authorized to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock, inclusive of
repurchases to offset dilution related to grants of stock-based compensation.
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.
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.
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.
During 2018, we also made an investment in land and a mixed-use real estate development in the City of University Park,
Texas, which is expected to serve as headquarters for both Hilltop and the Bank beginning in the fourth quarter of 2019.
Banking. At December 31, 2018, our banking segment conducted business at 72 locations throughout Texas, including
seven support facilities. We lease 36 banking locations, including our principal offices, and we own the remaining 36
banking locations.
Broker-Dealer. At December 31, 2018, our broker-dealer segment conducted business from 53 locations in 20 states.
Each of these locations is leased by Hilltop Securities.
Mortgage Origination. At December 31, 2018, our mortgage origination segment conducted business from over 300
locations in 44 states. Each of these locations is leased by PrimeLending.
Insurance. At December 31, 2018, 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.
51
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.
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”. At February 14, 2019, there
were 93,611,624 shares of our common stock outstanding with 442 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 2018, we declared and
paid cash dividends of $0.28 per common share. On January 24, 2019, we announced that our board of directors increased
our quarterly dividend to $0.08 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 Business — There can be no assurance that we will continue to declare
cash dividends or repurchase stock.”
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2018 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)
1,246,880
1,246,880
— $
— $
—
—
*
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, 2018, 3,128,011 awards had been granted pursuant to the
2012 Plan, while 374,891 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.
52
Issuer Repurchases of Equity Securities
The following table details our repurchases of shares of common stock during the three months ended December 31,
2018.
Period
October 1 - October 31, 2018
November 1 - November 30, 2018
December 1 - December 31, 2018
Total
Total Number of
Shares
Purchased
Average Price
Paid per
Share
60,000 $
966,872
—
1,026,872
$
19.85
19.60
—
19.62
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)
60,000 $
966,872
—
1,026,872
59,977,931
41,026,749
41,026,749
(1) On January 25, 2018, we announced that our board of directors authorized a stock repurchase program under which we may repurchase, in the
aggregate, up to $50.0 million of our outstanding common stock through January 2019. In July 2018, our board of directors increased the
aggregate amount of common stock that we may repurchase under this program to $100.0 million, which is inclusive of repurchases to offset
dilution related to grants of stock-based compensation. As of December 31, 2018, we had repurchased an aggregate of $59.0 million of our
outstanding common stock under this stock repurchase program.
Recent Sales of Unregistered Securities
On December 31, 2018, we issued an aggregate of 8,131 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 fourth quarter of 2018. The
shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.
53
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2018 and 2017 and our consolidated statement of
operations data for the years ended December 31, 2018, 2017 and 2016 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 SWS Merger and BORO Acquisition are included in our operating
results beginning January 1, 2015, and August 1, 2018, respectively (dollars in thousands, except per share data and
weighted average shares outstanding).
2018
2017
2016
2015
2014
$
$
$
$
$
$
$
$
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:
Earnings per common share - basic
Weighted average shares outstanding - basic
Earnings per common share - 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
Loans held for sale
Loans held for investment, net of unearned income (3)
Allowance for loan losses (3)
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)
Net interest margin (taxable equivalent) (7)
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
579,428
143,104
436,324
5,088
431,236
1,022,790
1,293,249
160,777
35,050
125,727
4,286
121,441
—
121,441
$
$
$
$
1.28
94,969
1.28
95,067
20.83
17.31
0.28
$
$
$
21.90 %
1.36
97,137
1.36
97,353
19.92
16.92
0.24
$
$
$
17.59 %
$
$
$
$
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
$
$
$
$
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
—
$
— %
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
1.18
89,710
1.17
90,573
14.93
11.47
—
— %
$
$
13,683,572
644,073
1,991,815
—
1,393,246
6,930,458
(59,486)
329,440
8,536,156
228,872
67,012
1,973,893
13,365,786
486,977
1,852,094
—
1,715,357
6,455,798
(63,686)
288,240
7,978,119
208,809
67,012
1,914,807
$
12,738,062
669,357
1,215,372
—
1,795,463
6,099,626
(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
5,587,911
(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
4,563,116
(41,652)
311,591
6,369,892
56,684
67,012
1,461,239
6.33 %
0.93 %
3.55 %
3.56 %
7.00 %
1.03 %
3.61 %
3.63 %
8.13 %
1.21 %
3.68 %
3.71 %
0.89 %
175.22 %
0.86 %
0.14 %
1.33 %
139.58 %
0.99 %
0.08 %
1.39 %
193.05 %
0.90 %
0.57 %
12.32 %
1.70 %
3.71 %
3.74 %
2.34 %
137.99 %
0.84 %
0.14 %
8.01 %
1.26 %
4.71 %
4.74 %
4.14 %
74.01 %
0.91 %
0.21 %
14.25 %
12.13 %
14.31 %
12.42 %
14.68 %
12.65 %
14.64 %
12.37 %
15.80 %
11.59 %
54
2018
2017
2016
2015
2014
Regulatory Capital Ratios:
Hilltop - Leverage ratio
Hilltop - Common equity Tier 1 risk-based capital ratio (8)
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 (8)
PlainsCapital - Tier 1 risk-based capital ratio
PlainsCapital - Total risk-based capital ratio
12.53 %
16.58 %
17.04 %
17.47 %
12.47 %
13.90 %
13.90 %
14.63 %
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 %
18.48 %
18.89 %
13.22 %
16.25 %
16.99 %
12.65 %
14.17 %
Other Data:
Banking Segment:
Efficiency ratio (9)
Return on average assets (5)
Net interest margin (6)
Net interest margin (taxable equivalent) (7)
Broker-Dealer Segment:
Net revenue (10)
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 (11)
Statutory premiums to surplus ratio
61.93 %
1.23 %
4.23 %
4.24 %
58.24 %
0.85 %
4.31 %
4.33 %
58.87 %
0.94 %
4.65 %
4.68 %
56.45 %
1.36 %
5.05 %
5.08 %
$
$
$
352,592
$
62.0 %
412,156
$
60.8 %
416,938
$
60.6 %
367,466
$
69.6 %
131,595
59.7 %
$
11,798,804
1,893,680
13,692,484
13,735,885
$
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
58.0 %
39.0 %
97.0 %
96,545
$
138.6 %
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 %
141,987
115.8 %
19.02 %
19.69 %
10.31 %
13.74 %
14.45 %
61.17 %
1.20 %
4.97 %
5.00 %
(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) At the close of business on September 30, 2018, the loss-share agreements with the FDIC for commercial assets expired, except for certain
obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered into a Termination Agreement pursuant to
which all rights and obligations under each of the loss-share agreements with the FDIC were resolved and terminated. As such, all loans previously
identified as either “covered loans” or “non-covered loans” are now collectively referred to as “loans held for investment” for all periods
presented. In addition, the allowance for loan losses on the aforementioned loans held for investment is presented as one combined line item for all
periods presented.
(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 Cuts
and Jobs Act of 2017 (“the Tax Legislation”). Deferred tax asset amounts recorded in December 2017 following enactment of the Tax Legislation
were final as of September 30, 2018.
(6) Net interest margin is defined as net interest income divided by average interest-earning assets.
(7) 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 21% federal income tax rate for 2018 periods presented and 35% federal income tax
rate for all previous periods presented. 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 $0.9 million, $2.2 million, $2.4 million, $3.0 million
and $2.3 million, respectively, and for the banking segment were $0.8 million, $1.6 million, $1.5 million, $1.8 million and $2.0 million,
respectively.
(8) Common equity Tier 1 risk-based capital ratio applicable for reporting periods beginning after January 1, 2015.
(9) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(10) Net revenue is defined as the sum of total broker-dealer net interest income plus total broker-dealer noninterest income.
(11) Statutory surplus includes combined surplus of NLIC and ASIC.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We present two measures in our selected financial data that are not measures of financial performance recognized by
GAAP. “Tangible book value per common share” is defined as our total stockholders’ equity, excluding preferred stock,
reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity
to tangible assets” is defined as our total stockholders’ equity, excluding preferred stock, reduced by goodwill and other
intangible assets divided by total assets reduced by goodwill and other intangible assets. These measures are important to
investors interested in changes from period to period in tangible common equity per share exclusive of changes in
intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result
in the recording of significant amounts of goodwill and other intangible assets related to those transactions.
55
You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is
not necessarily comparable to that of other companies that use non-GAAP measures.
The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures,
“book value per common share” and “Hilltop stockholders’ equity to total assets” (dollars in thousands, except per share
data).
Book value per common share
Effect of goodwill and intangible
assets per share
$
$
Tangible book value per common
2018
2017
20.83 $
19.92
(3.52) $
(3.00)
share
$
17.31 $
16.92
December 31,
2016
$
$
$
18.98
(3.01)
15.97
$
$
$
2015
17.56
(3.10)
14.46
2014
14.93
(3.46)
11.47
$
$
$
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
$ 1,949,470 $ 1,912,081
—
—
$ 1,870,509
—
$ 1,736,954
—
$ 1,460,452
114,068
329,440
1,620,030
288,240
1,623,841
296,503
1,574,006
306,676
1,430,278
311,591
1,034,793
13,683,572
13,365,786
12,738,062
11,867,001
9,242,416
329,440
13,354,132
288,240
13,077,546
296,503
12,441,559
306,676
11,560,325
311,591
8,930,825
14.25 %
14.31 %
14.68 %
14.64 %
15.80 %
12.13 %
12.42 %
12.65 %
12.37 %
11.59 %
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), Hilltop Securities and HTS Independent Network are collectively referred to as the
“Hilltop Broker-Dealers”, 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).
56
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 2018, our net income to common stockholders was $121.4 million, or $1.28 per diluted share. We declared and
paid total common dividends of $0.28 per share, or $26.7 million, during 2018, which resulted in a dividend payout ratio
of 21.90%. 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 $59.0 million to repurchase our common stock during 2018.
We reported $160.8 million of consolidated income before income taxes during 2018, including the following
contributions from our four reportable business segments.
• The banking segment contributed $152.4 million of income before income taxes during 2018;
• The broker-dealer segment contributed $32.6 million of income before income taxes during 2018;
• The mortgage origination segment contributed $12.9 million of income before income taxes during 2018; and
• The insurance segment contributed $5.7 million of income before income taxes during 2018.
At December 31, 2018, on a consolidated basis, we had total assets of $13.7 billion, total deposits of $8.5 billion, total
loans, including loans held for sale, of $8.3 billion and stockholders’ equity of $2.0 billion.
On January 24, 2019, our board of directors declared a quarterly cash dividend of $0.08 per common share, payable on
February 28, 2019 to all common stockholders of record as of the close of business on February 15, 2019.
Factors Affecting Results of Operations
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.
57
Factors Affecting the Current Year
On August 1, 2018, we acquired privately-held, Houston-based The Bank of River Oaks (“BORO”) in an all-cash
transaction (the “BORO Acquisition”). Pursuant to the terms of the definitive agreement, we paid cash in the aggregate
amount of $85 million to the shareholders and option holders of BORO. The fair value of the assets acquired was $434.8
million, including $326.6 million in loans, while the fair value of liabilities assumed was $389.4 million, consisting
primarily of $376.4 million in deposits. The operations of BORO were included in our operating results beginning
August 1, 2018. The estimated fair value of the core deposit intangible asset acquired as of August 1, 2018 was $10.0
million and resulting goodwill was $39.6 million. In connection with the acquisition, we merged BORO into the Bank,
and all customer accounts were converted to the PlainsCapital Bank platform.
On August 3, 2018, we made a $24.6 million investment in a new real estate development in Dallas’ University Park. This
investment consisted of $5.3 million for the building, which is currently under construction, and $19.3 million for the land
on which the building is being constructed. Joining Hilltop in the transaction is our chairman and largest shareholder,
Gerald J. Ford, who will be an equal investing partner in the project. Hilltop and the Ford family each own 25% of the
119,000-square-foot commercial office building and 50% of the 1.7-acre tract on which the building will sit. Construction
commenced in the fourth quarter of 2017, and total construction costs are expected to be approximately $62 million.
Hilltop and the Bank have agreed to lease approximately 68,000 square feet of corporate office space in the building as
well as an approximate 4,000-square-foot PlainsCapital Bank branch for an average cost of $3.1 million per year and $0.3
million per year, respectively, over the initial 129-month terms. The building will be named Hilltop Plaza and is expected
to serve as headquarters for both Hilltop and the Bank beginning in the fourth quarter of 2019.
On October 23, 2018, PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the
DOJ and HUD, respectively. In these agreements, PrimeLending did not admit to any liability or wrongdoing, and the
DOJ and HUD did not make any concessions with respect to their alleged claims. These agreements provide for payments
of $13.5 million to the DOJ and HUD in the aggregate. In exchange for these payments, each of the DOJ and HUD
released any civil claims they may have related to certain loans originated by PrimeLending. The payments were made to
the DOJ and HUD during the fourth quarter of 2018 and the indemnification liability related to this matter was released.
Accordingly, our operating results or financial condition will not be impacted by this matter in future periods.
At the close of business on September 30, 2018, the loss-share agreement for commercial assets with the FDIC expired,
except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered
into a Termination Agreement pursuant to which each of the loss-share agreements terminated in exchange for the
payment by the FDIC to the Bank of $6.26 million. These funds were received on October 19, 2018. Pursuant to the
Termination Agreement, all rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements,
including, among others, the true-up provisions and the settlement of loss-share and expense reimbursement claims, have
been resolved and terminated. In October 2018, in conjunction with the receipt of the $6.26 million noted above, the
FDIC Indemnification Asset of $22.8 million and the FDIC true-up accrual of $16.6 million were removed with no further
impact to the Company’s consolidated statements of operations. The balance of the FDIC Indemnification Asset at
December 31, 2017 is included in other assets within the consolidated balance sheets. Additionally, loans which were
previously referred to as either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans”
are now collectively referred to as “loans held for investment.” In addition, the allowance for loan losses on the
aforementioned loans held for investment is presented as one combined line item for all periods presented. Similarly,
other real estate owned (“OREO”) which was previously referred to as “covered OREO” if covered by the loss-share
agreements or otherwise “non-covered OREO” is now collectively referred to as OREO and included in other assets
within the consolidated balance sheets.
Factors Affecting Prior Years
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) was enacted. The Tax Legislation
significantly revised the U.S. corporate income tax by lowering corporate income tax rates. Our results during 2017
included the estimated impact of a non-recurring, non-cash charge of $28.4 million as a result of the enactment of the Tax
Legislation. The charge was primarily due to the revaluation of deferred tax assets as a result of the reduction in the
corporate tax rate from 35% to 21%, and other anticipated impacts associated with the Tax Legislation. Deferred tax asset
amounts recorded in December 2017 following enactment of the Tax Legislation were final as of September 30, 2018.
The 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
58
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. 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.
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 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. The banking segment 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.
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
January 1, 2015 acquisition of SWS (the “SWS Merger”) as discussed in detail in Note 18, Commitments and
Contingencies.
During 2016, the Bank discovered irregularities with respect to a 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.
Technology Enhancements and Corporate Initiatives
In furtherance of our goal of building a premier, diversified financial services company, we regularly evaluate strategic
opportunities to invest in our business and technology platforms. Such investments are intended to support long-term
technological competitiveness and improved operational efficiencies throughout our organization. During 2018, we made
significant investment in new technological solutions, substantial core system upgrades and other technology
enhancements, and we are working on preliminary plans for additional investments in such solutions, upgrades and
enhancements. In combination with these technology enhancements, we have begun the consolidation of common back
office functions. During 2018, we incurred approximately $10 million in expenses related to core system replacements
and other technology enhancements. We believe that costs incurred related to these technology investments and corporate
initiatives will continue to represent an increasingly significant portion of our noninterest expenses in the near term, but
we are making such investments with the expectation that they will result in cost savings over the long term.
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.
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.
59
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 loans and other real estate owned
(“OREO”) that the Bank acquired in the FNB Transaction. As previously discussed, the loss-share agreements with the
FDIC were terminated in the fourth quarter of 2018.
On August 1, 2018, we acquired privately-held, Houston-based The Bank of River Oaks (“BORO”) in an all-cash
transaction (the “BORO Acquisition”) as discussed above. In connection with the acquisition, we merged BORO into the
Bank, and all customer accounts were converted to the PlainsCapital Bank platform.
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, and since August 1, 2018, the operations acquired in the BORO
Acquisition, 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 Hilltop Securities and HTS Independent Network and included the
operations of FSC through January 22, 2016. 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. Hilltop Securities, HTS Independent Network and Hilltop
Securities Asset Management, LLC, formerly known as First Southwest Asset Management, LLC, a wholly-owned
subsidiary of First Southwest Holdings, LLC, are registered investment advisers under the Investment Advisers Act of
1940.
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 and servicing 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.
60
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, 2018
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Year Ended December 31, 2017
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Year Ended December 31, 2016
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
How We Generate Revenue
Banking
370,732
5,319
43,588
256,577
152,424
$
$
Banking
$
$
366,581
14,073
59,904
248,404
164,008
Mortgage
$
$
Broker-Dealer Origination
1,485
—
551,860
540,474
12,871
50,878
(231)
301,714
320,241
32,582
$
$
Insurance
3,025
$
—
142,565
139,921
5,669
$
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
Banking
363,083
40,673
52,579
244,715
130,274
$
$
$
$
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
$
$
Corporate
(9,176)
—
4,893
36,628
(40,911)
$
$
All Other and Hilltop
Eliminations
19,380
—
(21,830)
(592)
(1,858)
Consolidated
436,324
5,088
1,022,790
1,293,249
160,777
$
$
$
$
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
$
$
$
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 $436.3 million in net interest
income during 2018, compared with net interest income of $421.7 million and $397.5 million during 2017 and 2016,
respectively. Changes in net interest income during 2018, compared with 2017, and during 2017, compared with 2016,
primarily included increases within our banking, broker-dealer and mortgage origination segments.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i)
(ii)
Income from broker-dealer operations. Through Securities Holdings, we provide investment banking
and other related financial services that generated $241.0 million, $266.3 million and $273.9 million in
securities brokerage commissions and fees and investment advisory fees and commissions, and $47.8
million, $91.1 million and $102.2 million in gains on derivative and trading portfolio activities
(included within other noninterest income) during 2018, 2017 and 2016, respectively.
Income from mortgage operations. Through PrimeLending, we generate noninterest income by
originating and selling mortgage loans. During 2018, 2017 and 2016, we generated $548.7 million,
$632.4 million and $703.3 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.
(iii)
Income from insurance operations. Through NLC, we provide fire and homeowners insurance for low
value dwellings and manufactured homes. The insurance segment generated $136.8 million, $142.3
million and $155.5 million in net insurance premiums earned during 2018, 2017 and 2016, respectively.
In the aggregate, we generated $1.0 billion, $1.2 billion and $1.3 billion in noninterest income during 2018, 2017 and
2016, respectively. The decrease in noninterest income during 2018, compared with 2017, was predominantly attributable
to decreases of $93.4 million in net gains from sale of loans and other mortgage production income, $43.3 million in gains
from derivative and trading portfolio activities and $19.9 million in investment and securities advisory fees and
commissions. Additionally, our results for 2017 reflect $15.0 million of other noninterest income within the banking
segment related to coverage provided by an insurance policy for forgery, and $11.6 million within corporate related to the
resolution of the appraisal proceedings from the SWS Merger, both of which were nonrecurring. The decrease in
61
noninterest income during 2017, compared with 2016, was primarily due 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.
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 2018 was $121.4 million, or $1.28 per diluted share, compared
with net income applicable to common stockholders of $132.5 million, or $1.36 per diluted share, during 2017, and net
income applicable to common stockholders of $145.9 million, or $1.48 per diluted share, during 2016. See “Factors
Affecting Results of Operations” above for details regarding significant items that affected our operating results in 2018
and 2017. 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.
Our consolidated operating results during 2018 also included $8.2 million of pre-tax transaction costs related to the
BORO Acquisition. Our consolidated operating results during 2017 included $2.1 million of pre-tax transaction costs
related to the SWS Merger, while our consolidated operating results during 2016 included $7.4 million of pre-tax
transaction costs and $5.9 million of 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), as a result of the integration of the operations and systems acquired in the SWS Merger.
Certain items included in net income for 2018, 2017 and 2016 resulted from purchase accounting associated with the
PlainsCapital Merger, the FNB Transaction, the SWS Merger and the BORO Acquisition (collectively, the “Bank
Transactions”). Income before income taxes during 2018, 2017 and 2016 included the following purchase accounting
items related to the Bank Transactions (in thousands).
Year Ended December 31, 2018
Net accretion on earning assets and liabilities
Amortization of identifiable intangibles
Year Ended December 31, 2017
Net accretion on earning assets and liabilities
Amortization of identifiable intangibles
Year Ended December 31, 2016
Net accretion on earning assets and liabilities
Amortization of identifiable intangibles
PlainsCapital
Merger
FNB Transaction SWS Merger
BORO
Acquisition
2,426 $
(5,643)
28,373 $
(412)
1,922 $
(781)
4,909 $
(1,190)
PlainsCapital
Merger
FNB
Transaction
SWS Merger
BORO
Acquisition
5,333 $
(6,322)
47,677 $
(565)
3,080 $
(866)
— $
—
PlainsCapital
Merger
FNB
Transaction
SWS Merger
BORO
Acquisition
9,662 $
(7,869)
50,697 $
(719)
4,556 $
(952)
— $
—
$
$
$
Total
37,630
(8,026)
Total
56,090
(7,753)
Total
64,915
(9,540)
As mentioned in the “Factors Affecting Results of Operations” section above, the Bank terminated its loss-share
agreements with the FDIC in the fourth quarter of 2018, resulting in a $6.26 million payment from the FDIC to the Bank.
Prior to the termination, the Bank recorded “true-up” accruals with respect to the FNB Transaction loss-share agreements
with the FDIC of $2.1 million in 2017 and $8.7 million in 2016. The true-up accrual was 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 were below a stated threshold. In 2018, the Bank also recorded $6.5 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.
62
We consider the ratios shown in the table below to be key indicators of our performance.
Return on average stockholder's equity
Return on average assets
Net interest margin (1) (2) (4) (5)
Net interest margin (taxable equivalent) (2) (3) (4) (5)
2018
Year Ended December 31,
2017
2016
6.33 %
0.93 %
3.55 %
3.56 %
7.00 %
1.03 %
3.61 %
3.63 %
8.13 %
1.21 %
3.68 %
3.71 %
(1) Net interest margin is defined as net interest income divided by average interest-earning assets.
(2) Noted measures during 2017 and 2016 reflect certain asset category reclassifications within the detailed calculations to conform with the current
period presentation.
(3) 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 the applicable corporate federal income tax rates of 21% for 2018 and 35% for 2017
and 2016. 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.
(4) 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 42 basis points, 48 basis points and 55 basis points during 2018, 2017 and 2016, respectively.
(5) During 2018, 2017 and 2016, purchase accounting contributed 34 basis points, 52 basis points and 66 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 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 2018, 2017 and 2016, purchase accounting contributed 34, 52 and 66 basis points to our consolidated taxable
equivalent net interest margin of 3.56%, 3.63% and 3.71%, respectively, and primarily related to the following purchase
accounting items associated with the Bank Transactions (in thousands).
Year Ended December 31, 2018
Accretion of discount on loans
Amortization of premium on acquired securities
Year Ended December 31, 2017
Accretion of discount on loans
Amortization of premium on acquired securities
Year Ended December 31, 2016
Accretion of discount on loans
Amortization of premium on acquired securities
$
$
$
PlainsCapital
Merger
FNB Transaction SWS Merger
28,373 $
—
2,123 $
—
3,689 $
(1,263)
BORO
Acquisition
Total
4,909 $
—
39,094
(1,263)
PlainsCapital
Merger
FNB Transaction
SWS Merger
BORO
Acquisition
Total
7,879 $
(2,407)
47,677 $
—
2,889 $
—
— $
—
58,444
(2,407)
PlainsCapital
Merger
FNB Transaction SWS Merger
50,697 $
—
4,235 $
—
12,938 $
(3,083)
BORO
Acquisition
Total
— $
—
67,870
(3,083)
63
The table below provides additional details regarding our consolidated net interest income (dollars in thousands). The
2016 detailed calculations reflect certain asset category reclassifications to conform with the current period presentation.
2018
Year Ended December 31,
2017
2016
Average
Outstanding Earned or Yield or
Balance
Rate
Paid
Interest Annualized Average
Interest Annualized Average
Interest Annualized
Outstanding Earned or Yield or
Outstanding Earned or Yield or
Balance
Paid
Rate
Balance
Paid
Rate
$ 1,472,772 $ 68,536
4.65 % $ 1,541,000 $ 64,344
4.18 % $ 1,387,023 $ 53,529
3.86 %
6,601,453
1,680,976
368,189
50,860
5.58 %
3.03 %
6,177,933
1,399,379
347,644
36,378
5.63 %
2.60 %
5,764,936
1,038,763
334,226
25,129
5.80 %
2.42 %
247,651
7,752
3.13 %
234,741
8,012
3.41 %
282,780
8,674
3.07 %
189,183
2,831
1.50 %
140,337
923
0.66 %
150,337
316
0.21 %
459,628
1,542,539
74,684
12,268,886
(62,681)
12,206,205
1,288,718
$ 13,494,923
8,683
66,914
6,535
580,300
6,114
41,048
4,897
509,360
572,829
1.89 %
1,518,041
4.34 %
8.75 %
85,550
4.73 % 11,669,810
(59,153)
11,610,657
1,345,174
$ 12,955,831
568,809
1.07 %
1,523,195
2.70 %
5.72 %
72,965
4.36 % 10,788,808
(51,925)
10,736,883
1,457,110
$ 12,193,993
2,886
29,518
4,129
458,407
0.51 %
1.94 %
5.66 %
4.25 %
Assets
Interest-earning assets
Loans held for sale
Loans held for investment,
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
$ 5,568,473 $ 46,002
56,733
1,395,947
0.83 % $ 5,220,359 $ 24,695
32,337
1,378,748
4.06 %
0.47 % $ 4,824,374 $ 15,843
22,510
1,428,829
2.35 %
1,477,966
8,442,386
40,369
143,104
2.73 %
1.70 %
1,515,874
8,114,981
28,376
85,408
1.87 %
1.05 %
1,237,609
7,490,812
20,070
58,423
0.33 %
1.58 %
1.62 %
0.78 %
Total interest-bearing liabilities
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Noncontrolling interest
2,504,599
617,227
11,564,212
1,919,940
10,771
Total liabilities and stockholders'
equity
$ 13,494,923
2,309,776
634,630
11,059,387
1,894,009
2,435
$ 12,955,831
2,239,751
665,878
10,396,441
1,795,219
2,334
$ 12,193,994
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 437,196
$ 423,952
$ 399,984
3.03 %
3.56 %
3.31 %
3.63 %
3.47 %
3.71 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on a 21% federal income tax rate for and a 35% federal income
tax rate for 2017 and 2016. The adjustment to interest income was $0.9 million, $2.2 million and $2.4 million during 2018, 2017 and 2016,
respectively.
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 $14.6 million during 2018, compared with 2017, and increased
$24.2 million during 2017, compared with 2016. The increase in net interest income during 2018, compared with 2017,
was primarily related to improved spreads on customer balances and an increase in net interest income earned on trading
securities within our broker-dealer segment, offset by a decrease in accretion of discount on loans and changes
attributable to both volumes and yields within our banking segment. 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.
64
The provision (recovery) for loan losses is determined by management as the amount to be added to (recovered from) 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 $5.1 million, $14.3 million and
$40.6 million during 2018, 2017 and 2016, respectively. During 2018, the provision for loan losses was comprised of
charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $7.0 million and
recoveries on PCI loans of $1.9 million. The provision for loan losses during 2017 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. The provision for loan losses during 2016 was comprised of charges relating to newly originated
loans and acquired loans without credit impairment of $41.6 million, partially offset by recoveries on PCI loans of $1.0
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.
Consolidated noninterest income decreased $182.3 million during 2018, compared with 2017, and decreased $81.9
million during 2017, compared with 2016. 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 2018, compared with 2017, were primarily driven by decreases in noninterest income within our mortgage
origination, broker-dealer and insurance segments. The decrease in noninterest income, during 2017, compared with 2016,
of $81.9 million, other than the items discussed in the “Factors Affecting Results of Operations” section above, was
primarily driven by decreases in noninterest income within our mortgage origination, broker-dealer and insurance
segments.
Consolidated noninterest expense during 2018 decreased $76.0 million, compared with 2017, and decreased $43.2 million
during 2017, compared with 2016. The decrease in noninterest expense during 2018, compared with 2017, was primarily
driven by decreases in noninterest expense within our mortgage origination, broker-dealer and insurance segments,
partially offset by a wire fraud loss and BORO Acquisition-related transaction expenses incurred within the banking
segment during 2018, as discussed in more detail in the banking segment discussion below. The decrease in noninterest
expense during 2017, compared with 2016, primarily included decreases in noninterest expense within our mortgage
origination and broker-dealer 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.
Consolidated income tax expense during 2018, 2017 and 2016 was $35.1 million, $110.1 million and $83.5 million,
respectively, reflecting effective rates of 21.8%, 45.3% and 36.1%, respectively. The 2018 effective tax rate approximated
statutory rates and included the effect of tax planning strategies in conjunction with the enactment of the Tax Legislation,
offset by non-deductible expenses. In addition, a tax benefit was recognized from the portion of the indemnification
reserve that was a deductible settlement amount. The effective tax rate during 2017 was higher than the statutory rate
primarily due to the revaluation of deferred tax assets as a result of the 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.
65
Segment Results
Banking Segment
Income before income taxes in our banking segment during 2018, 2017 and 2016 was $152.4 million, $164.0 million and
$130.3 million, respectively. The decrease in income before income taxes during 2018, compared with the same period in
2017, was primarily due to a decline in accretion, increases in deposit rates, the previously mentioned BORO Acquisition-
related transaction expenses, a $4.5 million loss attributable to wire fraud and related expenses and the previously
mentioned $15.0 million of other noninterest income recognized during 2017 related to an insurance policy for forgery.
These factors that contributed to the decrease in income before income taxes were partially offset by an increase in
interest income associated with increases in both rate and volume on the loan portfolio and a decrease in FNB-acquired
asset-related expenses. The previously mentioned wire fraud loss and related expenses were comprised of the $4.0 million
wire fraud loss and approximately $0.5 million in costs related to the incident, all of which were expensed as incurred
within the banking segment. We also may incur expenses, including legal, professional services and increased insurance
expenses, and claims for damages related to this incident in the future. We have not recorded an accrual for future claims
as we have not concluded that such a loss is probable. We expect available insurance coverage will reduce our overall
financial exposure and we continue to seek recovery of the wire fraud loss arising from this incident. We cannot currently
estimate the amount of any future legal or insurance recoveries related to this loss. 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 “Factors Affecting Results of Operations” above for
the effect of hurricanes on the banking segment’s operating results during 2017.
The ratios shown in the table below include certain key indicators of the performance and asset quality of our banking
segment.
Efficiency ratio (1)
Return on average assets
Net interest margin (2) (4)
Net interest margin (taxable equivalent) (3) (4)
Net charge-offs to average loans outstanding
2018
Year Ended December 31,
2017
2016
61.93 %
1.23 %
4.23 %
4.24 %
0.15 %
58.24 %
0.85 %
4.31 %
4.33 %
0.09 %
58.87 %
0.94 %
4.65 %
4.68 %
0.62 %
(1) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period.
(2) Net interest margin is defined as net interest income divided by average interest-earning assets.
(3) 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 the applicable corporate federal income tax rates of 21% for 2018 and 35% for 2017
and 2016. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. See footnote 2 to the
following table for the taxable equivalent adjustments to interest income.
(4) During 2018, 2017 and 2016, purchase accounting contributed 48 basis points, 72 basis points and 93 basis points, respectively, to net interest
margin and taxable equivalent net interest margin.
The banking segment presents net interest margin in the table above, 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 2018, 2017 and 2016, purchase accounting contributed 48, 72 and 93 basis points, respectively, to the banking
segment’s taxable equivalent net interest margin of 4.24%, 4.33% and 4.68%, respectively, and primarily related to the
purchase accounting items associated with the Bank Transactions as detailed in the tables presented in the Consolidated
Operating Results above.
66
other financial institutions
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
Notes payable and other
borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
2,492,728
48,847
8,196,123
1,415,903
Total liabilities and stockholders’
equity
$ 9,612,026
The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
2018
Year Ended December 31,
2017
2016
Average
Outstanding Earned or Yield or
Interest Annualized Average
Outstanding Earned or Yield or
Interest Annualized Average
Interest Annualized
Outstanding Earned or Yield or
Assets
Interest-earning assets
Loans held for investment,
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
Balance
Paid
Rate
Balance
Paid
Rate
Balance
Paid
Rate
$ 6,032,767 $ 342,098
5.67 % $ 5,695,927 $ 326,906
5.74 % $ 5,299,307 $ 317,695
5.99 %
1,364,577
58,551
4.29 % 1,436,401
54,701
3.81 % 1,261,016
49,075
3.89 %
965,937
22,451
2.32 %
851,066
16,275
1.91 %
714,096
13,911
1.95 %
110,386
3,707
3.36 %
123,969
4,747
3.83 %
136,141
4,998
3.67 %
1,049
16
1.54 %
5,947
50
0.85 %
28,297
155
0.55 %
241,124
51,906
8,767,746
(62,306)
8,705,440
906,586
$ 9,612,026
4,429
2,282
433,534
3,499
2,412
408,590
316,186
1.84 %
4.40 %
70,123
4.94 % 8,499,619
(59,007)
8,440,612
947,484
$ 9,388,096
335,136
1.11 %
3.44 %
56,867
4.81 % 7,830,860
(51,706)
7,779,154
1,036,910
$ 8,816,064
1,823
2,075
389,732
0.54 %
3.65 %
4.98 %
$ 5,237,014 $
55,060
1.05 % $ 4,932,689 $ 33,420
0.68 % $ 4,523,079 $ 19,815
0.44 %
417,534
5,654,548
7,000
62,060
1.68 %
741,561
1.10 % 5,674,250
6,953
40,373
0.94 %
675,011
0.71 % 5,198,090
3,633
23,448
0.54 %
0.45 %
2,297,390
48,303
8,019,943
1,368,153
$ 9,388,096
2,255,630
57,501
7,511,221
1,304,843
$ 8,816,064
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 371,474
$ 368,217
$ 366,284
3.85 %
4.24 %
4.10 %
4.33 %
4.52 %
4.68 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for
2018 and 35% for 2017 and 2016. The adjustment to interest income was $0.8 million, $1.6 million and $1.5 million during 2018, 2017 and 2016,
respectively.
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.
67
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,
2018 vs. 2017
Change Due To (1)
2017 vs. 2016
Change Due To (1)
Volume Yield/Rate Change
Volume Yield/Rate Change
Interest income
Loans held for investment, 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
$ 19,324 $ (4,132) $ 15,192 $ 23,649 $ (14,438) $ 9,211
5,626
2,364
(251)
3,850
6,176
(1,040)
(2,735)
2,197
(520)
(1,196)
(307)
196
6,822
2,671
(447)
6,585
3,979
(520)
(42)
8
(34)
(123)
18
(105)
(831)
(627)
16,766
1,761
497
8,178
930
(130)
24,944
(102)
484
32,954
1,778
(147)
(14,096)
1,676
337
18,858
$ 2,062 $ 19,578 $ 21,640 $ 1,789 $ 11,816 $ 13,605
3,320
16,925
2,961
14,777
3,085
22,663
47
21,687
(3,038)
(976)
359
2,148
Net interest income (2)
$ 17,742 $ (14,485) $ 3,257 $ 30,806 $ (28,873) $ 1,933
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Taxable equivalent.
Taxable equivalent net interest income increased $3.3 million during 2018, compared with 2017. Changes in the yields
earned on interest-earning assets increased taxable equivalent net interest income by $8.2 million during 2018, primarily
as a result of higher yields due to increased market rates, partially offset by a decrease in accretion of discount on loans of
$19.4 million. Accretion of discount on loans is expected to continue to decrease in future periods as loans acquired in the
Bank Transactions are repaid, refinanced or renewed. While we are seeing an increase in loan yields as a result of the
rising interest rate environment, a portion of our loan portfolio remains at applicable rate floors, 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 trend will continue until contractual rate resets allow
our entire loan portfolio to reprice above applicable rate floors. Changes in the volume of interest-earning assets,
primarily due to an increase in the loan portfolio, increased taxable equivalent net interest income by $16.8 million during
2018, compared with 2017. Changes in rates paid on interest-bearing liabilities decreased taxable equivalent net interest
income by $22.7 million during 2018, compared with 2017, due to increases in market interest rates. Short-term interest
rates have risen faster than medium and longer term rates, which has reduced the favorable impact of our asset-sensitive
position on net interest income. Any changes in interest rates across the term structure will continue to impact net interest
income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including
any changes in steepness or flatness and inversions at any points on the yield curve.
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. 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.
The banking segment’s noninterest income was $43.6 million, $59.9 million and $52.6 million during 2018, 2017 and
2016, respectively. The decrease during 2018, compared to 2017, was primarily due to the previously mentioned
insurance receivable and related increase in other noninterest income of $15.0 million recorded during 2017 from
68
coverage provided by an insurance policy for forgery related to a single, large loan previously charged off by the Bank.
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 banking segment’s noninterest expenses were $256.6 million, $248.4 million and $244.7 million during 2018, 2017
and 2016, respectively. The increase during 2018, compared to 2017, was primarily due to the previously mentioned
BORO acquisition-related transaction expenses and the wire fraud loss and related expenses of $4.5 million previously
discussed, partially offset by net decreases in expenses related to previously-covered assets, other real estate owned
(“OREO”) and other operating expenses. 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 previously-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. This activity was partially offset by a year-over-year decrease of $12.5 million associated with downward valuation
adjustments on a significant previously-covered OREO property recorded during 2016, as well as decreases in occupancy
expenses associated with closed branches and expenses associated with organizational changes.
Broker-Dealer Segment
Income before income taxes in our broker-dealer segment was $32.6 million, $64.6 million and $39.5 million during
2018, 2017, and 2016, respectively. The decrease in income before income taxes during 2018, compared with 2017, was
primarily the result of a decrease of $43.4 million in trading gains earned from our derivative and trading portfolio
activities, most notably in our structured finance business. This decrease in trading gains was primarily due to market
volatility, competitive pricing pressures, and a decrease of 19% in the structured finance business line’s to-be-announced
(“TBA”) mortgage-backed securities volume. In addition, during 2018, our broker-dealer segment experienced a decrease
of $19.9 million in investment and securities advisory fees and commissions primarily earned on the underwriting of
municipal bond transactions within our public banking business line and an increase of $5.1 million in other noninterest
expense primarily related to the purchase and development of new software solutions. These changes were partially offset
by a 107-basis point increase in the federal funds rate during 2018, which led to an increase of $3.7 million in fees earned
on money market and FDIC insured bank deposits, an increase in the net interest income earned from stock lending and
margin lending and a decrease in variable compensation of $27.7 million based on less robust financial results.
The change 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 banking and capital markets business lines.
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 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, as well as the interest revenue earned on trading securities, net of financing costs.
69
The following table provides additional details regarding our broker-dealer operating results (in thousands).
Net interest income:
Securities lending
Structured finance
Clearing (1)
Other (1)
Total net interest income
Noninterest income:
Securities commissions and fees by business line (2):
Capital markets
Retail
Clearing
Other
Investment and securities advisory fees and commissions by business line:
Public banking
Capital markets
Retail
Structured finance
Clearing
Other
Other:
Structured finance
Capital markets
Other
Total noninterest income
Net revenue (3)
Noninterest expense (4):
Employees' compensation and benefits
Other
Total noninterest expense
Year Ended December 31,
2017
2018
2016
2018 vs 2017 2017 vs 2016
Variance
$
10,181 $
10,304
13,038
17,355
50,878
8,711 $
9,600
10,728
14,696
43,735
7,008 $
3,261
12,290
8,613
31,172
1,470 $
704
2,310
2,659
7,143
41,146
80,625
35,605
4,847
162,223
59,817
5,533
19,037
4,354
1,190
135
90,066
34,957
12,865
1,603
49,425
301,714
352,592
218,467
101,543
320,010
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
(4,769)
(450)
1,597
372
(3,250)
(26,258)
4,826
2,731
(1,321)
38
130
(19,854)
(31,276)
(12,013)
(314)
(43,603)
(66,707)
(59,564)
(32,147)
4,645
(27,502)
1,703
6,339
(1,562)
6,083
12,563
(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)
Income before income taxes
$
32,582 $
64,644 $
39,467 $
(32,062) $
25,177
(1) Noted balances during 2017 and 2016 include certain reclassifications to conform with current period presentation.
(2) Securities commissions and fees includes income of $11.3 million, $9.1 million, and $3.9 million during 2018, 2017, and 2016, respectively, that is
eliminated in consolidation.
(3) Net revenue is defined as the sum of total net interest income and total noninterest income.
(4) 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 $50.9 million, $43.7 million and $31.2 million during 2018, 2017
and 2016, 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 2018, compared with 2017, was primarily due to
improved spreads on customer balances and an increase in net interest earned on trading securities as a result of increases
in market interest rates. 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.
Noninterest income was $301.7 million, $368.4 million and $385.8 million during 2018, 2017 and 2016, respectively. The
decrease in noninterest income of $66.7 million during 2018, compared with 2017, was primarily due to decreases of
$43.6 million in other noninterest income and $19.9 million in investment and securities advisory fees and commissions.
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.
Securities commissions and fees decreased $3.3 million during 2018, compared with 2017. The decrease during 2018 was
primarily attributable to decreases in commissions earned by our retail and capital markets business lines related to
changes made on January 1, 2018 in connection with the implementation of Accounting Standards Codification 606,
Revenue from Contracts with Customers, partially offset by an increase in fees earned on money market accounts and
FDIC insured bank deposits by the clearing and retail business lines resulting from the 107-basis point increase in the
federal funds rate during 2018. 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
70
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.
Investment banking and advisory fees decreased $19.9 million during 2018, compared with 2017, and decreased $6.1
million in 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. Revenues in the public banking line of business decreased during 2017, compared with 2016, although a
number of national municipal issuers elected to accelerate certain capital raising initiatives in the fourth quarter of 2017
before the enactment of the Tax Legislation. As a result, we experienced lower municipal issuance volume in 2018
compared to 2017. We expect national municipal issuance volume in 2019 to be comparable to that of 2018. Also, near
the end of the second quarter of 2018, public finance banker attrition contributed to the decline in investment and
securities advisory fees and commissions.
The decrease in other noninterest income during 2018, compared with 2017, was primarily the result of a $43.3 million
decrease in trading gains earned from our derivative and trading portfolio activities, most notably in our structured finance
business primarily due to market volatility, competitive pricing pressures and a decrease of 19% in the business line’s
TBA mortgage-backed securities volume. In addition, the value of investments held in the broker-dealer segment’s
deferred compensation plan decreased $1.5 million during 2018 compared to 2017. These decreases were partially offset
by $1.4 million in recoveries from legal settlements in 2018. 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.
Noninterest expenses, including provision (recovery) for loan losses, were $320.0 million, $347.5 million and $377.5
million during 2018, 2017 and 2016, respectively. The decrease in noninterest expenses of $27.5 million during 2018,
compared with 2017, was primarily due to a decrease in the variable compensation and benefits expense components that
are based on performance, partially offset by increases in expenses related to the purchase and development of new
software solutions. The decrease in noninterest expenses 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 line’s performance.
Selected information concerning the broker-dealer segment follows (dollars in thousands).
Compensation as a % of net revenue
FDIC insured program balances at the 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 banking:
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
Correspondents (end of period)
Securities lending:
Interest-earning assets - stock borrowed (end of period)
Interest-bearing liabilities - stock loaned (end of period)
Year Ended December 31,
2018
62.0 %
1,302,558
905,503
333,054
394,005
1,111
53,548,611
66,370,939
659,237
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
124
208
120
218
117
224
$
4,829,687
$
5,938,788
$
6,088,319
1,661,535
152
1,325,760
162
1,669,856
175
$
$
1,365,547
1,186,073
$
$
1,386,821
1,215,093
$
$
1,436,069
1,283,676
71
Mortgage Origination Segment
Income before income taxes in our mortgage origination segment during 2018, 2017 and 2016 was $12.9 million, $49.6
million and $77.8 million, respectively. The year-over-year decrease in income before income taxes during 2018,
compared with 2017, was primarily due to a decrease in noninterest income, partially offset by a decrease in noninterest
expense and an increase in net interest income. The 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. Net interest income of $1.5 million during 2018 was comprised of interest income earned on loans held
for sale, partially offset by interest incurred on warehouse lines of credit held with the Bank and related intercompany
financing costs. The improvement in net interest income during 2018, compared with 2017, included the effects of
improved net yields on mortgage loans held for sale. Net interest expense of $0.9 million and $11.6 million during 2017
and 2016, respectively, was primarily comprised of interest incurred on a warehouse line of credit held with the Bank and
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. As
average mortgage interest rates have increased each year between 2016 and 2018, refinancing volume as a percentage of
total origination volume has continued to decrease, as noted in the table below. Changes in mortgage interest rates have
historically had a lesser impact on home purchases volume than on refinancing volume. We do not anticipate additional
increases in mortgage interest rates will significantly impact the percentage mix of refinancing and purchase volumes
relative to total loan origination volume in 2019.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending
through its affiliated business relationships (“ABAs”). For 2018, funded loan volume through ABAs was approximately
6% of the mortgage origination segment’s total loan volume. As of December 31, 2018, PrimeLending owned a 51%
membership interest in five ABAs. We expect production within the ABA channel to increase to approximately 10% of
the total loan volume of the mortgage origination segment during 2019.
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
2018
Amount
% of
Total
57,186
Year Ended December 31,
2017
Amount
% of
Total
62,058
2016
Amount
% of
Total
66,881
Mortgage Loan Originations - volume
$
13,692,484
$
14,457,913
$
15,460,213
Mortgage Loan Originations:
Conventional
Government
Jumbo
Other
Home purchases
Refinancings
Texas
California
Florida
Ohio
Arizona
Washington
South Carolina
Missouri
North Carolina
Maryland
All other states
Mortgage Loan Sales - volume
$
$
$
$
$
$
$
8,262,800
3,413,300
1,181,353
835,031
13,692,484
11,798,804
1,893,680
13,692,484
2,594,585
1,511,931
1,026,157
588,199
567,202
520,543
474,844
454,517
413,686
403,086
5,137,734
13,692,484
13,735,885
60.34 % $
24.93 %
8.63 %
6.10 %
100.00 % $
8,666,935
3,440,264
1,415,682
935,032
14,457,913
59.95 %
23.80 %
9.79 %
6.46 %
100.00 %
86.17 % $
13.83 %
100.00 % $
11,974,571
2,483,342
14,457,913
82.82 %
17.18 %
100.00 %
18.95 % $
11.04 %
7.49 %
4.30 %
4.14 %
3.80 %
3.47 %
3.32 %
3.02 %
2.94 %
37.53 %
100.00 % $
3,129,008
1,846,172
853,727
634,142
554,463
465,501
472,935
448,565
440,456
430,668
5,182,276
14,457,913
21.64 %
12.77 %
5.90 %
4.39 %
3.84 %
3.22 %
3.27 %
3.10 %
3.05 %
2.98 %
35.84 %
100.00 %
$
14,454,260
$
$
$
$
$
$
$
9,897,230
3,595,219
1,312,800
654,964
15,460,213
64.02 %
23.25 %
8.49 %
4.24 %
100.00 %
11,276,378
4,183,835
15,460,213
72.94 %
27.06 %
100.00 %
3,352,469
2,235,915
797,578
637,435
527,055
538,857
446,221
441,125
512,087
521,686
5,449,785
15,460,213
15,155,340
21.69 %
14.46 %
5.16 %
4.12 %
3.41 %
3.49 %
2.89 %
2.85 %
3.31 %
3.37 %
35.25 %
100.00 %
72
Refinancing volume decreased to $1.9 billion during 2018 from $2.5 billion during 2017 (representing 13.8% and 17.2%,
respectively, of total loan origination volume), while home purchases volume decreased 1.5% to $11.8 billion during
2018 from $12.0 billion during 2017. Refinancing volume decreased to $2.5 billion from $4.2 billion during 2017,
compared with 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.
The mortgage origination segment’s total loan origination volume during 2018 decreased 5.3%, compared with 2017,
while income before income taxes during 2018 decreased 74.0%, compared with 2017. The decrease in income before
income taxes during 2018 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”),
segment operating costs and lender paid closing costs, and an increase in mortgage loan origination fees earned. The
mortgage origination segment’s total loan origination volume decreased 6.5% between 2017 and 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 IRLCs and loans held for sale. These changes were partially offset by decreases in variable compensation, net
interest expense, and lender paid closing costs.
Noninterest income was $551.9 million, $632.4 million and $704.1 million during 2018, 2017 and 2016, respectively, and
was comprised of the following (in thousands).
Net gains from sale of loans
Mortgage loan origination fees and other related income
Other mortgage production income:
$
Change in net fair value and related derivative
2018
Year Ended December 31,
2017
536,007 $
94,244
450,515 $
104,463
2016
577,003 $
96,267
Variance
2018 vs 2017 2017 vs 2016
(40,996)
(2,023)
(85,492) $
10,219
activity:
IRLCs and loans held for sale
Mortgage servicing rights asset
Servicing fees
Total noninterest income
(20,608)
(5,856)
23,346
(14,451)
(4,132)
20,720
13,357
(6,277)
23,776
$
551,860 $
632,388 $
704,126 $
(6,157)
(1,724)
2,626
(80,528) $
(27,808)
2,145
(3,056)
(71,738)
Net gains from sale of loans decreased 15.9% during 2018, compared with 2017, while mortgage loan origination fees and
other related income increased 10.8% during 2018, compared with 2017. Net gains from sale of loans and mortgage loan
origination fees and other related income decreased 7.1% and 2.1% during 2017, respectively, compared with 2016. The
decrease in net gains from sale of loans during 2018, compared with 2017, was primarily a result of a decrease in average
loan sales margin, in addition to a decrease in total loan sales volume of 5.0% during 2018, compared with 2017. The
decrease in average loan sales margin was primarily attributable to competitive pricing pressure resulting from home
inventory shortages and a reduction in national refinancing volume. The increase in mortgage loan origination fees and
other related income was primarily the result of increases in average mortgage loan origination fees, partially offset by a
5.3% decrease in total loan origination volume during 2018, compared with 2017. 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 and
other related income was primarily the result of a 6.5% 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, with the
reasons for the decreases being largely consistent with those between 2018 and 2017 explained above.
Noninterest income included decreases of $20.6 million and $14.5 million during 2018 and 2017, respectively, and an
increase of $13.4 million during 2016, 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 loans held for sale. The decreases during 2018 and 2017 were the
result of decreases in the average value and the total volume of individual IRLCs and loans at the end of these periods.
The increase during 2016 was primarily the result of an increase in the volume and average value of IRLCs and loans held
for sale at the end of the period.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary
market, the majority servicing released. During 2018, 2017 and 2016, the mortgage origination segment retained servicing
on approximately 13%, 11% and 16% of loans sold, respectively. The mortgage origination segment’s determination of
73
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
$67.9 million on $5.3 billion of serviced loan volume at December 31, 2018, compared with a value of $55.8 million on
$4.9 billion of serviced loan volume at December 31, 2017. 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 U.S. Treasury bond futures and options, Eurodollar futures and forward
commitments to sell mortgage-backed securities, 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 $5.9 million, $4.1
million and $6.3 million during 2018, 2017 and 2016, respectively. Additionally, net servicing income was $10.9 million,
$8.6 million and $10.2 million during 2018, 2017 and 2016, respectively. In May 2018, March 2017 and May 2016, the
mortgage origination segment sold MSR assets of $9.3 million, $17.5 million and $7.6 million, respectively, which
represented $834.3 million, $1.7 billion and $917.4 million, respectively, of its serviced loan volume at the time.
Noninterest expense was $540.5 million, $581.9 million and $614.7 million during 2018, 2017 and 2016, respectively,
and was comprised of the following (in thousands). Reclassifications of $7.7 million and $6.2 million from variable
compensation to segment operating costs were made to the amounts presented below for 2017 and 2016, respectively, to
conform with the current period presentation.
Variable compensation
Segment operating costs
Lender paid closing costs
Servicing expense
Total noninterest expense
Year Ended December 31,
2017
236,676 $
307,110
26,031
12,082
581,899 $
2018
216,038 $
291,723
20,294
12,419
540,474 $
$
$
2016
260,173 $
305,933
35,061
13,574
614,741 $
Variance
2018 vs 2017 2017 vs 2016
(23,497)
1,177
(9,030)
(1,492)
(32,842)
(20,638) $
(15,387)
(5,737)
337
(41,425) $
During the third quarter of 2018, PrimeLending committed to close certain underperforming branches, while at the same
time reducing its fulfillment and corporate support staff. The purpose of this initiative is to better align resources and
lower PrimeLending’s cost structure. Lease exit and severance costs incurred as a result of this initiative were $0.8
million during 2018, which are included in segment operating costs in the table above. Costs under this initiative are
expected to total up to $1.3 million. We expect to realize cost savings as a result of this initiative of approximately $1.0
million per month beginning in 2019.
Employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods
presented. Variable compensation decreased $20.6 million during 2018, compared with 2017, and comprised 55.5% and
57.4% of the total employees’ compensation and benefits expenses during 2018 and 2017, respectively. Variable
compensation decreased $23.5 million during 2017, compared with 2016, and comprised 59.7% of the total employees’
compensation and benefits expenses during 2016. 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. In addition to decreases in loan origination volume each year, a decrease in the average incentive rate paid and the
impact of incentive plans driven by non-mortgage production criteria contributed to the decreases in variable
compensation between 2018 and 2017 and between 2017 and 2016.
While total loan origination volumes decreased 5.3% during 2018, compared with 2017, the mortgage origination
segment’s operating costs decreased 5.0%. The decrease in segment operating costs during 2018, compared to 2017, was
primarily due decreases in administrative, non-variable compensation and related benefits, and loan origination costs, in
addition to a decrease in indemnification liability reserve expense. These decreases were partially offset by increases in
professional fees associated with software development projects and software license and maintenance expense. The
decrease in non-variable compensation and benefits during 2018, compared to 2017, was due to reductions in loan
processing, loan fulfillment, and corporate headcount primarily resulting from PrimeLending’s cost reduction plan
initiated during the third quarter of 2018.
74
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, 2009 and December 31, 2018, the mortgage origination segment sold mortgage loans totaling $113.0
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.
Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between
January 1, 2009 and December 31, 2018 (dollars in thousands).
Original Loan Balance
Loss Recognized
% of
Loans
Sold
% of
Loans
Sold
Amount
Amount
Claims resolved with no payment
$
216,239
0.19 % $
—
0.00 %
Claims resolved because of a loan
repurchase or payment to an investor for
losses incurred (1)
$
222,189
438,428
0.20 %
0.39 % $
11,732
11,732
0.01 %
0.01 %
(1) Losses incurred include refunded purchased servicing rights.
The mortgage origination segment 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, 2018 and 2017, the mortgage origination segment’s total indemnification liability reserve totaled $10.7
million and $23.5 million, respectively. The related provision for indemnification losses was $3.2 million, $4.0 million,
and $4.6 million during 2018, 2017 and 2016, respectively.
On October 23, 2018, PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the
DOJ and HUD, respectively. These agreements provide for payments of $13.5 million, in the aggregate, to the DOJ and
HUD. In exchange for these payments, each of the DOJ and HUD released any civil claims they may have related to
certain loans originated by PrimeLending. The payments were made to the DOJ and HUD during the fourth quarter of
2018, and the indemnification liability related to this matter was released, which represents the majority of the decrease in
the indemnification liability reserve between December 31, 2018 and 2017. The mortgage origination segment’s operating
results or financial condition will not be impacted by this matter in future periods.
75
Insurance Segment
Income (losses) before income taxes in our insurance segment were $5.7 million during 2018, compared with ($4.1)
million and $21.4 million during 2017 and 2016, respectively. The improvement in income (losses) before income taxes
during 2018, compared with 2017, was primarily driven by a decrease in loss and LAE due to fewer weather-related
events, partially offset by a decline in net insurance premiums earned. The total estimated loss and LAE incurred
associated with Hurricane Michael, which occurred during the fourth quarter of 2018, was $6.2 million at December 31,
2018. However, the significance of Hurricane Harvey and other non-catastrophic weather-related losses that occurred
during 2017 are the primary drivers of the reduction in loss and LAE during 2018, compared to 2017. The year-over-year
changes during 2017, compared with 2016, were primarily driven 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, monsoons 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 reduced 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. We believe that current
initiatives to evaluate product offerings and pricing, streamline business activities and expenses and mitigate the impact of
future significant weather-related events are critical to improving the insurance segment’s long-term financial condition
and operating results.
The following table sets forth our total gross written premiums by state for the periods shown (dollars in thousands).
Texas
Arizona
Tennessee
Oklahoma
Georgia
All other states
Total
2018
Year Ended December 31,
2017
2016
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
$
$
97,266
16,278
9,924
8,175
4,557
6,328
142,528
68.2 % $
11.4 %
7.0 %
5.7 %
3.2 %
4.5 %
100.0 % $
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
164,308
70.1 %
10.2 %
6.0 %
6.2 %
3.3 %
4.2 %
100.0 %
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 2018 totaled $26.1 million through December 31, 2018, with a net loss, after reinsurance, of $24.4 million
during 2018. During 2017, and 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 totaled $44.0 million through December 31, 2016, with a net loss, after reinsurance, of $34.0
million during 2016.
76
The insurance segment’s operations resulted in a combined ratio of 97.0% during 2018, compared with 106.5% and
90.9% during 2017 and 2016, respectively. The decrease in the combined ratio during 2018, compared with 2017, was
primarily driven by decreases in the loss and LAE ratio due to fewer weather-related events. 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 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 $142.6 million, $151.4 million and $164.8 million during 2018, 2017 and 2016, respectively,
included net insurance premiums earned of $136.8 million, $142.3 million and $155.5 million, respectively. The
decreases in net insurance premiums earned during 2018 and 2017, compared with 2017 and 2016, respectively, were
primarily due to the effect of decreases in direct 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,
2017
2018
2016
2018 vs 2017 2017 vs 2016
Variance
$
$
50,689
40,544
36,288
1,969
121
129,611
$
$
54,706
42,414
36,925
2,884
162
137,091
$
$
64,816
46,792
37,953
3,225
184
152,970
$
$
(4,017)
(1,870)
(637)
(915)
(41)
(7,480)
$
$
(10,110)
(4,378)
(1,028)
(341)
(22)
(15,879)
The total direct insurance premiums written for our three largest insurance product lines decreased by $6.5 million during
2018, compared with 2017, and $15.5 million during 2017, compared with 2016. These continued decreases were due to
increased competition, rationalization of product offerings and continued review of geographic concentrations. In the
fourth quarter of 2018, in connection with a strategic initiative to focus on our insurance segment’s key markets, we
discontinued writing new insurance policies in five non-core states. Approximately 3% of total net insurance premiums
earned during 2018 were from these five non-core states. As our insurance policies are generally in effect for one year, we
anticipate that the full impact of this initiative on premiums earned will be complete by the end of 2019.
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,
2017
2018
2016
2018 vs 2017 2017 vs 2016
Variance
$
$
53,482
42,777
38,287
2,077
128
136,751
$
$
56,784
44,025
38,328
2,993
168
142,298
$
$
65,907
47,580
38,592
3,279
187
155,545
$
$
(3,302)
(1,248)
(41)
(916)
(40)
(5,547)
$
$
(9,123)
(3,555)
(264)
(286)
(19)
(13,247)
Net insurance premiums earned during 2018 and 2017 decreased, compared to 2017 and 2016, respectively, primarily due
to the decreases in direct insurance premiums written noted above.
Noninterest expenses of $139.9 million, $158.4 million and $146.6 million during 2018, 2017 and 2016, 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 2018 was $79.3 million, compared to $94.7 million and $89.2 million during 2017
and 2016, respectively, resulting in loss and LAE ratios during 2018, 2017 and 2016 of 58.0%, 66.6% and 57.4%,
respectively. The decrease in the loss and LAE ratio during 2018, compared with 2017, was primarily driven by a 16.2%
decrease in loss and LAE expense and a decrease in net insurance premiums earned of 3.9%. 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
attributable to non-catastrophic weather-related losses as well as Hurricane Harvey, and a decrease in net insurance
premiums earned of 8.5%. The actual loss related to Hurricanes Harvey and Irma, excluding reinstatement premiums, was
$4.4 million after reinsurance.
77
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
$
$
$
$
Year Ended December 31,
2017
36,549
23,930
60,479
(3,745)
56,734
142,298
2018
34,683
22,698
57,381
(4,036)
53,345
136,751
$
$
$
39.0 %
$
$
39.9 %
Variance
2016
38,502
16,998
55,500
(3,460)
52,040
155,545
$
$
2018 vs 2017 2017 vs 2016
(1,953)
6,932
4,979
(285)
4,694
(13,247)
(1,866)
(1,232)
(3,098)
(291)
(3,389)
(5,547)
$
$
(0.9) %
$
$
33.5 %
6.4 %
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. Hilltop’s merchant banking investment activities include the
identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through
its merchant bank subsidiary, Hilltop Opportunity Partners LLC, formerly known as PlainsCapital Equity, LLC.
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, dividend payments and potential stock repurchases. Investment
and interest income earned was $3.1 million, $0.3 million and $0.4 million during 2018, 2017 and 2016, respectively.
Investment and interest income during 2018 was primarily comprised of dividend income from merchant banking
investment activities, in addition to interest income earned on intercompany notes that were contributed to Hilltop by
Securities Holdings during the third quarter of 2018.
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.
Interest expense was $12.3 million, $10.4 million and $7.6 million during 2018, 2017 and 2016, respectively. Interest
expense during 2018 and 2017 was primarily associated with recurring annual interest expense of $7.6 million incurred on
our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”). Additionally, we incurred
interest expense of $3.7 million and $3.0 million during 2018 and 2017, respectively, on junior subordinated debentures
of $67.0 million issued by PCC (the “Debentures”). Interest expense on the Debentures was included within corporate
during 2018 and 2017 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 was $4.9 million, $12.8 million during 2018 and 2017, respectively, and was nominal during 2016.
Noninterest income during 2018 primarily included a $5.3 million pre-tax gain on the sale of a merchant bank investment,
partially offset by a $2.5 million charge on a legacy merchant bank equity investment as a result of our periodic fair value
assessment, as well as activity related to the Hilltop Plaza investment. 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.
Noninterest expenses of $36.6 million, $34.0 million and $29.9 million during 2018, 2017 and 2016, respectively, were
primarily comprised of employees’ compensation and benefits and professional fees, including corporate governance,
legal and transaction costs. During 2018, compared with 2017, the $2.6 million increase in noninterest expenses primarily
included a $1.0 million increase in salary and benefits and a $2.5 million increase in occupancy expenses due to increased
corporate headcount and a $0.7 million increase related to ongoing technology enhancements, partially offset by a $2.1
million decrease in transaction costs associated with the SWS Merger. During 2017, compared with 2016, the $4.1
million increase in noninterest expenses primarily included a $3.7 million increase associated with the organizational
changes noted above related to employees’ compensation and benefits costs, a $4.0 million increase in professional fees,
and a $3.0 million increase in occupancy and equipment expenses, 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.
78
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2018 as compared
to December 31, 2017 and December 31, 2016.
Securities Portfolio
At December 31, 2018, 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, held to maturity and
equity securities.
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). With the adoption of
Accounting Standards Update 2016-01 in January 2018, we reclassified all equity investments out of available for sale
securities, with all subsequent changes in fair value recognized in net income. Securities are classified as held to maturity
based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These
securities are carried at amortized cost.
The table below summarizes our securities portfolio (in thousands).
Trading securities, at fair value
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
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
Equity securities, at fair value
Total securities portfolio
2018
December 31,
2017
2016
$
7,945
$
—
$
5,940
1,494
309,455
4,239
206,813
59,293
126,748
19,913
5,680
3,886
745,466
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
11,538
24,669
31,801
85,611
385,074
11,772
276,399
53,302
51,962
—
875,658
9,903
39,018
21,903
87,065
142,474
50,649
351,012
96,640
243,505
12,023
233,812
68,662
65,008
—
744,319
122,652
133,138
8,715
114,702
79,129
87,515
515
578,167
—
—
39,015
16,130
71,373
173,928
55,403
355,849
40,513
19,606
31,767
217,954
41,991
351,831
19,679
21,241
19,840
$
1,991,815
$
1,852,094
$
1,215,372
79
We had net unrealized losses of $11.1 million and $3.9 million December 31, 2018 and December 31, 2017, respectively,
and a net unrealized gain of $1.1 million at December 31, 2016, related to the available for sale investment portfolio. We
had net unrealized losses associated with the securities held to maturity portfolio of $9.9 million, $5.9 million and $6.7
million at December 31, 2018, December 31, 2017 and December 31, 2016, respectively. We had net unrealized losses of
$0.9 million at December 31, 2018, and net unrealized gains of $1.6 million and $0.9 million at December 31, 2017 and
December 31, 2016, respectively, related to equity securities.
Banking Segment
The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates
additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust
deposits, securities sold under agreements to repurchase and other purposes. The available for sale and equity securities
portfolios serve as a source of liquidity. Historically, to minimize credit risk, 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. At December 31, 2018, the banking segment’s securities portfolio of $1.1 billion
was comprised of trading securities of $4.6 million, available for sale securities of $775.0 million, held to maturity
securities of $351.0 million and equity securities of $0.1 million, in addition to $13.9 million of other investments
included in other assets within the consolidated balance sheets.
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 $740.9 million at December 31, 2018. 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 $81.7 million
at December 31, 2018.
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, 2018, the insurance segment’s securities portfolio was comprised of $100.6 million in available for sale
securities, $19.5 million of equity securities and $5.9 million of other investments included in other assets within the
consolidated balance sheet.
80
The following table sets forth the estimated maturities of our debt securities, excluding trading securities, at December 31,
2018. Contractual maturities may be different (dollars in thousands, yields are tax-equivalent).
U.S. Treasury securities:
Amortized cost
Fair value
Weighted average yield
U.S. government agencies:
Bonds:
Amortized cost
Fair value
Weighted average yield
Residential mortgage-backed
securities:
Amortized cost
Fair value
Weighted average yield
Commercial mortgage-backed
securities:
Amortized cost
Fair value
Weighted average yield
One Year
Or Less
One Year to
Five Years
Five Years to
Greater Than
Ten Years
Ten Years
Total
$ 11,604
$ 11,595
$
$
2.42 %
9,851
9,849
$
$
2.34 %
$
—
—
$
— %
—
—
—
$
$
21,455
21,444
2.38 %
$ 34,777
$ 34,690
$
$
2.29 %
63,743
63,006
$
$
10,990
11,043
$
$
15,000
14,412
$
$
124,510
123,151
2.39 %
3.03 %
1.99 %
2.37 %
$
$
$
$
$
—
—
$
— %
88
91
4.42 %
$
$
46,088
45,529
$
$
367,155
361,094
$
$
413,331
406,714
2.57 %
2.60 %
2.60 %
$
$
—
—
—
7,175
6,851
$
$
1.81 %
83,436
82,774
$
$
2.83 %
8,157
8,020
3.11 %
$
$
98,768
97,645
2.78 %
Collateralized mortgage obligations:
Amortized cost
Fair value
Weighted average yield
$
$
$
—
—
$
— %
7,370
7,243
$
$
18,610
18,080
$
$
397,944
388,549
$
$
423,924
413,872
2.67 %
1.96 %
2.43 %
2.41 %
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
$
$
5,944
5,911
$
$
2.29 %
34,208
34,242
$
$
3.32 %
12,542
12,249
$
$
3.51 %
$
919
900
$
6.24 %
53,613
53,302
3.30 %
$
$
1,142
1,141
$
$
2.20 %
6,574
6,583
$
$
23,180
23,027
$
$
71,312
69,902
$
$
102,208
100,653
2.90 %
3.15 %
3.64 %
3.46 %
$ 53,467
$ 53,337
$ 129,009
$ 127,865
$ 194,846
$ 192,702
$
$
860,487
842,877
$ 1,237,809
$ 1,216,781
2.31 %
2.65 %
2.78 %
2.61 %
2.62 %
81
Loan Portfolio
Consolidated loans held for investment are detailed in the tables 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.
As previously discussed, the loans acquired in the FNB Transaction were previously subject to loss-share agreements with
the FDIC. At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the
FDIC expired, except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the
FDIC entered into a Termination Agreement pursuant to which all rights and obligations of the Bank and the FDIC under
the FDIC loss-share agreements have been resolved and terminated. Accordingly, loans which were previously referred to
as either “covered loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively
referred to as “loans held for investment.” Loans that were previously covered by the FDIC loss-share agreements are
included in the “covered” portfolio segment in the tables below as of December 31, 2017, 2016, 2015 and 2014. The
majority of the loans previously covered by the FDIC loss-share agreements were commercial real estate and 1-4 family
residential loans.
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Loans held for investment, gross
Allowance for loan losses
Loans held for investment, net of allowance
December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
Loans held for investment, net of allowance
December 31, 2016
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
Loans held for investment, net of allowance
82
Loans, excluding
PCI Loans
PCI
Loans
$ 2,912,407 $ 27,713 $
1,501,892
932,445
620,936
243,806
47,537
578,363
6,837,386
(56,594)
6,559
464
58,327
—
9
—
93,072
(2,892)
$ 6,780,792 $ 90,180 $
Loans, excluding
PCI Loans
PCI
Loans
$ 2,557,008 $ 25,159 $
1,345,319
961,167
424,976
329,787
40,319
577,889
95,016
6,331,481
(58,951)
6,099
1,438
4,381
—
127
—
87,113
124,317
(4,735)
$ 6,272,530 $ 119,582 $
Loans, excluding
PCI Loans
PCI
Loans
$ 2,308,867 $ 34,080 $
1,687,781
783,383
323,776
145,125
41,058
502,077
122,373
5,914,440
(51,158)
8,672
3,467
4,919
—
294
—
133,754
185,186
(3,441)
$ 5,863,282 $ 181,745 $
Total Loans Held
for Investment
2,940,120
1,508,451
932,909
679,263
243,806
47,546
578,363
6,930,458
(59,486)
6,870,972
Total Loans Held
for Investment
2,582,167
1,351,418
962,605
429,357
329,787
40,446
577,889
182,129
6,455,798
(63,686)
6,392,112
Total Loans Held
for Investment
2,342,947
1,696,453
786,850
328,695
145,125
41,352
502,077
256,127
6,099,626
(54,599)
6,045,027
December 31, 2015
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
Loans held for investment, net of allowance
December 31, 2014
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
PCI
Loans
46,780 $
Loans, excluding
PCI Loans
$ 1,808,857 $
1,539,455
700,206
316,737
134,870
44,893
590,545
158,320
5,293,883
(40,961)
13,350
5,150
5,995
—
779
—
221,974
294,028
(5,986)
Total Loans Held
for Investment
1,855,637
1,552,805
705,356
322,732
134,870
45,672
590,545
380,294
5,587,911
(46,947)
5,540,964
$ 5,252,922 $ 288,042 $
$
PCI
Loans
Loans, excluding
PCI Loans
1,279,631 $ 22,341 $
1,366,984
404,465
241,165
149,888
51,009
378,425
207,252
4,078,819
(31,799)
13,442
9,178
1,810
—
2,138
—
435,388
484,297
(9,853)
Total Loans Held
for Investment
1,301,972
1,380,426
413,643
242,975
149,888
53,147
378,425
642,640
4,563,116
(41,652)
4,521,464
4,047,020 $ 474,444 $
Loans held for investment, net of allowance
$
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 total loans held for investment, net of the allowance for loan losses, were $7.5 billion, $7.2 billion
and $6.9 billion at December 31, 2018, 2017 and 2016, respectively. The banking segment’s loan portfolio includes
warehouse lines of credit extended to PrimeLending of $2.3 billion, of which $1.2 billion, $1.5 billion and $1.6 billion was
drawn at December 31, 2018, 2017 and 2016, respectively. Amounts advanced against the warehouse lines of credit are
eliminated from net loans held for investment 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, 2018, the banking segment had loan concentrations (loans to borrowers engaged in similar activities)
that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were
non-construction commercial real estate loans, construction and land development loans, and non-construction residential
real estate loans, which represented 46.3%, 14.7% and 10.7%, respectively, of the banking segment’s total loans held for
investment at December 31, 2018. The banking segment’s loan concentrations were within regulatory guidelines at
December 31, 2018.
Broker-Dealer Segment
The loan portfolio of the broker-dealer segment consists primarily of 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
loans held for investment, net of the allowance for loan losses, were $578.2 million, $577.5 million and $501.9 million at
December 31, 2018, 2017 and 2016, respectively. The increase during 2018, compared to 2017, was primarily attributable
to increases of $17.2 million in receivables from clients, offset by decreases of $16.7 million in borrowings on margin
83
accounts. The increase during 2017, compared to 2016, was primarily attributable to increases of $17.0 million in
borrowings in margin accounts and $58.8 million in receivables from clients.
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
2018
December 31,
2017
2016
$ 1,213,068
44,707
$ 1,257,775
$ 1,528,834
52,770
$ 1,581,604
$ 1,706,383
42,115
$ 1,748,498
$
$
677,267
17,421
694,688
$
$
850,850
18,851
869,701
$
$
944,550
23,269
967,819
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, 2018, 2017 and 2016 were
$1.4 billion, $2.0 billion and $2.1 billion, respectively, while the related estimated fair values were ($11.6) million, ($0.2)
million and $8.5 million, respectively.
Termination of FDIC Loss-Share Agreements
At the close of business on September 30, 2018, the loss-share agreement for commercial assets with the FDIC expired,
except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered
into a Termination Agreement pursuant to which each of the loss-share agreements for single family residential assets and
commercial assets were terminated.
As of September 30, 2018, loans acquired in the FNB Transaction that were subject to loss-share agreements with the
FDIC were referred to as “covered loans” and reported separately in our consolidated balance sheets. Under the terms of
the loss-share agreements through October 17, 2018, the FDIC had 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 were defined as book value losses plus
certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement
for commercial assets through September 30, 2018, the amount of subsequent recoveries that were reimbursable to the
FDIC for a particular asset was limited to book value losses and expenses actually billed plus any book value charge-offs
incurred prior to the Bank Closing Date. There was no limit on the amount of subsequent recoveries reimbursable to the
FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and
single family residential assets were originally in effect for approximately five years and ten years, respectively, and the
loss recovery provisions to the FDIC were in effect for eight years and ten years, respectively, from the Bank Closing
Date. As part of the loss-share agreements, the Bank was subject to annual FDIC compliance audits. In accordance with
the loss-share agreements, the Bank may have been required to make a “true-up” payment to the FDIC approximately ten
years following the Bank Closing Date if our actual net realized losses over the life of the loss-share agreements were less
than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment was calculated using a defined
formula set forth in the P&A Agreement. On October 17, 2018, the Bank and the FDIC entered into a Termination
Agreement pursuant to which each of the loss-share agreements terminated in exchange for the payment by the FDIC to
the Bank of $6.26 million. These funds were received on October 19, 2018. Pursuant to the Termination Agreement, all
rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements, including, among others, the true-
up provisions and the settlement of loss-share and expense reimbursement claims, have been resolved and terminated. In
October 2018, in conjunction with the receipt of the $6.26 million payment noted above, the FDIC Indemnification Asset
of $22.8 million and the FDIC true-up accrual of $16.6 million were removed with no further impact to the Company’s
84
consolidated statements of operations. As previously discussed, all loans that were previously identified as “covered” are
included in loans held for investment within the consolidated balance sheets as of December 31, 2018.
Loan Portfolio Maturities
The following table provides information regarding the maturities of the banking segment’s real estate and commercial
and industrial loans held for investment, net of unearned income (in thousands).
Due Within
One Year
Due From One Due After
Five Years
To Five Years
Total
December 31, 2018
Real estate
Commercial and industrial
Total
Fixed rate loans
Floating rate loans
Total
$ 1,089,789 $ 2,143,778 $ 1,321,189 $ 4,554,756
2,945,773
$ 3,363,375 $ 2,628,217 $ 1,508,937 $ 7,500,529
2,273,586
484,439
187,748
$ 1,475,952 $ 2,365,819 $ 1,400,762 $ 5,242,533
2,257,996
$ 3,363,375 $ 2,628,217 $ 1,508,937 $ 7,500,529
1,887,423
262,398
108,175
In the table above, real estate includes commercial real estate, construction and land development and 1-4 family
residential loans. Commercial and industrial includes mortgage warehouse loans. 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 loan portfolio. 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.
85
While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole
basis upon which we determine the appropriate level for the allowance for loan losses. Management considers recent
qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to
differ from historical loss experience, including but not limited to:
•
•
•
•
•
•
•
changes in the volume and severity of past due, non-accrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, non-accrual and classified loans, as well as changes in the nature, volume
and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the
historical loss factors. Classified loans are defined as loans having a well-defined weakness or weaknesses related to the
borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are
characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard
classification are not corrected. The magnitude of the impact of these factors on 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 Bank Transactions are accounted for either on an individual loan
basis or in pools. 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 certain
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. The balance of the aggregate discount on our loans was
$99.8 million and $120.7 million at December 31, 2018 and 2017, respectively.
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.
86
Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed
appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted,
the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the
results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and
other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking
segment, was $5.1 million, $14.3 million and $40.6 million during 2018, 2017 and 2016, respectively. The significant
changes in the provision for loan losses during 2018, compared with 2017, were primarily the result of improved
economic outlook in the oil and gas industry which affected the qualitative factors used to calculate the provision for loan
losses as well as lower loan growth. The significant changes in the provision for loan losses during 2017, compared with
2016, 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 loan portfolio at December 31, 2018, 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 loan portfolio for the periods
presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.
Loans Held for Investment
Balance, beginning of year
Provision for loan losses
Recoveries of loans previously charged off:
2018
$ 63,686
5,088
Year Ended December 31,
2016
$ 46,947
40,620
2015
$ 41,652
12,715
2017
$ 54,599
14,271
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total recoveries
Loans charged off:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total charge-offs
Net charge-offs
Balance, end of year
Allowance for loan losses as a percentage of gross
loans held for investment
—
4,273
6
146
—
64
—
—
4,489
24
1,833
7
201
—
79
—
22
2,166
51
1,931
—
344
—
123
—
121
2,570
406
3,558
—
114
—
127
123
342
4,670
2014
$ 34,302
16,933
70
2,943
185
148
—
105
1
—
3,452
800
12,741
—
143
—
93
—
—
13,777
(9,288)
$ 59,486
193
6,253
13
112
—
208
—
571
7,350
(5,184)
$ 63,686
1,243
33,776
—
196
—
203
1
119
35,538
(32,968)
$ 54,599
79
7,144
—
526
—
378
—
3,963
12,090
(7,420)
$ 46,947
—
6,926
—
114
—
359
—
5,636
13,035
(9,583)
$ 41,652
0.86 %
0.99 %
0.90 %
0.84 %
0.91 %
87
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 loan portfolio are presented in the tables below (dollars in thousands).
2018
2017
December 31,
2016
2015
2014
% of
Gross
Loans
% of
Gross
Loans
Reserve
% of
% of
Gross
Loans
Reserve
Gross
Loans
Reserve
% of
Gross
Loans
Reserve
42.42 % $ 26,413
40.00 % $ 22,262
38.41 % $ 15,669
33.21 % $
6,815
28.53 %
Reserve
$ 27,100
21,980
21.77 % 23,674
20.93 % 21,369
27.81 %
19,845
27.79 %
18,833
30.25 %
6,061
3,956
—
267
122
—
$ 59,486
13.46 %
9.80 %
3.52 %
0.69 %
8.34 %
— %
7,844
2,362
—
311
353
2,729
100.00 % $ 63,686
14.91 %
6.65 %
5.11 %
0.63 %
8.95 %
2.82 %
7,002
2,974
—
424
155
413
100.00 % $ 54,599
12.90 %
5.39 %
2.38 %
0.68 %
8.23 %
4.20 %
6,064
3,314
—
314
209
1,532
100.00 % $ 46,947
12.62 %
5.78 %
2.41 %
0.82 %
10.57 %
6.81 %
6,450
4,316
—
461
166
4,611
100.00 % $ 41,652
9.06 %
5.32 %
3.28 %
1.16 %
8.29 %
14.08 %
100.00 %
Commercial real estate
Commercial and
industrial
Construction and land
development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
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. We had seven credit
relationships totaling $17.8 million of potential problem loans at December 31, 2018, compared with six credit
relationships totaling $27.6 million of potential problem loans at December 31, 2017 and five credit relationships totaling
$4.3 million of potential problem loans at December 31, 2016.
Non-Performing Assets
As previously discussed, during the fourth quarter of 2018, the Bank and the FDIC entered into a Termination Agreement
pursuant to which all rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements were
resolved and terminated. As such, the following table presents components of our non-performing assets with previously
covered assets presented in a separate portfolio segment as of December 31, 2017, 2016, 2015 and 2014 (dollars in
thousands).
2018
2017
2016
2015
2014
December 31,
Loans accounted for on a non-accrual basis:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
$
$
$
5,324
14,870
3,278
10,437
—
41
—
—
33,950
14,620
20,878
611
4,358
—
56
—
5,104
45,627
9,515
13,932
755
244
—
—
—
3,836
28,282
$
$
17,764
7,160
114
7
—
—
—
8,978
34,023
$
$
16,648
4,707
703
—
—
—
—
34,223
56,281
$
$
$
Non-performing loans as a percentage of total loans
0.41 %
0.56 %
0.36 %
0.48 %
0.96 %
Other real estate owned
Other repossessed assets
Non-performing assets
$
27,578
$
40,627
$
56,149
$
68
$
323
$
1,117
$
$
99,484
$
137,753
—
$
361
$
61,596
$
86,577
$
85,548
$
133,507
$
194,395
Non-performing assets as a percentage of total assets
0.45 %
0.65 %
0.67 %
1.13 %
2.10 %
Non-PCI loans past due 90 days or more and still accruing
$
83,131
$
85,396
$
47,659
$
50,776
$
19,304
Troubled debt restructurings included in accruing loans held for
investment
$
1,339
$
1,433
$
1,699
$
1,933
$
3,227
88
At December 31, 2018, total non-performing assets decreased $25.0 million to $61.6 million, compared with $86.6
million at December 31, 2017. At December 31, 2017, total non-performing assets increased $1.0 million to $86.6
million, compared with $85.6 million at December 31, 2016. Non-performing loans totaled $34.0 million, $45.6 million
and $28.3 million at December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, non-accrual loans included
16 commercial and industrial relationships with loans totaling $14.9 million secured by accounts receivable, life
insurance, oil and gas, livestock, and equipment. Non-accrual loans at December 31, 2018 also included $15.8 million
characterized as real estate loans, including four commercial real estate loan relationships totaling $5.3 million and $10.4
million in loans secured by 1-4 family residential real estate, $3.4 million of which were classified as loans held for sale,
as well as five construction and land development relationships of $3.3 million. At December 31, 2017, non-accrual loans
included 19 commercial and industrial relationships with loans totaling $20.9 million secured by accounts receivable, life
insurance, livestock, oil and gas, and equipment. Non-accrual loans at December 31, 2017 also included $24.1 million
characterized as real estate loans, including eight commercial real estate loan relationships totaling $14.6 million and
$9.5 million in loans secured by 1-4 family 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-accrual loans
included 20 commercial and industrial relationships with loans of $9.6 million secured by accounts receivable, inventory,
life insurance, livestock, and oil and gas. Non-accrual loans at December 31, 2016 also included $17.6 million
characterized as real estate loans, including eight commercial real estate loan relationships totaling $11.7 million and $5.9
million in loans secured by residential real estate, $1.7 million of which were classified as loans held for sale, as well as
construction and land development loans of $0.8 million.
OREO decreased $13.0 million to $27.6 million at December 31, 2018, compared with $40.6 million at December 31,
2017. Changes in OREO in 2018, compared with 2017, included the disposal of 111 properties totaling $16.7 million and
downward valuation adjustments of $2.8 million, partially offset by the addition of 50 properties totaling $6.7 million.
OREO decreased $15.5 million to $40.6 million at December 31, 2017, compared with $56.1 million at December 31,
2016. Changes in OREO in 2017, compared with 2016, included the disposal of 171 properties totaling $19.7 million and
downward valuation adjustments of $4.5 million, partially offset by the addition of 54 properties totaling $8.7 million. At
both December 31, 2018 and 2017, OREO was primarily comprised of commercial real estate properties.
Non-PCI loans past due 90 days or more and still accruing were $83.1 million, $85.4 million and $47.7 million at
December 31, 2018, 2017 and 2016, 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 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, 2018, troubled debt restructurings (“TDRs”) on loans totaled $7.2 million. These TDRs were comprised
of $1.3 million of loans that were considered to be performing and non-performing loans of $5.9 million reported in non-
accrual loans. At December 31, 2017, TDRs on loans totaled $11.9 million, consisting of $1.5 million related to loans that
were considered to be performing and non-performing loans of $10.4 million reported in non-accrual loans. At
December 31, 2016, TDRs on loans totaled $7.8 million, consisting of $1.7 million related to loans that were considered
to be performing and non-performing loans of $6.1 million reported in non-accrual loans.
Current Expected Credit Loss (CECL) Standard
In June 2016, the FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model for
measuring credit losses on certain exposures. The new model will require the measurement of expected credit losses to
reflect the lifetime of an exposure (or pool of exposures) represented by certain financial instruments to be based on
historical experience, current conditions and reasonable and supportable forecasts. Under the current “incurred loss”
model, the allowance for loan losses is based only on estimates of loan losses that currently exist in the portfolio as of the
reporting date. The new model will become effective on January 1, 2020, and applies to most debt instruments, trade
receivables, lease receivables, reinsurance receivables, financial guarantees and loan commitments. Our ongoing
transition CECL efforts include reassessing risk ratings, developing and validating the new model, collecting and
processing new data and establishing internal controls and accounting policies. New model development has increased
expenses associated with the collection and processing of data during 2018, and these increases in expenses will continue
89
into 2019. We expect that the new model may require a material increase in our allowance for loan losses upon adoption
on January 1, 2020.
Insurance Losses and Loss Adjustment Expenses
At December 31, 2018, 2017 and 2016, our gross reserve for unpaid losses and LAE was $20.6 million, $30.2 million,
and $35.8 million, respectively, including estimated recoveries from reinsurance of $3.2 million, $11.5 million, and $9.4
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
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, 2018, this
equates to approximately plus or minus $1.7 million, or 1.4% of insurance segment equity, and 2.2% of calendar year
2018 insurance losses.
90
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 $8.1 billion during 2018 and were higher than average deposits of $7.5 billion during
2017 and $7.1 billion during 2016. 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
2018
Average
Balance
$ 2,504,599
4,025,259
201,328
1,341,886
$ 8,073,072
Average
Rate Paid
Year Ended December 31,
2017
Average
Balance
Average
Rate Paid
2016
Average
Balance
Average
Rate Paid
0.00 % $ 2,309,776
0.66 % 3,671,521
0.11 %
234,420
1.42 % 1,314,418
0.57 % $ 7,530,135
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 %
0.14 %
0.15 %
0.81 %
0.22 %
The maturity of consolidated interest-bearing time deposits of $100,000 or more at December 31, 2018 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
$
116,887
128,918
519,525
253,878
$ 1,019,208
The banking segment experienced a decrease of $129.2 million in interest-bearing time deposits of $100,000 or more at
December 31, 2018, compared to December 31, 2017. The decrease during 2018, compared to 2017, was primarily due to
our strategic decision to not renew brokered certificates of deposit in 2018. This is compared to 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.
The increase during 2017, compared to 2016, was primarily due to our strategic decision to offer more attractive time
deposit rate options. At December 31, 2018, there were $991.4 million in interest-bearing time deposits scheduled to
mature within one year.
Borrowings
Our borrowings are shown in the table below (dollars in thousands).
2018
Short-term borrowings
Notes payable
Junior subordinated debentures
Average
Rate Paid
December 31,
2017
2016
Balance
Average
Rate Paid
Balance
Average
Rate Paid
2.15 % $ 1,206,424
208,809
4.95 %
5.47 %
67,012
2.70 % $ 1,482,245
1.20 % $ 1,417,289
317,912
3.65 %
4.50 %
67,012
1.84 % $ 1,802,213
0.65 %
3.89 %
3.99 %
1.57 %
Balance
$ 1,065,807
228,872
67,012
$ 1,361,691
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 $140.6 million decrease in short-term
borrowings at December 31, 2018 compared with December 31, 2017 included a net decrease of $138.5 million in our
banking segment primarily associated with decreases in FHLB notes and securities sold under agreements to repurchase,
91
in addition to a net decrease of $2.1 million in short-term bank loans and securities sold under agreements to repurchase
used by the Hilltop Broker-Dealers to finance their activities. 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.
Notes payable at December 31, 2018 of $228.9 million was comprised of $148.6 million related to Senior Notes, net of
loan origination fees, FHLB borrowings with an original maturity greater than one within our banking segment of $4.4
million, insurance segment line of credit and term notes of $27.5 million, and mortgage origination segment borrowings
of $48.4 million. 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. The increase in notes payable at December 31, 2018 compared to December 31, 2017 is
primarily the result of higher outstanding balances on lines of credit held by the mortgage segment’s ABAs. 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. 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, dividend payments and stock repurchases. At December 31, 2018,
Hilltop had $43.9 million in cash and cash equivalents, a decrease of $52.9 million from $96.8 million at December 31,
2017. This decrease in cash and cash equivalents was primarily due to $26.7 million in cash dividends declared, $59.0
million of purchases under our stock repurchase program, $24.6 million in cash paid related to the Hilltop Plaza
transaction and other general corporate expenses, partially offset by $82.5 million of dividends from subsidiaries. Subject
to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. If
necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. 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 2018, we
declared and paid cash dividends of $0.28 per common share, or $26.7 million.
On January 24, 2019, our board of directors declared a quarterly cash dividend of $0.08 per common share, payable on
February 28, 2019 to all common stockholders of record as of the close of business on February 15, 2019.
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.
BORO Acquisition
On August 1, 2018, we acquired BORO in an all-cash transaction. Pursuant to the terms of the definitive agreement, we
paid cash in the aggregate amount of $85 million to the shareholders and option holders of BORO. The transaction was
funded through short-term borrowings made by the Bank. The fair value of the assets acquired was $434.8 million,
including $326.6 million in loans, while the fair value of liabilities assumed was $389.4 million, consisting primarily of
$376.4 million in deposits. The operations of BORO were included in the Bank’s operating results beginning August 1,
2018. The estimated fair value of the core deposit intangible asset acquired as of August 1, 2018 was $10.0 million and
resulting goodwill was $39.6 million.
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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.”
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, 2018, $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 2018, our board of directors reauthorized the stock repurchase program, under which it authorized us to
repurchase, in the aggregate, up to $50.0 million of our outstanding common stock through January 2019. In July 2018,
our board of directors increased the aggregate amount of common stock that we may repurchase under this program to
$100.0 million. In January 2019, our board of directors authorized a new stock repurchase program through January 2020,
pursuant to which we are authorized to repurchase, in the aggregate, up to $50.0 million of our outstanding common
stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. Under the stock
repurchase program authorized, we may repurchase shares in the open market 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 2018, the Company paid $59.0 million to repurchase an aggregate of 2,729,568 shares of common stock at an
average price of $21.61 per share. The purchases were funded from available cash balances.
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Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material
adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements,
we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In January 2015, the comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for
PlainsCapital, which includes the Bank and PrimeLending, 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, 2018, as well
as the fully phased-in requirements through 2019.
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are
allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if
an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion
in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier
2 capital. All of the debentures issued to the 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, 2018, under guidance issued by the Board of Governors of the
Federal Reserve System.
At December 31, 2018, Hilltop had a total capital to risk weighted assets ratio of 17.47%, Tier 1 capital to risk weighted
assets ratio of 17.04%, common equity Tier 1 capital to risk weighted assets ratio of 16.58% and a Tier 1 capital to
average assets, or leverage, ratio of 12.53%. 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, 2018, PlainsCapital had a total capital to risk weighted assets ratio of 14.63%, Tier 1 capital to risk
weighted assets ratio of 13.90%, common equity Tier 1 capital to risk weighted assets ratio of 13.90%, and a Tier 1
capital to average assets, or leverage, ratio of 12.47%. 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 this Annual Report.
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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
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.
Within our banking segment, we had deposits of $8.2 billion at December 31, 2018, an increase of $515.1 million from
$7.6 billion at December 31, 2017. 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,
2018, money market deposits, including brokered deposits, were $2.7 billion; time deposits, including brokered deposits,
were $1.3 billion; and noninterest bearing demand deposits were $2.5 billion. Money market deposits, including brokered
deposits, increased by $406.4 million from $2.3 billion and time deposits, including brokered deposits, decreased $100.5
million from $1.4 billion at December 31, 2017.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 10.08% of the
Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively
accounted for 5.66% of the Bank’s total deposits at December 31, 2018. 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, 2018, Hilltop Securities had credit arrangements with five
unaffiliated banks, with maximum aggregate commitments 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, 2018, Hilltop Securities had borrowed $189.0 million under its credit arrangements and had no
borrowings under its credit facility.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through warehouse lines of credit maintained with the Bank which
have an aggregate commitment of $2.3 billion, of which $1.2 billion was drawn at December 31, 2018. 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, 2018.
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,
2018, these ABAs had combined available lines of credit totaling $110.0 million, $50.0 million of which was with a
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single unaffiliated bank, and the remaining $60.0 million of which was with the Bank. At December 31, 2018, Ventures
Management had outstanding borrowings of $66.2 million, $17.8 million of which was with the Bank. In December 2018,
we began the process of winding down one ABA and anticipate the process to be completed by the end of the first quarter
of 2019. This ABA held $10.0 million of the ABAs’ combined available lines of credit and had outstanding borrowings of
$3.3 million, all of which was with the 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 $141.1 million, or 87.9%, equity investments of $19.5 million and other investments of $5.9
million comprised NLC’s $160.6 million in total cash and investments at December 31, 2018. 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.
Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2018 (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, and the table below includes all leases that had commenced as of December 31, 2018. 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
Total
$
13,503 $
1,093,882
63,041
1,186
36,171
$ 1,207,783 $
5,446 $
—
29,405
2,409
50,167
87,427 $
205 $
Total
20,552
1,398 $
1,093,882
—
—
443,570
324,483
26,641
9,576
3,460
2,521
28,747
133,349
18,264
59,307 $ 346,412 $ 1,700,929
In addition to the contractual obligations presented above, during 2018, Hilltop and the Bank entered into leases for an
aggregate of approximately 72,000 of the total 119,000 square feet of rentable space in Hilltop Plaza to serve as the
headquarters for both companies. The two separate 129-month office and retail leases, which are expected to commence
in the fourth quarter of 2019, have combined total base rent of approximately $35 million with the first nine months of
rent abated.
Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently
require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative
value of money due to inflation or recession are generally not considered. The primary effect of inflation on our
operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly
influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the
inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the
expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of
the U.S. government, its agencies and various other governmental regulatory authorities.
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Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in
our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These
transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses,
at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon
customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under
these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated
with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated
financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to
a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third
party, we would be required to fund the commitment. The maximum potential amount of future payments we could be
required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be
entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements
contain security and debt covenants similar to those contained in loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.4 billion at December 31, 2018
and outstanding financial and performance standby letters of credit of $85.0 million at December 31, 2018.
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 MD&A. 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, as summarized below.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses existing 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 been
incurred on a specific loan. Recoveries are credited as a reduction 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 existing in the portfolio. Based on these estimates, an amount is charged to or recovered from
the provision 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 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 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.
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FDIC Indemnification Asset
As previously discussed, the loss-share agreements with the FDIC entered into in connection with the FNB Transaction
were terminated in the fourth quarter of 2018. However, accounting for the FDIC Indemnification Asset required a critical
accounting estimate and affected our consolidated balance sheets and statements of operations through October 17, 2018.
The FDIC Indemnification Asset was initially recorded at fair value, based on the discounted value of expected future
cash flows under the loss-share agreements. The difference between the present value and the undiscounted cash flows we
expected to collect from the FDIC was accreted into noninterest income within the consolidated statements of operations
over the life of the FDIC Indemnification Asset. The FDIC Indemnification Asset was reviewed quarterly and the
accretion rate was adjusted for changes in the timing of cash flows expected to be collected from the FDIC. Cumulative
net losses over the life of the loss-share agreements of less than $240.4 million reduced the value of the FDIC
Indemnification Asset. Any amortization of changes in value of the FDIC Indemnification Asset was limited to the
contractual terms of the loss-share agreements. Changes to the FDIC Indemnification Asset were recorded as adjustments
to other noninterest income or expense, as appropriate, within the consolidated statements of operations over the life of
the loss-share agreements.
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 reporting 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 unpaid losses, including case reserves and IBNR
reserves, and 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, many factors are considered in determining the appropriate amount of reserves to record
for the period, including 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 are 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 or other identifiable intangible assets may be
impaired, an interim impairment test would be required. Intangible assets with finite lives are amortized over their useful
lives. We perform required annual impairment tests of our goodwill and other intangible assets as of October 1st for our
reporting units.
The goodwill impairment test requires us to make judgments and assumptions. The test 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 each 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, any loss recognized will not exceed the total amount
of goodwill allocated to that reporting unit.
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This 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 a 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
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 an 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 conditions outside of our
control such as unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely
affecting specific borrowers or industries, 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 adversely impact the recorded value of the MSR asset. The value of the MSR asset is also
dependent upon the discount rate used in the model, which is based on current market rates and is reviewed by
management on an ongoing basis. An increase in the discount rate would result in a decrease in 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 and liabilities assumed, including identifiable intangibles, 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, as liquid markets often do not exist
for certain loans, deposits, identifiable intangible assets and other assets and liabilities acquired or assumed. Our valuation
methodologies employ 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 permitted to be revised for up to one year after the acquisition date, determine the amount of goodwill or
bargain purchase gain recognized in connection with a 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 our periodic impairment
assessments 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.
99
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, 2018, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and
unamortized debt issuance costs and premiums, were $297.1 million, and were comprised of $154.2 million in debt
obligations subject to fixed interest rates, with the remainder of indebtedness subject to variable interest rates. If LIBOR
and the prime rate were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable
rate debt would not have a significant impact on our future consolidated earnings or cash flows.
Banking Segment
The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in
interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest
rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference
between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that
our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to
interest rate risk and corresponding fluctuations in net interest income.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact
on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities.
Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher
rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the
same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers
to unequal movements in interest rates across a full range of maturities.
We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-
bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable
levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet
decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the
asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge
specified assets and liabilities.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an
interest rate change in line with general market interest rates. The management of interest rate risk is performed by
analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at
specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific
periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A
company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets
maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing
within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the
amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-
earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP
would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income,
while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively
balanced so that changes in rates do not have a significant impact on earnings.
100
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).
3 Months or > 3 Months to > 1 Year to > 3 Years to
Less
1 Year
3 Years
5 Years
> 5 Years
Total
December 31, 2018
Interest sensitive assets:
Loans
Securities
Federal funds sold and securities purchased under agreements to
resell
Other interest sensitive assets
$ 4,250,885
144,159
$
1,240,987
143,150
$ 1,545,627
267,669
$
281,888
133,961
$
228,688
443,401
$
7,548,075
1,132,340
400
440,118
4,835,562
—
—
1,384,137
—
—
1,813,296
—
—
415,849
—
29,191
701,280
400
469,309
9,150,124
Total interest sensitive assets
Interest sensitive liabilities:
Interest bearing checking
Savings
Time deposits
Notes payable and other borrowings
Total interest sensitive liabilities
$
$ 4,123,853
184,700
180,000
343,766
4,832,319
$
—
—
823,432
550
823,982
$
—
—
247,675
3,779
251,454
$
—
—
12,343
602
12,945
—
—
44,834
5,071
49,905
$
4,123,853
184,700
1,308,284
353,768
5,970,605
Interest sensitivity gap
$
3,243
$
560,155
$ 1,561,842
$
402,904
$
651,375
$
3,179,519
Cumulative interest sensitivity gap
$
3,243
$
563,398
$ 2,125,240
$ 2,528,144
$
3,179,519
Percentage of cumulative gap to total interest sensitive assets
0.04 %
6.16 %
23.23 %
27.63 %
34.75 %
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, 2018 (dollars in
thousands).
Change in
Interest Rates
(basis points)
+300
+200
+100
-50
Changes in
Net Interest Income
Amount
Percent
Changes in
Economic Value of Equity
Amount
Percent
$
$
$
$
64,525
43,542
20,717
(9,360)
18.20 % $
12.28 % $
5.84 % $
(2.64)% $
301,279
216,620
111,418
(64,476)
16.14 %
11.61 %
5.97 %
(3.45)%
The projected changes in net interest income and economic value of equity to changes in interest rates at December 31,
2018 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.
While we are seeing an increase in loan yields as a result of the rising interest rate environment, a portion of our loan
portfolio remains at applicable rate floors, 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 trend will continue until contractual rate resets allow our entire loan portfolio to reprice above applicable rate
floors. Short-term interest rates have risen faster than medium and longer term rates, which has reduced the favorable
impact of our asset-sensitive position on net interest income. Any changes in interest rates across the term structure will
101
continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape
of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.
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 receivables
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 and receivables 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, 2018
> 5 Years
to 10 Years
> 10 Years
Total
187
—
(4,724)
(4,537)
(17,962)
23,797
1,298
$
$
2,168
2,515
(2,595)
2,088
—
—
2,088
$
$
28,576
(9,696)
8,831
27,711
—
—
27,711
$
$
95,817
516,168
16,155
628,140
—
—
628,140
$
$
126,748
508,987
17,667
653,402
(17,962)
23,797
659,237
1.58 %
8.66 %
3.13 %
2.09 %
2.52 %
3.98 %
2.79 %
2.68 %
4.96 %
3.91 %
4.20 %
6.12 %
3.62 %
4.15 %
4.83 %
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
102
market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment
through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price
risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date
or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and
our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of
our interest rate risk management strategy is our execution of forward commitments to sell MBSs to minimize the impact
on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by
changes in interest rates.
We have 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 U.S. Treasury bond futures and options, Eurodollar futures 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 and the financial statement schedule on page F-76 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
103
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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2018. In making
this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our assessment, management
concluded that, at December 31, 2018, our internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of our internal
control over financial reporting as of December 31, 2018, and issued an unqualified opinion thereon as stated in their
report, which appears on page F-2.
Item 9B. Other Information.
None.
104
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 2019 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 2019 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 2019 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 2019 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 2019 Annual Meeting of
Stockholders, and is incorporated herein by reference.
105
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
2. Financial Statement Schedules.
Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment
Expenses, Net of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-76
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.
106
Exhibit
Number
2.1.1
2.1.2
2.2
3.1
3.2
4.1
4.2
4.3.1
4.3.2
4.3.3
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).
Termination Agreement among Federal Deposit Insurance Corporation, as Receiver of First National Bank,
Edinburg, Texas, PlainsCapital Bank and Federal Deposit Insurance Corporation, acting in its corporate
capacity, dated as of October 17, 2019 (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K
filed on October 22, 2018 (File No. 001-31987) and incorporated herein by reference.
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).
107
4.3.4
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
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).
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).
108
4.5.2
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
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).
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).
10.1.1†
10.1.2†
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 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).
109
10.1.3†
10.1.4†
10.1.5†
10.1.6†
10.1.7†
10.1.8†
10.1.9†
10.2†
10.3.1†
10.3.2†
10.4.1†
10.4.2†
10.5†
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).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in
2018 (filed as Exhibit 10.1.8 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards
beginning in 2018 (filed as Exhibit 10.1.9 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by
reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for
awards beginning in 2018 (filed as Exhibit 10.1.10 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by
reference).
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).
110
10.5.1†
First Amendment to Employment Agreement, dated as of November 8, 2017, by and between Todd Salmans
and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
November 13, 2017 (File No. 001-31987) and incorporated herein by reference).
10.6†
10.7†
10.8†
10.9.1†
10.9.2†
10.10†
10.11†
10.12†
10.13†
10.14†
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).
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).
Employment Agreement, dated as of November, 20, 2018, by and between Hilltop Holdings Inc. and Martin
B. Winges (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 12, 2018
(File No. 001-31987) and incorporated herein by reference).
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).
Limited Liability Company Agreement of HTH Diamond Hillcrest Land LLC, dated as of July 31, 2018
(filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File
No. 001- 31987) and incorporated herein by reference).
Ground Lease Agreement by and among HTH Diamond Hillcrest Land LLC, as Ground Lessor, and SPC
Park Plaza Partners LLC, HTH Hillcrest Project LLC and Diamond Hillcrest LLC, as Ground Lessees, dated
as of July 31, 2018 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 6,
2018 (File No. 001-31987) and incorporated herein by reference).
Hilltop Plaza Co-Owners Agreement, by and among Diamond Hillcrest, LLC, HTH Hillcrest Project LLC
and SPC Park Plaza Partners LLC, dated as of July 31, 2018 (filed as Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by
reference).
Office Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project
LLC, as Co-Owners, and Hilltop Holdings Inc., as Tenant, dated July 31, 2018 (filed as Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated
herein by reference).
Retail Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project
LLC, as Co-Owners, and PlainsCapital Bank, as Tenant, dated July 31, 2018 (filed as Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated
herein by reference).
21.1*
List of subsidiaries of the Registrant.
23.1*
Consent of PricewaterhouseCoopers LLP.
31.1*
31.2*
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.
111
31.3*
32.1*
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 or arrangement.
112
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, 2019
HILLTOP HOLDINGS INC.
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
113
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
/s/ Charlotte Jones Anderson
Charlotte Jones Anderson
/s/ Rhodes Bobbitt
Rhodes Bobbitt
/s/ Tracy A. Bolt
Tracy A. Bolt
/s/ W. Joris Brinkerhoff
W. Joris Brinkerhoff
/s/ 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
/s/ C. Clifton Robinson
C. Clifton Robinson
/s/ Kenneth D. Russell
Kenneth D. Russell
/s/ A. Haag Sherman
A. Haag Sherman
/s/ Robert Taylor, Jr.
Robert Taylor, Jr.
/s/ Carl B. Webb
Carl B. Webb
President, Co-Chief Executive Officer and Director
February 15, 2019
(Co-Principal Executive Officer)
Vice Chairman and Co-Chief Executive Officer
February 15, 2019
(Co-Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
February 15, 2019
Executive Vice President, Corporate Controller
February 15, 2019
(Principal Accounting Officer)
Director
Director
February 15, 2019
February 15, 2019
Director and Audit Committee Member
February 15, 2019
Director
Director
February 15, 2019
February 15, 2019
Director and Chairman of Audit Committee
February 15, 2019
Director
Chairman of the Board
February 15, 2019
February 15, 2019
Director and Audit Committee Member
February 15, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
114
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
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-76
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hilltop Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hilltop Holdings Inc. and its subsidiaries (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2018, including the related notes, 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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, 2019
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)
Assets
Cash and due from banks
Federal funds sold
Assets segregated for regulatory purposes
Securities purchased under agreements to resell
Securities:
Trading, at fair value
Available for sale, at fair value (amortized cost of $886,799 and $748,255, respectively)
Held to maturity, at amortized cost (fair value of $341,124 and $349,939, respectively)
Equity, at fair value
Loans held for sale
Loans held for investment, net of unearned income
Allowance for loan losses
Loans held for investment, net
Broker-dealer and clearing organization receivables
Premises and equipment, net
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; 93,610,217 and 95,982,184 shares issued
and outstanding at December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Deferred compensation employee stock trust, net
Employee stock trust (10,894 and 11,672 shares, at cost, at December 31, 2018 and 2017, respectively)
Total Hilltop stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes.
December 31,
2018
2017
$
644,073 $
400
133,993
61,611
486,977
405
186,578
186,537
745,466
875,658
351,012
19,679
1,991,815
1,393,246
6,930,458
(59,486)
6,870,972
730,685
744,319
355,849
21,241
1,852,094
1,715,357
6,455,798
(63,686)
6,392,112
1,440,287
237,373
580,362
291,435
38,005
13,683,572 $
1,464,378
177,577
615,531
251,808
36,432
13,365,786
2,560,750 $
5,975,406
8,536,156
2,411,849
5,566,270
7,978,119
1,294,925
1,065,807
81,667
228,872
67,012
435,240
11,709,679
1,287,563
1,206,424
232,821
208,809
67,012
470,231
11,450,979
$
$
936
1,489,816
(8,627)
466,737
825
(217)
1,949,470
24,423
1,973,893
13,683,572 $
960
1,526,369
(394)
384,545
848
(247)
1,912,081
2,726
1,914,807
13,365,786
$
F-3
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2018
Year Ended December 31,
2017
2016
$
436,725 $
66,914
411,988 $
41,048
50,975
6,834
17,980
579,428
46,002
56,733
25,816
10,263
3,663
627
143,104
436,324
5,088
431,236
445,116
103,563
150,989
90,066
136,751
96,305
1,022,790
768,688
115,207
105,752
79,347
224,255
1,293,249
160,777
35,050
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
125,727
4,286
121,441 $
133,144
600
132,544 $
389,637
29,518
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
1.28 $
1.28 $
1.36 $
1.36 $
1.48
1.48
94,969
95,067
97,137
97,353
98,404
98,629
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
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
Earnings per common share:
Basic
Diluted
Weighted average share information:
Basic
Diluted
$
$
$
See accompanying notes.
F-4
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
Net unrealized gains (losses) on securities available for sale, net of
tax of $(1,558), $(565) and $1,264, respectively
Reclassification adjustment for gains (losses) included in net
income, net of tax of $0, $(6) and $0, respectively
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
2018
125,727 $
Year Ended December 31,
2017
133,144 $
2016
147,944
$
(5,632)
(869)
(2,144)
—
120,095
4,286
(10)
132,265
600
—
145,800
2,050
Comprehensive income applicable to Hilltop
$
115,809 $
131,665 $
143,750
See accompanying notes.
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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:
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Depreciation, amortization and accretion, net
Net realized gains on securities
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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
Proceeds from sales, maturities and principal reductions of equity securities
Purchases of securities held to maturity
Purchases of securities available for sale
Purchases of equity securities
Net change in loans held for investment
Purchases of premises and equipment and other assets
Proceeds from sales of premises and equipment and other real estate owned
Net cash received from (paid for) Federal Home Loan Bank and Federal Reserve Bank stock
Net cash paid for acquisition
Net cash used in investing activities
Financing Activities
Net change in deposits
Net change in short-term borrowings
Proceeds from notes payable
Payments on notes payable
Proceeds from issuance of common stock
Payments to repurchase common stock
Dividends paid on common stock
Net cash contributed from (distributed to) noncontrolling interest
Taxes paid on employee stock awards netting activity
Other, net
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks
Federal funds sold
Assets segregated for regulatory purposes
Total cash, cash equivalents and restricted cash
Supplemental Disclosures of Cash Flow Information
Cash paid for interest
Cash paid for income taxes, net of refunds
Supplemental Schedule of Non-Cash Activities
Construction in progress related to build-to-suit lease obligations
Conversion of loans to other real estate owned
Additions to mortgage servicing rights
See accompanying notes.
F-7
Year Ended December 31,
2017
2016
2018
$
125,727 $
133,144 $
147,944
5,088
(2,345)
—
2,486
13,197
8,838
124,926
(14,781)
23,618
22,831
13,741
(7,054)
(93,890)
(151,154)
9,303
(445,116)
(14,287,551)
15,041,676
389,540
14,271
(13,869)
(16)
—
40,933
12,085
(97,107)
(465,151)
(42,449)
24,890
(47,352)
(2,412)
(55,557)
78,932
17,499
(538,468)
(15,014,118)
15,634,027
(320,718)
40,620
(49,765)
—
—
(9,690)
16,564
16,230
(51,388)
(46,775)
20,577
41,315
(33,180)
11,752
23,845
7,586
(606,991)
(16,026,911)
16,337,299
(160,968)
43,699
243,708
3
(39,259)
(323,991)
(933)
(110,615)
(68,079)
25,847
3,198
(63,245)
(289,667)
196,060
(140,617)
664,045
(643,921)
—
(58,990)
(26,698)
17,411
(1,844)
(813)
4,633
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)
—
(27,388)
(23,140)
(1,885)
(3,264)
(674)
480,882
166,522
396,572
—
(186,875)
(326,810)
—
(555,040)
(41,941)
73,032
(19,021)
—
(493,561)
153,131
469,916
296,993
(217,630)
4,139
—
(5,801)
790
(2,442)
(868)
698,228
104,506
673,960
778,466 $
(197,797)
871,757
673,960 $
43,699
828,058
871,757
644,073 $
400
133,993
778,466 $
486,977 $
405
186,578
673,960 $
669,357
21,407
180,993
871,757
143,201 $
8,378 $
84,309 $
85,840 $
58,429
88,899
27,802 $
6,899 $
25,028 $
— $
8,853 $
16,401 $
—
20,184
23,381
$
$
$
$
$
$
$
$
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company
registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business
and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In
addition, the Company provides an array of financial products and services through its broker-dealer, mortgage origination
and insurance subsidiaries.
The Company, headquartered in Dallas, Texas, provides its products and services through three primary business units,
PlainsCapital Corporation (“PCC”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds
Corporation (“NLC”). PCC is a financial holding company, that provides, through its subsidiaries, traditional banking,
wealth and investment management and treasury management services primarily in Texas and residential mortgage lending
throughout the United States. Securities Holdings is a holding company, that provides, through its subsidiaries, investment
banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and
tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage
services throughout the United States. NLC is a property and casualty insurance holding company, that provides, through
its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and
other areas of the southern United States.
Basis of Presentation
Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of
the membership interest in Hilltop Opportunity Partners LLC, formerly known as PlainsCapital Equity, LLC, a merchant
bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the
outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures
Management”), which holds an ownership interest in and is the managing member of certain affiliated business
arrangements (“ABAs”).
PCC also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which
are not included in the consolidated financial statements under the requirements of the Variable Interest Entities (“VIE”)
Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), because
the primary beneficiaries of the Trusts are not within the consolidated group.
Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries,
Hilltop Securities Inc. (“Hilltop Securities”), Hilltop Securities Independent Network (“HTS Independent Network”) and
Hilltop Securities Asset Management, LLC, formerly known as First Southwest Asset Management, LLC. Hilltop
Securities is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and FINRA and a member
of the New York Stock Exchange (“NYSE”), HTS Independent Network is an introducing broker-dealer that is also
registered with the SEC and FINRA, and Hilltop Securities Asset Management, LLC, a wholly-owned subsidiary of First
Southwest Holdings, LLC (“First Southwest”), is a registered investment adviser under the Investment Advisers Act of
1940. From January 1, 2016 to January 22, 2016, Securities Holdings’ subsidiaries also included First Southwest Company,
LLC (“FSC”), First Southwest’s principal subsidiary and formerly a broker-dealer registered with the SEC and FINRA and
a member of the NYSE.
Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance
Company (“NLIC”) and American Summit Insurance Company (“ASIC”).
In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC and Hilltop Investments
I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC which is
consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza
F-8
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
investment discussed in detail in Note 17 to the consolidated financial statements and are collectively referred to as the
“Hilltop Plaza Entities”.
The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and
balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not
wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of
the ASC.
Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current
period presentation. In preparing these consolidated financial statements, subsequent events were evaluated through the
time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all
stockholders and other financial statement users, or filed with the SEC.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding
the allowance for loan losses, the fair values of financial instruments, reserves for losses and loss adjustment expenses
(“LAE”), the mortgage loan indemnification liability, and the potential impairment of assets are particularly subject to
change. The Company has applied its critical accounting policies and estimation methods consistently in all periods
presented in these consolidated financial statements.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable
intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net
assets purchased exceeds the consideration given, a bargain purchase gain is recognized. If the consideration given exceeds
the fair value of the net assets received, goodwill is recognized.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as
collateralized financings and are carried at the amounts at which the securities will subsequently be resold as specified in
the agreements. The Company is in possession of collateral with a fair value equal to or in excess of the contract amounts.
Securities
Management classifies securities at the time of purchase and reassesses such designation at each balance sheet date.
Securities held for resale to facilitate principal transactions with customers are classified as trading and are carried at fair
value, with changes in fair value reflected in the consolidated statements of operations. Hilltop reports interest income on
trading securities as interest income on securities and other changes in fair value as other noninterest income.
Debt securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale.
Securities included in this category are those that management intends to use as part of its asset/liability management
strategy and that may be sold in response to changes in interest rates, prepayment risk or other factors related to interest
rate and prepayment risk. Debt securities available for sale are carried at fair value. Unrealized holding gains and losses on
debt securities available for sale, net of taxes, are reported in other comprehensive income (loss) until realized. Premiums
and discounts are recognized in interest income using the effective interest method and reflect any optionality that may be
embedded in the security.
Equity securities are carried at fair value, with changes in fair value reflected in the consolidated statements of operations.
Equity securities that do not have readily determinable fair values are initially recorded at cost and subsequently
remeasured when there is (i) an observable transaction involving the same investment, (ii) an observable transaction
F-9
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
involving a similar investment from the same issuer or (iii) an impairment. These remeasurements are reflected in the
consolidated statements of operations.
Purchases and sales (and related gain or loss) of securities are recorded on the trade date, based on specific identification.
Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses to the extent the other-than-temporary impairment (“OTTI”) is related to credit
losses. The amount of the OTTI related to other factors is recognized in other comprehensive income (loss). In estimating
cash flows related to these securities, management primarily considers, (i) the length of time and the extent to which the
fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the historic and
implied volatility of the security, (iv) failure of the issuer to make scheduled interest payments and (v) changes to the rating
of the security by a rating agency.
Loans Held for Sale
Loans held for sale consist primarily of single-family residential mortgages funded through PrimeLending. These loans are
generally on the consolidated balance sheet between 30 and 45 days. Substantially all mortgage loans originated by
PrimeLending are sold to various investors in the secondary market, the majority with servicing released. Mortgage loans
held for sale are carried at fair value in accordance with the provisions of the Fair Value Option Subsections of the ASC
(the “Fair Value Option”). Changes in the fair value of the loans held for sale are recognized in earnings and fees and costs
associated with origination are recognized as incurred. The specific identification method is used to determine realized
gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to
certain indemnification provisions with investors, including the repurchase of loans sold and repayment of certain sales
proceeds to investors under certain conditions. In addition, certain mortgage loans guaranteed by U.S. Government
agencies and sold into Government National Mortgage Association (“GNMA”) pools may, under certain conditions
specified in the government programs, become subject to repurchase by PrimeLending. When such loans subject to
repurchase no longer qualify for sale accounting, they are reported as loans held for sale in the consolidated balance sheets.
Loans Held for Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at
the amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for loan
losses. Unearned income on installment loans and interest on other loans is recognized using the effective interest method.
Net fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to
interest income over the life of the related loan, beginning with the initial borrowing. Net fees on commitments and letters
of credit that are not expected to be funded are amortized to noninterest income over the commitment period. Income on
direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding
investment.
Impaired loans include non-accrual loans, troubled debt restructurings, purchased credit impaired (“PCI”) loans and
partially charged-off loans. The accrual of interest on impaired loans is discontinued when, in management’s opinion, there
is a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is
generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. When a loan
is placed on non-accrual status, all previously accrued and unpaid interest is charged against income. If the ultimate
collectability of principal, wholly or partially, is in doubt, any payment received on a loan on which the accrual of interest
has been suspended is applied to reduce principal to the extent necessary to eliminate such doubt. Once the collection of the
remaining recorded loan balance is fully expected, interest income is recognized on a cash basis.
Management has defined the loans acquired in a business combination as acquired loans. Acquired loans are recorded at
estimated fair value on their purchase date with no carryover of the related allowance for loan losses. At acquisition,
acquired loans are segregated between those considered to be credit impaired and those without credit impairment at
acquisition. To make this determination, management considered such factors as past due status, non-accrual status and
credit risk ratings. The fair value of acquired performing loans was determined by discounting expected cash flows, both
principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances due
at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan.
F-10
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans acquired in the Federal Deposit Insurance Corporation (“FDIC”) -assisted transaction whereby the Bank acquired
certain assets and assumed certain liabilities of Edinburg, Texas-based First National Bank (“FNB”) on September 13,
2013 (the “FNB Transaction”) were previously subject to loss-share agreements with the FDIC. At the close of business on
September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired, except for certain obligations
on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered into a Termination Agreement
pursuant to which all rights and obligations of the Bank and the FDIC under the FDIC loss-share agreements were resolved
and terminated. Accordingly, loans which were previously referred to as either “covered loans” if covered by the loss-share
agreements or otherwise “non-covered loans” are now collectively referred to as “loans held for investment.”
PCI loans acquired by the Company are accounted for either on an individual loan basis or in pools. The Company has
established under its PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based
on a minimum of two layers of similar risk characteristics for the purpose of determining their respective fair values as of
their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and
impairment testing. The similar risk characteristics used for the pooling of PCI loans are risk grade and loan collateral type.
PCI loans show evidence of credit deterioration that make it probable that not all contractually required principal and
interest payments will be collected. Their fair value was initially based on an estimate of cash flows, both principal and
interest, expected to be collected, discounted at prevailing market rates of interest. Management estimates cash flows using
key assumptions such as default rates, loss severity rates assuming default, prepayment speeds and estimated collateral
values. The excess of cash flows expected to be collected from a loan or pool over its estimated fair value at acquisition is
referred to as accretable yield and is recognized in interest income using an effective yield method over the remaining life
of the loan or pool. The excess of total contractual cash flows over the cash flows expected to be received at acquisition is
referred to as the nonaccretable difference. Subsequent to acquisition, management must update these estimates of cash
flows expected to be collected at each reporting date. These updates require the continued use of key assumptions and
estimates, similar to those used in the initial estimate of fair value.
The Bank accretes the discount for PCI loans for which it can predict the timing and amount of cash flows. PCI loans for
which a discount is accreted are reported as performing loans.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to or recovered from
expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans at the
balance sheet date. The allowance for loan losses includes allowance allocations calculated in accordance with the
regulatory Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and
Contingencies Topics of the ASC. The level of the allowance reflects management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and
regulatory conditions, and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be
allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment,
should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors beyond its control, including the performance of the loan portfolio, the
economy and changes in interest rates.
The Bank’s allowance for loan losses consists of three elements: (i) specific valuation allowances established for probable
losses on individually impaired loans; (ii) general historical valuation allowances calculated based on historical loan loss
experience for homogenous loans with similar collateral; and (iii) valuation allowances to adjust general reserves based on
current economic conditions and other qualitative risk factors both internal and external to the Bank. The Bank’s
methodology regarding the calculation of the allowance for loan losses is discussed in more detail within Note 5 to the
consolidated financial statements.
Broker-Dealer and Clearing Organization Transactions
Amounts recorded in broker-dealer and clearing organization receivables and payables include securities lending activities,
as well as amounts related to securities transactions for either customers of the Hilltop Broker-Dealers or for the
F-11
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
accounts of the Hilltop Broker-Dealers. Securities borrowed and securities loaned transactions are generally reported as
collateralized financings. Securities borrowed transactions require the Hilltop Broker-Dealers to deposit cash, letters of
credit, or other collateral with the lender. With respect to securities loaned, the Hilltop Broker-Dealers receive collateral in
the form of cash or other assets in an amount generally in excess of the market value of securities loaned. The Hilltop
Broker-Dealers monitor the market value of securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded as necessary. Interest income and interest expense associated with collateralized financings is
included in the accompanying consolidated statements of operations.
Insurance Premiums Receivable
Insurance premiums receivable include premiums written and not yet collected. NLC routinely evaluates the receivable
balance to determine if an allowance for uncollectible amounts is necessary. At December 31, 2018 and 2017, NLC
determined that no valuation allowance was necessary.
Deferred Policy Acquisition Costs
Costs of acquiring insurance vary with, and are primarily related to, the successful acquisition of new and renewal
business. These costs primarily consist of commissions, premium taxes and underwriting expenses, and are deferred and
amortized over the terms of the policies or reinsurance treaties to which they relate. Proceeds from reinsurance transactions
that represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net
acquisition costs are capitalized and charged to expense in proportion to net revenue recognized. Future investment income
is considered in determining the recoverability of deferred policy acquisition costs. NLC regularly reviews the categories of
acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding
charge to income is recognized if the sum of the expected loss and LAE, unamortized policy acquisition costs, and
maintenance costs exceed related unearned insurance premiums and anticipated investment income. At December 31, 2018
and 2017, there was no premium deficiency.
Reinsurance
In the normal course of business, NLC seeks to reduce the loss that may arise from catastrophes or other events that could
cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured
policy. NLC routinely evaluates the receivable balance to determine if any uncollectible balances exist.
Net insurance premiums earned, losses and LAE, and policy acquisition and other underwriting expenses are reported net
of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the
portions of the liability for losses and LAE and unearned insurance premiums ceded to them are included in other assets
within the consolidated balance sheets. Reinsurance assumed from other companies, including assumed premiums written
and earned, and losses and LAE, is accounted for in the same manner as direct insurance written.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the
straight-line method over the estimated useful lives of the assets, which range between 3 and 40 years. Gains or losses on
disposals of premises and equipment are included in results of operations.
Other Real Estate Owned
Real estate acquired through foreclosure (“OREO”) is included in other assets within the consolidated balance sheets and is
carried at management’s estimate of fair value, less estimated cost to sell. Any excess of recorded investment over fair
value, less cost to sell, is charged against either the allowance for loan losses or the related PCI pool discount when
property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are
charged against earnings. Valuation adjustments, revenue and expenses from operations of the properties and resulting
gains or losses on sale are included within the consolidated statements of operations in other noninterest income or
expense, as appropriate.
F-12
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Prior to the termination of the FDIC loss-share agreements, acquired OREO previously subject to FDIC loss-share
agreements was referred to as “covered OREO” and reported separately in the consolidated balance sheets. Covered OREO
was reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral was
transferred into covered OREO at the collateral’s fair value, less selling costs. Covered OREO was initially recorded at its
estimated fair value based on similar market comparable valuations, less estimated selling costs. Subsequently, loan
collateral transferred to OREO was recorded at its net realizable value. Any subsequent valuation adjustments due to
declines in fair value of the covered OREO were charged to noninterest expense, while any recoveries of previous
valuation decreases were credited to noninterest expense. Subsequent to the termination of the loss-share agreements,
OREO which was previously referred to as “covered OREO” if covered by the loss-share agreements or otherwise “non-
covered OREO” is now collectively referred to as OREO.
FDIC Indemnification Asset
As previously discussed, the loss-share agreements with the FDIC entered into in connection with the FNB Transaction
were terminated in the fourth quarter of 2018. Subsequent to the termination of the loss-share agreements and the receipt of
payment from the FDIC, the remaining balance of the amounts receivable from the FDIC under the loss-share agreements
(the “FDIC Indemnification Asset”) was removed from the consolidated balance sheets. The balance of the FDIC
Indemnification Asset as of December 31, 2017, is included in other assets within the consolidated balance sheets. Prior to
the termination of the loss-share agreements, the Company accounted for the FDIC Indemnification Asset in accordance
with the Business Combination Topic of the ASC. The FDIC Indemnification Asset was initially recorded at fair value,
based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the
present value and the undiscounted cash flows the Bank expected to collect from the FDIC was accreted into noninterest
income or amortized into noninterest expense within the consolidated statements of operations over the life of the FDIC
Indemnification Asset. The FDIC Indemnification Asset was reviewed quarterly and the accretion rate was adjusted for
changes in the timing of cash flows expected to be collected from the FDIC. Cumulative net losses over the life of the loss-
share agreements of less than $240.4 million reduced the value of the FDIC Indemnification Asset. Any amortization of
changes in value of the FDIC Indemnification Asset was limited to the contractual term of the loss-share agreements.
Changes to the FDIC Indemnification Asset were recorded as adjustments to other noninterest income or expense, as
appropriate, within the consolidated statements of operations over the life of the loss-share agreements.
Debt Issuance Costs
The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized using the
effective interest method over the repayment term of the debt. Unamortized debt issuance costs are presented in the
consolidated balance sheets as a direct reduction from the associated debt liability. Debt issuance costs of $0.2 million
during 2018 and $0.1 million during each of 2017 and 2016 were amortized and included in interest expense within the
consolidated statements of operations. In April 2015, debt issuance costs of $1.9 million were capitalized in connection
with Hilltop’s issuance of the 5% senior notes due 2025.
Goodwill
Goodwill, which represents the excess of cost over the fair value of the net assets acquired, is allocated to reporting units
and tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the
carrying amount should be assessed. The Company performs required annual impairment tests of its goodwill as of
October 1st for each of its reporting units, which is one level below an operating segment. Goodwill is assigned to reporting
units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains
its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally
generated, are available to support the value of the goodwill. The goodwill impairment test requires the Company to make
judgments in determining what assumptions to use in the calculation. The process consists of estimating the fair value of
each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit
forecasts and recent industry transaction and trading multiples of peers, and comparing those estimated fair values with the
carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair
value is less than the carrying value, the Company is required to recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value; however, any loss recognized will not exceed the total amount
of goodwill allocated to that reporting unit. Additional information
F-13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
concerning the results of the Company’s impairment test of goodwill is included in Note 9 to the consolidated financial
statements.
Intangibles and Other Long-Lived Assets
Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in
combination with a related contract, asset or liability. The Company’s intangible assets primarily consist of core deposits,
trade names and customer relationships. Intangible assets with definite useful lives are generally amortized on the straight-
line method over their estimated lives, although certain intangibles, including core deposits, and customer and agent
relationships, are amortized on an accelerated basis. Amortization of intangible assets is recorded in other noninterest
expense within the consolidated statements of operations. Intangible assets with indefinite useful lives are tested for
impairment on an annual basis as of October 1st, or more often if events or circumstances indicate there may be
impairment, and not amortized until their lives are determined to be definite. Intangible assets with definite useful lives,
premises and equipment, and other long-lived assets are tested for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows.
Impaired assets are recorded at fair value.
Mortgage Servicing Rights
The Company determines its classes of residential mortgage servicing assets based on the asset type being serviced along
with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value
the servicing assets. The Company measures its servicing assets at fair value and reports changes in fair value through
earnings.
The retained mortgage servicing rights (“MSR”) asset is measured at fair value as of the date of sale of the related
mortgage loan. Subsequent fair value measurements of the MSR asset are determined by valuing the projected net servicing
cash flows, which are then discounted to estimate fair value using a discounted cash flow model. Assumptions used include
market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.
The model assumptions and the MSR asset fair value estimates are compared to observable trades of similar portfolios as
well as to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from
management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of
management’s estimates would adversely impact the recorded value of the MSR asset. The value of the MSR asset is also
dependent upon the discount rate used in the model, which is based on current market rates that are reviewed by
management on an ongoing basis. Any increase in the discount rate would reduce the value of the MSR asset.
Derivative Financial Instruments
The Company enters into various derivative financial instruments to manage interest rate risk or to hedge specified assets
and liabilities. The Company’s derivative financial instruments also include interest rate lock commitments (“IRLCs”)
executed with its customers that allow those customers to obtain a mortgage loan on a future date at an agreed-upon interest
rate. The IRLCs, forward commitments, interest rate swaps, U.S. Treasury bond futures and options and Eurodollar futures
meet the definition of a derivative under the provisions of the Derivatives and Hedging Topic of the ASC.
Derivatives are recorded at fair value in the consolidated balance sheets. To qualify for hedge accounting, derivatives must
be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the
inception of the derivative contract. If derivative instruments are designated as hedges of fair values, the change in the fair
value of both the derivative instrument and the hedged item are included in current earnings. Changes in the fair value of
derivatives designated as hedges of cash flows are recorded in other comprehensive income (loss). Actual cash receipts
and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the line item where the
hedged item’s effect on earnings is recorded.
F-14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Revenue from Contracts with Customers
Certain activities primarily within the Company’s broker-dealer and banking segments are subject to the provisions of
ASC 606, Revenue from Contracts with Customers. The Company’s broker-dealer segment has six primary lines of
business: (i) public banking, (ii) capital markets, (iii) retail, (iv) structured finance, (v) clearing services and (vi) securities
lending. Revenue from contracts with customers subject to the guidance in ASC 606 from the broker-dealer segment is
included within the securities commissions and fees and investment and securities advisory fees and commissions line
items within the consolidated statements of operations. Commissions and fees revenue is generally recognized at a point
in time upon the delivery of contracted services based on a predefined contractual amount or on the trade date for trade
execution services based on prevailing market prices and internal and regulatory guidelines.
The Company’s banking segment has three primary lines of business: (i) business banking, (ii) personal banking and
(iii) wealth and investment management. Revenue from contracts with customers subject to the guidance in ASC 606
from the banking segment (certain retail and trust fees) is included within the other noninterest income line item within
the consolidated statements of operations. Retail and trust fees are generally recognized at the time the related transaction
occurs or when services are completed. Fees are based on the dollar amount of the transaction or are otherwise predefined
in contracts associated with each customer account depending on the type of account and services provided.
Reserve for Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (“LAE”) includes an amount determined from loss reports and
individual cases and an amount, based on past experience, for losses incurred but not reported (“IBNR”). Such liabilities
are based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess
of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are
continually reviewed, and any adjustments are reflected in earnings currently. The liability for losses and LAE has not been
reduced for reinsurance recoverable.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stock-Based Compensation
Stock-based compensation expense for all share-based awards granted is based on the grant date fair value estimated in
accordance with the provisions of the Stock Compensation Topic of the ASC. The Company recognizes these
compensation costs for only those awards expected to vest over the service period of the award.
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled $4.6 million, $4.7 million and $5.3 million during
2018, 2017 and 2016, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of the temporary difference between the tax basis and book basis of assets and liabilities
reported in the accompanying consolidated balance sheets. The provision for income tax expense or benefit differs from
the amounts of income taxes currently payable because certain items of income and expense included in the consolidated
financial statements are recognized in different time periods by taxing authorities. Interest and penalties incurred related
to tax matters are charged to other interest expense or other noninterest expense, respectively. The revaluation of deferred
tax assets as a result of enacted tax rate changes, such as those found in the Tax Cuts and Jobs Act of 2017 (“Tax
Legislation”), is recognized within income tax expense in continuing operations in the period of enactment.
Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely
than not that the tax position will be sustained upon examination by the appropriate taxing authority having full
F-15
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured
at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the
reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-
than-not recognition threshold are derecognized in the reporting period in which that threshold is no longer met. If the
Company were to prevail on all uncertain tax positions, the effect would be a benefit to the Company’s effective tax rate.
Due to uncertainties in any tax audit outcome, estimates of the ultimate settlement of unrecognized tax positions may
change and the actual tax benefits may differ significantly from the estimate.
Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance when,
in the opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be realized.
Periodic reviews of the carrying amount of deferred tax assets are made when it is more likely than not that all or a
portion of a deferred tax asset will not be realized.
Cash, Cash Equivalents and Restricted Cash
For the purpose of presentation in the consolidated statements of cash flows, cash, cash equivalents and restricted cash are
defined as the amounts included in the consolidated balance sheet captions “Cash and due from banks”, “Federal funds
sold” and “Assets segregated for regulatory purposes.” Cash equivalents have original maturities of three months or less.
Repurchases of Common Stock
In accordance with Maryland law, the Company uses the par value method of accounting for its stock repurchases,
whereby the par value of the shares is deducted from common stock. The excess of the cost of shares acquired over the
par value is allocated to additional paid-in capital based on an estimated average sales price per issued share with the
excess amounts charged to retained earnings.
Basic and Diluted Net Income Per Share
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and are included in the computation of earnings per share pursuant to the two-class method
prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. Throughout 2018, Hilltop had no instruments
outstanding which qualified as participating securities.
Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the
common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed
by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding
during the period, excluding participating nonvested restricted shares.
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to
include the number of additional common shares that would have been outstanding if potentially dilutive common shares,
excluding the participating securities, were issued using the treasury stock method. During 2018 and 2017, restricted stock
units (“RSUs”) were the only potentially dilutive non-participating instruments issued by Hilltop, while during 2016, stock
options and RSUs were the only potentially dilutive non-participating instruments. Next, the Company determines and
includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities using
the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based
payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to
share in the losses of the Company.
F-16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Acquisition
BORO Acquisition
On August 1, 2018, in an effort to expand its Houston-area banking operations, the Company acquired privately-held The
Bank of River Oaks (“BORO”) in an all-cash transaction (the “BORO Acquisition”). Pursuant to the terms of the
definitive agreement, the Company paid cash in the aggregate amount of $85 million to the shareholders and option
holders of BORO. The operations of BORO are included in the Bank’s operating results beginning August 1, 2018.
BORO’s results of operations prior to the acquisition date are not included in the Company’s consolidated operating
results.
The BORO Acquisition was accounted for using the acquisition method of accounting, and accordingly, purchased assets,
including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair
values. The resulting fair values of the identifiable assets acquired and liabilities assumed from BORO at August 1, 2018
are summarized in the following table (in thousands).
Cash and due from banks
Securities
Loans held for investment
Other assets
Total identifiable assets acquired
Deposits
Short-term borrowings
Other liabilities
Total liabilities assumed
Net identifiable assets acquired
Goodwill resulting from the acquisition
Net assets acquired
$
$
21,756
60,477
326,618
25,912
434,763
376,393
10,000
2,996
389,389
45,374
39,627
85,001
The goodwill of $39.6 million resulting from the BORO Acquisition represents the inherent long-term value expected
from the business opportunities created from combining BORO with the Company. The Company used significant
estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The amount of goodwill
recorded in connection with the Company’s acquisition of BORO is not deductible for tax purposes.
Included within the fair value of other assets in the table above are identifiable core deposits intangible assets recorded in
connection with the BORO Acquisition of $10.0 million which is being amortized on an accelerated basis over an
estimated useful life of six years. The fair value of the core deposit intangible assets was estimated using the net cost
savings method, a variation of the income approach. This involved the use of the following significant assumptions: cost
of deposits, customer attrition rate, and discount rate.
During 2018, pre-tax transaction- and integration-related expenses of $8.2 million associated with the BORO Acquisition
are included in noninterest expense within the consolidated statement of operations. Such expenses were for professional
services and other incremental employee costs associated with the integration of BORO’s operations.
In connection with the BORO Acquisition, the Company acquired loans both with and without evidence of credit quality
deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance
for loan losses. Acquired loans were segregated between those considered to be PCI loans and those without credit
impairment at acquisition.
F-17
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table presents details on acquired loans at the acquisition date (in thousands).
Loans, excluding
PCI Loans
PCI
Loans
Commercial real estate
1 - 4 family residential
Construction and land development
Commercial and industrial
Consumer
Total
$
$
119,188 $
55,487
37,134
98,259
9,021
319,089 $
Total Loans Held
for Investment
124,538
55,526
37,134
100,386
9,034
326,618
5,350 $
39
—
2,127
13
7,529 $
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
$
$
10,730
2,859
7,871
342
7,529
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
$
381,551
15,286
319,089
3. Fair Value Measurements
Fair Value Measurements and Disclosures
The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC
(the “Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The
Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market
for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude
transaction costs and are not the result of forced transactions.
The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used in
valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs,
as indicated below.
• Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can
access at the measurement date.
• Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield
curves, prepayment speeds, default rates, credit risks and loss severities), and inputs that are derived from or
corroborated by market data, among others.
• Level 3 Inputs: Unobservable inputs that reflect an entity’s own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted
cash flow techniques, among others.
F-18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained
MSR asset at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of
the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. At December 31, 2018 and 2017, the aggregate fair value of PrimeLending’s mortgage loans held for sale
accounted for under the Fair Value Option was $1.26 billion and $1.58 billion, respectively, and the unpaid principal
balance of those loans was $1.21 billion and $1.53 billion, respectively. The interest component of fair value is reported
as interest income on loans in the accompanying consolidated statements of operations.
The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the
application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are
determined primarily using Level 2 inputs, as further described below. Those inputs include quotes from mortgage loan
investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is
determined using an exit price method.
Trading Securities — Trading securities are reported at fair value primarily using either Level 1 or Level 2 inputs in the
same manner as discussed below for available for sale securities.
Available For Sale Securities — Most securities available for sale are reported at fair value using Level 2 inputs. The
Company obtains fair value measurements from independent pricing services. As the Company is responsible for the
determination of fair value, control processes are designed to ensure that the fair values received from independent pricing
services are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with
prevailing market conditions. The fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the financial instruments’ terms and conditions, among other things.
Equity Securities - For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs
based on observable market transactions.
Loans Held for Sale — Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs
that consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively
short periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a significant
component of the change in fair value. The fair value of certain loans held for sale that cannot be sold through normal sale
channels or are non-performing is measured using Level 3, or unobservable, inputs. The fair value of such loans is
generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable
assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.
Derivatives — Derivatives, which are included in other assets and liabilities within the Company’s consolidated balance
sheets, are reported at fair value using either Level 2 or Level 3 inputs. The Bank uses dealer quotes to value interest rate
swaps, forward purchase commitments and forward sale commitments executed for both hedging and non-hedging
purposes. PrimeLending and the Hilltop Broker-Dealers use dealer quotes to value forward purchase commitments and
forward sale commitments, respectively, executed for both hedging and non-hedging purposes. PrimeLending also issues
IRLCs to its customers and the Hilltop Broker-Dealers issue forward purchase commitments to its clients that are valued
based on the change in the fair value of the underlying mortgage loan from inception of the IRLC or purchase
commitment to the balance sheet date, adjusted for projected loan closing rates. PrimeLending determines the value of the
underlying mortgage loan as discussed in “Loans Held for Sale”, above. The Hilltop Broker-Dealers determine the value
of the underlying mortgage loan from prices of comparable securities used to value forward sale commitments.
Additionally, PrimeLending also uses dealer quotes to value Eurodollar futures and U.S Treasury bond futures and
options used to hedge interest rate risk, and the Hilltop Broker-Dealers use dealer quotes to value Eurodollar futures and
U.S. Treasury bond futures and options used to hedge changes in the fair value of securities.
MSR Asset — The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is
reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then
discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors.
F-19
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 10 to the
consolidated financial statements.
Securities Sold, Not Yet Purchased — Securities sold, not yet purchased are reported at fair value primarily using either
Level 1 or Level 2 inputs in the same manner as discussed above for trading and available for sale securities.
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring
basis (in thousands).
$
$
December 31, 2018
Trading securities
Available for sale securities
Equity securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
December 31, 2017
Trading securities
Available for sale securities
Equity securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
Level 1
Inputs
Level 2
Inputs
737,519 $
875,658
—
1,207,311
35,010
—
48,667
26,355
7,947 $
—
19,679
—
—
—
33,000
—
Level 3
Inputs
Total
Fair Value
— $
—
—
50,464
—
66,102
—
—
745,466
875,658
19,679
1,257,775
35,010
66,102
81,667
26,355
Level 1
Inputs
3,329 $
—
21,241
—
—
—
156,586
—
Level 2
Inputs
727,356 $
744,319
—
1,544,631
34,150
—
76,235
13,197
Level 3
Inputs
Total
Fair Value
— $
—
—
36,972
—
54,714
—
—
730,685
744,319
21,241
1,581,603
34,150
54,714
232,821
13,197
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, 2018
Loans held for sale
MSR asset
Total
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
$
$
36,972 $
54,714
91,686 $
61,573 $
25,028
86,601 $
(41,801) $
(9,303)
(51,104) $
(6,280) $
(4,337)
(10,617) $
— $
—
— $
50,464
66,102
116,566
$
$
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) $
$
— $
—
—
— $
—
35,801
61,968
97,769
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial
statements. Excluding the trading securities activity noted above, the unrealized gains (losses) relate to financial
instruments still held at December 31, 2018.
F-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, 2018 and 2017, the
significant unobservable inputs used in the fair value measurements were as follows.
Financial instrument
Loans held for sale Discounted cash flows / Market comparable Projected price
Valuation Technique
Unobservable Inputs
Range (Weighted-Average)
December 31,
2018
2017
95 - 96 % ( 95%) 90 - 95 % ( 95%)
MSR asset
Discounted cash flows
Constant prepayment rate
Discount rate
10.51 %
11.11 %
10.93 %
11.03 %
The Company had no transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes
in the observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly
reporting period in which they occur.
The following table presents those changes in fair value of instruments recognized in the consolidated statements of
operations that are accounted for under the Fair Value Option (in thousands).
Year Ended December 31, 2018
Other
Noninterest Changes in
Total
Net
Gains (Losses)
Year Ended December 31, 2017
Other
Total
Year Ended December 31, 2016
Other
Total
Net
Noninterest Changes in
Net
Loans held for sale
MSR asset
$
(8,063) $
(4,337)
— $
—
(8,063) $
(4,337)
10,655 $
(6,156)
— $
—
10,655 $
(6,156)
(8,275) $
(6,112)
Income
Fair Value Gains (Losses)
Income
Fair Value Gains (Losses)
Income
Noninterest Changes in
Fair Value
(8,275)
(6,112)
— $
—
The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair
value of all assets acquired and liabilities assumed in an acquisition of a business are determined at their respective
acquisition date fair values. In addition, facts and circumstances may dictate a fair value measurement when there is
evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.
Impaired Loans — The Company reports individually impaired loans based on the underlying fair value of the collateral
through specific allowances within the allowance for loan losses. PCI loans with a fair value of $172.9 million, $822.8
million, $73.5 million and $7.5 million were acquired by the Company upon completion of the merger with PCC (the
“PlainsCapital Merger”), the FNB Transaction, the acquisition of SWS Group, Inc. (the “SWS Merger”) and the BORO
Acquisition, respectively (collectively, the “Bank Transactions”). The fair value of PCI loans was determined using Level
3 inputs, including estimates of expected cash flows that incorporated significant unobservable inputs regarding default
rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for in pools (“Pooled Loans”),
and estimated collateral values.
Estimates for these significant unobservable inputs and the resulting weighted average expected loss on PCI loans were as
follows.
December 31, 2018
Weighted average default rate
Weighted average loss severity rate
Weighted average prepayment speed
Resulting weighted average expected loss on PCI loans
PlainsCapital
FNB
SWS
BORO
Merger
Transaction
Merger
Acquisition
PCI Loans
81 %
59 %
0 %
48 %
34 %
12 %
6 %
71 %
28 %
0 %
63 %
42 %
0 %
4 %
20 %
26 %
December 31, 2017
Weighted average default rate
Weighted average loss severity rate
Weighted average prepayment speed
Resulting weighted average expected loss on PCI loans
PlainsCapital
PCI Loans
FNB
SWS
Merger
Transaction
Merger
64 %
66 %
0 %
42 %
41 %
18 %
7 %
60 %
28 %
0 %
7 %
17 %
F-21
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at
least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a
quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company
orders an updated appraisal of the fair value of the collateral. Because the Company obtains updated appraisals when
evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.
Other Real Estate Owned — The Company determines fair value primarily using independent appraisals of OREO
properties. The resulting fair value measurements are classified as Level 2 inputs. At December 31, 2018 and 2017, the
estimated fair value of OREO was $27.6 million and $40.6 million, respectively. As previously discussed, subsequent to
the termination of the loss-share agreements, OREO which was previously referred to as “covered OREO” if covered by
the loss-share agreements or otherwise “non-covered OREO” is now collectively referred to as OREO. The amounts are
included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements
for OREO subsequent to initial recognition utilized Level 2 inputs.
The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring
basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in
thousands).
December 31, 2018
Impaired loans held for investment
Other real estate owned
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
2018
Total Gains (Losses) for the
Year Ended December 31,
2017
$
— $
—
— $
19,976
76,711 $
—
76,711 $
19,976
2,481 $
(2,757)
(2,402) $
(4,436)
2016
3,643
(19,036)
The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and
liabilities, including the financial assets and liabilities previously discussed. The methods for determining estimated fair
value for financial assets and liabilities measured at fair value on a recurring or non-recurring basis are discussed
above. For other financial assets and liabilities, the Company utilizes quoted market prices, if available, to estimate the
fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company’s
financial instruments, the fair value of such instruments has been derived based on management’s assumptions with
respect to future economic conditions, the amount and timing of future cash flows, and estimated discount rates. Different
assumptions could significantly affect these estimates. Accordingly, the estimates provided herein do not necessarily
indicate amounts which could be realized in a current transaction. Further, as it is management’s intent to hold a
significant portion of its financial instruments to maturity, it is not probable that the fair values shown below will be
realized in a current transaction.
Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may
be difficult to make reasonable comparisons of the Company’s fair value information to that of other financial institutions.
The aggregate estimated fair value amount should in no way be construed as representative of the underlying value of
Hilltop and its subsidiaries. The following methods and assumptions are typically used in estimating the fair value
disclosures for financial instruments:
Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
Assets Segregated for Regulatory Purposes — Assets segregated for regulatory purposes may consist of cash and
securities with carrying amounts that approximate fair value.
Securities Purchased Under Agreements to Resell — Securities purchased under agreements to resell are carried at the
amounts at which the securities will subsequently be resold as specified in the agreements. The carrying amounts
approximate fair value due to their short-term nature.
Held to Maturity Securities — For securities held to maturity, estimated fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar
securities.
F-22
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans Held for Sale — Loans held for sale consist primarily of certain mortgage loans held for sale that are subject to
purchase by related parties. Such loans are reported at fair value, as discussed above, using Level 2 inputs that consist of
commitments on hand from investors or prevailing market prices.
Loans Held for Investment — In accordance with ASU 2016-01, effective January 1, 2018, the fair values of loans held
for investment are measured using an exit price method.
Broker-Dealer and Clearing Organization Receivables and Payables — The carrying amount approximates their fair
value.
FDIC Indemnification Asset — Prior to termination of the loss-share agreements, the fair value of the FDIC
Indemnification Asset was based on Level 3 inputs, including the discounted value of expected future cash flows under
the loss-share agreements. The discount rate contemplated the credit worthiness of the FDIC as counterparty to this asset,
and considered an incremental discount rate risk premium reflective of the inherent uncertainty associated with the timing
of the cash flows.
Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit
approximates their fair values.
Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements,
Federal Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.
Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates
for similar types of borrowing arrangements.
Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance
policies and accrued interest receivable and payable with carrying amounts that approximate their fair values using
Level 2 inputs. The fair value of certain other receivables and investments is based on Level 3 inputs.
The following tables present the carrying values and estimated fair values of financial instruments not measured at fair
value on either a recurring or non-recurring basis (in thousands).
December 31, 2018
Financial assets:
Cash and cash equivalents
Assets segregated for regulatory purposes
Securities purchased under agreements to
resell
Held to maturity securities
Loans held for sale
Loans held for investment, net
Broker-dealer and clearing organization
receivables
Other assets
Financial liabilities:
Carrying
Amount
Level 1
Inputs
Estimated Fair Value
Level 3
Inputs
Level 2
Inputs
Total
$
644,473 $ 644,473 $
133,993
133,993
— $
—
— $
—
644,473
133,993
61,611
351,012
135,471
6,870,972
1,440,287
69,720
—
—
—
—
61,611
341,124
135,471
578,363
—
—
—
6,445,810
61,611
341,124
135,471
7,024,173
—
—
1,440,287
68,573
—
1,147
1,440,287
69,720
Deposits
Broker-dealer and clearing organization
payables
Short-term borrowings
Debt
Other liabilities
8,536,156
—
8,528,947
—
8,528,947
1,294,925
1,065,807
295,884
3,482
—
—
—
—
1,294,925
1,065,807
293,685
3,482
—
—
—
—
1,294,925
1,065,807
293,685
3,482
F-23
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2017
Financial assets:
Cash and cash equivalents
Assets segregated for regulatory purposes
Securities purchased under agreements to
resell
Held to maturity securities
Loans held for sale
Loans held for investment, 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 $
186,578
186,578
— $
—
— $
—
487,382
186,578
186,537
355,849
133,753
6,392,112
1,464,378
29,340
64,862
—
—
—
—
186,537
349,939
133,754
577,889
—
—
—
6,098,254
186,537
349,939
133,754
6,676,143
—
—
—
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
The Company held equity investments other than securities of $35.8 million and $38.7 million at December 31, 2018 and
2017, respectively, which are included within other assets in the consolidated balance sheets. Of the $35.8 million of such
equity investments held at December 31, 2018, $20.4 million do not have readily determinable fair values as defined in
ASU 2016-01 (see Note 33) and each is measured at cost, less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The following table presents the adjustments to the carrying value of these investments (in thousands).
Year ended
Balance, beginning of year
Additional investments
Upward adjustments
Impairments and downward adjustments
Dispositions
Balance, end of year
December 31, 2018
$
22,946
8,643
3,663
(4,083)
(10,793)
20,376
$
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,
2018
2017
$
7,945 $
—
1,494
309,455
4,239
206,813
59,293
126,748
19,913
5,680
3,886
745,466 $
52,078
372,817
6,125
5,122
96,182
170,413
22,612
1,631
3,705
730,685
$
The Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at
prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop
Broker-Dealers’ ultimate obligation may exceed the amount recognized in the financial statements. These securities,
which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a
value of $81.7 million and $232.8 million at December 31, 2018 and 2017, respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in
thousands).
December 31, 2018
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
Totals
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
Totals
Available for Sale
Amortized
Unrealized
Unrealized
Cost
11,552 $
$
Gains
Losses
Fair Value
30 $
(44) $
11,538
85,492
391,428
11,703
281,450
53,614
51,560
$ 886,799 $
552
608
189
385
268
608
2,640 $
(433)
(6,962)
(120)
(5,436)
(580)
(206)
85,611
385,074
11,772
276,399
53,302
51,962
(13,781) $ 875,658
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
$ 748,255 $
829
538
105
106
1,819
1,099
4,603 $
(366)
(3,740)
(48)
(4,142)
(25)
(115)
96,640
243,505
12,023
233,812
68,662
65,008
(8,539) $ 744,319
F-25
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Amortized
Unrealized
Unrealized
Held to Maturity
December 31, 2018
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
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
Cost
9,903 $
Gains
Losses
Fair Value
3 $
— $
9,906
$
$
39,018 $
21,903
87,065
142,474
50,649
$ 351,012 $
— $
—
271
—
91
365 $
(1,479) $
(263)
(1,462)
(5,000)
(2,049)
37,539
21,640
85,874
137,474
48,691
(10,253) $ 341,124
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
Held to Maturity
$
39,015 $
16,130
71,373
173,928
55,403
$ 355,849 $
— $
44
241
19
437
741 $
(1,188) $
—
(735)
(3,969)
(759)
37,827
16,174
70,879
169,978
55,081
(6,651) $ 349,939
Additionally, the Company had unrealized net losses of $0.9 million and unrealized net gains of $1.6 million from equity
securities with fair values of $19.7 million and $21.2 million held at December 31, 2018 and December 31, 2017,
respectively. The Company recognized net losses of $3.3 million during 2018, due to changes in the fair value of equity
securities still held at the balance sheet date. During 2018, net gains recognized from equity securities sold were nominal.
F-26
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding available for sale, held to maturity and equity securities that were in an unrealized loss position is
shown in the following tables (dollars in thousands).
December 31, 2018
December 31, 2017
Number of
Unrealized Number of
Unrealized
Securities
Fair Value
Losses
Securities
Fair Value Losses
Available for Sale
U.S. treasury securities:
Unrealized loss for less than twelve months
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
Total available for sale:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
1 $
3
4
981 $
3,556
4,537
6
39
45
6 $
1
7
15,449 $
4,150
19,599
3
3
6
8
27
35
—
1
1
11
28
39
8
8
16
29
18
47
24,772
30,472
55,244
66,791
194,228
261,019
—
4,953
4,953
44,394
140,483
184,877
16,256
15,665
31,921
8,590
9,029
17,619
5
428
433
432
6,530
6,962
—
120
120
498
4,938
5,436
282
297
579
27
179
206
10
—
10
15
11
26
1
—
1
16
17
33
1
—
1
9
9
18
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
69
34
103
366
—
366
820
2,920
3,740
48
—
48
819
3,323
4,142
25
—
25
97
18
115
161,784
398,385
60
88
148 $ 560,169 $
1,250
12,531
13,781
328,881
180,876
58
38
96 $ 509,757 $
2,244
6,295
8,539
F-27
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2018
December 31, 2017
Number of
Securities
Unrealized Number of
Unrealized
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
Equity
Common and preferred stock:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
— $
— $
4
4
1
3
4
1
13
14
1
24
25
9
86
95
37,539
37,539
8,411
13,229
21,640
4,973
59,670
64,643
2,051
135,423
137,474
6,431
32,909
39,340
—
1,479
1,479
89
174
263
27
1,435
1,462
26
4,974
5,000
56
1,993
2,049
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
21,866
278,770
12
130
142 $ 300,636 $
198
10,055
10,253
93,489
191,404
40
63
103 $ 284,893 $
656
5,995
6,651
—
—
— $
—
—
— $
—
—
—
1
1
2 $
944
6,800
7,744 $
13
103
116
During 2018, 2017 and 2016, the Company did not record any OTTI. While some of the securities held in the investment
portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are
not believed to be significant enough to warrant OTTI of the securities. Factors considered in the Company’s analysis
include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit
worthiness, and forecasted performance of the investee. The Company does not intend, nor is it likely that the Company
will be required to sell, these securities before the recovery of the cost basis.
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay
obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and available for
sale equity securities, at December 31, 2018 are shown by contractual maturity below (in thousands).
Available for Sale
Held to Maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities
Collateralized mortgage obligations
Commercial mortgage-backed securities
Amortized
Cost
Amortized
Cost
Fair Value
Fair Value
$ 50,468 $ 50,354 $ 11,301 $ 11,305
24,842
4,786
55,203
96,136
96,799
32,239
23,021
202,413
96,689
32,435
22,626
202,218
25,732
4,908
57,629
99,570
391,428
281,450
11,703
21,640
137,474
85,874
$ 886,799 $ 875,658 $ 351,012 $ 341,124
385,074
276,399
11,772
21,903
142,474
87,065
During 2018, 2017 and 2016, the Company recognized net gains from its trading portfolio of $6.2 million, $20.2 million
and $15.9 million, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product
F-28
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
trading activities of $41.9 million, $62.8 million and $109.8 million during 2018, 2017 and 2016, respectively. Other net
realized gains on securities during 2018, 2017 and 2016 were nominal. All such net gains (losses) are recorded as a
component of other noninterest income within the consolidated statements of operations.
Securities with a carrying amount of $612.3 million and $738.5 million (with a fair value of $600.0 million and $730.1
million, respectively) at December 31, 2018 and 2017, respectively, were pledged by the Bank to secure public and trust
deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required
or permitted by law. Substantially all of these pledged securities were included in the Company’s available for sale and
held to maturity securities portfolios at December 31, 2018 and 2017.
Mortgage-backed securities and collateralized mortgage obligations consist principally of GNMA, Federal National
Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and
participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA
and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and
conditionally guaranteed by the full faith and credit of the United States.
At December 31, 2018 and 2017, NLC had investments on deposit in custody for various state insurance departments with
carrying values of $9.5 million and $9.3 million, respectively.
5. Loans Held for Investment and Allowance for Loan Losses
The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios
and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is
substantially dependent upon the general economic conditions of the region and of the industries in which its debtors
operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop
Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and
independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring
customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based
upon market conditions. Securities owned by customers and held as collateral for loans are not included in the
consolidated financial statements.
As previously discussed, the loans acquired in the FNB Transaction were subject to loss-share agreements with the FDIC.
At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired,
except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered
into a Termination Agreement pursuant to which all rights and obligations of the Bank and the FDIC under the FDIC loss-
share agreements were resolved and terminated. Accordingly, loans which were previously referred to as either “covered
loans” if covered by the loss-share agreements or otherwise “non-covered loans” are now collectively referred to as “loans
held for investment.” Loans that were previously covered by the FDIC loss-share agreements are included in the
“covered” portfolio segment as of December 31, 2017 and prior. The majority of the loans previously covered by the
FDIC loss-share agreements are comprised primarily of commercial real estate and 1-4 family residential loans. Loans
held for investment summarized by portfolio segment are as follows (in thousands).
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer (1)
Covered
Allowance for loan losses
Total loans held for investment, net of allowance
December 31,
2018
2017
$ 2,940,120 $ 2,582,167
1,351,418
1,508,451
962,605
932,909
429,357
679,263
329,787
243,806
47,546
40,446
577,889
578,363
182,129
—
6,455,798
6,930,458
(63,686)
(59,486)
$ 6,870,972 $ 6,392,112
(1) Primarily represents margin loans to customers and correspondents associated with broker-dealer segment
operations.
F-29
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on
stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are
underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary
sources of repayment and any collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size and complexity of the credit. The financial
components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and
trends in appropriate balance sheet and statement of operations ratios. The Bank’s loan policy provides specific
underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land
development, and consumer loans. The guidelines for each individual portfolio segment set forth permissible and
impermissible loan types. With respect to each loan type, the guidelines within the Bank’s loan policy provide minimum
requirements for the underwriting factors listed above. The Bank’s underwriting procedures also include an analysis of
any collateral and guarantor. Collateral analysis includes a complete description of the collateral, as well as determined
values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information
relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow evaluation based on the
significance with which the guarantors are expected to serve as secondary repayment sources.
The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that
potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process
reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process
complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel.
Results of these reviews are presented to management and the Bank’s board of directors.
In connection with the Bank Transactions, the Company acquired loans both with and without evidence of credit quality
deterioration since origination. The following table presents the carrying values and the outstanding balances of PCI loans
(in thousands).
Carrying amount
Outstanding balance
December 31,
$
2018
93,072 $
172,808
2017
124,317
230,083
Changes in the accretable yield for PCI loans were as follows (in thousands).
2018
Year Ended December 31,
2017
2016
Balance, beginning of year
Additions
Reclassifications from nonaccretable difference, net (1)
Disposals of loans
Accretion
Transfer of loans to OREO (2)
Balance, end of year
$
$
98,846 $
340
26,166
(1,226)
(43,433)
—
80,693 $
156,847 $
—
12,946
(1,663)
(69,284)
—
98,846 $
194,463
—
47,407
—
(84,536)
(487)
156,847
(1) Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts. Reclassifications
to nonaccretable difference occur when accruing loans are moved to non-accrual and expected cash flows are no longer predictable and the
accretable yield is eliminated.
(2) Transfer of loans to OREO is the difference between the value removed from the pool and the expected cash flows for the loan.
The remaining nonaccretable difference for PCI loans was $64.2 million and $91.9 million at December 31, 2018 and
2017, respectively. During 2018, 2017 and 2016, a combination of factors affecting the inputs to the Bank’s quarterly
recast process led to the reclassifications from nonaccretable difference to accretable yield. These transfers resulted from
revised cash flows that reflect better-than-expected performance of the PCI loan portfolio acquired in the FNB
Transaction as a result of the Bank’s strategic decision to dedicate resources to the liquidation of those loans acquired in
the FNB Transaction during the noted periods.
F-30
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest
payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of
collection. Impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially
charged-off loans.
The amounts shown in following tables include loans accounted for on an individual basis, as well as acquired Pooled
Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment
measured at the pool level. Impaired loans, segregated between those considered to be PCI loans and those without credit
impairment at acquisition, are summarized by class in the following tables (in thousands).
December 31, 2018
PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Non-PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
December 31, 2017
PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Non-PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Unpaid
Contractual
Recorded
Recorded
Investment with Investment with Recorded
Total
Principal Balance No Allowance
Allowance
Related
Investment Allowance
$
42,668 $
36,246
27,403
10,992
106,503
—
2,185
—
225,997
—
5,231
22,277
3,430
8,695
—
149
—
39,782
$
265,779 $
5,549 $
11,657
5,491
74
646
—
9
—
23,426
—
4,098
9,891
2,711
6,922
—
42
—
23,664
47,090 $
7,540 $
2,967
1,068
390
57,681
—
—
—
69,646
13,089 $
14,624
6,559
464
58,327
—
9
—
93,072
—
—
1,740
535
—
—
—
—
2,275
—
4,098
11,631
3,246
6,922
—
42
—
25,939
71,921 $ 119,011 $
1,125
304
72
92
1,299
—
—
—
2,892
—
—
721
31
—
—
—
—
752
3,644
Unpaid
Contractual
Recorded
Recorded
Total
Principal Balance No Allowance
Investment with Investment with Recorded Related
Investment Allowance
Allowance
7,770 $
3,067
3,610
428
2,053
—
12
—
2,641
19,581
—
10,934
15,924
—
1,177
—
56
—
5,382
33,473
53,054 $
8,207 $
6,115
2,489
1,010
2,328
—
115
—
84,472
104,736
15,977 $
9,182
6099
1,438
4,381
—
127
—
87,113
124,317
—
3,686
2,072
611
—
—
—
—
—
6,369
—
14,620
17,996
611
1,177
—
56
—
5,382
39,842
111,105 $ 164,159 $
722
670
89
215
324
—
18
—
2,697
4,735
—
932
365
93
—
—
—
—
—
1,390
6,125
$
20,155 $
20,042
19,752
2,001
7,001
—
2,377
—
226,889
298,217
—
15,504
24,427
668
1,596
—
162
—
6,341
48,698
$
346,915 $
F-31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Average investment in impaired loans is summarized by class in the following table (in thousands).
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Year Ended December 31,
2017
2018
2016
$ 14,533 $
21,262
21,143
2,880
35,404
—
117
—
46,248
16,623 $ 19,871
25,754
25,307
20,216
19,189
4,744
3,136
6,474
5,797
—
—
659
361
—
—
181,921
115,085
$ 141,587 $ 185,498 $ 259,639
Non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in
thousands).
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
December 31, December 31,
2018
2017
$
$
1,226 $
4,098
14,870
3,278
7,026
—
41
—
—
30,539 $
—
14,620
20,878
611
1,614
—
56
—
5,104
42,883
At December 31, 2018 and 2017, non-accrual loans included PCI loans of $4.9 million and $3.3 million, respectively, for
which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans can no
longer be reasonably estimated. In addition to the non-accrual loans in the table above, $3.4 million and $2.7 million of
real estate loans secured by residential properties and classified as held for sale were in non-accrual status at
December 31, 2018 and 2017, respectively.
Interest income, including recoveries and cash payments, recorded on impaired loans was $1.4 million, $1.7 million and
$1.3 million during 2018, 2017 and 2016, respectively. Except as noted above, PCI loans are considered to be performing
due to the application of the accretion method.
The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and
that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable
payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates
and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans
(“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans,
the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is
not forgiven to the debtor.
F-32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
There were no TDRs granted during 2018. Information regarding TDRs granted during 2017 and 2016 is shown in the
following table (in thousands). At December 31, 2018 and 2017, the Bank had nominal unadvanced commitments to
borrowers whose loans have been restructured in TDRs.
Year Ended December 31, 2017
Year Ended December 31, 2016
Number of Balance at Balance at
Number of Balance at Balance at
Loans
Extension End of Period Loans
Extension End of Period
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
— $
— $
2
1
1
—
—
—
—
—
4 $ 6,787 $
4,775
1,357
655
—
—
—
—
—
—
4,629
1,186
611
—
—
—
—
—
6,426
— $
—
1
—
—
—
—
—
—
— $
—
1,196
—
—
—
—
—
—
1 $ 1,196 $
—
—
944
—
—
—
—
—
—
944
All of the loan modifications included in the table above involved payment term extensions. The Bank did not grant
principal reductions on any restructured loans during 2018, 2017 or 2016.
There were no TDRs granted during the twelve months preceding December 31, 2018, for which a payment was at least
30 days past due. The following table presents information regarding TDRs granted during the twelve months preceding
December 31, 2017, for which a payment was at least 30 days past due (dollars in thousands).
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Twelve Months Preceding December 31, 2017
Number of
Loans
Balance at
Extension
Balance at
End of Period
— $
1
—
1
—
—
—
—
—
2 $
— $
1,481
—
655
—
—
—
—
—
2,136 $
—
1,352
—
611
—
—
—
—
—
1,963
An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).
December 31, 2018
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land
development
1-4 family residential
Mortgage warehouse
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
1,373 $ 1,708,160 $ 13,089 $ 1,722,622 $
5,537
13,892
1,197,337
1,488,000
1,217,498
1,508,451
14,624
6,559
3,549
10,421
—
401
—
928,896
610,515
243,806
47,136
578,363
464
58,327
—
9
—
932,909
679,263
243,806
47,546
578,363
35,173 $ 6,802,213 $ 93,072 $ 6,930,458 $
—
75
3
—
—
—
—
—
78
$
$
1,174 $
1,364
1,792
3,549
5,987
—
254
—
14,120 $
199 $
—
1,049
—
2,484
—
147
—
3,879 $
— $
4,173
11,051
—
1,950
—
—
—
17,174 $
F-33
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2017
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land
development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
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
$
$
— $
442
2,702
1,685
1,490
—
194
—
5,871
12,384 $
— $
—
312
101
1,290
—
20
—
1,324
3,047 $
— $
— $ 1,473,942 $ 15,977 $ 1,489,919 $
2,195
5,714
2,637
8728
1,080,429
1,336,591
9,182
6,099
1,092,248
1,351,418
—
418
—
—
—
3,226
11,553 $
1,786
3,198
0
214
—
10,421
26,984 $ 6,304,497 $ 124,317 $ 6,455,798 $
959,381
421,778
329,787
40,105
577,889
84,595
962,605
429,357
329,787
40,446
577,889
182,129
1,438
4,381
—
127
—
87,113
—
—
640
—
—
—
—
—
283
923
In addition to the loans shown in the table above, PrimeLending had $83.1 million and $84.5 million of loans included in
loans held for sale (with an aggregate unpaid principal balance of $84.0 million and $85.2 million, respectively) that were
90 days past due and accruing interest at December 31, 2018 and 2017, respectively. These loans are guaranteed by U.S.
government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset
levels, (iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in state and local markets.
The Company utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio with the exception of
broker-dealer loans. A risk rating is assigned based on an assessment of the borrower’s management, collateral position,
financial capacity, and economic factors. The general characteristics of the various risk grades are described below.
Pass — “Pass” loans present a range of acceptable risks to the Company. Loans that would be considered virtually risk-
free are rated Pass — low risk. Loans that exhibit sound standards based on the grading factors above and present a
reasonable risk to the Company are rated Pass — normal risk. Loans that exhibit a minor weakness in one or more of the
grading criteria but still present an acceptable risk to the Company are rated Pass — high risk.
Special Mention — “Special Mention” loans have potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken
the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose
the Company to sufficient risk to require adverse classification.
Substandard — “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the
obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain
some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.
PCI — “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually
required principal payments would not be collected.
F-34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables present the internal risk grades of loans, as previously described, in the portfolio by class (in
thousands).
December 31, 2018
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
December 31, 2017
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Allowance for Loan Losses
Pass
Special Mention Substandard
PCI
Total
$ 1,673,424 $
1,175,225
1,433,227
929,130
601,264
243,806
47,416
578,363
$ 6,681,855 $
— $
2,083
15,320
—
393
—
—
—
36,109 $ 13,089 $ 1,722,622
1,217,498
25,566
1,508,451
53,345
932,909
3,315
679,263
19,279
243,806
—
47,546
121
578,363
—
17,796 $ 137,735 $ 93,072 $ 6,930,458
14,624
6,559
464
58,327
—
9
—
Pass
Special Mention Substandard
PCI
Total
$ 1,460,758 $
1,030,611
1,275,489
958,157
419,317
329,787
40,211
577,889
81,583
$ 6,173,802 $
6,408 $
1,239
17,354
2,259
—
—
—
—
356
6,776 $ 15,977 $ 1,489,919
1,092,248
9,182
51,216
1,351,418
6,099
52,476
962,605
1,438
751
429,357
4,381
5,659
329,787
—
—
40,446
127
108
577,889
—
—
182,129
87,113
13,077
27,616 $ 130,063 $ 124,317 $ 6,455,798
It is management’s responsibility to, at the end of each quarter, or more frequently as deemed necessary, analyze the level
of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio. Estimated
credit losses are the probable current amount of loans that the Company will be unable to collect given facts and
circumstances as of the evaluation date. When management determines that a loan, or portion thereof is uncollectible, the
loan, or portion thereof, is charged-off against the allowance for loan losses, or for acquired loans accounted for in pools,
charged against either the pool discount or the post-acquisition allowance. Recoveries on charge-offs of loans acquired in
the Bank Transactions that occurred prior to their acquisition represent contractual cash flows not expected to be collected
and are recorded as accretion income. Recoveries on acquired loans charged-off subsequent to their acquisition are
credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the
pool discount.
The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and
Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the
Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated using one of
three impairment measurement methods as of the evaluation date: (1) the present value of expected future cash flows
discounted at the loan’s effective rate, (2) the loan’s observable market price, or (3) the fair value of the collateral if the
loan is collateral dependent. Specific reserves are provided in the estimate of the allowance based on the measurement of
impairment under these three methods, except for collateral dependent loans, which require the fair value method. All
non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are
calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year
average net loss rate to calculate historical loss factors. The analysis is conducted by call report loan category, and further
disaggregates commercial and industrial loans by collateral type. The analysis uses net charge-off experience by
considering charge-offs and recoveries in determining the loss rate. The historical loss calculation for the quarter is
calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category
balance. The Bank utilizes a weighted average loss rate to better represent recent trends.
F-35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole
basis upon which the Company determines the appropriate level for the allowance for loan losses. Management considers
recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing
portfolio to differ from historical loss experience, including but not limited to:
•
•
•
•
•
•
•
changes in the volume and severity of past due, non-accrual and classified loans;
changes in the nature, volume and terms of loans in the portfolio;
changes in lending policies and procedures;
changes in economic and business conditions and developments that affect the collectability of the portfolio;
changes in lending management and staff;
changes in the loan review system and the degree of oversight by the Bank’s board of directors; and
any concentrations of credit and changes in the level of such concentrations.
Changes in the volume and severity of past due, non-accrual and classified loans, as well as changes in the nature, volume
and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the
historical loss factors. Classified loans are defined as loans having a well-defined weakness or weaknesses related to the
borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are
characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard
classification are not corrected. The magnitude of the impact of these factors on the qualitative assessment of the
allowance for loan loss changes from quarter to quarter.
The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process,
requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information
necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when:
(i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process
of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review
scope, or (iv) the loan is identified by the servicing officer as a problem.
In connection with the Bank Transactions, the Bank acquired loans both with and without evidence of credit quality
deterioration since origination. PCI loans are accounted for in pools as well as on an individual loan basis. Cash flows
expected to be collected are recast quarterly for each loan or pool. These evaluations require the continued use and
updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed
assumptions (similar to those used for the initial fair value estimate). Management judgment must be applied in
developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan
losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any
previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield.
This increase in accretable yield is taken into income over the remaining life of the loan.
Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each
reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for
originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value
discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a
provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce
any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance
established for that loan.
The allowance for loan losses is subject to regulatory examinations and determinations as to adequacy, which may take
into account such factors as the methodology used to calculate the allowance and the size of the allowance. While the
Company believes it has an appropriate allowance for the existing loan portfolio at December 31, 2018, additional
provisions for losses on existing loans may be necessary in the future.
During 2016, the Bank discovered irregularities in connection with a single loan that was in default. As a result, the Bank
increased its provision for loan losses and recorded a $24.5 million charge-off during the second quarter of 2016,
F-36
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
representing the entire outstanding principal balance of the loan. During the second quarter of 2017, the Bank recorded
other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery of a document
delivered in connection with this loan.
Changes in the allowance for loan losses, distributed by portfolio segment, are shown below (in thousands).
Year Ended December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Total
Year Ended December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total
Year Ended December 31, 2016
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total
Balance,
beginning of year
$
Provision (recovery)
for loan losses
charged off
Balance,
beginning of year
$
Provision (recovery)
for loan losses
charged off
Loans
Recoveries on Balance,
27,232 $
23,698
7,847
4,245
—
311
353
63,686 $
22,262 $
21,369
7,002
2,974
—
424
155
413
54,599 $
15,669 $
19,845
6,064
3,314
—
314
209
1,532
46,947 $
$
$
$
Loans
Recoveries on Balance,
(800) $
— $
charged of loans end of year
27,100
21,980
6,061
3,956
—
267
122
59,486
4,273
6
146
—
64
—
4,489 $
(12,741)
—
(143)
—
(93)
—
(13,777) $
668 $
6,750
(1,792)
(292)
—
(15)
(231)
5,088 $
4,320 $
6,725
848
(701)
—
16
198
2,865
14,271 $
7,785 $
33,369
938
(488)
—
190
(53)
(1,121)
40,620 $
(193) $
24 $
charged of loans end of year
26,413
23,674
7,844
2,362
—
311
353
2,729
63,686
1,833
7
201
—
79
—
22
2,166 $
(6,253)
(13)
(112)
—
(208)
—
(571)
(7,350) $
Loans
Recoveries on Balance,
(1,243) $
51 $
charged of loans end of year
22,262
21,369
7,002
2,974
—
424
155
413
54,599
1,931
—
344
—
123
—
121
2,570 $
(33,776)
—
(196)
—
(203)
(1)
(119)
(35,538) $
Balance,
beginning of year
$
Provision (recovery)
for loan losses
charged off
F-37
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Total
December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total
Loans individually Loans collectively
evaluated for
impairment
evaluated for
impairment
PCI
loans
$
$
3,909 $
10,741
3,241
—
—
—
—
17,891 $
2,908,498 $
1,491,151
929,204
620,936
243,806
47,537
578,363
6,819,495 $
27,713
6,559
464
58,327
—
9
—
93,072
Loans individually Loans collectively
evaluated for
impairment
evaluated for
impairment
PCI
loans
$
$
13,782 $
16,819
611
—
—
—
—
—
31,212 $
2,543,226 $
1,328,500
960,556
424,976
329,787
40,319
577,889
95,016
6,300,269 $
25,159
6,099
1,438
4,381
—
127
—
87,113
124,317
$
$
$
$
Total
2,940,120
1,508,451
932,909
679,263
243,806
47,546
578,363
6,930,458
Total
2,582,167
1,351,418
962,605
429,357
329,787
40,446
577,889
182,129
6,455,798
The allowance for loan losses was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Total
December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Mortgage warehouse
Consumer
Broker-dealer
Covered
Total
Loans individually Loans collectively
evaluated for
impairment
evaluated for
impairment
PCI
loans
$
$
— $
721
31
—
—
—
—
752 $
25,671 $
21,187
5,938
2,657
—
267
122
55,842 $
1,429
72
92
1,299
—
—
—
2,892
Loans individually Loans collectively
evaluated for
impairment
evaluated for
impairment
PCI
loans
$
$
932 $
365
93
—
—
—
—
—
1,390 $
24,089 $
23,220
7,536
2,038
—
293
353
32
57,561 $
1,392
89
215
324
—
18
—
2,697
4,735
$
$
$
$
Total
27,100
21,980
6,061
3,956
—
267
122
59,486
Total
26,413
23,674
7,844
2,362
—
311
353
2,729
63,686
6. Covered Assets and Indemnification Asset
The Bank acquired certain assets and assumed certain liabilities of FNB in connection with an FDIC-assisted transaction
on September 13, 2013 (the “Bank Closing Date”). As part of the Purchase and Assumption Agreement (the “P&A
Agreement”) by and among the FDIC (as receiver of FNB), the Bank and the FDIC, the Bank and the FDIC entered into
loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company referred to
acquired commercial and single family residential loan portfolios and OREO that were subject to the loss-share
agreements as “covered loans” and “covered OREO”, respectively, and these assets were presented as separate line items
in the Company’s consolidated balance sheets. Collectively, covered loans and covered OREO were referred to as
“covered assets”. Pursuant to the loss-share agreements, the FDIC agreed to reimburse the Bank the following amounts
F-38
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net
losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in
excess of $365.7 million of net losses incurred. Net losses were defined as book value losses plus certain defined expenses
incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the
amount of subsequent recoveries that were reimbursable to the FDIC for a particular asset was limited to book value
losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There was no
limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family
residential assets. The loss-share agreements for commercial and single family residential assets were in effect for five
years and ten years, respectively, from the Bank Closing Date, and the loss recovery provisions to the FDIC were in effect
for eight years and ten years, respectively, from the Bank Closing Date. The asset arising from the loss-share agreements,
referred to as the “FDIC Indemnification Asset,” was measured separately from the covered loan portfolio because the
agreements were not contractually embedded in the covered loans and were not transferable if the Bank chose to dispose
of the covered loans. In accordance with the loss-share agreements, the Bank may have been required to make a “true-up”
payment to the FDIC approximately ten years following the Bank Closing Date if its actual net realized losses over the
life of the loss-share agreements were less than the FDIC’s initial estimate of losses on covered assets. The “true-up”
payment was calculated using a defined formula set forth in the P&A Agreement.
At the close of business on September 30, 2018, the loss-share agreements for commercial assets with the FDIC expired,
except for certain obligations on the part of the Bank that survived. On October 17, 2018, the Bank and the FDIC entered
into a Termination Agreement pursuant to which the loss-share agreements for single family residential assets and
commercial assets were terminated in exchange for the payment by the FDIC to the Bank of $6.26 million. Accordingly,
loans which were previously referred to as either “covered loans” if covered by the loss-share agreements or otherwise
“non-covered loans” are now collectively referred to as “loans held for investment.”
Covered Other Real Estate Owned
A summary of the activity in OREO previously covered by the FDIC loss-share agreements is as follows (in thousands)(1).
Balance, beginning of year
Additions to covered OREO
Dispositions of covered OREO
Valuation adjustments in the period
Transfer to other assets as a result of loss-share termination
Balance, end of year
$
$
2018
36,744 $
5,284
(10,145)
(2,027)
(29,856)
Year Ended December 31,
2017
51,642 $
6,700
(17,866)
(3,732)
—
36,744 $
— $
2016
99,090
13,876
(42,843)
(18,481)
—
51,642
(1) The additions, dispositions and valuation adjustments during 2018 as presented in the table represent activity from January 1, 2018 through
September 30, 2018, prior to the expiration and termination of the FDIC loss-share agreements. All previously “covered” OREO is included in
other assets as of December 31, 2018.
During 2018, 2017 and 2016, the Bank wrote down certain covered OREO assets to fair value to reflect new appraisals on
certain OREO acquired in the FNB Transaction and OREO acquired from the foreclosure on certain FNB loans acquired
in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired assets upon acquisition, in
some cases additional downward valuations were required. The downward valuations recorded during the periods
presented above were related to covered assets subject to the loss-share agreements with the FDIC.
These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the
OREO, including in some cases the intended use of the OREO, due to the availability of more information as well as the
passage of time. The process of determining fair value is subjective in nature and requires the use of significant estimates
and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information
may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent
information, that its estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments
requires that the decreases to fair value be recorded at the time such new information is received. Any increases to fair
value up to the amount of cumulative losses previously recognized are recorded as gains when the asset is subsequently
sold.
F-39
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As previously discussed, upon termination of the loss-share agreements, OREO acquired in the FNB Transaction which
was previously identified as “covered” is now included in other assets within the consolidated balance sheets.
FDIC Indemnification Asset
A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).
Balance, beginning of year
FDIC Indemnification Asset accretion (amortization)
Transfers to due from FDIC and other
FDIC loss-share termination
Balance, end of year
$
$
2018
29,340 $
(6,509)
—
(22,831)
Year Ended December 31,
2017
71,313 $
(17,083)
(24,890)
—
29,340 $
— $
2016
91,648
242
(20,577)
—
71,313
In October 2018, in conjunction with the receipt of the $6.26 million payment associated with the termination of the FDIC
loss-share agreements, the then-remaining FDIC Indemnification Asset of $22.8 million and the FDIC true-up accrual of
$16.6 million were removed with no further impact to the Company’s consolidated statements of operations.
7. Cash and Due from Banks
Cash and due from banks consisted of the following (in thousands).
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,
2018
47,621 $
83,949
425,770
1,595
85,138
644,073 $
2017
44,765
92,271
248,442
1,501
99,998
486,977
$
$
The amounts above include interest-bearing deposits of $469.4 million and $302.2 million at December 31, 2018 and
2017, respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at
December 31, 2018.
8. Premises and Equipment
The components of premises and equipment are summarized as follows (in thousands).
December 31,
Land and premises
Furniture and equipment
Less accumulated depreciation and amortization
$
2018
147,783 $
259,082
406,865
(169,492)
$
237,373 $
2017
111,203
207,552
318,755
(141,178)
177,577
The amounts shown above include gross assets recorded under capital leases of $7.8 million and $8.4 million, with
accumulated amortization of $3.6 million and $3.3 million at December 31, 2018 and 2017, respectively.
Occupancy expense was reduced by rental income of $1.4 million, $1.8 million and $2.0 million during 2018, 2017 and
2016, respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of
capital leases, amounted to $33.1 million, $34.6 million and $35.4 million during 2018, 2017 and 2016, respectively.
F-40
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Goodwill and Other Intangible Assets
At December 31, 2018, the carrying amount of goodwill of $291.4 million was comprised of $39.6 million recorded
during the third quarter of 2018 in connection with the BORO Acquisition, $24.0 million recorded in connection with the
acquisition of NLC and $227.8 million recorded in connection with the PlainsCapital Merger.
Other intangible assets of $38.0 million and $36.4 million at December 31, 2018 and 2017, respectively, include an
indefinite lived intangible asset with an estimated fair value of $3.0 million related to state licenses acquired as a part of
the NLC acquisition in January 2007.
The Company performed required annual impairment tests of its goodwill and other intangible assets having an indefinite
useful life as of October 1st for each of its reporting units. At October 1, 2018, the Company determined that the
estimated fair value of each of its reporting units exceeded its carrying value. The Company estimated the fair values of
its reporting units based on both a market and income approach using historical, normalized actual and forecasted results.
Based on this evaluation, the Company concluded that the goodwill and other identifiable intangible assets were fully
realizable.
The Company’s evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates
that may change over time. If future discounted cash flows become less than those projected by the Company, future
impairment charges may become necessary that could have a materially adverse impact on the Company’s results of
operations and financial condition. As quoted market prices in active stock markets are relevant evidence of fair value, a
significant decline in the Company’s common stock trading price may indicate an impairment of goodwill.
The carrying value of intangible assets subject to amortization was as follows (in thousands).
Estimated Gross
Net
December 31, 2018
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
December 31, 2017
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
Intangible
Assets
Accumulated Intangible
Amortization Assets
Useful Life
(Years)
4 - 12 $ 48,930 $ (31,062) $ 17,868
11,156
—
5,935
46
$ 105,580 $ (70,575) $ 35,005
(8,844)
(11,650)
(15,465)
(3,554)
15 - 20
4 - 6
12 - 14
13
20,000
11,650
21,400
3,600
Net
Estimated Gross
Useful Life Intangible
Accumulated Intangible
Amortization
Assets
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
6
4 -
12 - 14
13
Amortization expense related to intangible assets during 2018, 2017 and 2016 was $8.4 million, $8.3 million and $10.2
million, respectively.
The estimated aggregate future amortization expense for intangible assets at December 31, 2018 is as follows (in
thousands).
2019
2020
2021
2022
2023
Thereafter
$
$
7,851
6,539
5,313
3,987
2,860
8,455
35,005
F-41
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Mortgage Servicing Rights
The following tables present the changes in fair value of the Company’s MSR asset, as included in other assets within the
consolidated balance sheets, and other information related to the serviced portfolio (dollars in thousands).
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
Year Ended December 31,
2018
54,714
25,028
(9,303)
159
(4,496)
66,102
$
$
2017
61,968
16,401
(17,499)
(1,722)
(4,434)
54,714
$
$
December 31,
2018
5,086,461
$
1.30 %
2017
4,762,042
1.15 %
$
$
$
2016
52,285
23,381
(7,586)
(153)
(5,959)
61,968
(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,
2018
2017
10.51 %
11.11 %
7.1
10.93 %
11.03 %
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,
2018
2017
$
(2,512) $
(4,980)
(1,948)
(3,839)
(2,677)
(5,139)
(2,135)
(4,103)
This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset.
The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the
change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis,
the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In
reality, changes in one assumption may change another assumption.
Contractually specified servicing fees, late fees and ancillary fees earned of $23.3 million, $20.7 million and $23.8
million during 2018, 2017 and 2016, respectively, were included in other noninterest income within the consolidated
statements of operations.
F-42
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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,
2018
2017
$
2,560,750 $
2,411,849
1,358,196
2,725,541
5,000
393,685
184,700
1,308,284
—
$
8,536,156 $
1,202,752
2,222,555
101,624
411,771
218,812
1,313,482
95,274
7,978,119
At December 31, 2018, deposits include $655.6 million of time deposit accounts that meet or exceed the FDIC insurance
limit of $250,000. Scheduled maturities of interest-bearing time deposits at December 31, 2018 are as follows (in
thousands).
2019
2020
2021
2022
2023 and thereafter
$
$
991,402
237,452
21,269
13,327
44,834
1,308,284
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
December 31,
2018
100,100 $
576,707
200,000
189,000
1,065,807 $
2017
101,775
539,149
250,000
315,500
1,206,424
$
$
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on
some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under
agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held
by the Bank, the Hilltop Broker-Dealers or a third-party dealer.
F-43
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,
2018
701,622
$
1.96 %
849,568
2017
588,847
1.06 %
904,704
$
2016
368,012
0.58 %
520,715
Average interest rate at end of year
Securities underlying the agreements at end of year:
Carrying value
Estimated fair value
December 31,
2018
2017
2.43 %
1.21 %
$
$
587,609
618,231
$
$
581,636
598,300
FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock,
nonspecified real estate loans and certain specific commercial real estate loans. At December 31, 2018, the Bank had
available collateral of $3.4 billion, substantially all of which was blanket collateral. Other information regarding FHLB
short-term borrowings is shown in the following tables (dollars in thousands).
Average balance during the period
Average interest rate during the period
Maximum month-end balance during the year
Average interest rate at end of period
Year Ended December 31,
$
2018
214,110
2.09 %
$
675,000
2017
390,616
1.08 %
850,000
$
$
2016
361,475
0.46 %
1,000,000
$
$
December 31,
2018
2017
2.65 %
1.30 %
The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers
and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The
weighted average interest rate on the borrowings at December 31, 2018 and 2017 was 3.35% and 2.27%, respectively.
13. Notes Payable
Notes payable consisted of the following (in thousands).
Senior Notes due April 2025, net of discount of $1,393 and $1,545, respectively
FHLB notes, net of premium of $222 and $436, respectively, with maturities
ranging from September 2020 to June 2030 and interest payable monthly
NLIC note payable due May 2033, three-month LIBOR plus 4.10% (6.89% at
December 31, 2018) with interest payable quarterly
NLIC note payable due September 2033, three-month LIBOR plus 4.05% (6.84%
at December 31, 2018) with interest payable quarterly
ASIC note payable due April 2034, three-month LIBOR plus 4.05% (6.84% at
December 31, 2018) with interest payable quarterly
Insurance company line of credit due December 30, 2019, 3.25% plus a calculated
index rate (4.220% at December 31, 2018) with interest payable quarterly
Ventures Management lines of credit due March 2019
December 31,
$
2018
148,607 $
2017
148,455
4,391
10,000
10,000
7,500
19,402
10,000
10,000
7,500
—
48,374
228,872 $
1,000
12,452
208,809
$
F-44
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Senior Notes
On April 9, 2015, Hilltop completed an offering of $150.0 million aggregate principal amount of its 5% senior notes due
2025 (“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”). The Senior Unregistered Notes were offered within the United
States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to persons outside of the
United States under Regulation S under the Securities Act. The Senior Unregistered Notes were issued pursuant to an
indenture, dated as of April 9, 2015, by and between Hilltop and U.S. Bank National Association, as trustee. The net
proceeds from the offering, after deducting estimated fees and expenses and the initial purchasers’ discounts, were
approximately $148 million. Hilltop used the net proceeds of the offering to redeem all of Hilltop’s outstanding Non-
Cumulative Perpetual Preferred Stock, Series B at an aggregate liquidation value of $114.1 million, plus accrued but
unpaid dividends of $0.4 million, and Hilltop utilized the remainder for general corporate purposes. Unamortized debt
issuance costs presented as a reduction from the Senior Notes are discussed further in Note 1 to the consolidated financial
statements.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, the Company entered into a
registration rights agreement with the initial purchasers of the Senior Unregistered Notes. Under the terms of the
registration rights agreement, the Company agreed to offer to exchange the Senior Unregistered Notes for notes registered
under the Securities Act (the “Senior Registered Notes”). The terms of the Senior Registered Notes are substantially
identical to the Senior Unregistered Notes for which they were exchanged (including principal amount, interest rate,
maturity and redemption rights), except that the Senior Registered Notes generally are not subject to transfer restrictions.
On May 22, 2015 and subject to the terms and conditions set forth in the Senior Registered Notes prospectus, the
Company commenced an offer to exchange the Senior Unregistered Notes for Senior Registered Notes. Substantially all
of the Senior Unregistered Notes were tendered in the exchange offer, and on June 22, 2015, the Company fulfilled its
requirements under the registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes
in exchange for the tendered Senior Unregistered Notes. The Senior Registered Notes and the Senior Unregistered Notes
that remain outstanding are collectively referred to as the “Senior Notes.”
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and
October 15 of each year. The Senior Notes will mature on April 15, 2025, unless Hilltop redeems the Senior Notes, in
whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the
Senior Notes) at its election at a redemption price equal to 100% of the principal amount of the Senior Notes to be
redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture contains covenants that limit the Company’s ability to, among other things and subject to certain significant
exceptions: (i) dispose of or issue voting stock of certain of the Company’s bank subsidiaries or subsidiaries that own
voting stock of the Company’s bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien
or charge on the capital stock of certain of the Company’s bank subsidiaries or subsidiaries that own capital stock of the
Company’s bank subsidiaries and (iii) sell all or substantially all of the Company’s assets or merge or consolidate with or
into other companies. The indenture also provides for certain events of default, which, if any of them occurs, would
permit or require the principal amount, premium, if any, and accrued and unpaid interest on the then outstanding Senior
Notes to be declared immediately due and payable.
Federal Home Loan Bank notes
The FHLB notes, assumed by the Bank in the SWS Merger, have interest rates ranging from 2.88% to 5.70%, with a
weighted average interest rate of 3.69% at December 31, 2018. The FHLB notes, as well as other borrowings from the
FHLB, are collateralized by FHLB stock, a blanket lien on commercial and real estate loans, as well as by the amount of
securities that are in safekeeping at the FHLB, the value of which was $3.4 billion at December 31, 2018.
NLIC and ASIC Notes Payable
The NLIC and ASIC notes payable to unaffiliated companies are each subordinated in right of payment to all policy
claims and other indebtedness of NLIC and ASIC, respectively. Further, all payments of principal and interest require the
prior approval of the Insurance Commissioner of the State of Texas and are only payable to the extent that the statutory
surplus of NLIC exceeds $30 million and ASIC exceeds $15 million.
F-45
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The NLIC and ASIC loan agreements relating to the notes payable contain various covenants pertaining to limitations on
additional debt, dividends, officer and director compensation, and minimum capital requirements. The Company was in
compliance with the covenants at December 31, 2018.
NLC has entered into an indenture relating to the NLIC and ASIC notes payable which provides that (i) if a person or
group becomes the beneficial owner directly or indirectly of 50% or more of its equity securities and (ii) if NLC’s ratings
are downgraded by a nationally recognized statistical rating organization as defined in the Securities Exchange Act of
1934, as amended (the “Exchange Act”), then each holder of the notes governed by such indenture has the right to require
that NLC purchase such holder’s notes in whole or in part at a price equal to 100% of the outstanding principal amount.
Insurance Company Line of Credit
The Company’s insurance subsidiary has a line of credit with a financial institution which allows for borrowings by NLC
of up to $7.5 million and is collateralized by substantially all of NLC’s assets. The loan agreements relating to the line of
credit contain various financial and other covenants which must be maintained until all indebtedness to the financial
institution is repaid. The Company was in compliance with the covenants at December 31, 2018.
Ventures Management Lines of Credit
At December 31, 2018, Ventures Management’s ABAs had combined available lines of credit totaling $110.0 million,
$50.0 million of which was with a single unaffiliated bank and $60.0 million of which was with the Bank. At
December 31, 2018, the outstanding balance of $48.4 million was related to two lines of credit, both with an unaffiliated
bank with stated interest rates of the greater of a calculated index rate on mortgage notes or 2.75%. The weighted average
interest rate of these two lines of credit at December 31, 2018 was 4.16%. The Ventures Management lines of credit are
collateralized by mortgage notes, and the loan agreements relating to the lines of credit contain various financial and other
covenants which must be maintained until all indebtedness to the financial institution is repaid. The Company was in
compliance with the covenants at December 31, 2018.
Scheduled Maturities
Scheduled maturities for notes payable outstanding at December 31, 2018 are as follows (in thousands).
2019
2020
2021
2022
2023
Thereafter
$
$
48,374
2,389
462
157
—
178,661
230,043
14. Junior Subordinated Debentures and Trust Preferred Securities
PCC has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which,
PCC Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole purpose
of issuing and selling preferred securities and common securities, using the resulting proceeds to acquire junior
subordinated debentures issued by PCC (the “Debentures”). Accordingly, the Debentures are the sole assets of the Trusts,
and payments under the Debentures are the sole revenue of the Trusts. All of the common securities are owned by PCC;
however, PCC is not the primary beneficiary of the Trusts. Accordingly, the Trusts are not included in the Company’s
consolidated financial statements.
The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have
invested the proceeds from the securities in floating rate Debentures of PCC.
F-46
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding the PCC Debentures is shown in the following table (in thousands).
Investor
PCC Statutory Trust I
PCC Statutory Trust II
PCC Statutory Trust III
PCC Statutory Trust IV
Issue Date
$
July 31, 2001
March 26, 2003
$
September 17, 2003 $
$
February 22, 2008
Amount
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, 2018 was
5.95%. The term, rate and other features of the preferred securities are the same as the Debentures. PCC’s obligations
under the Debentures and related documents, taken together, constitute a full and unconditional guarantee of the Trust’s
obligations under the preferred securities.
15. Income Taxes
The significant components of the income tax provision are as follows (in thousands).
Current:
Federal
State
Deferred:
Federal
State
Year Ended December 31,
2017
2016
2018
$
19,504 $
2,349 $
21,853
63,769 $
5,440 $
69,209
82,970
10,181
93,151
40,176 $
757 $
11,352 $
1,845 $
13,197
35,050 $ 110,142 $
40,933
(6,732)
(2,958)
(9,690)
83,461
$
The income tax provision differs from the amount that would be computed by applying the statutory Federal income tax
rate to income before income taxes as a result of the following (in thousands). The applicable corporate federal income
tax rates were 21% for 2018 and 35% for 2017 and 2016.
Computed tax at federal statutory rate
Tax effect of:
$
Year Ended December 31,
2017
85,150 $ 80,992
2018
33,763 $
2016
Tax Legislation
Non-taxable acquisition adjustment
Nondeductible transaction costs
Nondeductible expenses
State income taxes
Tax-exempt income, net
Valuation allowance
Minority interest
Share-based compensation benefit
Prior year return to provision adjustment
Other
—
263
86
2,864
3,313
(1,432)
—
(900)
(273)
(1,682)
(952)
—
28,363
—
(6,682)
2,608
774
3,301
3,089
4,708
4,028
(2,850)
(2,758)
(2,094)
—
(718)
(210)
(2,391)
(412)
251
(943)
(346)
(257)
35,050 $ 110,142 $ 83,461
$
F-47
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of the tax effects of temporary differences that give rise to the net deferred tax asset included in other
assets within the consolidated balance sheets are as follows (in thousands).
Deferred tax assets:
Net operating and built-in loss carryforward
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,
2018
2017
9,656 $
19,673
14,137
14,865
3,483
3,974
15,142
80,930
12,344
—
9,326
4,169
15,761
7,074
48,674
32,256 $
11,697
24,883
15,105
15,860
4,359
5,859
11,961
89,724
10,288
2,960
8,994
4,527
13,184
8,157
48,110
41,614
The Tax Legislation enacted on December 22, 2017 significantly revised the U.S. corporate income tax by lowering
corporate income tax rates. The Company’s results during the fourth quarter and full year of 2017 include the estimated
impact of a non-recurring, non-cash charge of $28.4 million as a result of the enactment of the Tax Legislation. The
charge was primarily due to the revaluation of deferred tax assets as a result of the reduction in the corporate tax rate from
35% to 21%, and other anticipated impacts associated with the Tax Legislation. Deferred tax asset amounts recorded in
December 2017 following enactment of the Tax Legislation were final as of September 30, 2018.
The Company’s effective tax rate was 21.8%, 45.3% and 36.1% during 2018, 2017 and 2016, respectively. The 2018
effective tax rate approximated statutory rates and included the effect of tax planning strategies in conjunction with the
Tax Legislation, offset by non-deductible expenses. In addition, a tax benefit was recognized from the portion of the
indemnification reserve that was a deductible settlement amount. The effective tax rate during 2017 was higher than the
statutory rate primarily due to the revaluation of deferred tax assets as a result of the Tax Legislation, partially offset by a
non-taxable gain recorded in the resolution of the SWS appraisal proceedings as the SWS Merger was a tax-free
reorganization. The effective tax rate during 2016 was relatively consistent with the statutory rate, but did include effects
related to non-deductible transaction costs associated with the SWS Merger, offset by the reversal of a valuation
allowance of $2.2 million previously established on a deferred tax asset associated with the SWS Merger and the
recognition of excess tax benefits on share-based payment awards as a result of the Company’s adoption of the provisions
of Accounting Standards Update (“ASU”) 2016-09 as of January 1, 2016.
At December 31, 2018 and 2017, the Company had net operating loss carryforwards for Federal income tax purposes of
$20.9 million and $29.9 million, respectively (or $4.4 million and $6.3 million, respectively, on a tax effected basis at
applicable rates for respective tax years). The net operating loss carryforwards are subject to an annual Section 382
limitation on their usage. These net operating loss carryforwards expire in starting in 2033. The Company expects to
realize its current deferred tax asset for these net operating loss carryforwards through the implementation of certain tax
planning strategies, core earnings, and reversal of timing differences. At December 31, 2018, the Company also had a
recognized built-in loss (“RBIL”) carryover of $20.5 million from the ownership change resulting from the SWS Merger.
These RBILs, if recognized during a five year recognition period before January 1, 2020, are subject to the annual Section
382 limitation rules similar to the Company’s net operating loss carryforwards. The RBIL’s are expected to be fully
realized prior to any expiration. The Company’s remaining net unrealized built-in loss of $9.4 million, if recognized
during a five year recognition period before January 1, 2020, would also be subject to the Section 382 limitation.
F-48
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Based on the Company’s evaluation of its deferred tax assets, management determined that no valuation allowance
against its gross deferred tax assets was necessary at December 31, 2018 or 2017.
GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax
position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. At
December 31, 2018 and 2017, the total amount of gross unrecognized tax benefits was $3.1 million and $1.6 million,
respectively, of which $2.5 million and $1.2 million, respectively, if recognized, would favorably impact the Company’s
effective tax rate. The aggregate changes in gross unrecognized tax benefits, which excludes interest and penalties, are as
follows (in thousands).
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
2018
Year Ended December 31,
2017
2016
$
$
1,574 $
770
—
712
3,056 $
1,704 $
476
(1,273)
667
1,574 $
644
844
—
216
1,704
Specific positions that may be resolved include issues involving apportionment and tax credits. At December 31, 2018,
the unrecognized tax benefit is recorded as taxes receivable, which is included in other assets within the consolidated
balance sheet.
The Company files income tax returns in U.S. federal and numerous state jurisdictions. The Company is subject to tax
audits in numerous jurisdictions in the United States until the applicable statute of limitations expires. The Company is no
longer subject to U.S. federal tax examinations for tax years prior to 2015. The Company is open for various state tax
audits for tax years 2014 and later.
16. Employee Benefits
Hilltop and its subsidiaries have benefit plans that provide for elective deferrals by employees under Section 401(k) of the
Internal Revenue Code. Employee contributions are determined by the level of employee participation and related salary
levels per Internal Revenue Service regulations. Hilltop and its subsidiaries match a portion of employee contributions
based on the amount of eligible employees’ contributions and salaries. The amount charged to operating expense for these
matching contributions totaled $15.0 million, $13.9 million and $15.1 million during 2018, 2017 and 2016, respectively.
Effective upon the completion of the PlainsCapital Merger, the Company recorded a liability of $8.9 million associated
with separate retention agreements entered into between Hilltop and two executive officers. At December 31, 2018 and
2017, the recorded liability, including interest, was $9.2 million and $9.1 million, respectively.
The Bank purchased $15.0 million of flexible premium universal life insurance in 2001 to help finance the annual expense
incurred in providing various employee benefits. At December 31, 2018 and 2017, the carrying value of the policies
included in other assets was $26.5 million and $25.8 million, respectively. During each of 2018, 2017 and 2016, the Bank
recorded income of $0.6 million related to the policies that was reported in other noninterest income within the
consolidated statement of operations.
Deferred Compensation Plan
As a result of the SWS Merger, the Company assumed a deferred compensation plan (the “SWS Plan”) that allows former
SWS eligible officers and employees to defer a portion of their bonus compensation and commissions. The SWS Plan
matched 15% of the deferrals made by participants up to a predetermined limit through matching contributions that vest
ratably over four years. Pursuant to the terms of the SWS Plan, the trustee periodically purchased the former SWS
common stock in the open market. As a result of the SWS Merger, the former SWS common shares were converted into
Hilltop common stock based on the terms of the merger agreement. No further contributions can be made to this plan.
F-49
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The assets of the SWS Plan are held in a rabbi trust and primarily include investments in company-owned life insurance
(“COLI”) and Hilltop common stock. These assets are consolidated with those of the Company. Investments in COLI are
carried at the cash surrender value of the insurance policies and recorded in other assets within the consolidated balance
sheet at December 31, 2018 and 2017, respectively. Investments in Hilltop common stock, which are carried at cost, and
the corresponding liability related to the deferred compensation plan are presented as components of stockholders’ equity
as employee stock trust and deferred compensation employee stock trust, net, respectively, at December 31, 2018 and
2017, respectively.
17. Related Party Transactions
Pursuant to a Sublease Agreement, Diamond A Administration Company LLC (“Diamond A Admin”), an affiliate of
Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 16.8% of Hilltop common stock
at December 31, 2018, provided office space to Hilltop at a cost of $24 thousand per month. This Sublease Agreement
expired July 31, 2018 and was not renewed.
Jeremy B. Ford, a director and the President and Co-Chief Executive Officer of Hilltop, is the beneficiary of a trust that
owns a 49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owned 16.8% of the
outstanding Hilltop common stock at December 31, 2018. He also is a director and the Secretary of Diamond A Admin,
which provided office space to Hilltop as described in the preceding paragraph. Diamond A Admin is owned by Hunter’s
Glen/Ford, Ltd., a limited partnership in which a trust for the benefit of Jeremy B. Ford is a 46% limited partner.
Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop’s General Counsel and Secretary, is the son-in-
law of Gerald J. Ford. Accordingly, Messrs. Jeremy Ford and Corey Prestidge are brothers-in-law.
In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and their affiliates
(collectively referred to as related parties) totaling $1.2 million and $34.6 million at December 31, 2018 and 2017,
respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal
risk of collectability. For such loans during 2018, there were no principal additions and total principal payments were
$33.5 million.
At December 31, 2018 and 2017, the Bank held deposits of related parties of $126.3 million and $151.0 million,
respectively.
A related party is the lessor in an operating lease with the Bank. The Bank’s minimum payment under the lease is $0.5
million annually through 2028, for an aggregate remaining obligation of $5.0 million at December 31, 2018.
The Bank purchased loans from a company for which a related party serves as a director, president and chief executive
officer. At December 31, 2018 and 2017, the outstanding balance of the purchased loans was $1.2 million and $2.1
million, respectively. The loans were purchased with recourse in the ordinary course of business and the related party had
no direct financial interest in the transaction.
Hilltop Plaza Investment
On July 31, 2018, HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) purchased approximately 1.7 acres of land
in the City of University Park, Texas for $38.5 million. Hillcrest Land LLC is owned equally between Hilltop Investments
I, LLC, a wholly owned entity of Hilltop, and Diamond Ground, LLC, an affiliate of Gerald J. Ford. Each of Hilltop
Investments I, LLC and Diamond Ground, LLC contributed $19.3 million to Hillcrest Land LLC to complete the
purchase. As the voting rights of Hillcrest Land LLC are shared equally between the Company and Diamond Ground,
LLC, there is no primary beneficiary, and Diamond Ground, LLC’s interest in Hillcrest Land LLC has been reflected as a
noncontrolling interest in the Company’s consolidated financial statements. Therefore, the Company has consolidated
Hillcrest Land LLC under the VIE model according to the “most-closely associated” test. The purchased land is included
within premises and equipment, net in the consolidated balance sheets. Any income (loss) associated with Hillcrest Land
LLC is included within other noninterest income in the consolidated statements of operations. Trusts for which Jeremy
Ford and the wife of Corey Prestidge are a beneficiary own 10.2% and 10.1%, respectively, of Diamond Ground, LLC.
F-50
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In connection with the purchase of the land, Hillcrest Land LLC entered into a 99-year ground lease of the land with three
tenants-in-common: SPC Park Plaza Partners LLC (“Park Plaza LLC”), an unaffiliated entity which received an
undivided 50% leasehold interest; HTH Hillcrest Project LLC (“HTH Project LLC”), a wholly owned subsidiary of
Hilltop, which received an undivided 25% leasehold interest; and Diamond Hillcrest, LLC (“Diamond Hillcrest”), an
entity owned by Mr. Gerald J. Ford, which received an undivided 25% leasehold interest (collectively, the “Co-Owners”).
The ground lease is triple net. The base rent from the Co-Owners under the ground lease commences 18 months after the
ground lease was signed at $1.8 million per year and increases 1.0% per year each January 1 thereafter. The ground lease
was classified as an operating lease under ASC 840, and the accounting commencement date was determined to be
July 31, 2018, the date the land was available to the Co-Owners.
Concurrent with the ground lease, the Co-Owners entered into an agreement to purchase the improvements currently
being constructed on the land, which is a mixed-use project containing a six-story building (“Hilltop Plaza”). HTH Project
LLC and Diamond Hillcrest each own an undivided 25% interest in Hilltop Plaza. Park Plaza LLC owns the remaining
undivided 50% interest in Hilltop Plaza. Park Plaza LLC has agreed to serve as the Co-Owner property manager under the
Co-Owners Agreement; however, certain actions require unanimous approval of all Co-Owners. Hilltop Plaza will be
funded through a $41.0 million construction loan from an unaffiliated third party bank, as well as cash contributions of
$5.3 million from each of HTH Project LLC and Diamond Hillcrest. HTH Project LLC’s undivided interest in Hilltop
Plaza is accounted for as an equity method investment as the tenants-in-common have joint control over decisions
regarding Hilltop Plaza. The investment is included within other assets in the consolidated balance sheets and any income
(loss) is included within other noninterest income in the consolidated statements of operations.
Hilltop and the Bank entered into leases for an aggregate of approximately 72,000 of the total 119,000 square feet of
rentable space in Hilltop Plaza to serve as the headquarters for both companies. The two separate 129-month office and
retail leases have combined total base rent of approximately $35 million with the first nine months of rent abated. Move-
in is expected in the fourth quarter of 2019. The office and retail leases were considered under the build-to-suit provisions
of ASC 840, and the Company was determined to be the accounting owner of the project as its affiliate, HTH Project
LLC, has an equity investment in the project. As such, the assets of Hilltop Plaza are recognized during the construction
period as costs are incurred to construct the asset, with a corresponding liability representing the costs paid for by the
lessor (the Co-Owners). At December 31, 2018, the $27.8 million of costs incurred to date are included within premises
and equipment and other liabilities, respectively, in the consolidated balance sheets.
All intercompany transactions associated with the Hilltop Plaza investment and the related transactions discussed above
are eliminated in consolidation.
18. Commitments and Contingencies
During 2017, the Bank acted as agent on behalf of certain correspondent banks in the purchase and sale of federal funds
that aggregated to $3.0 million at December 31, 2017. There were no such transactions during 2018.
Legal Matters
The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative
cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on
information currently available, including advice of counsel. The Company establishes accruals for those matters when a
loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically
reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss
contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of
possible loss contingencies, the Company does not take into account the availability of insurance coverage, other than that
provided by reinsurers in the insurance segment. When it is practicable, the Company estimates loss contingencies for
possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate
such probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts
accrued, the Company is required to make a disclosure of the aggregate estimation. As available information changes,
however, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted
accordingly.
F-51
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability.
Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified,
unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting
meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery
has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a
class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to
estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted
against the Company.
Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock (the
“Petitioners”) filed petitions in the Court of Chancery of the State of Delaware (the “Court”) seeking appraisal for their
shares pursuant to Section 262 of the Delaware General Corporation Law. These petitions were consolidated as In re SWS
Group, Inc., C.A. No. 10554-VCG. On May 30, 2017, the Court issued its Memorandum Opinion in the matter. The
Court found the “fair value” of the shares of SWS common stock as of the date of the transaction was $6.38 per share.
Accordingly, Hilltop paid cash of $6.38 per share, plus statutory interest from the effective date of the merger until the
date of payment, to the Petitioners and the other stockholders of SWS who properly demanded appraisal rights under
Delaware law, collectively representing 7,438,453 shares. Each outstanding share of SWS common stock, other than
shares held by Hilltop, in treasury by SWS or by stockholders who properly demanded appraisal rights under Delaware
law, was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, the aggregate value
of which was $6.92 per share of SWS common stock as of the effective date of the merger. The resolution of this matter
resulted in 1,856,638 shares of HTH common stock, which had been held in escrow during the pendency of the
proceeding, being returned to the Company’s pool of authorized but unissued shares of common stock and a pre-tax net
increase to other noninterest income of $11.6 million during the second quarter of 2017. This change in common stock is
reflected in repurchases of common stock within the consolidated statements of stockholders’ equity. Petitioners filed an
appeal to the Court’s Memorandum Opinion. On February 23, 2018, the Delaware Supreme Court affirmed the decision
of the lower Court.
The Company is involved in information-gathering requests and investigations (both formal and informal), as well as
reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law
enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as
well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In
connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information.
The Inquiries, including the Inquiry described below, could develop into administrative, civil or criminal proceedings or
enforcement actions that could result in consequences that have a material effect on the Company's consolidated financial
position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings,
settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could
result in additional expenses and collateral costs, including reputational damage.
As a part of an industry-wide Inquiry, PrimeLending received a subpoena from the Office of Inspector General of the U.S.
Department of Housing and Urban Development (“HUD”) regarding mortgage-related practices, including those relating
to origination practices for loans insured by the Federal Housing Administration (the “FHA”). On August 20, 2014,
PrimeLending received a Civil Investigative Demand from the DOJ related to this Inquiry. According to the Civil
Investigative Demand, the DOJ conducted an investigation to determine whether PrimeLending violated the False Claims
Act in connection with originating and underwriting single-family residential mortgage loans insured by the FHA. In
order to avoid the delay, uncertainty, inconvenience and expense of protracted ligation, on October 23, 2018,
PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the DOJ and HUD,
respectively. In these agreements, PrimeLending did not admit to any liability or wrongdoing, and the DOJ and HUD did
not make any concessions with respect to their alleged claims. These agreements provide for payments to each of the DOJ
and HUD of $6.75 million. In exchange for these payments, each of the DOJ and HUD released any civil claims it may
have related to certain loans originated by PrimeLending. The payments were made to the DOJ and HUD during the
fourth quarter of 2018 and the indemnification liability related to this matter was released. Accordingly, the Company’s
operating results or financial condition will not be impacted by this matter in future periods.
While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is
currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not, except related to
specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position,
F-52
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably
possible that an adverse outcome in any matter, including the matters discussed above, could be material to the
Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting
period of occurrence.
Indemnification Liability Reserve
The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions
relating to its representations and warranties that each loan sold meets certain requirements, including representations as
to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined
to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant
against loss. The mortgage origination segment has established an indemnification liability reserve for such probable
losses.
Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss
has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse
the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment establishes
a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably
estimable.
An additional reserve has been established for probable agency, investor or other party losses that may have been
incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses.
Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold
exclusive of specific claimant requests, actual claim settlements and the severity of estimated losses resulting from future
claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests. While
the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase
provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor
considered in the calculation of this reserve.
At December 31, 2018 and 2017, the mortgage origination segment’s indemnification liability reserve totaled $10.7
million and $23.5 million, respectively. The provision for indemnification losses was $3.2 million, $4.0 million and $4.6
million during 2018, 2017 and 2016, respectively.
F-53
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment
based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification
liability reserve activity (in thousands).
Balance, beginning of period
Claims made
Claims resolved with no payment
Repurchases
Indemnification payments
Balance, end of period
Balance, beginning of period
Additions for new sales
Repurchases
Early payment defaults
Indemnification payments
Change in reserves for loans sold in prior years
Balance, end of period
Reserve for Indemnification Liability (1):
Specific claims
Incurred but not reported claims
Total
Representation and Warranty Specific Claims
Activity - Origination Loan Balance
Year Ended December 31,
2017
2018
2016
33,702 $
22,156
(13,169)
(8,250)
(655)
33,784 $
40,669 $
42,330
(37,439)
(6,490)
(5,368)
33,702 $
57,298
21,410
(19,696)
(4,164)
(14,179)
40,669
Indemnification Liability Reserve Activity
Year Ended December 31,
2017
2018
2016
23,472 $
3,170
(612)
(368)
(13,687)
(1,274)
10,701 $
18,239 $
3,962
(466)
(228)
(713)
2,678
23,472 $
16,640
4,638
(392)
(241)
(2,482)
76
18,239
December 31,
2018
2017
676 $
10,025
10,701 $
646
22,826
23,472
$
$
$
$
$
$
(1) As a result of the DOJ and HUD agreements discussed above, at December 31, 2018, the change in the Reserve for Indemnification Liability
reflects the total of $13.5 million of payments made to the DOJ and HUD to resolve the specific claims related to this matter. These claims were
included in incurred but not reported claims in prior periods.
Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the
reserve over time to address incurred losses, due to unanticipated adverse changes in the economy and historical loss
patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or
investors. The impact of such matters is considered in the reserving process when probable and estimable.
Other Contingencies
As discussed in Note 16 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger,
Hilltop entered into separate retention agreements with two executive officers, one having an initial term of three years
(with automatic one-year renewals at the end of two years and each anniversary thereof) and the other having an initial
term of two years (with automatic one-year renewals at the end of the first year and each anniversary thereof). Each of
these retention agreements provides for severance pay benefits if the executive officer’s employment is terminated
without “cause”.
In addition to these retention agreements, Hilltop and its subsidiaries maintain employment contracts with certain officers
that provide for benefits in the event of a “change in control” as defined in these agreements.
Hilltop and its subsidiaries lease space, primarily for corporate offices, branch facilities and automated teller machines,
under noncancelable operating leases with remaining terms, including renewal options, of 1 to 10 years and under capital
leases with remaining terms of 5 to 9 years. Rental expense under the operating leases was $42.9 million, $43.5 million
and $41.9 million in 2018, 2017 and 2016, respectively.
F-54
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Future minimum lease payments under lease agreements that had commenced as of December 31, 2018, excluding
intercompany leases and subleases which are eliminated in consolidation, are presented below (in thousands).
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Amount representing interest
Present value of minimum lease payments
Operating Leases
$
36,171 $
29,109
21,058
16,386
12,361
18,264
133,349
Capital Leases
1,186
1,197
1,212
1,241
1,280
3,460
9,576
(1,221)
8,355
$
$
19. Financial Instruments with Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of
credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated
financial statements. Such financial instruments are recorded in the consolidated financial statements when they are
funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of
involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are
met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to
a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to
customers.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.4 billion at December 31, 2018
and outstanding financial and performance standby letters of credit of $85.0 million at December 31, 2018.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance
sheet instruments. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s
credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable
securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.
In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions
that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not
fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by
customers or for the accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing
organization clients and to hedge changes in the fair value of certain securities, clearing agreements between the Hilltop
Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged
securities, and when-issued underwriting and purchase commitments.
20. Stock-Based Compensation
Pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”), the Company may grant nonqualified
stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights and other
awards to employees of the Company, its subsidiaries and outside directors of the Company. In the aggregate, 4,000,000
shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At December 31, 2018,
1,246,880 shares of common stock remain available for issuance pursuant to the 2012 Plan,
F-55
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
including shares that may be delivered pursuant to outstanding awards. Compensation expense related to the 2012 Plan
was $9.1 million, $10.8 million and $10.5 million during 2018, 2017 and 2016, respectively.
During 2018, 2017 and 2016, Hilltop granted 30,400, 16,859 and 21,224 shares of common stock, respectively, to certain
non-employee members of the Company’s board of directors for services rendered to the Company pursuant to the 2012
Plan.
Restricted Stock Awards and RSUs
The Compensation Committee of the board of directors of the Company issued restricted shares of Hilltop common stock
(“Restricted Stock Awards”) and RSUs pursuant to the 2012 Plan.
The Restricted Stock Awards generally cliff vested on the third anniversary of the grant date and were subject to service
conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective
vesting periods. The award agreements governing the Restricted Stock Awards provided for accelerated vesting under
certain conditions. As of September 30, 2017, all remaining Restricted Stock Awards had vested and none were
outstanding.
Certain RSUs are subject to time-based vesting conditions and generally provided for a cliff vest on the third anniversary
of the grant date, while other RSUs provided for vesting based upon the achievement of certain performance goals over a
three-year period subject to service conditions set forth in the award agreements, with associated costs generally
recognized on a straight-line basis over the respective vesting periods. The RSUs are not transferable, and the shares of
common stock issuable upon conversion of vested RSUs may be subject to transfer restrictions for a period of one year
following conversion, subject to certain exceptions. In addition, the applicable RSU award agreements provide for
accelerated vesting under certain conditions.
The following table summarizes information about Restricted Stock Award and RSU activity for the noted periods (shares
in thousands).
Restricted Stock Awards
RSUs
Weighted
Average
Weighted
Average
Outstanding
Grant Date
Fair Value Outstanding
Balance, December 31, 2015
Granted
Vested/Released
Forfeited
Balance, December 31, 2016
Granted
Vested/Released
Forfeited
Balance, December 31, 2017
Granted
Vested/Released
Forfeited
Balance, December 31, 2018
453 $
— $
(447) $
(2) $
4 $
— $
(4) $
— $
— $
— $
— $
— $
— $
13.50
—
13.41
19.72
19.95
—
19.95
—
—
—
—
—
—
Grant Date
Fair Value
21.22
17.78
22.22
20.70
19.83
26.37
22.48
22.41
20.89
24.00
19.92
20.97
22.44
875 $
598 $
(7) $
(10) $
1,456 $
450 $
(451) $
(137) $
1,318 $
510 $
(406) $
(152) $
1,270 $
Vested/Released Restricted Stock Awards and RSUs include an aggregate of 327,387 shares withheld to satisfy employee
statutory tax obligations during 2018, 2017 and 2016. Pursuant to certain RSU award agreements, an aggregate of 17,481
vested RSUs at December 31, 2018 require deferral of the settlement in shares and statutory tax obligations to a future
date.
During 2018, the Compensation Committee of the board of directors of the Company awarded certain executives and key
employees an aggregate of 486,155 RSUs pursuant to the 2012 Plan. At December 31, 2018, 366,827 of these outstanding
RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the
F-56
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
grant date, and 84,626 of these outstanding RSUs will cliff vest based upon the achievement of certain performance goals
over a three-year period.
At December 31, 2018, in the aggregate, 1,010,075 of the outstanding RSUs are subject to time-based vesting conditions
and generally cliff vest on the third anniversary of the grant date, and 258,773 outstanding RSUs cliff vest based upon the
achievement of certain performance goals over a three-year period. At December 31, 2018, unrecognized compensation
expense related to outstanding RSUs of $12.8 million is expected to be recognized over a weighted average period of 1.25
years.
21. Regulatory Matters
Banking and Hilltop
PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a
direct, material effect on the consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet
specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices.
The Company is ultimately dependent upon its subsidiaries to provide funding for operating expenses, debt service and
dividends. Various laws limit the payment of dividends and other distributions by subsidiaries to parent companies, and
may therefore limit the Company’s ability to pay dividends on its common stock. In addition, the federal bank regulatory
agencies have issued policy statements providing that FDIC-insured depository institutions and their holding companies
should generally pay dividends only out of their current operating earnings. Furthermore, if required payments on the
Company’s outstanding junior subordinated debentures held by its unconsolidated subsidiary trusts are not made or are
suspended, the Company may be prohibited from paying dividends on its common stock. Regulatory authorities could
also impose administratively stricter limitations on the ability of the Company’s subsidiaries to pay dividends to the
Company if such limits were deemed appropriate to preserve certain capital adequacy requirements.
In January 2015, the comprehensive capital framework (“Basel III”) for U.S. banking organizations became effective for
PlainsCapital and Hilltop for reporting periods beginning after January 1, 2015 (subject to a phase-in period through
January 2019). Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further
composed of common equity Tier 1 capital and additional Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier
2 capital. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy
and compliance with the Basel III regulatory capital requirements. The capital classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set
forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and
minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain
discretionary bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which
requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer will help
to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of
economic stress. The buffer is measured relative to risk-weighted assets. The phase-in of the capital conservation buffer
requirements began on January 1, 2016 for PlainsCapital and Hilltop. Based on the actual ratios as shown in the table
below, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of December 31,
2018, as well as the fully phased-in requirements through 2019.
In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are
allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if
an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion
in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier
2 capital. All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of
December 31, 2018, under guidance issued by the Board of Governors of the Federal Reserve System.
F-57
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables show PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III
compared to the regulatory minimum capital requirements including conservation buffer in effect at the end of the period
and on a fully phased-in basis as if such requirements were currently in effect as measured at December 31, 2018 and
2017, respectively (dollars in thousands). Based on the actual capital amounts and ratios shown in the following table,
PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements.
December 31, 2018
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
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
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
$ 1,183,447 12.47 %
1,680,364 12.53 %
4.0 %
4.0 %
4.0 %
4.0 %
5.0 %
N/A
1,183,447 13.90 %
1,634,978 16.58 %
6.375 %
6.375 %
1,183,447 13.90 %
1,680,364 17.04 %
7.875 %
7.875 %
7.0 %
7.0 %
8.5 %
8.5 %
6.5 %
N/A
8.0 %
N/A
1,245,177 14.63 %
1,722,602 17.47 %
9.875 %
9.875 %
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, 2017
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
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 12.32 %
1,688,358 12.94 %
4.0 %
4.0 %
4.0 %
4.0 %
5.0 %
N/A
1,147,527 14.47 %
1,639,009 17.71 %
1,147,527 14.47 %
1,688,358 18.24 %
1,212,793 15.29 %
1,738,325 18.78 %
5.75 %
5.75 %
7.25 %
7.25 %
9.25 %
9.25 %
7.0 %
7.0 %
8.5 %
8.5 %
6.5 %
N/A
8.0 %
N/A
10.5 %
10.5 %
10.0 %
N/A
F-58
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).
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
Other
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, including unfunded
commitments
Deduct:
Additional Tier 2 capital deductions
Total capital (as defined)
Broker-Dealer
December 31, 2018
December 31, 2017
PlainsCapital Hilltop
$ 1,459,985 $ 1,949,470 $ 1,379,402 $ 1,912,081
PlainsCapital Hilltop
7,988
8,627
3,520
394
(282,238)
(2,288)
1,183,447
(319,942)
(3,177)
1,634,978
(235,395)
—
1,147,527
(273,466)
—
1,639,009
—
65,000
—
65,000
—
1,183,447
(19,614)
1,680,364
—
1,147,527
(15,651)
1,688,358
61,730
61,852
65,266
65,618
(15,651)
$ 1,245,177 $ 1,722,602 $ 1,212,793 $ 1,738,325
(19,614)
—
—
Pursuant to the net capital requirements of the Exchange Act, Hilltop Securities elected to determine its net capital
requirement using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital, as
defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 and $1,000,000,
respectively, or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act.
Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if
resulting net capital would be less than 5% of the aggregate debit items. HTS Independent Network follows the primary
(aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the
maintenance of the larger of minimum net capital of $250,000 or 1/15 of aggregate indebtedness.
At December 31, 2018, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).
Net capital
Less: required net capital
Excess net capital
Hilltop
Securities
$
193,995 $
10,898
183,097 $
$
HTS
Independent
Network
3,073
250
2,823
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
35.6 %
$
166,750
Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for
the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated under the provisions of
the Exchange Act are not available for general corporate purposes. At December 31, 2018 and 2017, the Hilltop Broker-
Dealers held cash of $134.0 million and $186.6 million, respectively, segregated in special reserve bank accounts for the
benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash or securities in special reserve
accounts for the benefit of proprietary accounts of introducing broker-dealers at December 31, 2018 and 2017.
F-59
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Mortgage Origination
As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity requirements
established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited
financial statements to HUD and GNMA, as applicable, documenting their respective compliance with minimum net
worth and liquidity requirements. As of December 31, 2018, PrimeLending and its subsidiaries’ net worth and liquidity
exceeded the amounts required by both HUD and GNMA, as applicable.
Insurance
The statutory financial statements of the Company’s insurance subsidiaries, are domiciled in the State of Texas, are
presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has
adopted the statutory accounting practices of the National Association of Insurance Commissioners (“NAIC”) as the basis
of its statutory accounting practices with certain differences that are not significant to the insurance company subsidiaries’
statutory equity.
A summary of statutory capital and surplus and statutory net income of each insurance subsidiary is as follows (in
thousands).
Statutory capital and surplus:
National Lloyds Insurance Company
American Summit Insurance Company
December 31,
2018
2017
$ 78,637 $ 93,812
22,778
17,908
Year Ended December 31,
2017
2016
2018
Statutory net income (loss):
National Lloyds Insurance Company
American Summit Insurance Company
$
9,114 $
(1,304)
(1,785) $ 13,043
2,124
742
Regulations of the Texas Department of Insurance require insurance companies to maintain minimum levels of statutory
surplus to ensure their ability to meet their obligations to policyholders. At December 31, 2018, the Company’s insurance
subsidiaries had statutory surplus in excess of the minimum required.
The NAIC has adopted a risk based capital (“RBC”) formula for insurance companies that establishes minimum capital
requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset
credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance
regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. At
December 31, 2018, the Company’s insurance subsidiaries’ RBC ratio exceeded the level at which regulatory action
would be required.
22. Stockholders’ Equity
The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At
December 31, 2018, $163.5 million of its earnings was available for dividend declaration without prior regulatory
approval.
At December 31, 2018, the maximum aggregate dividend that may be paid to NLC from its insurance company
subsidiaries without regulatory approval was $11.7 million.
Dividends
During 2018, 2017 and 2016, the Company declared and paid cash dividends of $0.28, $0.24 and $0.06 per common
share, or $26.7 million, $23.1 million and $5.8 million, respectively.
F-60
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On January 24, 2019, the Company announced that its board of directors declared a quarterly cash dividend of $0.08 per
common share, payable on February 28, 2019, to all common stockholders of record as of the close of business on
February 15, 2019.
Stock Repurchase Programs
The Company’s board of directors has periodically approved stock repurchase programs under which it authorized the
Company to repurchase its outstanding common stock. Under the respective stock repurchase program authorized, the
Company could repurchase shares in open-market purchases or through privately negotiated transactions as permitted
under Rule 10b-18 promulgated under the Exchange Act. The extent to which the Company repurchased its shares and the
timing of such repurchases depended upon market conditions and other corporate considerations, as determined by
Hilltop’s management team. Repurchased shares will be returned to the Company’s pool of authorized but unissued
shares of common stock.
In January 2017, the Hilltop board of directors reauthorized the stock repurchase program originally approved during the
second quarter of 2016 through January 2018. During 2017, the Company paid $27.4 million to repurchase an aggregate
of 1,057,656 shares of common stock at an average price of $25.87 per share, inclusive of repurchases to offset dilution
related to grants of stock-based compensation. This stock repurchase program expired in January 2018. All purchases
were funded from available cash balances.
In January 2018, the Hilltop board of directors authorized a stock repurchase program through January 2019 pursuant to
which the Company was originally authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding
common stock. In July 2018, the Hilltop board of directors authorized an increase to the aggregate amount of common
stock the Company may repurchase under this program to $100.0 million, inclusive of repurchases to offset dilution
related to grants of stock-based compensation. During 2018, the Company paid $59.0 million to repurchase an aggregate
of 2,729,568 shares of common stock at an average price of $21.61 per share. These shares were returned to the
Company’s pool of authorized but unissued shares of common stock. The purchases were funded from available cash
balances.
In January 2019, our board of directors authorized a new stock repurchase program through January 2020, pursuant to
which we are authorized to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock, inclusive
of repurchases to offset dilution related to grants of stock-based compensation.
F-61
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
Service charges on depositor accounts
Trust fees
Net gain from trading securities portfolio
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
SWS merger appraisal proceeding
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
Travel, meals and entertainment
Amortization of intangible assets
FDIC indemnification asset amortization
Office supplies
Funding fees
OREO and repossessed assets
FDIC "true-up"
Other
24. Derivative Financial Instruments
Year Ended December 31,
2017
2016
2018
$
$
$
$
41,543 $
14,484
9,807
6,197
5,211
3,930
2,966
764
—
—
11,403
96,305 $
56,986 $
20,674
19,705
16,798
15,913
12,389
8,426
6,509
6,123
5,414
3,885
250
51,183
224,255 $
70,922 $
14,429
7,485
20,210
4,819
4,353
3,169
1,280
11,757
—
25,546
163,970 $
45,891 $
22,884
22,353
20,428
18,619
12,839
8,263
17,083
7,806
8,464
4,004
2,100
51,362
242,096 $
86,383
14,162
6,782
15,926
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
10,174
—
8,719
7,451
13,438
8,750
49,523
251,521
The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk
management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to
mitigate potential adverse impacts from changes in interest rates on the Bank’s net interest margin. PrimeLending has
interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale.
PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related
mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-
backed securities (“MBSs”) and Eurodollar futures. Additionally, PrimeLending has interest rate risk relative to its MSR
asset and uses derivative instruments, including U.S. Treasury bond futures and options, to hedge this risk. The Hilltop
Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a
means to hedge related exposure to interest rate risk in certain inventory positions. Additionally, Hilltop Securities uses
both U.S. Treasury bond and Eurodollar futures to hedge changes in the fair value of their securities.
F-62
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all
mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without
applying complex hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments are
recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments
are recorded as a component of net gains from sale of loans and other mortgage production income. The fair values of
PrimeLending’s derivative instruments decreased $12.8 million during 2018, compared with a decrease of $13.1 million
during 2017 and an increase of $8.0 million during 2016. Changes in fair value are attributable to changes in the volume
of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market
interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for
sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market
interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 3 to the consolidated financial
statements. The fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other
assets or other liabilities, as appropriate. The fair values of the Hilltop Broker-Dealers’ derivatives decreased $0.4 million
during 2018, compared with an increase of and $8.1 million during 2017 and a decrease of $23.4 million during 2016.
The fair values of the Bank’s derivatives increased nominally during 2018, and increased $0.3 million and $0.4 million
during 2017 and 2016, respectively. The changes in fair value were recorded as a component of other noninterest income.
Derivative positions are presented in the following table (in thousands).
December 31, 2018
December 31, 2017
Notional
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
U.S. Treasury bond futures and options (1)
Eurodollar futures (1)
$
677,267 $ 17,421 $
31,200
31,200
2,359,630
3,711,477
15,104
367,200
104,000
(49)
49
10,467
(19,315)
82
—
—
850,850 $ 18,851
38
(38)
(921)
2,972
51
—
—
21,637
21,637
2,831,635
4,963,498
25,971
214,500
—
(1)
Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the
Hilltop Broker-Dealers.
PrimeLending has cash collateral advances totaling $11.9 million and $0.8 million to offset net liability derivative positions
on its commitments to sell MBSs at December 31, 2018 and 2017, respectively. In addition, PrimeLending and the Hilltop
Broker-Dealers advanced cash collateral totaling $3.4 million and $3.2 million on its U.S. Treasury bond futures and
options and Eurodollar futures at December 31, 2018 and 2017, respectively. These amounts are included in other assets
within the consolidated balance sheets.
F-63
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, 2018
Securities borrowed:
Assets
Gross Amounts Gross Amounts
of Recognized
Offset in the
Balance Sheet
of Assets
Presented in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Institutional counterparties
$
1,365,547 $
— $
1,365,547 $
(1,307,121) $
— $
58,426
Interest rate options:
Customer counterparties
Interest rate swaps:
Institutional counterparties
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2017
Securities borrowed:
49
88
61,611
—
—
—
49
88
—
—
—
—
49
88
61,611
(61,390)
—
221
10,469
1,437,764 $
$
—
— $
10,469
1,437,764 $
(10,469)
(1,378,980) $
—
— $
—
58,784
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
38
—
38
—
—
38
186,537
—
186,537
(186,026)
—
511
3,576
1,576,972 $
$
—
— $
3,576
1,576,972 $
(3,576)
(1,517,138) $
—
— $
—
59,834
Net Amounts
Gross Amounts Gross Amounts of Liabilities
Offset in the
of Recognized
Balance Sheet
Presented in the
Balance Sheet
Liabilities
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
December 31, 2018
Securities loaned:
Institutional counterparties
$
1,186,073 $
— $
1,186,073 $
(1,136,033) $
— $
50,040
Interest rate options:
Institutional counterparties
Interest rate swaps:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2017
Securities loaned:
49
6
533,441
43,266
—
—
—
—
49
6
—
—
533,441
43,266
(533,441)
(43,266)
—
—
—
—
49
6
—
—
19,331
1,782,166 $
$
(15)
(15) $
19,316
1,782,151 $
(7,728)
(1,720,468) $
—
— $
11,588
61,683
Institutional counterparties
$
1,215,093 $
— $
1,215,093 $
(1,157,198) $
— $
57,895
Interest rate options:
Institutional counterparties
Interest rate swaps:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
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
F-64
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Secured Borrowing Arrangements
Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold
under repurchase agreements, which are secured borrowings and generally mature one to thirty days from the transaction
date or involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected
at the amount of cash received in connection with the transactions. The Company may be required to provide additional
collateral based on the fair value of the underlying securities, which is monitored on a daily basis.
Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-
dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to other
broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the
required settlement date and as a conduit for financing activities.
When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount
of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written
agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The
Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned.
The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded,
as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The
Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other
party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits
regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities
lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the
amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The
Company’s securities lending business subjects the Company to credit risk if a counterparty fails to perform or if
collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit risk during the
period between the execution of a trade and the settlement by the customer.
The following tables present the remaining contractual maturities of repurchase agreement and securities lending
transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity
transactions outstanding at both December 31, 2018 and 2017.
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, 2018
Repurchase agreement transactions:
U.S. Treasury and agency securities
Asset-backed securities
Securities lending transactions:
Corporate securities
Equity securities
Total
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
$
131,848 $
444,859
113
1,185,960
1,762,780 $
$
— $
—
—
—
— $
— $
—
—
—
— $
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 $
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
131,848
444,859
—
—
— $
113
1,185,960
1,762,780
$
$
1,762,780
—
— $
—
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
F-65
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
Trades in process of settlement
Other
December 31,
2018
2017
$
$
$
$
1,365,547 $
16,300
32,993
25,447
1,440,287 $
1,186,073 $
29,311
75,015
—
4,526
1,294,925 $
1,386,821
25,491
29,412
22,654
1,464,378
1,215,093
30,160
37,864
—
4,446
1,287,563
27. Deferred Policy Acquisition Costs
Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to the successful
issuance of a new or renewal policy incurred by NLC are deferred and charged against income ratably over the terms of
the related policies. A summary of the activity in deferred policy acquisition costs is as follows (in thousands).
Balance, beginning of year
Acquisition expenses capitalized
Amortization charged to income
Balance, end of year
$
$
Year Ended December 31,
2017
18,603 $
34,934
(36,549)
16,988 $
2018
16,988 $
34,328
(34,683)
16,633 $
2016
19,874
37,231
(38,502)
18,603
Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated
statements of operations.
28. Reserve for Losses and Loss Adjustment Expenses
A summary of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated balance
sheets, is as follows (in thousands).
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,
2018
16,498 $
3,214
840
20,552 $
2017
17,470
11,495
1,248
30,213
F-66
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).
Year Ended December 31, 2018
Incurred
Paid
December 31, 2018
Total of
IBNR Reserves
Plus Expected
Development on
Reported Claims
Cumulative
Number of
Reported Claims
83,808 $
86,549
83,169
86,319
61,922
401,767 $
83,894 $
86,961
84,076
88,025
75,217
418,173
22
171
401
1,047
6,250
18,832
20,611
20,201
20,757
15,296
$
Accident
Year
2014
2015
2016
2017
2018
Total
92 All outstanding reserves prior to 2014, net of reinsurance
$
16,498 Reserve for unpaid losses and allocated LAE, net of reinsurance
29. Reinsurance Activity
NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring
(ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve
NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other
forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses
and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance
ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE
and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations
could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC
evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. At December 31, 2018, total reinsurance recoverables and receivables had a carrying value of
$5.4 million, which is included in other assets within the consolidated balance sheet. There was no allowance for
uncollectible accounts at December 31, 2018, based on NLC’s quality requirements.
Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2018
are listed below (in thousands).
R+V Versicherung AG
Partner Reinsurance Company Ltd.
Arch Reinsurance Company
Aspen Bermuda Ltd
Balances
Due From
Reinsurers
$
A.M. Best
Rating
N/A
A
A+
A
817
812
706
276
2,611
$
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
2018
Earned
Year Ended December 31,
2017
Earned
Written
Written
$ 129,611 $ 133,112 $ 137,091 $ 144,990 $ 152,970 $ 159,884
11,024
(15,363)
$ 133,779 $ 136,751 $ 136,961 $ 142,298 $ 149,346 $ 155,545
11,767
(14,459)
11,338
(14,962)
12,150
(12,280)
12,516
(8,877)
12,917
(8,749)
Written
2016
Earned
F-67
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
Year Ended December 31,
2017
2018
76,464 $ 138,358 $ 113,494
(24,251)
2,883
(43,657)
89,243
79,347 $
94,701 $
2016
NLC’s liabilities for losses and LAE include liabilities for reported losses, liabilities for IBNR losses and liabilities for
LAE less a reduction for reinsurance recoverables related to those liabilities. The amount of liabilities for reported claims
is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and
any other information considered relevant to estimating exposure presented by the claim. The amounts of liabilities for
IBNR losses and LAE are estimated on the basis of historical trends, adjusted for changes in loss costs, underwriting
standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and LAE is
inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are
intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such
claims. Based upon the contractual terms of the reinsurance agreements, reinsurance recoverables offset, in part, NLC’s
gross liabilities.
Effective July 1, 2017, NLC renewed its catastrophic excess of loss reinsurance coverage for a two year-period. At
December 31, 2018, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million
retention by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.0
million in excess of its $2.0 million retention to bridge to the primary program. The reinsurance in excess of $8 million is
comprised of three layers of protection: $17 million in excess of $8 million retention and/or loss; $30 million in excess of
$25 million loss; and $50 million in excess of $55 million loss. NLIC and ASIC retain no participation in any of the
layers, beyond the first $8 million and $1.5 million, respectively. At December 31, 2018, total retention for any one
catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.
Effective January 1, 2019, NLC renewed its underlying excess of loss contract that provides $10.0 million aggregate
coverage in excess of NLC’s per event retention of $1.0 million and aggregate retention of $15.0 million for sub-
catastrophic events. As of January 1, 2019, NLC retains 37.5% participation in this coverage, up from 17.5% participation
during 2018.
During August and September 2017, NLC experienced losses related to Hurricane Harvey in excess of retention. As of
December 31, 2018, the total gross losses and LAE incurred associated with Hurricane Harvey was $16.4 million.
However, because the losses exceeded retention, net exposure to NLC was $5.9 million retention and $1.4 million in
reinstatement premiums. During 2018 and 2016, NLC experienced no significant catastrophes that resulted in losses in
excess of retention at NLIC or ASIC.
There were 11 tornado, hail, monsoon and wind storms during 2018 that fit the coverage criteria for the underlying excess
of loss contract providing aggregate coverage for sub-catastrophic events. These events had a gross incurred loss total of
$26.1 million. During 2017, the 16 tornado, hail and wind storms that exceeded retention had incurred losses of
$38.1 million, which developed a reinsured recoverable of $4.6 million at the 100% subscription level. During 2016, the
15 tornado, hail and wind storms that exceeded retention had incurred losses of $44.0 million, which developed a
reinsured recoverable of $10.0 million at the 91% subscription level. These losses have no effect on net loss and LAE
incurred beyond retention because the catastrophic events exceeded retention levels and are fully recoverable. Any losses
beyond the reinsurance coverage limits of $10.0 million for 2016 are retained by the Company and have an effect on the
net loss and LAE incurred. The primary financial effect beyond the reinsurance retention is additional reinstatement
premiums payable to the affected reinsurers. In addition to the $1.4 million in reinstatement premiums noted above related
to Hurricane Harvey in 2017, reinstatement premiums during 2018, 2017 and 2016 of $0.1 million, $1.4 million and $0.6
million, respectively, were recorded as ceded premiums.
F-68
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
30. Segment and Related Information
The Company currently has four reportable business segments that are organized primarily by the core products offered to
the segments’ respective customers. These segments reflect the manner in which operations are managed and the criteria
used by the Company’s chief operating decision maker function to evaluate segment performance, develop strategy and
allocate resources. The chief operating decision maker function consists of the Company’s President and Co-Chief
Executive Officer and the Company’s Vice Chairman and Co-Chief Executive Officer.
The banking segment includes the operations of the Bank, and since August 1, 2018, the operations of the former BORO
acquired in the BORO Acquisition. The broker-dealer segment includes the operations of Securities Holdings, the
mortgage origination segment is composed of PrimeLending, and the insurance segment is composed of NLC.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities and management and administrative
services to support the overall operations of the Company.
Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All
Other and Eliminations.” The following tables present certain information about reportable business segment revenues,
operating results, goodwill and assets (in thousands).
Year Ended December 31, 2018
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
$
Income (loss) before income taxes
$
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 (recovery) for loan losses
Noninterest income
Noninterest expense
$
Income (loss) before income taxes
$
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
370,732 $
5,319
43,588
256,577
152,424 $
50,878 $
(231)
301,714
320,241
32,582 $
1,485 $
—
551,860
540,474
12,871 $
3,025 $
—
142,565
139,921
5,669 $
(9,176) $
—
4,893
36,628
(40,911) $
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
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
Mortgage
Broker-Dealer Origination
Insurance
Corporate
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) $
19,380 $
—
(21,830)
(592)
(1,858) $
Consolidated
436,324
5,088
1,022,790
1,293,249
160,777
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
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Consolidated
23,988 $
291,435
253,513 $ 2,243,182 $ (3,658,343) $ 13,683,572
— $
— $
23,988 $
251,808
291,639 $ 2,106,978 $ (3,923,787) $ 13,365,786
— $
— $
December 31, 2018
Goodwill
Total assets
December 31, 2017
Goodwill
Total assets
$
247,368 $
$ 10,004,971 $
7,008 $
13,071 $
3,213,115 $ 1,627,134 $
$
$
207,741 $
9,558,718 $
7,008 $
13,071 $
3,394,911 $ 1,937,327 $
F-69
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,
2017
2016
2018
Basic earnings per share:
Income attributable to Hilltop
Less: income applicable to participating shares
Net earnings available to Hilltop common stockholders
$ 121,441 $ 132,544 $ 145,894
(6)
$ 121,441 $ 132,544 $ 145,888
—
—
Weighted average shares outstanding - basic
94,969
97,137
98,404
Basic earnings per common share
$
1.28 $
1.36 $
1.48
Diluted earnings per share:
Income attributable to Hilltop
Weighted average shares outstanding - basic
Effect of potentially dilutive securities
Weighted average shares outstanding - diluted
$ 121,441 $ 132,544 $ 145,894
94,969
98
95,067
97,137
216
97,353
98,404
225
98,629
Diluted earnings per common share
$
1.28 $
1.36 $
1.48
32. Financial Statements of Parent
The following tables present the condensed combined financial statements of the Company’s bank holding company
entities, Hilltop and PCC. The tables also include the corporate activities associated with Hilltop Opportunity Partners
LLC and the Hilltop Plaza Entities (in thousands). Investments in subsidiaries are determined using the equity method of
accounting.
Condensed Combined Statements of Operations and Comprehensive Income
Dividends from bank subsidiaries
Dividends from nonbank subsidiaries
Investment income
Interest expense
Other income
General and administrative expense
Income before income taxes, equity in undistributed earnings of subsidiaries
$
Year Ended December 31,
2017
53,000 $
41,500
312
10,381
12,798
33,983
2018
42,000 $
37,500
3,089
12,265
4,893
36,628
2016
87,826
—
382
7,639
2
29,938
38,589
(7,767)
79,371
63,246
(15,577)
54,321
50,633
(10,077)
87,234
$ 125,727 $ 133,144 $ 147,944
(2,144)
$ 120,071 $ 132,265 $ 145,800
(5,656)
(879)
and preferred stock activity
Income tax benefit
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net
Comprehensive income
F-70
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Condensed Combined Balance Sheets
Assets:
Cash and cash equivalents
Investment in subsidiaries:
Bank 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 Combined Statements of Cash Flows
2018
December 31,
2017
2016
$
54,405 $
96,764 $
118,290
1,459,984
483,593
245,200
1,304,917
609,539
3
$ 2,243,182 $ 2,106,978 $ 2,032,749
1,340,093
603,631
66,490
$
58,319 $
215,620
1,969,243
13,929
148,311
1,870,509
$ 2,243,182 $ 2,106,978 $ 2,032,749
46,442 $
148,455
1,912,081
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries
Net realized gains on equity investments
Deferred income taxes
Other, net
Net cash provided by operating activities
Investing Activities:
Reimbursement from nonbank subsidiaries
Capital contribution to bank and bank holding company subsidiaries
Capital contribution to nonbank subsidiaries
Purchases of equity investments
Purchases of premises and equipment and other
Proceeds from sales of equity investments
Net cash used in investing activities
Financing Activities:
Proceeds from issuances of common stock
Payments to repurchase common stock
Dividends paid on common stock
Net cash contributed from noncontrolling interest
Other, net
Net cash used in financing activities
Year Ended December 31,
2017
2016
2018
$ 125,727 $ 133,144 $ 147,944
(79,371)
(5,336)
217
19,368
60,605
—
—
—
(12,492)
(42,390)
16,174
(38,708)
—
(58,990)
(26,698)
19,250
2,182
(64,256)
(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)
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
(42,359)
96,764
54,405 $
62,748
(21,526)
118,290
55,542
96,764 $ 118,290
$
Supplemental Schedule of Non-Cash Activities:
Construction in progress related to build-to-suit lease obligations
Note receivable contributed from nonbank subsidiary
$
27,802 $
$ 111,653 $
— $
— $
—
—
F-71
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
33. Recently Issued Accounting Standards
Accounting Standards Adopted During 2018
In June 2018, FASB issued ASU 2018-07 which expands the scope of ASC 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. The amendment is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2018. The Company early adopted the
amendment as of July 1, 2018, which did not have a material effect on its consolidated financial statements.
In February 2018, FASB issued ASU 2018-02 to help organizations address certain stranded income tax effects in
accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and Jobs Act of 2017 (“Tax
Legislation”). The amendment provides an option to reclassify stranded tax effects within AOCI to retained earnings in
each period in which the effect of the changes in the U.S. federal corporate income tax rate in the Tax Legislation (or
portion thereof) is recorded. The amendment also includes disclosure requirements regarding the issuer’s accounting
policy for releasing income tax effects from AOCI. The amendment is effective for annual periods, and interim periods
within those annual periods, beginning after December 15, 2018. As permitted within the amendment, the Company
elected to early adopt and apply the provisions of this amendment as of January 1, 2018. The adoption of the amendment
resulted in a reclassification of $0.1 million from AOCI to retained earnings, representing an increase to retained earnings.
This reclassification is included within the adoption of accounting standards line item in the consolidated statements of
stockholders’ equity.
In May 2017, FASB issued ASU 2017-09 which provides clarity and reduces both diversity in practice and cost and
complexity associated with changes to the terms or conditions of a share-based payment award and, specifically, which
changes require an entity to apply modification accounting. The amendments in this update are effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the
amendments as of January 1, 2018, which did not have a material effect on the Company’s consolidated financial
statements.
In January 2017, FASB issued ASU 2017-01 which provides guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is effective for
annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the
prospective method. The Company adopted the amendment as of January 1, 2018, which did not have a material effect on
its consolidated financial statements during the current year.
In November 2016, FASB issued ASU 2016-18 which requires that restricted cash be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash
flows. We have adopted the requirements of the new standard as of January 1, 2018. As a result, assets segregated for
regulatory purposes, which consist of cash and cash equivalents, are now included in the beginning-of-period and end-of-
period total amounts shown on the statements of cash flows for 2018, 2017 and 2016. Furthermore, the consolidated
statements of cash flows now include disclosure of the line items in the consolidated balance sheets which make up cash,
cash equivalents and restricted cash. The adoption of this ASU had no impact on the Company’s financial condition or
results of operations.
In October 2016, FASB issued ASU 2016-16 which addresses improvement in accounting for income tax consequences
of intra-equity transfers of assets other than inventory. The amendment requires that an entity recognize the income tax
consequences of the intra-equity transfer of an asset other than inventory when the transfer occurs. The amendment was
effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15,
2017, using the modified retrospective transition method. The Company adopted the amendment as of January 1, 2018,
which did not have a material effect on its consolidated financial statements.
In August 2016, FASB issued ASU 2016-15 to add or clarify guidance on the classification of certain cash receipts and
payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The
amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after
F-72
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 15, 2017 using a retrospective transition method. The Company adopted the amendments as of January 1,
2018, which did not have a material effect on the Company’s consolidated financial statements.
In January 2016, FASB issued ASU 2016-01 related to financial instruments and subsequently issued technical
corrections to the amendment in ASU 2018-03. The amendments require that most equity investments be measured at fair
value, with subsequent changes in fair value recognized in net income. The amendments also impact financial liabilities
under the Fair Value Option and the presentation and disclosure requirements for financial instruments and modify the
required process used to evaluate deferred tax assets on available for sale securities. The amendments are effective for
annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company
adopted the amendments as of January 1, 2018, which resulted in $21.2 million of securities being reclassified from
available for sale to equity within the consolidated balance sheets consistent with the provisions of the amendments, while
certain other equity investments of $35.8 million are included in other assets within the consolidated balance sheets at
December 31, 2018. The adoption of the amendments also resulted in $2.5 million being reclassified from accumulated
other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018.
This reclassification is included within the adoption of accounting standards line item in the consolidated statement of
stockholders’ equity. All subsequent changes in fair value related to these equity investments will be recognized in net
income. Additionally, the enhanced disclosures required by the amendments are included within the notes to the
consolidated financial statements, including the disclosure of the fair value of the loan portfolio using an exit price
method instead of the prior discounted cash flow method. These disclosure changes did not have a material effect on the
Company’s consolidated financial statements.
On January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from Contracts with Customers, using the
modified, cumulative-effect approach wherein the guidance is applied only to existing contracts as of the date of initial
application and to new contracts entered into thereafter. The new standard outlines a single comprehensive model for
entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company
expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Revenue
from the Company’s mortgage origination and insurance segments are not in the scope of the new guidance, while certain
revenue from contracts with customers within the broker-dealer and banking segments are subject to the new guidance.
The revenue recognition policies within the Company’s broker-dealer segment were affected upon adoption of ASC 606.
Specifically, the new guidance required changes to the principal versus agent conclusion for certain advisory and
underwriting revenues and expenses which, as of January 1, 2018, are recorded on a gross basis while legacy guidance
required these revenues to be recognized net of the related expenses. Conversely, certain contract costs related to clearing
and retail operations are now netted against the revenues while the legacy guidance required these revenues and expenses
to be recognized on a gross basis. These changes did not have a material effect on the Company’s consolidated financial
statements during 2018. As the measurement and timing of revenue recognition was not affected for any of the
Company’s revenue streams, the implementation of the new guidance had no impact on opening retained earnings as of
January 1, 2018.
Accounting Standards Issued But Not Yet Adopted
In August 2018, FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software (and hosting arrangements that include an internal-use software licenses). The
accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in
this update. The amendment also includes presentation and disclosure provisions regarding capitalized implementation
costs. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of the amendment
and the impact on its future consolidated financial statements.
In August 2018, FASB issued ASU 2018-13 which includes various removals, modifications and additions to existing
guidance regarding fair value disclosures. The amendments are effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently
F-73
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
evaluating the provisions of the amendments but does not expect the amendments to have a material impact on its future
consolidated financial statements.
In July 2018, FASB issued ASU 2018-09 which clarifies, corrects and makes minor improvements to a wide variety of
topics in the ASC. The amendments make the ASC easier to understand and apply by eliminating inconsistencies and
providing clarifications. The transition and effective dates are based on the facts and circumstances of each amendment,
with some amendments becoming effective upon issuance of the ASU, and others becoming effective for annual periods
beginning after December 15, 2018. Those amendments that were effective upon issuance of the ASU did not have a
significant impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact
of the adoption of the other amendments on its future consolidated financial statements.
In August 2017, FASB issued ASU 2017-12 which provides targeted improvements to accounting for hedging activities.
Subsequently, in October 2018, FASB issued ASU 2018-16. The purpose of the amendments is to better align a
company’s risk management activities with its financial reporting for hedging relationships, to simplify the hedge
accounting requirements and to improve the disclosures of hedging arrangements in addition to clarifying the benchmark
interest rates which are eligible for purposes of applying hedge accounting under Topic 815. The amendments are
effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early
adoption is permitted, and all transition requirements and elections should be applied to hedging relationships existing on
the date of adoption. The Company has not historically applied hedge accounting to its derivative transactions. However,
the Company is currently evaluating the provisions of the amendments and the impact, if any, on its future consolidated
financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model which requires
entities to measure all credit losses expected over the life of an exposure (or pool of exposures) for financial instruments
held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The
new standard, which is codified in ASC 326, Financial Instruments – Credit Losses, replaces the existing incurred loss
model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to
some off-balance sheet credit exposures. For available for sale debt securities, entities will be required to record
allowances for credit losses rather than reduce the carrying amount, as required under the current OTTI model, and will be
allowed to reverse previously established allowances in the event the credit of the issuer improves. The new standard also
requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used
in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The new
standard is effective for annual periods, and interim reporting periods within those annual periods, beginning after
December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of
adoption. The Company does not intend to adopt the provisions of the new standard early. The Company’s cross-
functional team has begun the implementation of new credit forecasting models and a credit scoring system that will be
utilized to estimate the likelihood of default and loss severity as a part of its credit loss estimation methodology in
accordance with the new standard. In addition, the Company continues to identify and assess key interpretive policy
issues, as well as design and build new or modified policies and procedures that will be used to calculate its credit loss
reserves. However, the magnitude of the change in allowance for loan losses upon adoption will depend on, among other
things, the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that
time.
In February 2016, FASB issued ASU 2016-02 related to leases and subsequently issued amendments and technical
corrections in ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20. The new standard, which is codified in
ASC 842, Leases, is intended to increase transparency and comparability among organizations and require lessees to
record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases.
Accounting by lessors will remain largely unchanged. The new standard is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2018. The Company adopted the new standard as of
January 1, 2019, using the required modified retrospective transition where the lessees and lessors are required to
recognize and measure leases at the date of adoption. The Company’s implementation efforts are substantially complete,
including the installation of an enhanced technology solution, which will aid in determining the magnitude of the
increases in assets and liabilities and their impact on the consolidated financial statements. The Company recognized lease
liabilities and corresponding right-to-use assets (at their present value) related to predominantly all of the future minimum
lease payments required under operating leases as disclosed in Note 18 to the consolidated financial statements. The
balance sheet effects of the new lease accounting standard will also impact regulatory capital ratios,
F-74
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
performance ratios, and other measures which are dependent upon asset or liability balances. The Company expects to
record operating lease liabilities in the range of approximately $120 million to $125 million and right-to-use assets in the
range of approximately $110 million to $115 million upon completion of its implementation efforts during the first
quarter of 2019. In addition, the Company reassessed its accounting ownership of the Hilltop Plaza assets under
construction as of January 1, 2019, upon implementation of ASC 842 and concluded it is not the accounting owner under
the new lease accounting standard. As such, the assets and liabilities of the project are required to be derecognized during
the first quarter of 2019, with the offset recorded directly to retained earnings.
34. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information is summarized as follows (in thousands, except per share data).
Year Ended December 31, 2018
Interest income
Interest expense
Net interest income
Provision (recovery) 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
Third
Quarter
Second
Quarter
Fourth
Quarter
$ 157,702 $ 148,326 $ 140,040 $
37,985
110,341
(371)
269,697
335,711
44,698
7,600
37,098
39,987
117,715
6,926
238,516
310,819
38,486
8,928
29,558
35,192
104,848
340
279,434
338,517
45,425
11,034
34,391
First
Quarter
133,360 $
29,940
103,420
(1,807)
235,143
308,202
32,168
7,488
24,680
Full
Year
579,428
143,104
436,324
5,088
1,022,790
1,293,249
160,777
35,050
125,727
1,443
1,293
1,311
$ 28,115 $ 35,805 $ 33,080 $
239
24,441 $
4,286
121,441
$
$
0.30 $
0.30 $
0.38 $
0.38 $
0.35 $
0.35 $
0.25 $
0.25 $
1.28
1.28
Cash dividends declared per common share
$
0.07 $
0.07 $
0.07 $
0.07 $
0.28
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
Third
Quarter
Second
Quarter
Fourth
Quarter
$ 133,665 $ 128,944 $ 136,306 $
23,964
104,980
1,260
298,477
353,842
48,355
18,003
30,352
24,973
108,692
5,453
290,456
328,670
65,025
51,350
13,675
20,330
115,976
5,853
344,692
366,251
88,564
25,754
62,810
First
Quarter
108,241 $
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-75
Schedule I – Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
(in thousands)
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2018
Total of
Incurred
But Not
Reported
2014
2015
2016
December 31, 2018
83,784 $
85,037 $
89,646
84,221 $
88,477
84,771
2017
84,074 $
87,262
85,189
87,899
$
2018
83,894 $
86,961
84,076
88,025
75,217
418,173
Reserves Plus Cumulative
Development Number of
On Reported
Reported
Claims
Claims
22
171
401
1,047
6,250
18,832
20,611
20,201
20,757
15,296
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2018
2014
2015
2016
70,831 $
79,713 $
71,820
81,684 $
82,940
71,543
2017
83,346 $
85,507
81,682
77,675
Total $
2018
83,808
86,549
83,169
86,319
61,922
401,767
92
All outstanding reserves prior to 2014, net of reinsurance
Reserve for unpaid losses and allocated loss adjustment expenses, net of
$
Accident
Year
2014
2015
2016
2017
2018
$
Accident
Year
2014
2015
2016
2017
2018
reinsurance $
16,498
F-76
(This page has been left blank intentionally.)
STOCK PERFORMANCE GRAPH
Our common stock is listed on the New York Stock Exchange under the symbol “HTH.” The following
graph assumes $100 invested on December 31, 2013, and compares (a) the yearly percentage change in
the cumulative total stockholder return on our common stock (as measured by dividing (i) the sum of
(A) the cumulative amount of dividends, assuming dividend reinvestment, during the period commencing
on the first day of trading, and ending on December 31, 2018, and (B) the difference between our share
price at the end and the beginning of the periods presented by (ii) the share price at the beginning of the
periods presented) with (b) the KBW NASDAQ Regional Banking Index, and (c) our selected peer group
of the following institutions: BancFirst Corporation; Banner Corporation; Cadence Bancorp; Community
Trust Bancorp, Inc.; First Midwest Bancorp, Inc.; IBERIABANK Corporation; International Banchares
Corp.; MB Financial, Inc.; Park National Corporation; Pinnacle Financial Partners, Inc.; Texas Capital
Bancshares, Inc.; Southside Bancshares, Inc.; Westamerica Bancorporation; Trustmark Corporation; and
Umpqua Holdings Corporation.
Date
12/31/2018
12/31/2017
12/31/2016
12/31/2015
12/31/2014
HTH
(21.0)
10.8
29.1
(16.9)
(13.7)
HTH Selected Peer Group
27.0
49.4
51.5
3.2
2.0
KBW NASDAQ Regional
Bank Index
13.1
40.2
40.6
3.7
0.2
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
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 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, Principal Accounting
Officer and Corporate Controller
Jerry L. Schaffner
Chief Executive Officer of PlainsCapital Bank
Todd L. Salmans
Chief Executive Officer of PrimeLending
Hill A. Feinberg
Chariman of Hilltop Securities Inc.
M. Bradley Winges
President and Chief Executive Officer of Hilltop
Securities Inc.
2323 Victory Avenue, Suite 1400
Dallas, Texas 75219
Telephone: (214) 855-2177
Facsimile: (214) 855-2173