2019 Annual Report,
Notice of 2020 Annual Meeting &
Proxy Statement
To Our Stockholders, Customers and Employees:
2019 was an exceptional year across the Hilltop family of companies, both financially and operationally.
Through acquisitions and organic maturation, our company has experienced material growth over the past
few years. Accordingly, a key 2019 initiative was to increase the connectivity and collaboration across the
organization. To help drive this effort, management from all lines of business and the holding company
completed the Momentum World Tour, visiting all major markets across 50 cities and connecting with over
3,500 employees. I continue to be blown away by the quality of our people in the field. They are the tip of
the spear for Hilltop, and I want to thank them for their steadfast commitment to our clients and the
communities we serve.
Hilltop generated consolidated net income of $225.3 million in 2019, with sizable profitability gains from all
operating companies. These results illustrate the strength of our diversified business model, where
PlainsCapital Bank, our cornerstone business, produced substantial bank earnings that were augmented by
favorable market conditions and strong operational execution from PrimeLending and HilltopSecurities.
Hilltop also was able to return $103.0 million of earnings to stockholders via dividends and share
repurchases in 2019. Notably, in 2019 we achieved a significant milestone of surpassing $1 billion in
cumulative net income since Hilltop’s transformational acquisition of PlainsCapital Corporation in 2012.
In last year’s letter, I acknowledged the retirement of PlainsCapital Bank’s founder, Alan White, and the
succession planning at HilltopSecurities, where Brad Winges succeeded Hill Feinberg as CEO. Hill
continues to serve as Chairman Emeritus of HilltopSecurities and a Director of Hilltop Holdings, and Brad
has done an outstanding job transitioning into his new role. Additionally, in October of 2019, we proudly
announced the promotion of Steve Thompson to CEO of PrimeLending, effective January 1, 2020. Steve
succeeded Todd Salmans, who remains with PrimeLending as its Chairman. I would like to thank Todd for
his tremendous contribution over his past fourteen years building PrimeLending into a vibrant, industry
leading mortgage company. Jerry Schaffner continues to do an exceptional job as CEO of PlainsCapital
Bank and has provided unwavering leadership throughout this past year. Alan, Todd and Hill were pioneers
that laid the foundation for what Hilltop is today. Because of their stewardship, we now have outstanding
leadership across the Hilltop enterprise, with deep industry expertise and the capacity to grow with our
shared strategic vision.
Operating Companies:
PlainsCapital Bank had a strong year and delivered $182.2 in pre-tax income, primarily due to organic
loan and deposit growth, a 4.00% net interest margin and meaningful efficiency improvements. The
bank offers commercial banking, personal banking and wealth management products and services across
Texas and continues to employ a measured approach to profitable growth by focusing on relationship-
based lending and prioritizing credit quality. The bank had net charge-offs of only 0.08% of the loan
portfolio in 2019 and ended the year with $11.1 billion of assets, $8.8 billion of deposits and 63
branches. In August, we announced the sale of two branches that were not core to PlainsCapital Bank,
and we continue to evaluate our branch network to optimize the bank’s presence throughout Texas.
PrimeLending is a nationwide mortgage originator operating in 44 states with over 300 locations. After
a challenging 2018, the mortgage company rebounded in 2019 from realizing the benefit of key
efficiency initiatives taken in the prior year and capitalizing on heightened levels of refinance activity.
While PrimeLending took advantage of the elevated refinance volume, we remain committed to purchase
mortgage originations, which represented 75% of total volume and has proven to be an enduring
strategy. We are in the deployment phase of our new loan origination system that will drive further
efficiency, as well as give our loan originators better tools to serve their customers. In 2019,
PrimeLending originated $15.6 billion in mortgage loans, equating to a 14% year-over-year increase, and
contributed pre-tax income of $64.7 million.
HilltopSecurities operates through four primary lines of business: public finance services, structured
finance, fixed income services, and wealth management. 2019 was the first year under the stewardship
of the company’s President & CEO, Brad Winges. During the year, we undertook an extensive review of
HilltopSecurities’ businesses and made the strategic decision to further leverage our deep expertise in
municipal finance by becoming a full-service provider for public entities. By orienting operations
around our public entity clients, we also decided to exit certain smaller, non-core business units. The
declining rate environment in 2019 served as a catalyst for multiple business lines, resulting in increased
volume and superior execution. The combination of a constructive market and the strategic actions taken
led to HilltopSecurities delivering pre-tax income of $89.8 million in 2019 on net revenue of $455.7
million.
National Lloyds is a niche property & casualty underwriter offering primarily fire and limited
homeowners insurance for low value dwellings and manufactured homes in Texas, Arizona and other
southern states. In 2019, National Lloyds streamlined its book of business by simplifying its product lines
into three core policies and by exiting non-core states and its commercial book of business. These
actions have enhanced our underwriting profitability and better position the insurance company for long-
term success. Notably, on January 31, 2020, Hilltop announced the sale of National Lloyds to Align
Financial Holdings. I have worked closely with National Lloyds since we acquired the company in 2007
and am incredibly proud of everyone involved with the business. The transaction is expected to close in
the second quarter of 2020.
We continue to execute on our multi-year plan of lowering operating costs, driving revenue growth and
building a foundation for future organic and acquisition growth. I appreciate the dedication shown across our
organization and applaud the teams charged with implementing these initiatives. The actions taken through
year end 2019 have resulted in approximately $45 million of incremental PPNR benefit, over half way to our
goal of $84 million in run-rate PPNR improvements by year end 2021. We remain focused on maintaining a
resilient balance sheet and preserving excess capital to deploy via organic growth and acquisitions. Our
prudent, long-term oriented capital management will allow us to seek out attractive opportunities, while also
appropriately returning capital to stockholders through dividends and share repurchases.
As I write this letter, we are in the midst of an unprecedented environment caused by the COVID-19
pandemic. Since the onset of this pandemic, we have worked hard to ensure the business continuity of
Hilltop and its operating companies. Our focus continues to be on providing our employees with a safe work
environment, serving the needs of our clients and preserving our financial strength. Times like these
demonstrate the importance of Hilltop’s sound financial position, as we have significant excess capital and
maintain ample liquidity. I am confident that we will get through this together and emerge a stronger and
closer company.
In closing, I would like to sincerely thank the entire Hilltop organization. I am extremely proud of our
company and believe the results we generated in 2019 are a reflection of the hard work and dedication shown
by each employee. I would also like to thank our clients who trust PlainsCapital, PrimeLending,
HilltopSecurities and National Lloyds with their financial services needs. Finally, I would like to thank the
Hilltop Board and stockholders for their continued support. 2019 was a successful year, and though we are
facing unprecedented challenges in early 2020, I believe Hilltop is well-positioned for the future.
Sincerely,
Jeremy B. Ford
President & Chief Executive Officer
Hilltop Holdings Inc.
May 22, 2020
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Hilltop Holdings Inc.
6565 Hillcrest Avenue
Dallas, Texas 75205
Tel: 214.855.2177
Fax: 214.855.2173
www.hilltop-holdings.com
NYSE: HTH
NOTICE OF 2020 ANNUAL MEETING
AND PROXY STATEMENT
April 29, 2020
You are cordially invited to attend our 2020 Annual Meeting of Stockholders (the “Annual Meeting”) at 10:00 a.m.,
Dallas, Texas, local time, on July 23, 2020. The meeting will be held at the offices of Hilltop Holdings at 6565 Hillcrest
Avenue, 5th Floor, Dallas, Texas 75205. Although we currently intend to hold the Annual Meeting in person, we are
actively monitoring the impact that the coronavirus (COVID-19) may have on the meeting. We are committed to
maintaining a safe and healthy environment at the Annual Meeting and, as a result, may determine that it is necessary or
appropriate to hold the meeting solely by means of remote communication. If we take this step, details about how to
participate in the Annual Meeting will be announced in advance via press release, posted on our website at
http://ir.hillop-holdings.com and filed with the Securities and Exchange Commission as additional proxy material.
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 2020 Annual Meeting of Stockholders and annual report for the year ended December 31, 2019
will be provided to stockholders of record on or about June 5, 2020.
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 23, 2020.
Our Proxy Statement and our annual report for the fiscal year ended December 31, 2019 are both available at
www.proxyvote.com.
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Notice of 2020 Annual Meeting of Stockholders
To Be Held on July 23, 2020
WHEN:
WHERE:
Thursday, July 23, 2020, at 10:00 a.m., Dallas, Texas local time
6565 Hillcrest Avenue, 5th Floor
Dallas, Texas 75205
WHY:
At this meeting, you will be asked to:
1. Elect 18 directors to serve on our Board of Directors until the 2021 annual meeting of
stockholders or until their successors are duly elected and qualified;
2. Approve the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Equity Incentive
Plan”);
3. Approve the Hilltop Holdings Inc. Employee Stock Purchase Plan (the “Employee Stock
Purchase Plan”);
4. Conduct a non-binding advisory vote to approve executive compensation;
5. Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for 2020; and
6. Transact any other business that may properly come before the meeting and any
adjournments or postponements of the meeting.
WHO MAY VOTE:
Stockholders of record at the close of business on April 28, 2020.
ANNUAL REPORT: Our 2019 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, 2019, 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,
Corey G. Prestidge
Executive Vice President, General Counsel & Secretary
April 29, 2020
Dallas, Texas
Although we currently intend to hold the Annual Meeting in person, we are actively monitoring the impact that the coronavirus
(COVID-19) may have on the meeting. We are committed to maintaining a safe and healthy environment at the Annual Meeting and,
as a result, may determine that it is necessary or appropriate to hold the meeting solely by means of remote communication. If we take
this step, details about how to participate in the Annual Meeting will be announced in advance via press release, posted on our website
at http://ir.hilltop-holdings.com and filed with the SEC as additional proxy material.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of Total Direct Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governance Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Program Philosophy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of our Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Programs and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table . . . . . . . . . . . . . . . . . . . . . .
Potential Payments Upon Termination or Change-in-Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEO Pay Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delinquent Section 16(a) Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL TWO — APPROVAL OF THE HILLTOP HOLDINGS INC. 2020 EQUITY INCENTIVE PLAN . . . . . . . . . . .
PROPOSAL THREE — APPROVAL OF THE HILLTOP HOLDINGS INC. EMPLOYEE STOCK PURCHASE PLAN . . . . .
PROPOSAL FOUR — ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . .
Vote Necessary to Approve, on a Non-Binding Advisory Basis, Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL FIVE — 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 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ANNEX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
ANNEX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
HILLTOP HOLDINGS INC.
6565 Hillcrest Avenue
Dallas, Texas 75205
PROXY STATEMENT
2020 Annual Meeting of Stockholders
To be Held on July 23, 2020
GENERAL INFORMATION
The Notice of Internet Availability of Proxy Materials, or this Proxy Statement and the accompanying proxy card, as
applicable, Notice of 2020 Annual Meeting of Stockholders and Annual Report for the year ended December 31, 2019 will
be provided to stockholders of record on or about June 5, 2020.
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 2020 Annual Meeting of Stockholders, or the Annual Meeting, which will take place at 10:00 a.m.
(Dallas, Texas local time) on Thursday, July 23, 2020, at 6565 Hillcrest Avenue, 5th Floor, Dallas, Texas 75205. 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 5, 2020, 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;
1
request a printed copy of the proxy materials; and
instruct us to send our future proxy materials to you electronically by email.
Copies of the proxy materials are available for viewing at www.proxyvote.com.
You may have received proxy materials by email. Even if you received a printed copy of our proxy materials, you may
choose to receive future proxy materials by email. Choosing to receive your future proxy materials by email will lower our
costs of delivery and will reduce the environmental impact of 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.
What am I voting on?
At the Annual Meeting, stockholders will be asked to:
Elect 18 directors to serve on our Board of Directors until the 2021 annual meeting of stockholders or until their
successors are duly elected and qualified;
Approve the 2020 Equity Incentive Plan;
Approve the Employee Stock Purchase Plan;
Conduct a non-binding advisory vote to approve executive compensation;
Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm
for 2020; 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 of the 2020 Equity Incentive Plan;
FOR the approval of the Employee Stock Purchase Plan;
FOR the approval, on a non-binding 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 2020.
Who is entitled to vote?
Holders of record of our common stock at the close of business on April 28, 2020 are entitled to vote at the Annual
Meeting. With respect to each matter presented, a stockholder is entitled to cast one vote for each share of common stock
owned at the close of business on April 28, 2020. Our stockholders are not entitled to cumulative voting rights, and
dissenters’ rights are not applicable to the matters being voted upon.
2
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 your broker from voting for the election of directors, the approval of the 2020 Equity Incentive Plan, the
approval of the Employee Stock Purchase Plan 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, the
2020 Equity Incentive Plan, the Employee Stock Purchase Plan, executive compensation and the ratification of the
appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2020.
If you are a stockholder of record and (a) you indicate when voting on the Internet or by telephone that you wish to vote
as recommended by our Board of Directors or (b) you sign and return the enclosed proxy card but do not specify how your
shares are to be voted, your shares will be voted FOR the election of all of our director candidates, FOR the approval of the
2020 Equity Incentive Plan, FOR the approval of the Employee Stock Purchase Plan, FOR the approval, on a non-binding
advisory basis, of our executive compensation, and FOR the ratification of the appointment of PricewaterhouseCoopers LLP
as our independent registered public accounting firm for 2020.
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.
3
Which matters are considered “routine” or “non-routine”?
The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for 2020 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 87.
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.
What constitutes a quorum?
In order to carry on the business of the Annual Meeting, a quorum must be present. This means that the holders of at
least a majority of the outstanding shares eligible to be cast must be represented at the Annual Meeting, either in person or by
proxy. Any shares that we hold for our own benefit may not be voted and are not counted in the total number of outstanding
shares eligible to be voted. Both abstentions and broker non-votes (described above) are counted as present for purposes of
determining the presence of a quorum. On April 28, 2020, we had 90,088,336 shares of common stock outstanding.
How many votes are needed for approval?
Election of Directors
The 18 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.
Approval of the 2020 Equity Incentive Plan
Approval of the adoption of the 2020 Equity Incentive Plan requires the affirmative vote of the holders of at least a
majority of the shares of Hilltop common stock cast on the proposal. For purposes of the adoption of the 2020 Equity
Incentive Plan, 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.
4
Approval of the Employee Stock Purchase Plan
Approval of the adoption of the Employee Stock Purchase Plan requires the affirmative vote of the holders of at least a
majority of the shares of Hilltop common stock cast on the proposal. For purposes of the adoption of the Employee Stock
Purchase Plan, 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.
Advisory Vote to Approve Executive Compensation
The affirmative vote of a majority of the votes cast on the matter is required to approve, on a non-binding 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 2020 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 April 28, 2020 (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 87. If you do not have an admission ticket, you must
show proof of your ownership of the common stock of the Company at the registration table at the door.
5
General
PROPOSAL ONE — ELECTION OF DIRECTORS
At the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has nominated
the director candidates named under “— Nominees for Election as Directors” below.
Our Board of Directors oversees our management on your behalf. The Board of Directors reviews our long-term strategic
plans and exercises direct decision-making authority on key issues, such as the approval of business combination
transactions, the authorization of dividends, the selection of the Chief Executive 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 18 persons currently
serving as directors whose terms are expiring at the Annual Meeting. Mr. Brinkerhoff will not stand for re-election at the
Annual Meeting.
If elected, each of the persons nominated as a director will serve until the next annual meeting of stockholders and until
his or her successor is duly elected and qualified. Biographical information on each of our nominees is given below.
Nominees for Election as Directors
Charlotte Jones Anderson
Age 53
Rhodes R. Bobbitt
Age 74
Tracy A. Bolt
Age 55
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.
6
J. Taylor Crandall
Age 66
Charles R. Cummings
Age 83
Hill A. Feinberg
Age 73
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, or 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 served 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 Emeritus of Hilltop Securities, a transition from
Mr. Feinberg’s previous role as Chairman of Hilltop Securities until June 30, 2019. 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.
7
Gerald J. Ford
Age 75
Jeremy B. Ford
Age 45
J. Markham Green
Age 76
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 45 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 Mechanics Bank. Mr. Gerald J. Ford previously served as
Chairman of Pacific Capital Bancorp and a director of Scientific Games Corporation, 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. and Ford Financial Fund III, L.P.,
private equity funds. 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 and has served as the Chief
Executive Officer or Co-Chief Executive Officer of Hilltop since March 2010. Mr. Jeremy
B. Ford also has served as President and a director of Hilltop since 2010. Mr. Jeremy B. Ford
has worked in the financial services industry for over 23 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 actively supports many academic and philanthropic
organizations, primarily in Texas.
8
William T. Hill, Jr.
Age 77
Lee Lewis
Age 68
Andrew J. Littlefair
Age 59
W. Robert Nichols, III
Age 75
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
served as Chairman and President until January 2020. 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.
9
Kenneth D. Russell
Age 71
A. Haag Sherman
Age 54
Jonathan S. Sobel
Age 53
Mr. Russell has served as a director of Hilltop since August 2010. Mr. Russell currently
serves as the 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 served as a director of Hilltop since July 2019. Mr. Sobel is a partner of Ford
Management II, L.P. and Ford Management III, L.P., the general partner of Ford Financial
Fund II, L.P. and Ford Financial Fund III, L.P., respectively, Dallas-based private equity
funds. 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.
10
Robert C. Taylor, Jr.
Age 72
Carl B. Webb
Age 70
Mr. Taylor has served as a director of Hilltop since our acquisition of PlainsCapital in
November 2012. He previously served as a director of PlainsCapital from 1997 to
November 2012. He has been engaged in the wholesale distribution business in Lubbock,
Texas since 1971. In February 2009, Mr. Taylor was appointed to serve as Chief Executive
Officer for United Supermarkets, LLC, a retail grocery business in Texas since 1915 and has
served as its President since its acquisition by Albertsons LLC. He also serves on the board
of directors of United Supermarkets, LLC. Prior to that appointment, Mr. Taylor served as
the Vice President of Manufacturing and Supply Chain for United Supermarkets since 2007.
From 2002 to 2007, Mr. Taylor was the President of R.C. Taylor Distributing, Inc., a
business engaged in the distribution of general merchandise, candy and tobacco to retail
outlets in West Texas and Eastern New Mexico. He is chairman of the Lubbock Downtown
Tax Increment Finance Redevelopment Committee and serves on the Texas Tech
Chancellors Advisory Board.
Mr. Webb has served as a director of Hilltop since June 2005. Mr. Webb is a Co-Managing
Member of Ford Financial Fund II, L.P. and Ford Financial Fund III, L.P., private equity
funds 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 11 of the 18 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, J. Taylor
Crandall, Charles R. Cummings, J. Markham Green, William T. Hill, Jr., Andrew J. Littlefair, W. Robert Nichols, III, A.
Haag Sherman and Robert C. Taylor, Jr.
In conducting its annual review of director independence, the Board of Directors considered transactions and
relationships between each director or any member of his or her immediate family and the Company. The Board of Directors
considered that one director it determined to be independent —Mr. Littlefair — had, 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 had, 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. This loan was repaid in full and terminated on December 3, 2019. In addition, the Board of Directors
considered transactions between the Bank and Clean Energy Finance, Inc., a subsidiary of Clean Energy Fuels Corp., a
11
company for which Andrew J. Littlefair serves as a director and president and chief executive officer. Mr. Littlefair also
beneficially owned 1.2% of the outstanding shares of common stock of Clean Energy Fuels Corp. at March 25, 2020. From
late 2011 through December 31, 2018, the Bank purchased, in a series of transactions, an aggregate of approximately $16.4
million in original principal amount of promissory notes issued by unaffiliated third parties from Clean Energy Finance, Inc.
Although purchased at a premium to the outstanding principal balance on the notes, at the time of purchase, the interest rates
on the notes exceeded the market rates charged by the Bank on similar-type loans that it originated. Clean Energy
Finance, Inc. performs the servicing on the notes at no cost to the Bank, and the Bank purchased these notes with recourse to
Clean Energy Finance, Inc. in the event of default. The aggregate yearly payments of the purchase prices in these transactions
constituted less than 2% of the consolidated gross revenues of each of Clean Energy Fuels Corp. and the Company in the
applicable year purchased and were made in the ordinary course of business in arms-length transactions. Mr. Littlefair did not
have a direct financial interest in any of the transactions with Clean Energy Finance, Inc. The Bank did not purchase
promissory notes issued by unaffiliated third parties from Clean Energy Finance, Inc. during 2019.
The Board of Directors also considered the lease transactions and relationships between companies affiliated with
Ms. Anderson, a director of the Company, and the Company. The Audit Committee of the Board of Directors reviewed and
approved each of these leases and determined such leases were on an arms-length basis. Accordingly, the Board of Directors
determined that Ms. Anderson is, and continues to be, an independent director of the Company given, among other things, the
arrangement and the immaterial nature of the leases to Ms. Anderson and the Company.
Meeting Attendance
Our Board of Directors met six times during 2019. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and the committees of the Board of Directors on which he or she served, if applicable,
during 2019. 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. Eighteen
directors, former directors, or newly elected directors, Messrs. Rhodes Bobbitt, Tracy Bolt, Joris Brinkerhoff, J. Crandall,
Hill A. Feinberg, Gerald J. Ford, Jeremy B. Ford, Mark Green, William Hill, Lee Lewis, Andrew Littlefair, Robert Nichols,
Clifton Robinson, Kenneth Russell, Haag Sherman, Jonathan Sobel, Robert Taylor and Carl Webb, attended the 2019 annual
meeting of stockholders.
Vote Necessary to Elect Directors
The 18 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.
12
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 2019, 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) Subsequent to the retirement of Mr. Alan B. White, former Co-Chief Executive Officer of the
Company, on April 1, 2019, Jeremy B. Ford, President and Chief Executive Officer of the
Company, was appointed chairman of the Executive Committee. Because he is an employee 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 fifth 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.
Under our stock ownership 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 or in fees in the form of stock.
In addition to the fees paid to our Chairman of the Board of Directors described above, we also grant the Chairman of the
Board of Directors a restricted stock unit, or RSU, award representing 30,000 shares each year. This RSU award cliff vests on
the third anniversary of the date of grant. The RSU award agreement also provides for pro rata vesting upon termination
without cause, death or disability. Commencing in 2019, all equity award agreements, including the RSU awards granted to
the Chairman of the Board of Directors, 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
13
connection with a change in control. Further discussion of the change in control payments that may be made pursuant to the
2012 Equity Incentive Plan may be found in the “Executive Compensation — Potential Payments Upon Termination or
Change-in-Control” section below. The Compensation Committee evaluates the compensation of directors annually,
including grants of RSUs to the Chairman of the Board of Directors. Given the experience and involvement of the Chairman
of the Board of Directors, we believe that the compensation paid to the Chairman of the Board of Directors is considerably
less than the cost that we would incur to employ or retain someone else of his caliber to provide guidance and advice to us as
frequently as he does.
Each member of our Board of Directors is reimbursed for out-of-pocket expenses associated with his or her service on,
and attendance at, Board of Directors or board committee meetings. Other than as described above, members of our Board of
Directors receive no additional compensation for their service on the Board of Directors or board committees.
Political Action Committee Matching Program
The 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. These programs are
completely voluntary.
2019 Director Compensation
Director Compensation Table for 2019
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 (d)
Kenneth D. Russell
A. Haag Sherman
Jonathan S. Sobel (e)
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White (f)
Fees Earned or
Paid in Cash
($)(a)
29,030
88,000
41
53,000
68,000
123,000
—
49
—
69,000
31,544
53,000
26,557
68,000
36,000
56,000
51
10,025
29,030
52
—
All Other
Stock
Awards
($)(a)
28,970
—
110,959
—
—
—
—
214,951
—
—
31,456
—
26,443
—
—
—
67,949
9,975
28,970
52,948
—
Compensation
($)
—
—
—
—
—
—
—
581,100 (c)
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
58,000
88,000
111,000
53,000
68,000
123,000
—
796,100
—
69,000
63,000
53,000
53,000
68,000
36,000
56,000
68,000
20,000
58,000
53,000
—
(a) Fees earned for services performed in 2019 include annual retainers 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
14
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, 2019.
(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
February 27, 2022 and a change of control.
(d) Mr. Robinson resigned as a member of the Board of Directors effective September 26, 2019.
(e) Mr. Sobel was elected to the Board of Directors on July 25, 2019.
(f) 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 2019 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 five 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.
The following numbers of shares of our common stock were issued to our directors as director fees for services
performed during 2019:
Name
Charlotte Jones Anderson
Tracy A. Bolt
Gerald J. Ford
William T. Hill, Jr.
Andrew J. Littlefair
A. Haag Sherman
Jonathan S. Sobel
Robert C. Taylor, Jr.
Carl B. Webb
Number of
Shares
1,352
5,178
10,031
1,468
1,234
3,171
402
1,352
2,471
For further information about the stockholdings of these directors and our management, see “Security Ownership of
Certain Beneficial Owners and Management” commencing on page 25 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 87.
15
Committee Membership
The following table shows the current membership of, and the 2019 fiscal year meeting information for, each of the
committees of the Board of Directors.
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 *
Jonathan S. Sobel ††
Robert C. Taylor, Jr.*
Carl B. Webb
Alan B. White †††
Meetings in Fiscal 2019
Audit
Committee Committee
Compensation Nominating and Corporate Risk
Chairman
8
Governance Committee
Chairman
Chairman
4
7
Merger and
Investment
Executive
Committee Committee Acquisition Committee Committee
Chairman
Chairman
Chairman
Chairman
1
6
4
4
Denotes independent director.
*
† Mr. Robinson resigned as a member of the Board of Directors effective September 26, 2019.
†† Mr. Sobel was elected as a member of the Board of Directors on July 25, 2019.
††† Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
Audit Committee
We have a standing Audit Committee established within the meaning of Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. The Audit Committee helps our Board of Directors ensure the integrity of our
financial statements, the qualifications and independence of our independent registered public accounting firm and the
performance of our internal audit function and independent registered public accounting firm. In furtherance of those matters,
the Audit Committee assists in the establishment and maintenance of our internal audit controls, selects, meets with and
assists the independent registered public accounting firm, oversees each annual audit and quarterly review and prepares the
report that federal securities laws require be included in our annual proxy statement, which appears on page 49.
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, or the Annual Incentive Plan, and the Hilltop Holdings
Inc. 2012 Equity Incentive Plan, or the 2012 Equity Incentive Plan, and produces the annual report on executive
compensation for inclusion in our annual proxy statement, which appears on page 49. Each member is independent in
accordance with the listing standards of the NYSE.
16
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, funding, strategic, regulatory 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.
Investment Committee
The Investment Committee is responsible for, among other things, reviewing investment policies, strategies and
programs; reviewing the procedures that we utilize in determining that funds are invested in accordance with policies and
limits approved by the Investment Committee; and reviewing the quality and performance of our investment portfolios and
the alignment of asset duration to liabilities.
Merger and Acquisition Committee
The purpose of the Merger and Acquisition Committee is to review potential mergers, acquisitions or dispositions of
material assets or a material portion of any business proposed by management and to report its findings and conclusions to
the Board of Directors. Each member of the Merger and Acquisition Committee is independent in accordance with the listing
standards of the NYSE.
Executive Committee
The Executive Committee, with certain exceptions, has the power and authority of the Board of Directors to manage the
affairs of the Company between meetings of the Board of Directors.
17
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 87.
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.
Board Performance
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
18
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
Mr. Bobbitt has an extensive investment background. This is particularly important given the
investment portfolios at our subsidiaries.
Tracy A. Bolt
Mr. Bolt has significant experience concerning accounting and risk matters that is essential to
our Audit Committee’s, Risk Committee’s and Board of Directors’ oversight responsibilities.
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
William T. Hill, Jr.
Lee Lewis
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 45 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.
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 also serves 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 former service on PlainsCapital’s Board
of Directors, Mr. Lewis has many years of knowledge of PlainsCapital and the challenges
and opportunities that it is presented. The background of Mr. Lewis as an owner and chief
executive officer of a Texas-based company also provides unique insight to the Board of
Directors.
19
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 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.
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. He also possesses extensive knowledge regarding the Company
and its operations, which makes him a valuable member of the Board of Directors.
Through his service on our Board of Directors and former service on PlainsCapital’s Board
of Directors, Mr. Taylor has many years of knowledge of PlainsCapital and the challenges
and opportunities that it is presented. The background of Mr. Taylor as a manager of a Texas-
based company also provides unique insight to the Board of Directors.
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 Corporate Secretary, 6565 Hillcrest Avenue, Dallas, Texas 75205.
All communications received as set forth in the preceding paragraph will be opened by the corporate Secretary or
assistant corporate Secretary 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 corporate Secretary’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.
20
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 87. 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.
Hedging and Other Securities Transaction Policy
The Company has adopted a written Insider Trading Policy, or the Trading Policy, which sets forth the Company’s
policies and procedures. Directors and executive officers are required to receive the permission of the General Counsel prior
to entering into any transactions in our securities, including gifts, grants and those involving derivatives. Generally, trading is
permitted only during announced trading periods for directors, executive officers and certain employees. Directors and
employees who are subject to trading restrictions, 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. Such
director or employee 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.
All employees also are prohibited from entering into hedging, short sale and derivative transactions and are subject to
restrictions on pledging our securities. Additionally, all employees are prohibited from hedging or pledging unvested RSUs.
The Trading Policy is available on our website at ir.hilltop-holdings.com under the heading “Investor Relations — Corporate
Information — Governance Documents.”
All employees are prohibited from hedging or pledging unvested restricted stock units.
Policies and Procedures for Approval of Related Party Transactions
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.
The Company also has adopted a written Related Party Transaction Policy, or the Related Party Policy, which sets forth
the Company’s policies and procedures for reviewing and approving transactions with related persons – namely, our
directors, executive officers, their respective immediate family members and 5% stockholders. The transactions covered by
the Policy include any financial transaction, arrangement or relationship in which the Company is a participant, the related
person has or will have a direct or indirect material interest and the aggregate amount involved will or may be expected to
exceed $120,000 in any fiscal year.
After becoming aware of any transaction which may be subject to the Related Party Policy, the related person is required
to report all relevant facts with respect to the transaction to the Chief Executive Officer or General Counsel of Hilltop. Upon
determination by the Company’s legal department that a transaction requires review under the Related Party Policy, the
material facts of the transaction and the related person’s interest in the transaction are provided to the Audit Committee. The
transaction is then reviewed by the disinterested members of the Audit Committee, who determine whether approval of the
transaction shall be granted. In reviewing a transaction, the Audit Committee considers facts and circumstances that it deems
relevant to its determination, such as: management’s assessment of the commercial reasonableness of the transaction; the
materiality of the related person’s direct or indirect interest in the transaction; whether the transaction may involve an actual,
or the appearance of, a conflict of interest; and, if the transaction involves a director, the impact of the transaction on the
director’s independence.
21
Certain types of transactions are pre-approved in accordance with the terms of the Related Party Policy. These include
transactions in the ordinary course of business involving financial products and services provided by, or to, the Company,
including loans, provided that such transactions are in compliance with the Sarbanes-Oxley Act of 2002, Federal Reserve
Board Regulation O and other applicable laws and regulations.
Stockholder Rights and Protections
The Company’s Amended and Restated Charter and By-laws provide stockholders with important rights and protections,
including:
• The ability to call a special meeting by stockholders holding at least 15% of the outstanding shares of our common
stock, subject to a one-year ownership requirement and certain other requirements.
• No “poison pill” in effect.
• No super-majority vote requirements in our Amended and Restated Charter or By-laws (other than for an action by
written consent).
The Company’s Amended and Restated Charter and By-laws are available as exhibits to our Annual Report on
Form 10 - K for the fiscal year ended December 31, 2019, as filed with SEC.
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 86 under “Stockholder Proposals for 2021,” 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
Corporate Secretary” at Hilltop Holdings Inc., 6565 Hillcrest Avenue, Dallas, Texas 75205. Director recommendations
22
submitted by stockholders should include the following information regarding the stockholder making the recommendation
and the individual(s) recommended for nomination:
•
•
•
•
name, age, business address and residence address;
the class, series and number of any shares of Hilltop stock or other securities of Hilltop or any affiliate of Hilltop
owned, beneficially or of record (including the name of the nominee holder if beneficially owned);
the date(s) that shares of Hilltop stock or other securities of Hilltop or any affiliate of Hilltop were acquired and the
investment intent of such acquisition;
any short interest (including any opportunity to profit or share in any benefit from any decrease in the price of such
stock or other security) in any securities of Hilltop or any affiliate of Hilltop;
• whether and the extent to which such person, directly or indirectly (through brokers, nominees or otherwise), is
subject to or during the prior six months has engaged in, any hedging, derivative or other transaction or series of
transactions or entered into any other agreement, arrangement or understanding (including any short interest, any
borrowing or lending of securities or any proxy or voting agreement), the effect or intent of which is to (a) manage
risk or benefit of changes in the price of Hilltop securities or any security of any entity listed in the peer group in the
stock performance graph included in the materials distributed with this Proxy Statement or (b) increase or decrease
the voting power of such person in Hilltop disproportionately to such person’s economic interest in Hilltop securities
(or, as applicable, any security of any entity listed in the peer group in the stock performance graph included in the
materials distributed with this Proxy Statement);
•
•
•
•
•
•
any substantial interest, direct or indirect (including, without limitation, any existing or prospective commercial,
business or contractual relationship with us), by security holdings or otherwise of such person in us or in any of our
affiliates, other than an interest arising from the ownership of securities where such person receives no extra or
special benefit not shared on a pro rata basis by all other holders of the same class or series;
the investment strategy or objective, if any, of the stockholder making the recommendation and a copy of the
prospectus, offering memorandum or similar document, if any, provided to investors, or potential investors, in such
stockholder (if not an individual);
to the extent known by the stockholder making the recommendation, the name and address of any other stockholder
supporting the nominee for election or reelection as a director;
a certificate executed by the proposed nominee that certifies that the proposed nominee is not, and will not, become
a party to any agreement, arrangement or understanding with any person or entity other than us in connection with
service or action as a director that has not been disclosed to us and that the proposed nominee consents to being
named in a proxy statement and will serve as a director if elected;
completed proposed nominee questionnaire (which will be provided upon request by writing or telephoning our
corporate Secretary at the address or phone number listed under “Questions” on page 87); 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
23
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 for
nomination 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.
24
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 28, 2020 by any
person or “group,” as that term is used in Section 13(d)(3) of the Exchange Act, known to us to beneficially own more than
five percent of the outstanding shares of our common stock.
Name and Address of Beneficial Owner
Gerald J. Ford (b)
6565 Hillcrest Avenue, 6th Floor
Dallas, Texas 75205
The Vanguard Group (c)
100 Vanguard Boulevard
Malvern, Pennsylvania 19355
Dimensional Fund Advisors LP (d)
Building One
6300 Bee Cave Road
Austin, Texas 78746
BlackRock, Inc. (e)
55 East 52nd Street
New York, New York 10055
Amount and Nature of Percent of
Class (a)
Beneficial Ownership
15,703,455
17.4 %
6,406,191
7.1 %
5,489,300
6.1 %
5,001,634
5.6 %
(a) Based on 90,088,336 shares of common stock outstanding on April 28, 2020. Shares issuable under instruments to purchase our common stock that are
exercisable within 60 days of April 28, 2020 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 60,915 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 and trustee 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 RSUs that will not vest within 60 days of April 28, 2020.
(c) Based on the Schedule 13G (Amendment No. 4) filed with the SEC by The Vanguard Group on February 12, 2020. According to the Schedule 13G
(Amendment No. 4), The Vanguard Group has sole voting power over 70,730 shares of our common stock, shared voting power over 9,980 shares of
our common stock, sole dispositive power over 6,337,361 shares of our common stock and shared dispositive power over 68,830 shares of our
common stock. The Schedule 13G (Amendment No. 4) reports that Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard
Group, is the beneficial owner of 58,850 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 21,860 shares of our
common stock as a result of its serving as investment manager of Australian investment offerings.
(d) Based on the Schedule 13G (Amendment No. 3) filed with the SEC by Dimensional Fund Advisors LP on February 12, 2020. According to the
Schedule 13G (Amendment No. 3), Dimensional Fund Advisors LP has sole voting power over 5,395,393 shares of our common stock and sole
dispositive power over 5,489,300 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, according to the Schedule 13G (Amendment No. 3), all
securities reported are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. In addition, the Schedule 13G (Amendment
No. 3) disclaims that the reporting person or any of its affiliates is the beneficial owner of any securities covered by the Schedule 13G (Amendment
No. 3) for any purposes other than Section 13(d) of the Securities Exchange Act of 1934.
(e) Based on the Schedule 13G (Amendment No. 1) filed with the SEC by BlackRock, Inc. on February 5, 2020. According to the Schedule 13G
(Amendment No. 1), BlackRock, Inc. has sole voting power over 4,829,612 shares of our common stock and sole dispositive power over 5,001,634
shares of our common stock. According to the Schedule 13G (Amendment No. 1), 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 shares
of common stock.
25
Security Ownership of Management
The following table sets forth information regarding the number of shares of our common stock beneficially owned as of
April 28, 2020, by:
•
•
•
each of our directors;
each of our named executive officers; and
all of our directors and executive officers presently serving, as a group.
Except as otherwise set forth below, the address of each of the persons listed below is c/o Hilltop Holdings Inc., 6565
Hillcrest Avenue, Dallas, Texas 75205. Except as otherwise indicated in the footnotes to this table, the persons named in the
table have specified that they have sole voting and investment power with respect to all shares of stock shown as beneficially
owned by them, subject to any applicable community property law.
Name of Beneficial Owner
Charlotte Jones Anderson
Rhodes Bobbitt
Tracy A. Bolt
W. Joris Brinkerhoff
J. Taylor Crandall
Charles R. Cummings
Hill A. Feinberg
Gerald J. Ford
6565 Hillcrest Avenue, 6th Floor
Dallas, Texas 75205
Jeremy B. Ford
William B. Furr
J. Markham Green
William T. Hill, Jr.
Lee Lewis
Andrew J. Littlefair
W. Robert Nichols, III
Kenneth D. Russell
Todd L. Salmans
A. Haag Sherman
Jonathan S. Sobel
Robert C. Taylor, Jr.
Carl B. Webb
Alan B. White
M. Bradley Winges
Common Stock
Amount and Nature of
Beneficial Ownership
12,693
126,059 (b)
31,744
25,228
—
37,476
753,034 (c)
Percent of
Class (a)
*
*
*
*
*
*
*
15,703,455 (d) 17.4%
777,944 (e)
41,223 (f)
114,763
34,624 (g)
656,199 (h)
15,770
11,000 (i)
—
37,549 (j)
20,598
822
38,158
118,794
346,126 (k)
—
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
All Directors and Executive Officers,
as a group (26 persons)
18,795,994 (l) 20.9%
* Represents less than 1% of the outstanding shares of such class.
(a) Based on 90,088,336 shares of common stock outstanding on April 28, 2020. Shares issuable under instruments to purchase our common stock that are
(b)
(c)
exercisable within 60 days of April 28, 2020 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.
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 16,110 shares of common stock deliverable
upon the vesting of RSUs that will not vest within 60 days of April 28, 2020.
26
(d) The shares of common stock beneficially owned by Mr. Gerald J. Ford include 60,915 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 28, 2020.
Jeremy B. Ford is a beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, LP (see footnote (d)). Excludes 289,441
shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 28, 2020 and 15,544,674 shares of common
stock held by Diamond A Financial, LP.
(e)
(f) Excludes 74,415 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 28, 2020.
(g)
(h)
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.
(i)
(j) Excludes 34,746 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 28, 2020.
(k) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors. Excludes 5,482
shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 28, 2020.
(l) Represents 26 persons. Excludes 800,811 shares of common stock deliverable upon the vesting of RSUs that will not vest within 60 days of April 28,
2020.
Executive Officers
General
MANAGEMENT
We have identified the following officers as “executive officers,” consistent with the definition of that term as used by
the SEC, as of April 28, 2020:
Name
Keith E. Bornemann
Jeremy B. Ford
William B. Furr
Darren E. Parmenter
Corey G. Prestidge
Jerry L. Schaffner
Stephen Thompson
M. Bradley Winges
Age
Position
47 Executive Vice President, Principal Accounting Officer and Corporate Controller
45 President and Chief Executive Officer
42 Executive Vice President, Chief Financial Officer
57 Executive Vice President, Chief Administrative Officer
46 Executive Vice President, General Counsel and Secretary
62 President and Chief Executive Officer of PlainsCapital Bank
58 President and Chief Executive Officer of PrimeLending
52 President and Chief Executive Officer of Hilltop Securities
Officer
Since
2017
2010
2016
2007
2008
2012
2020
2019
Business Experience of Executive Officers
Information concerning the business experience of Mr. Jeremy B. Ford is set forth above under “Proposal One —
Election of Directors — Nominees for Election as Directors” beginning on page 6.
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 and spent nine years working for the accounting
firm Ernst & Young LLP.
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.
27
Darren E. Parmenter. Mr. Parmenter has served as Executive Vice President and Chief Administrative Officer of Hilltop
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.
Jerry L. Schaffner. Mr. Schaffner has served as the President and Chief Executive Officer of PlainsCapital Bank since
November 2010. He currently serves as a director of PlainsCapital 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.
Stephen Thompson. Mr. Thompson has served as the President and Chief Executive Officer of PrimeLending since
January 2020, a continuation of his previous role as President of PrimeLending since 2017. Mr. Thompson joined
PrimeLending in 2011 and has held the roles of Regional Production Leader, Divisional Production Leader and National
Production Leader. Mr. Thompson has over 30 years of mortgage banking experience.
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 had 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
SEC.
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 6 and under “Management — Executive Officers — Business Experience of Executive Officers” on page 27,
(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 years 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.
28
Compensation Discussion and Analysis
This Compensation Discussion and Analysis, or this CD&A, 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 who served during the year ended December 31, 2019.
For 2019, our NEOs were:
Named Executive Officer
Jeremy B. Ford
William B. Furr
M. Bradley Winges
Todd L. Salmans (a)
Alan B. White (b)
Hill A. Feinberg (c)
Title/Role
President and Chief Executive Officer
Executive Vice President, Chief Financial Officer
President and Chief Executive Officer of Hilltop Securities
Chairman of PrimeLending
Former Vice Chairman and Co-Chief Executive Officer
Chairman Emeritus of Hilltop Securities
(a) Mr. Salmans was Chief Executive Officer of PrimeLending through December 31, 2019.
(b) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(c) Mr. Feinberg was Chief Executive Officer of Hilltop Securities through February 19, 2019, and Chairman of Hilltop Securities through
June 30, 2019.
Executive Summary
2019 Business Highlights
2019 was an exceptional year for Hilltop, with robust financial results and key organizational enhancements that position
us for further growth.
Key Financial Results
The charts below illustrate our strong financial and market performance in 2019. Additional details regarding our results
can be found in our Annual Report on Form 10-K for the year ended December 31, 2019.
Pre-Tax Income ($MM)
$300
EPS - Diluted
$243
$161
$300
$250
$200
$150
$100
$50
$0
$2.44
$1.36
$1.28
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2017
2018
2019
2017
2018
2019
29
Return on Average Assets
Return on Average Equity
1.0%
0.9%
11.2%
7.0%
6.3%
1.7%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2017
2018
2019
2017
2018
2019
2019 Total Shareholder Return vs.
Banks in the KBW Regional Banking Index*
42.7%
18.9%
23.0%
11.6%
1.8%
1.5%
1.2%
0.9%
0.6%
0.3%
0.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
25th %ile
50th %ile
75th %ile
HTH
* Calculated using a 20-trading day average stock price through December 31, 2018 and December 31, 2019, and assuming dividends were reinvested
In addition to the results shown above, we also achieved the following in 2019:
• Average loans grew by $376 million, or 6%, and average deposits grew by $525 million, or 6%, compared to
December 31, 2018.
• Mortgage origination volume increased by 14% to $15.6 billion as the business capitalized on the rate
environment.
• Hilltop Securities reported a pre-tax margin of 19.7% in 2019 compared to 9.2% in 2018, as Structured Finance,
Capital Markets and Public Finance all realized significant net revenue growth.
• Book value per share at December 31, 2019 grew by 11% versus the prior year to $23.20.
• Hilltop maintained strong capital levels with a Tier 1 Leverage Ratio of 12.71% and a Common Equity Tier 1
Capital Ratio of 16.70% at December 31, 2019.
• Net charge-offs equated to $5.6 million, or 8 basis points of average loans held for investment, for the full year
2019.
Strategic Highlights
During 2019, we had several key accomplishments in support of our business strategy:
• We launched our Platform for Growth and Efficiency in January 2019, designed to deliver $84 million in run-
rate Pre-Provision Net Revenue (“PPNR”) improvements by the year end 2021, and we achieved approximately
$45 million of our goal through year-end 2019 through actions including:
Streamlining our mortgage operations;
30
Enhancing our capital markets / securitized products platform;
Executing on targeted leadership changes and succession planning;
Implementing multiple enhanced programs for our strategic sourcing efforts; and
Consolidating functions across our organization.
• We conducted a thorough sales process for our NLC business, which resulted in the announcement on
January 31, 2020, to sell NLC to Align Financial for $150 million, subject to purchase price adjustments. A sale
at $150 million will represent a premium to book value. The sale will enable Hilltop to focus time, effort and
capital on our core businesses in support of our vision to be a premier regional bank holding company. This sale
remains subject to regulatory approvals.
Leadership Transitions
We also completed several leadership transitions successfully in 2019 through continued effective succession planning
including:
• Mr. Jeremy B. Ford becoming our sole Chief Executive Officer effective April 1, 2019, following the departure
of Mr. White.
• Mr. Winges becoming President and Chief Executive Officer of Hilltop Securities effective February 20, 2019,
in connection with the transition of Mr. Feinberg to the role of Chairman (effective February 20, 2019) and
Chairman Emeritus (effective July 1, 2019) of Hilltop Securities.
• Mr. Steve Thompson becoming President and Chief Executive Officer of PrimeLending effective January 1,
2020, in connection with the transition of Mr. Salmans to the role of Chairman of PrimeLending.
In connection with the commencement of our shared service initiative in 2016, we developed a succession plan for
anticipated leadership transitions. Below is a timeline of management changes since July 1, 2016, which reflects the
successful execution of that succession plan.
The execution of our succession plan and the implementation of shared services has resulted in the following current
reporting structure for our operating subsidiaries:
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Executive Compensation Highlights
Over the past several years, we have
completed leadership transitions, including
those noted above, and streamlined our
executive team. As illustrated in the graphs to
the right, these changes have resulted, and are
expected to continue to result, in a substantial
reduction in total executive compensation
expense as compared to 2016. It is important to
note that even with 2019 results triggering
maximum annual incentive payouts, aggregate
Section 16 officer compensation in 2019 was
lower than aggregate Section 16 officer
compensation in 2016, when annual incentive
payouts were below maximum levels.
Additionally, these leadership transitions have
resulted in the termination of certain legacy
compensation arrangements and allowed us to
align all of our executive team with our pay-
for-performance compensation program
outlined in this CD&A.
Our 2019 Executive Compensation Program
Aggregate Section 16 Officer
Base Salary ($MM)
Aggregate Section 16 Officer
Total Direct Compensation*
($MM)
-12%
-39%
$20.0
$17.5
$15.0
$12.5
$10.0
$7.5
$5.0
$2.5
$0.0
2016
2019
2016
2019**
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
$-
* 2019 Annual Incentive Compensation payout was at maximum based upon strong
business results for 2019. Total Direct Compensation includes base salary, annual
incentive payouts and the grant date value of equity awards.
The Compensation Committee, or, as used in this CD&A, 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, market 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.
32
Chief Executive Officer
Mix of Target Total
Direct Compensation
Total
Variable
77%
TRSUs
27%
Salary
23%
PRSUs
27%
Annual
Incentive
23%
Elements of Total Direct Compensation
Base Salary
• Intended to compensate the individual fairly for
the responsibility level of the position held.
Annual Incentives
• Variable component of pay intended to motivate
and reward the individual’s contributions to
achieving our short-term/annual objectives;
• Payouts are determined based on financial results
(weighted 70%) and each executive’s
performance with respect to strategic and
individual goals (weighted 30%); and
• Financial results are based on our consolidated
net income and, for executives of our
subsidiaries, the net income of their respective
business unit.
Long-Term Incentives
• Variable component of pay intended to retain,
motivate and reward the individual’s
contributions to achieving our long-term
objectives and creating stockholder value;
• Delivered through an equal grant value mix of
Performance-Based Restricted Stock Units, or
PRSUs, and Time-Based Restricted Stock Units,
or TRSUs; and
• The vesting of PRSUs varies based on
performance results with respect to cumulative
EPS goals over a three-year period, with a
modifier based on our 3-year total shareholder
return, or TSR, relative to other banks in the
KBW Regional Banking Index.
As illustrated in the chart, total variable compensation represents 77% of the Chief Executive Officer’s total direct
compensation.
33
Governance Highlights
The Committee maintains strong governance features for our executive compensation program as outlined below and
further discussed in this CD&A.
What We Do
We tie a significant portion of NEO
compensation to our performance
through a balance of annual and long-
term incentives with multiple
performance measures
We maintain robust stock ownership
guidelines for executive officers and
directors
We require all equity awards to
executive officers to be held for one
year following vesting
What We Don’t Do
Executive officers are prohibited from
entering into hedging, short sale and
derivative transactions and are subject to
restrictions on pledging our securities
We do not provide for any excise tax
gross-ups in any new employment
agreements
Commencing at the beginning of 2019,
RSU grants have double trigger (as
opposed to single trigger) change of
control provisions
We maintain a clawback policy for
We do not pay dividends on unvested
equity awards
We do not provide excessive perquisites
incentive compensation
We subject annual incentives to
downward adjustment for improper risk
taking or significant compliance issues
We annually conduct a risk assessment
of our compensation programs
We retain an independent compensation
consultant reporting directly to the
Committee
Role of Stockholder Say-on-Pay Votes and Stockholder Engagement
The Company provides its stockholders with the opportunity to cast an annual non-binding advisory vote on executive
compensation. At the Company’s annual meeting of stockholders held in July 2019, over 72% 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 similar to the 73% support received in 2018 and continued to seek to understand stockholder perspectives on our
executive compensation program.
From our stockholder outreach conducted in prior years, we understand the negative votes on our executive
compensation program were driven by concerns with the legacy employment arrangements for Mr. White, our former Co-
Chief Executive Officer, including the payments made in connection with his departure in April 2019 that were discussed in
last year’s CD&A. In our outreach efforts previously conducted, we have explained that these arrangements were based on
the retention agreement that we entered into with Mr. White upon our acquisition of PlainsCapital Corporation in 2012 and
subsequently amended in 2016 upon his promotion to Co-Chief Executive Officer of the Company. The severance provisions
were designed to keep Mr. White whole for amounts which would otherwise have been due to him immediately upon any
termination of his employment following our acquisition of PlainsCapital, and these provisions were negotiated in connection
34
with our acquisition of PlainsCapital, the company Mr. White founded. The Committee intends to avoid similar provisions in
any new employment arrangement going forward.
The Committee remains committed to understanding the perspectives of our stockholders on our executive compensation
program and being responsive to their feedback. During our previously conducted stockholder outreach, stockholders
generally conveyed that they were supportive of the design of our executive compensation program. Following Mr. White’s
retirement in April 2019, all of our NEOs are subject to compensation arrangements consistent with our current performance-
based compensation philosophy described in this CD&A. The Committee will continue to consider the outcome of the
Company’s say-on-pay votes and stockholder feedback when making future compensation decisions for the NEOs.
Compensation Program Philosophy and Objectives
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 RSUs to support our goals for alignment, ownership and retention. Half of the RSUs
awarded vest upon achievement of predefined performance goals. 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. The calculation
for the vesting of performance RSUs is as follows:
• 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.
35
Elements of our Executive Compensation Program
This section describes the 2019 compensation arrangements for our NEOs who served through the end of 2019.
Compensation for Mr. White, whose employment ended during 2019, and Mr. Feinberg, whose position changed in 2019, are
discussed separately below.
Base Salary
We provide base salaries for each NEO commensurate with the services he provides to us. We believe a portion of total
direct compensation should be provided in a form that is fixed and liquid. In reviewing base salaries, the Committee
evaluated the salaries of other executive officers of the Company and its peers and any increased level of responsibility,
among other items. The following table lists the base salaries for our NEOs in 2018 and 2019:
Base Salaries
Name
Jeremy B. Ford
William B. Furr
M. Bradley Winges
Todd L. Salmans
$
$
$
$
2018
750,000
450,000
$
$
— $
$
750,000
2019
750,000
485,000 (a)
500,000 (b)
750,000
% Increase
—
7.8 %
—
—
(a) Mr. Furr’s base salary increase became effective on April 1, 2019. The increase was approved by the Committee in February 2019
based on Mr. Furr’s performance, including the successful implementation of strategic plans, and market data for his position.
(b) Mr. Winges’s base salary was established in connection with the commencement of his employment on February 20, 2019.
Mr. Salmans’s base salary was reduced to $500,000 effective January 1, 2020, in connection with his transition to the
role of Chairman of PrimeLending. In February 2020, the Committee assessed base salaries of the other NEOs and decided to
provide the following increases beginning on March 29, 2020: $25,000 for Mr. Jeremy B. Ford (new salary $775,000) and
$15,000 for Mr. Furr (new salary $500,000). These increases were determined to be appropriate given performance by these
individuals and relative to market data for their respective positions.
Annual Incentive Program
Target Incentive Opportunities
Target incentive awards are defined at the start of the year in consideration of market data provided by the Committee’s
consultant, each NEO’s total compensation package and the entity’s budgetary considerations. The Committee increased the
annual incentive target (as a percent of salary) for Mr. Furr following a review of market practices and in order to place more
emphasis on pay-for-performance. The following table sets forth information concerning Annual Incentive Plan opportunities
for 2019:
Name
Jeremy B. Ford
William B. Furr
M. Bradley Winges
Todd L. Salmans
Annual Incentive Opportunity
Target
Threshold
($)
375,000
217,500
—
375,000
Amount
($)
750,000
435,000
1,000,000 (b)
750,000
% of
Base Salary
100 %
90 %
200 %
100 %
Maximum
($) (a)
1,125,000
652,500
1,500,000
1,125,000
(a) Awards are capped at 150% of the target amount.
(b) Pursuant to Mr. Winges’s employment agreement, he was guaranteed $1.0 million of his incentive award for his first year of
employment during 2019. No further guarantees were provided with respect to his incentive awards going forward.
Plan Structure and Performance Measures
Each NEO had pre-defined performance objectives based upon measurable performance of both the Company and the
individual. At least 70% of each executive’s incentive was based on the net income of the Company and/or their relevant
36
business unit. 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 2019 are summarized in the following graph:
Annual Incentive Performance Measures and Weightings
Corporate Executives
(Mr. Ford and Mr. Furr)
Hilltop
Net Income
70%
S trategic/Individual
Goals
30%
Business Unit Executives
(Mr. Winges and Mr. Salmans)
Hilltop
Net Income
20%
Business Unit
Pre-Tax Earnings
50%
S trategic/Individual
Goals
30%
In addition to the above criteria, all payouts under the Annual Incentive Plan are subject to forfeiture and clawback in the
event of any improper risk management or non-compliance with applicable laws and regulations.
2019 Goals and Results
The Committee, in its sole discretion, determines the final amount of each participant’s annual cash incentive award
based on attainment of the applicable performance goals and assessments of individual and strategic performance.
Each element of the annual cash incentive award is independent of the other. Accordingly, the executive officer may
achieve certain performance goals, while at the same time failing to achieve others. In that case, the executive officer will be
entitled to receive the award for the performance goal achieved, but not an award for a performance goal for which threshold
performance is not achieved. Potential awards ranged from 50% for threshold performance to a maximum of 150% for stretch
performance.
Early in 2019, the Committee established earnings goals for Hilltop and each business unit. Our 2019 goals were
intended to be realistic and reasonable but challenging in order to drive performance. At the end of the fiscal year, the
Committee determined a payout based on net income performance. 2019 performance goals and actual net income
performance were as follows (dollars in millions):
2019 Performance Goal (a)
Hilltop Adjusted Net Income
Threshold ($)
Target ($)
Maximum ($)
Actual ($)
Achievement (b)
82.2
137.0
205.5
232.9
150 %
Hilltop Securities Pre-Tax Income
29.3
48.8
73.2
91.5
150 %
PrimeLending Pre-Tax Income
13.3
22.2
27.7
71.2
150 %
(a) The Compensation Committee establishes goals and determines performance results based on adjusted non-GAAP results that exclude the
impact of items including leadership changes, business realignment and efficiencies that are not indicative of ongoing operations.
(b) Awards are capped at 150% of the target amount under the plan.
The individual and 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.
37
The following strategic and individual goals, among others, were established for the NEOs in 2019:
Executive
Jeremy B. Ford
William B. Furr
Key Objectives
• Provide leadership of succession plans
for subsidiaries
• Execute Strategic Plan to drive revenue
growth and manage expenses
• Execute platform initiatives, including
subsidiary compensation plans,
enhanced business operations, strategic
sourcing and shared services
• Execute capital management through
M&A sourcing and shareholder returns
• Lead strategic projects
• Provide leadership for implementation of
multiple systems
• Execute implementation of CECL for
2020
• Enhance strategies for Government
Deposits and Mortgage Banking
• Provide leadership of cost reduction
initiatives and Finance shared services
optimization
Key Outcomes
• Provided effective leadership through
successful succession transitions
• Executed Strategic Plan and platform
initiatives, including institutionalizing
compensation programs across HTH
• Delivered quantifiable benefits of efficiency
initiatives, capital management and M&A
• Provided effective leadership of Finance
function
• Successfully led implementation of multiple
significant efficiency initiatives and CECL
• Delivered quantifiable benefits of efficiency
projects and balance sheet optimization
M. Bradley Winges
• Transition into CEO role of Hilltop
• Effectively transitioned into Hilltop
Securities
• Develop and execute future state plan for
Hilltop Securities
• Actively support Hilltop shared services
initiatives
Securities CEO role
• Developed and executed on strategic plan
• Restructured core business and expense
base
• Delivered quantifiable benefits from future
state plan
Todd L. Salmans
• Drive PrimeLending strategic plan,
• Provided effective leadership of
budget and initiatives
• Foster growth initiatives in focus areas
• Drive succession planning and talent
management
• Actively support Hilltop shared services
initiatives
PrimeLending
• Executed seamless succession plan to new
PrimeLending CEO
• Fostered growth initiatives, drove culture
improvements and oversaw implementation
of strategic priorities
The Committee evaluated the individual performance of each executive, including the factors noted in the table above,
and recognized the results of each executive that drove the Company’s outstanding performance in 2019. Based upon these
evaluations of each NEO’s individual performance in 2019, the Committee awarded each NEO the maximum of 150% for his
strategic and individual goals. The Committee also assessed risk and compliance performance for each NEO and determined
that no reductions were warranted.
38
Based on the above financial and individual performance measures and the Committee’s discretion, the 2019 annual cash
incentive payments were awarded as follows relative to the 2019 target value:
Name
Jeremy B. Ford
William B. Furr
M. Bradley Winges
Todd L. Salmans
2019 Annual
Incentive Payment ($)
% of 2019 Target
Annual Incentive
1,125,000
652,500
1,500,000
1,125,000
150 %
150 %
150 %
150 %
See “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 Incentives
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 provide an equal mix of PRSUs and TRSUs.
PRSUs granted in 2019 will be earned and cliff vest subject to certain performance goals being met after the three-year
performance period from January 1, 2019 through December 31, 2021. The PRSUs provide that the percentage of
performance-based shares that will vest at the end of the performance period will be determined based on Hilltop’s cumulative
EPS relative to pre-established performance objectives, multiplied by a modifier that is determined based on Hilltop’s TSR
relative to banks in the KBW Regional Banking Index. The EPS component of the performance calculation ranges from 50%
at threshold (for results at 75% of the EPS goal) to 150% at maximum (for results at 125% of the EPS goal), and the TSR
modifier ranges as follows:
Performance
Rank
Modifier
Below Threshold
Below 25th percentile
Threshold
Target
Stretch
25th percentile or below
50th percentile
75th percentile or above
80%
80%
100%
120%
Accordingly, the total number of shares earned from the performance awards can range from 40% to 180% of the target
number of PRSUs granted. No shares will be awarded if EPS results are below threshold. The calculation for the vesting of
PRSUs is as follows:
For example, if EPS is above stretch performance and Relative TSR is below threshold, the payout percentage would be
as follows:
TRSUs cliff vest on the third anniversary of the date of grant.
All shares of common stock delivered pursuant to the RSUs are subject to a one-year holding period requirement after
vesting. 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
39
Committee and not pursuant to delegated authority. 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.
2019 Long-Term Incentive Grants
In 2019, long-term incentive awards were made in consideration of each executive’s role, competitive market practice,
and performance. Grants were made in the form of RSUs on February 27, 2019, to the following NEOs as set forth below:
Name
Jeremy B. Ford
William B. Furr
Todd L. Salmans
TRSUs
Awarded
(at Target)
PRSUs Awarded Total RSUs
Awarded
90,346
22,716
20,650
45,173
11,358
10,325
45,173
11,358
10,325
Mr. Winges received equity grants in 2019 in connection with the negotiations for him to join Hilltop Securities as the
Chief Executive Officer. Based on the terms of his employment agreement, on February 20, 2019 he received an equity grant
of 83,000 TRSUs to offset compensation forfeited from his prior employer, and an additional 10,363 TRSUs as a sign-on
award. These awards cliff vest on the third anniversary of the date of grant. The employment agreement also provided that if
Mr. Winges had been terminated without “cause” or due to death or disability within one year of the effective date of his
employment agreement, he would have received a payment of $2,000,000 less any salary and incentives received during his
employment, and this payment would be in lieu of any shares vesting from the grant of TRSUs.
On September 5, 2019, Mr. Furr received an additional grant of 13,600 TRSUs that will cliff vest on the third
anniversary of the date of grant. The additional TRSUs were granted in connection with Mr. Furr agreeing to extend his
employment agreement for three years, including the addition of a 24-month customer non-solicitation provision and an
increase in the employee non-solicitation provision from twelve months to 24 months.
2020 Long-Term Incentive Grants
On February 20, 2020, the Committee continued the same mix of long-term incentive awards and approved a grant of
RSUs to the NEOs, as set forth below:
Name
Jeremy B. Ford
William B. Furr
M. Bradley Winges
TRSUs
Awarded
67,782
11,297
13,557
(at Target)
PRSUs Awarded Total RSUs
Awarded
135,563
22,594
27,113
67,781
11,297
13,556
In determining the grant values for 2020, the Committee gave consideration to the Company’s exceptional results in
2019 that were well above the maximum performance levels allowed for in the Annual Incentive Plan (150% cap on target
amount). In particular, the Committee gave special consideration to Mr. Ford’s leadership in driving the Company’s financial
performance and successful execution of multiple key strategic priorities, as well as him assuming the role of the sole Chief
Executive Officer. The consideration given by the Committee described above is expected to be non-recurring; however,
such considerations will be evaluated by the Committee as it deems necessary.
Mr. Salmans did not receive an equity grant in 2020 due to his transition out of the role of Chief Executive Officer for
PrimeLending. Mr. Feinberg did not receive equity grants in either 2019 or 2020 due to his transition to Chairman Emeritus
of Hilltop Securities.
40
Payout of the 2017-2019 PRSUs
The following table provides the calculation of the payout for the PRSUs granted in 2017, which resulted in 120% of the
target number of shares being earned. Similar to the 2019 awards described above, payouts for the PRSUs granted in 2017
cliff vested in early 2020 based on three-year cumulative EPS performance multiplied by a modifier of the payout based on
our three-year TSR relative to the banks in the KBW Regional Banking Index.
Metric
Cumulative EPS
% of Target Payout
Relative TSR percentile ranking
Modifier
Final Payout
$
Threshold
3.00
50%
$
25th
80%
Target
4.00
100%
50th
100%
$
Maximum
5.00
150%
$
75th
120%
Actual
5.08
150%
13th
80%
120%
2019 Compensation for Former Executives
Pursuant to his Separation and Release Agreement, Mr. White received his base salary through April 1, 2019. He did not
participate in the 2019 Annual Incentive Program or receive any equity grants in 2019. Mr. White did receive additional
payments in connection with his termination as described below under “Severance and Other Post-Termination
Arrangements.”
Pursuant to the Retention Agreement entered into with Mr. Feinberg in connection with his transition from the role of
President and Chief Executive Officer of Hilltop Securities to Chairman and then Chairman Emeritus of Hilltop Securities
(discussed in more detail below under “Severance and Other Post-Termination Arrangements”), Mr. Feinberg received a base
salary of $500,000 in 2019 and a one-time payment of $900,000 in March 2019 for his 2018 performance, which was in
accordance with his incentive award. Given the tenure Mr. Feinberg held his role and his knowledge of the operations and
personnel of Hilltop Securities, the Feinberg Retention Agreement was designed to compensate Mr. Feinberg for the
assistance being provided to Mr. Winges in the transition. Mr. Feinberg provided significant support to Mr. Winges
throughout 2019 and continues to do so. Mr. Feinberg did not receive any equity grants in 2019 or 2020 in light of his
transition to Chairman Emeritus of Hilltop Securities.
Perquisites and Other Benefits
We provide various perquisites and other benefits to certain NEOs. Mr. Jeremy B. Ford is provided access to company
aircraft for personal use and such personal use is treated as income to him.. Prior to his departure, Mr. White was provided
personal access to company aircraft. Messrs. White and Salmans were provided with a monthly car allowance and
reimbursement for country club membership dues. In addition, Mr. White is provided bank-owned life insurance. Otherwise,
our NEOs generally receive only medical benefits, life insurance and long-term disability coverage, as well as supplemental
contributions to the Company’s 401(k) program, on the same terms and conditions as generally available to all employees.
See “Executive Compensation — All Other Compensation Table” below.
Severance and Other Post-Termination Arrangements
We generally do not currently maintain any severance or change in control programs other than the change in control
provisions in our 2012 Equity Incentive Plan (with exceptions noted below). We have, however, historically paid severance,
the amount of which is generally determined based on both 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.
41
Furr Employment Agreement
Pursuant to our employment agreement with Mr. Furr, as amended, upon termination of his 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, provided that Mr. Furr executes and
delivers a release to the Company. 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, provide that Mr. Furr executes and delivers a release to the Company. 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 Internal Revenue Code, or
the Code, then the benefits payable will be reduced to $1 below the parachute limit.
As noted above, Mr. Furr’s employment agreement was amended on August 30, 2019, to extend the term of the
agreement to August 31, 2022, add a customer non-solicitation provision and extend the employee non-solicitation provision,
among other changes to be consistent with other employment agreements with the Company.
Winges Employment Agreement
The Company entered into an employment agreement with Mr. Winges effective upon commencement of his
employment with us on February 20, 2019, which will remain in effect until February 20, 2022. Pursuant to the employment
agreement, Mr. Winges is entitled to an annual base salary of $500,000 and is eligible to participate in (1) an annual incentive
bonus program adopted by the Committee, or whomever is delegated such authority by the Board, and (2) any long-term
incentive award programs adopted by the Committee, or whomever is delegated such authority by the Board. With respect to
calendar year 2019, the employment agreement provided that Mr. Winges is entitled to a minimum annual cash incentive
bonus of $1,000,000 and the value of his long-term incentive award to be granted in 2020 will be at least $500,000.
Additionally, pursuant to his employment agreement, Mr. Winges received a sign-on cash bonus of $1,500,000 on the
effective date of his employment. This sign-on bonus was paid to offset bonus compensation forfeited at his prior employer.
As discussed in more detail below, this sign-on bonus also would have offset any amounts payable if Mr. Winges had been
terminated in the first year of his employment. Mr. Winges’s employment agreement also provides for the reimbursement of
up to $400,000 of out-of-pocket costs related to Mr. Winges’s relocation to Dallas, Texas and a gross-up of any such
expenses not deductible by him. We believed this amount to be reasonable given our requirement that he move to the Dallas,
Texas metroplex on an expedited basis.
As discussed above, the employment agreement provided for a grant of 83,000 TRSUs to offset compensation forfeited
from his prior employer. The employment agreement provided that if Mr. Winges had been terminated without “cause” or
due to death or disability within one year of the effective date of his employment agreement, he would have received a
payment of $2,000,000 less any salary and incentives received during his employment, and this payment would be in lieu of
any shares vesting from the grant of TRSUs. Following the first anniversary of his employment, if he is terminated without
cause he will receive a lump-sum cash payment equal to one 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, provided that Mr. Winges executes and
delivers a release to the Company. Any unvested portion of the equity grant of 83,000 TRSUs awarded to offset
compensation forfeited from his former employer also will vest in full if such termination, or a termination as a result of
death or disability, occurs on or after the first anniversary of the effective date of his employment.
If Mr. Winges’s employment is terminated without “Cause” following the first anniversary of his employment and
within the 12 months immediately following, or the six months immediately preceding, a “Change in Control,” Mr. Winges
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, provided that Mr. Winges executes
42
and delivers a release to the Company. Any unvested RSU awards also will vest if Mr. Winges is terminated without “Cause”
within the 12 months immediately following, or the six months immediately preceding, a “Change in Control.”
Notwithstanding, any amounts payable to Mr. Winges upon a “Change in Control” shall not constitute a “parachute payment”
and will be reduced accordingly.
The Employment Agreement also includes, among other things, customary non-competition, non-solicitation, non-
disparagement, confidentiality and arbitration provisions.
Salmans Retention Agreement
On October 25, 2019, the Company entered into a retention agreement with Mr. Salmans to set forth the terms of his
ongoing role with PrimeLending. The retention agreement provided that, as of January 1, 2020, Mr. Salmans would resign as
Chief Executive Officer of PrimeLending and from all other positions with the Company and its subsidiaries, other than as
Chairman of the Board of Directors of PrimeLending. Pursuant to the Retention Agreement, Mr. Salmans will continue to
serve as the Chairman of the Board of Directors of PrimeLending.
For his services, Mr. Salmans is entitled to receive an annual salary of $500,000. Mr. Salmans also was entitled to
receive a one-time cash payment of $1,250,000 on January 31, 2020. The one-time payment was designed to promote the
execution of the succession planning, as well as provide compensation for work performed to transition the role of Chief
Executive Officer of PrimeLending to Mr. Thompson. As of January 1, 2020, Mr. Salmans is not entitled to participate in the
Company’s annual incentive cash bonus program and long-term incentive award program; provided, however, (i) he
remained entitled to receive his annual incentive bonus pursuant to his performance under the annual incentive bonus
program for fiscal 2019, and (ii) the RSUs previously granted to him will continue to vest until he resigns or is terminated.
Additionally, following his resignation or termination, Mr. Salmans will be paid an amount equal to the cost of COBRA for
his immediate family and himself for a period of twelve months. Mr. Salmans may resign or be terminated at any time.
Mr. Salmans’s Retention Agreement also includes, among other things, customary non-competition, non-solicitation,
non-disparagement, confidentiality and arbitration provisions.
White Separation and Release Agreement
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, or the White Retention Agreement, terminated on the Retirement Date, except for
certain provisions that address, among other items, non-competition, non-solicitation, confidential information and
arbitration. Additional information about the White Retention Agreement is provided below under “Narrative Disclosure to
Summary Compensation Table and Grants of Plan-Based Awards Table.”
Pursuant to the Separation Agreement, and in accordance with the White Retention Agreement, Mr. White is entitled to
receive, subject to any delay required under Section 409A of the Code, the payments listed below. These payments were in
accordance with the provisions of the White Retention Agreement, which was originally negotiated in connection with our
acquisition of PlainsCapital, the company founded by Mr. White, and the terms of the original White Retention Agreement
were approved, on a non-binding, advisory basis by PlainsCapital stockholders in connection with the acquisition.
• Salary up to and including the Retirement Date;
•
• Commencing 60 days following the Retirement Date, $5,770,000, which amounts to two times his annual base
$1,450,000 as a cash bonus based upon the Company’s 2018 performance;
salary and average three-year bonus, in installments over two years following the Retirement Date in accordance
with current payroll practices of the Company;
43
•
$6,672,372 that constitutes the payment due under Mr. White’s employment agreement with PlainsCapital 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 RSUs continued to vest, or remained
eligible for vesting on a pro rata basis, through April 1, 2019. The unvested portion of the RSUs, based upon pro rata vesting
as of April 1, 2019, were forfeited. The Separation Agreement also contained a mutual release between Mr. White and the
Company.
Feinberg Retention Agreement
On February 19, 2019, the Company entered into a Retention Agreement with Hill A. Feinberg, or the Feinberg
Retention Agreement, to set forth the terms of his ongoing role with Hilltop Securities. The Feinberg Retention Agreement
provides that, as of February 20, 2019, Mr. Feinberg resigned as President and Chief Executive Officer of Hilltop Securities
and from all other positions with the Company and its subsidiaries, other than as Chairman of the Board of Directors of
Hilltop Securities, 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 Feinberg Retention Agreement, he continued to serve as the Chairman of
the Board of Directors of Hilltop Securities until June 30, 2019, at which time he became Chairman Emeritus of Hilltop
Securities and resigned 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. Under the terms of the agreement, Mr. Feinberg also received a
one-time payment of $900,000 in March 2019 and a one-time payment of $500,000 on March 12, 2020. 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 equity awards.
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. For equity grants after January 1, 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 for the
equity awards to vest in connection with a change in control. Further discussion of the change in control payments that may
be made pursuant to the 2012 Equity Incentive Plan may be found in the “Executive Compensation — Potential Payments
Upon Termination or Change-in-Control” section below.
The Annual Incentive Plan, pursuant to which annual incentive bonuses are awarded, does not contain specific change in
control provisions. Accordingly, the Committee, in its discretion, may determine what constitutes a change in control and
what effects such an event may have on any awards made pursuant to such plan.
44
Executive Compensation Process
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 above.
Role of the Chief Executive Officer in Compensation Decisions
The Chief Executive Officer provides input and recommendations to the Committee regarding compensation decisions
for his direct reports, including the other NEOs. These recommendations are made within the framework of the compensation
programs approved by the Committee and based on market data provided by the Committee’s independent consultant. The
input includes base salary changes, annual incentive and long-term incentive opportunities and payouts, specific individual
performance objectives, and individual performance assessments. The 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 executive officers.
Role of Compensation Consultant
Pursuant to its charter, the Committee is authorized to retain and terminate any consultant, as well as to approve the
consultant’s fees and other terms of the engagement. The Committee also has the authority to obtain advice and assistance
from internal or external legal, accounting or other advisors. In 2019, 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.
45
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.
Meridian has provided the Committee with appropriate assurances and confirmation of its independent status pursuant to
these and other factors. The Compensation Committee evaluated whether the work provided by Meridian raised any conflict
of interest, and determined that Meridian has been independent throughout its service for the Committee and no conflict of
interest was raised by the work of Meridian described in this Proxy Statement.
Peer Group and Benchmarking Approach
The Committee regularly assesses the components of the executive compensation program with advice from its
independent compensation consultant. In October 2018, 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 2019
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 and non-interest income. In evaluating the peer group, the Committee
considers that our combination of businesses adds complexity relative to other banks with similar asset sizes.
The following banks were included in the peer group for Meridian’s market study in October 2018:
Atlantic Union Bankshares Corporation LegacyTexas Financial Group, Inc.
BancorpSouth Bank
First Financial Bankshares, Inc.
First Midwest Bancorp, Inc.
Hancock Whitney Corporation
IBERIABANK Corporation
Independent Bank Group, Inc.
International Bancshares Corporation
Old National Bancorp
Pinnacle Financial Partners, Inc.
Prosperity Bancshares, Inc.
Simmons First National Corporation Umpqua Holdings Corporation
South State Corporation
TCF Financial Corporation
Texas Capital Bancshares, Inc.
TowneBank
Trustmark Corporation
UMB Financial Corporation
WesBanco, Inc.
Wintrust Financial Corporation
With Meridian’s assistance, the Committee reviewed the peer group in July 2019 and determined to make changes to the
group based upon merger and acquisition and other activity among the peers.
46
The review resulted in the following changes to the peer group:
Removed
Atlantic Union Bankshares Corporation
IBERIABANK Corporation
LegacyTexas Financial Group, Inc.
Old National Bancorp
Pinnacle Financial Partners, Inc.
TCF Financial Corporation
Wintrust Financial Corporation
Added
Ameris Bancorp
BancFirst Corporation
Cadence Bancorporation
Commerce Bancshares, Inc.
First Financial Bancorp.
Flagstar Bancorp, Inc.
Renasant Corporation
Risk Considerations in Our Compensation Program
We do not believe that our compensation policies and practices for 2019 give rise to risks that are reasonably likely to
have a material adverse effect on our Company. In reaching this conclusion for 2019, we considered the following factors:
• Base salary is fixed and the only compensation components that are variable are the annual incentives and PRSUs
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.
• Annual Incentive Plan and 2012 Equity 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 Programs and Policies
Stock Ownership Guidelines
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, or
fees in the form of stock. 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 the stock ownership guidelines, 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.
47
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, 2020, 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. Under our clawback policy, the Company may recover all or a portion of any
annual cash or equity incentive award from our NEOs in the event we are required to restate our financial statements due to
errors, omissions, fraud or misconduct. Annual Incentive Plan and 2012 Equity 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.
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. All employees are prohibited from hedging or pledging unvested RSUs.
Tax Considerations
Section 162(m) of the Code imposes a $1.0 million limit on the tax-deductibility of compensation paid to certain named
executive officers. Prior to the Tax Cuts and Jobs Act of 2017, or the Tax Legislation, exceptions were provided for
compensation that is “performance-based” and paid pursuant to a plan meeting certain requirements of Section 162(m) of the
Code. The Committee has historically considered the implications of Section 162(m) of the Code in the design of its
executive compensation programs. The Committee, however, reserved the flexibility, where appropriate, to approve
compensation arrangements that may not have been tax deductible to the Company, such as base salary and awards of
TRSUs.
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 that
were in place as of November 2, 2017, so long as such arrangements were not materially modified after that date. To the
extent that compensation is payable pursuant to such a historical arrangement, if the Company determines that Section
162(m) of the Code will apply to any such awards, the Company generally intends that the terms of those awards will not be
materially modified and will be constructed so as to constitute qualified performance-based compensation and, as such, will
be exempt from the $1,000,000 limitation on deductible compensation. The Committee continues to reserve flexibility to
provide compensation arrangements that it believes are consistent with its compensation philosophy even if the arrangements
will result in non-deductible compensation.
48
Compensation Committee Report
The Compensation Committee of the Board of Directors of Hilltop Holdings Inc. has reviewed and discussed with
management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on its review, the
Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be
included in the Proxy Statement.
The foregoing report has been submitted by the following members of the Compensation Committee:
A. Haag Sherman (Chairman)
Rhodes Bobbitt
W. Joris Brinkerhoff
William T. Hill, Jr.
Andrew Littlefair
49
Executive Compensation
The following tables set forth information concerning the compensation earned for services performed during 2019, 2018
and 2017 by the NEOs, who were either serving in such capacities on December 31, 2019, during 2019, or are reportable
pursuant to applicable SEC regulations.
Summary Compensation Table
Fiscal Years 2019, 2018 and 2017
Change in Pension
Name and principal position
Jeremy B. Ford
President and
Chief Executive Officer
Year
2019
2018
2017
Salary
($)
750,000
729,327
718,500
Bonus (a)
($)
Stock
Awards (b)
Option
Awards
($)
Value and
Nonqualified Deferred
Compensation
Earnings (d) ($)
All Other
Compensation (e)
($)
Non-Equity
Incentive Plan
Compensation (c)
($)
1,125,000
625,000
790,000
Alan B. White
Former Vice Chairman and
Co-Chief Executive Officer (f)
William B. Furr
Executive Vice President and
Chief Financial Officer
M. Bradley Winges
President and Chief Executive
Officer of Hilltop Securities (g)
Todd L. Salmans
Chairman of
PrimeLending
Hill A. Feinberg
Chairman Emeritus of
Hilltop Securities
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
395,962
1,409,615
1,387,500
—
1,450,000
1,450,000
—
—
—
—
—
—
($)
1,718,833
1,576,229
1,582,502
—
699,444
702,209
757,212
384,679
351,119
2,500,000 (h)
1,801,906 (i)
—
—
—
—
—
900,000 (j)
—
—
—
—
392,866
349,722
351,119
—
399,689
351,119
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
475,577
435,096
425,000
419,231
—
—
750,000
735,577
750,000
500,000
490,385
500,000
—
—
—
652,500
390,000
425,000
500,000
—
—
1,125,000
500,000
825,000
—
900,000
900,000
—
—
—
96,295
77,795
44,519
—
—
—
—
—
—
—
—
—
—
—
—
91,172
91,923
70,310
Total ($)
3,685,005
3,022,479
3,161,312
9,891,905
173,225
170,383
10,384,163
3,810,079
3,754,611
10,580
11,230
117,270
1,895,869
1,221,005
1,318,389
577,219
—
—
5,798,356
—
—
50,755
47,318
43,095
7,416
11,582
25,176
2,318,621
1,632,617
1,969,214
1,407,416
1,801,656
1,776,295
(a) Represents bonuses paid for services during 2019, 2018 and 2017, as applicable.
(b) Reflects the grant date fair value calculated in accordance with the provisions of the Stock Compensation Topic of the ASC, in accordance with the
assumptions described in Note 21 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31,
2019. The value of performance-based stock awards is based on the probable outcome of the applicable performance conditions. The following table
presents the value of performance-based awards included in the table above based on the achievement of both probable and maximum outcomes:
Name
Jeremy B. Ford
Alan B. White
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
Year
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
Performance-Based Stock Awards
(Probable Achievement) ($)
(Maximum Achievement) ($)
843,832
787,479
793,747
—
349,440
352,198
212,167
192,172
176,099
—
—
—
192,871
174,720
176,099
—
199,683
176,099
1,265,747
1,181,219
1,190,621
—
524,160
528,297
318,251
288,258
264,148
—
—
—
289,307
262,080
264,148
—
299,525
264,148
(c) For 2019, represents cash awards earned under the Annual Incentive Plan for services during 2019, but paid in March 2020. 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.
(d) Represents interest earned on non-qualified deferred compensation contributions to Mr. White during 2019, 2018 and 2017, as applicable. For
(e)
additional information, see “— Non-Qualified Deferred Compensation.”
Includes amounts paid during 2019, 2018 and 2017, 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. For Mr. White, reflects payments pursuant to the Separation
Agreement, and in accordance with the White Retention Agreement. 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. Winges began serving as President and Chief Executive Officer of Hilltop Securities effective February 20, 2019.
50
(h)
(i)
Includes sign-on bonus of $1.5 million and guaranteed annual cash incentive award for 2019 under his employment contract of $1.0 million.
Includes sign-on grants of equity of 10,363 time-based restricted stock units and 83,000 time-based restricted stock units to offset compensation
forfeited by Mr. Winges for terminating his employment with his former employer.
(j) Represents bonus paid pursuant to the Feinberg Retention Agreement.
All Other Compensation
Gross-Ups or
Other
Name
Jeremy B. Ford
Alan B. White (c)
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
Amounts
Reimbursed
for the
Perquisites
and Personal
Payment of
Benefits (a) ($) Taxes ($)
Company
Contributions
to Defined
Contribution
Plans ($)
Year
2019
2018
2017
2019
2018
2017
2019
2018
2017
80,502
81,893
60,164
14,170
98,163
95,699
300
1,200
71,659
—
—
366
117
—
80
—
—
36,161
2019
2018
2017
343,694
—
—
222,990
—
—
2019
2018
2017
2019
2018
2017
33,839
22,000
22,000
—
—
—
—
—
2,189
—
—
108
9,500
9,250
9,000
9,500
9,250
9,000
9,500
9,250
9,000
9,500
—
—
9,500
9,250
9,000
—
4,167
9,000
Insurance
Policies (b) ($) Other ($)
1,170
780
780
—
—
—
Total All Other
Compensation ($)
91,172
91,923
70,310
58,323 9,809,795 (d)
65,812
65,604
—
—
9,891,905
173,225
170,383
780
780
450
1,035
—
—
7,416
16,068
9,906
7,416
7,415
16,068
—
—
—
—
—
—
—
—
—
—
—
—
10,580
11,230
117,270
577,219
—
—
50,755
47,318
43,095
7,416
11,582
25,176
(a) Year 2019: For Mr. Jeremy B. Ford, reflects $1,200 gym membership allowance and personal use of company airplane of $79,302. For Mr. White,
reflects car allowance of $9,000, personal use of company airplane of $4,873 and personal use of company automobile of $296. For Mr. Furr, reflects a
cellular phone reimbursement of $300. For Mr. Salmans, reflects a car allowance of $12,000 and club expenses of $21,839. For Mr. Winges, reflects
taxable moving expenses of $343,694, which were provided for in his employment agreement. 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 for Messrs. Ford, Furr, Feinberg and Salmans, as applicable. For Mr. White, represents
bank-owned life insurance of $836, group term life insurance of $4,687 and key man life insurance of $52,800. Group term life insurance was not
included in “All Other Compensation” during 2019 and 2018 as this is a benefit that is available to all employees of the Company.
(c) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(d) Reflects payments to Mr. White pursuant to the Separation Agreement, and in accordance with the White Retention Agreement,
51
Grants of Plan-Based Awards
Grants of Plan-Based Awards Table
Fiscal Year 2019
All Other
Name
Jeremy B. Ford
Alan B. White (e)
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
Estimated Future Payouts Under Non-Equity Estimated Future Payouts Under Equity
Threshold
($)
Incentive Plan Awards (a)
Target
($)
Maximum Threshold Target
($)
(#)
(#)
Incentive Plan Awards (b)
Stock Awards:
Number of
Shares of
Maximum Stock or Units Option Awards
(c) (#)
Grant Date
Fair Value of
Share and
(d) ($)
(#)
375,000
750,000
1,125,000
—
—
—
22,587
45,173
67,760
45,173
875,001
843,832
—
—
—
—
—
—
217,500
435,000
652,500
5,679
11,358
17,037
13,600
11,358
325,040
220,004
212,167
83,000
10,363
1,601,900
200,006
—
1,000,000 (f)
1,500,000
375,000
750,000
1,125,000
—
—
—
5,163
10,325
15,488
10,325
199,995
192,871
—
—
—
—
—
—
Grant Date
2/27/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
9/5/2019
2/27/2019
2/27/2019
2/27/2019
2/20/2019
2/20/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
2/27/2019
(a) Represent the value of potential payments under the Annual Incentive Plan to the NEOs based on 2019 performance. Management incentive award
amounts shown above represent potential awards that may have been earned based on performance during 2019. The actual amounts earned pursuant to
Annual Incentive Plan awards for 2019 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, 2019 and ending December 31, 2021. 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 third anniversary of the date of grant. 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 Incentives.”
(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) Mr. White retired effective April 1, 2019, from all positions with the Company, including as a member of the Board of Directors.
(f) Mr. Winges was guaranteed to receive at least $1.0 million per his employment agreement provided that a termination of employment had not occurred
prior to the payment date.
52
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Contracts and Incentive Plans
Set forth below is a summary of our retention agreements with Messrs. White, Feinberg and Salmans and our
employment agreements with Messrs. Furr and Winges. We do not have an employment agreement with Mr. Jeremy B. Ford.
Also set forth below is a description of our incentive plans, pursuant to which the awards included in the “Outstanding Equity
Awards at Fiscal Year-End 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 the White Retention
Agreement. We amended the White 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 White 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 White Retention 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 White
Retention Agreement, Mr. White was entitled to participate in all of the Company’s employee benefit plans and programs.
Further, the White Retention 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 White Retention
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, the Company entered into 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 White Retention Agrement, 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 White Retention Agreement, Mr. White is entitled to
receive, subject to any delay required under Section 409A of the Code, the payments listed below. These payments were in
accordance with the provisions of the White Retention Agreement, which was originally negotiated in connection with our
acquisition of PlainsCapital, the company founded by Mr. White, and the terms of the original White Retention Agreement
were approved, on a non-binding, advisory basis by PlainsCapital stockholders in connection with the acquisition.
• 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 two years following the Retirement Date in accordance
with current payroll practices of the Company;
53
•
•
$6,672,372 that constitutes the payment due under Mr. White’s employment agreement with PlainsCapital 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 RSUs continued to vest, or remained
eligible for vesting on a pro rata basis, through April 1, 2019. Pursuant to certain RSU award agreements, an aggregate of
5,482 vested RSUs at April 28, 2020 require deferral of the settlement in shares and statutory tax obligations to a future date.
The unvested portion of the RSUs, based upon pro rata vesting as of April 1, 2019, were forfeited. The Separation Agreement
also contained a mutual release between Mr. White and the Company.
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 remained in effect
until the third anniversary of the effective date. In August 2019, the employment agreement was amended to extend its term
until August 31, 2022. Pursuant to this amended agreement, Mr. Furr is entitled to an annual base salary of $485,000 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. 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. 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 24 months following the earlier of (i) his termination and (ii) the termination of his employment
agreement. In consideration for the addition of the 24-month customer non-solicitation provision and the increased time
period of the employee non-solicitation provision from twelve to 24 months, as well as other additional provisions, the
employment agreement provides that Mr. Furr was entitled to receive a grant of RSUs having an aggregate fair market value
of $325,000 on the date of grant. 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.
Mr. Winges
The Company entered into an employment agreement with Mr. Winges effective upon commencement of his
employment with us on February 20, 2019, which will remain in effect until February 20, 2022. Pursuant to the employment
agreement, Mr. Winges is entitled to an annual base salary of $500,000 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, and (2) any long-term incentive award programs adopted by the Compensation
Committee, or whomever is delegated such authority by the Board. With respect to calendar year 2019, the employment
agreement provided that Mr. Winges is entitled to a minimum annual cash incentive bonus of $1,000,000 and the value of his
long-term incentive award to be granted in 2020 will be at least $500,000.
Additionally, pursuant to his employment agreement, Mr. Winges received a sign-on cash bonus of $1,500,000 on the
effective date of his employment. This sign-on bonus was paid to offset bonus compensation forfeited at his prior employer.
As discussed in more detail below, this sign-on bonus also would have offset any amounts payable if Mr. Winges had been
terminated in the first year of his employment. Mr. Winges’s employment agreement also provides for the reimbursement of
up to $400,000 of out-of-pocket costs related to Mr. Winges’s relocation to Dallas, Texas and a gross-up of any such
expenses not deductible by him. We believed this amount to be reasonable given our requirement that he move to the Dallas,
Texas metroplex on an expedited basis.
Mr. Winges’s employment agreement also provided for a grant of 83,000 TRSUs to offset compensation forfeited from
Mr. Winges’s prior employer. The employment agreement provided that if Mr. Winges had been terminated without “cause”
54
or due to death or disability within one year of the effective date, he would have received a payment of $2,000,000 less any
salary and incentives received during his employment, and this payment would be in lieu of any shares vesting from the grant
of TRSUs. Following the first anniversary of his employment, if he is terminated without cause he will receive a lump-sum
cash payment equal to one 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. Any unvested portion of the 83,000 TRSUs also will vest in full if such
termination, or a termination as a result of death or disability, occurs on or after the first anniversary of the effective date of
his employment. For a description of compensation and benefits to which Mr. Winges 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 October 25, 2019, the Company entered into a retention agreement with Mr. Salmans to set forth the terms of his
ongoing role with PrimeLending. The Company appointed Steve Thompson to succeed Mr. Salmans as Chief Executive
Officer of PrimeLending effective January 1, 2020. Mr. Salmans’s retention agreement provides that, as of January 1, 2020,
Mr. Salmans resigned as Chief Executive Officer of PrimeLending and from all other positions with the Company and its
subsidiaries, other than as Chairman of the Board of Directors of PrimeLending. Pursuant to his retention agreement,
Mr. Salmans will assist and advise the Chief Executive Officer of PrimeLending, attend events hosted by PrimeLending and
remain active in the mortgage industry.
For his services, Mr. Salmans is entitled to receive an annual salary of $500,000 per year. Mr. Salmans also received a
one-time payment of $1,250,000 on January 31, 2020. The one-time payment was designed to promote the execution of the
succession planning, as well as provide compensation for work performed to transition the role of Chief Executive Officer of
PrimeLending to Mr. Thompson. Mr. Salmans may resign or be terminated at any time. Mr. Salmans will no longer
participate in the Annual Incentive Plan or be granted additional awards under the 2012 Equity Incentive Plan.
Mr. Feinberg
On February 19, 2019, the Company entered into the Feinberg Retention Agreement to set forth the terms of
Mr. Feinberg’s ongoing role with Hilltop Securities. The Feinberg Retention Agreement provides that, as of February 20,
2019, Mr. Feinberg resigned as President and Chief Executive Officer of Hilltop Securities and from all other positions with
the Company and its subsidiaries, other than as Chairman of the Board of Directors of Hilltop Securities, 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 Feinberg Retention Agreement, Mr. Feinberg continued to serve as the Chairman of the Board of Directors of
Hilltop Securities until June 30, 2019, at which time he became Chairman Emeritus of Hilltop Securities and resigned 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 received a one-time payment of $900,000 in
March 2019 and a one-time payment of $500,000 on March 12, 2020. Mr. Feinberg may resign or be terminated at any time.
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. On June 15, 2017, our stockholders reapproved the performance goals contained
in 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. All other awards, including RSUs, are not
entitled to dividends nor to vote. 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.
55
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 SARs 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 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 performance goals contained in 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 $10,000,000 per
year. Except as otherwise provided in a participant’s employment or other individual agreement, the payment of a cash bonus
to a participant for a performance period is conditioned upon the participant’s active employment on the date that the final
awards are paid. We may amend or terminate the Annual Incentive Plan at any time.
56
Outstanding Equity Awards at Fiscal Year End
The following table presents information pertaining to all outstanding equity awards held by the NEOs as of
December 31, 2019.
Stock Awards
Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(a) (#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
(a) ($)
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
(#)
27,734 (b)
31,766 (d)
45,173 (f)
691,409
791,926
1,126,163
—
—
3,315 (h)
6,154 (b)
7,753 (d)
11,358 (f)
13,600 (i)
—
—
82,643
153,419
193,282
283,155
339,048
83,000 (j)
10,363 (k)
2,069,190
258,350
6,154 (b)
7,048 (d)
10,325 (f)
6,154 (b)
8,055 (d)
153,419
175,707
257,402
153,419
200,811
27,734 (c)
31,766 (e)
45,173 (g)
8,888 (c)
5,482 (e)
—
6,153 (c)
7,752 (e)
11,358 (g)
—
—
—
6,153 (c)
7,048 (e)
10,325 (g)
6,153 (c)
8,055 (e)
691,409
791,926
1,126,163
221,578
136,666
—
153,394
193,257
283,155
—
—
—
153,394
175,707
257,402
153,394
200,811
Name
Jeremy B. Ford
Alan B. White
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
(a) Value based upon the closing price of $24.93 for our common stock on December 31, 2019. 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, 2020.
(c) Represents shares underlying performance-based RSUs that vested on February 23, 2020 upon the achievement of certain performance goals during the
three-year period beginning January 1, 2017 and ending December 31, 2019. The amount disclosed in the table is based on applicable target
performance during the noted period. Actual shares issued under performance awards were 120.0% of unvested shares reported in the table above at
December 31, 2019, as approved by the Compensation Committee on February 20, 2020.
(d) Represents time-based RSUs that cliff vest upon the earlier of March 5, 2021 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,
2018 and ending December 31, 2020.
(f) Represents time-based RSUs that cliff vest upon the earlier of February 27, 2022 and a termination of employment without cause within the twelve
months following or six months preceding 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,
2019 and ending December 31, 2021.
(h) Represents outstanding time-based RSUs that vest upon the earlier of (i) February 15, 2020 or (ii) a change in control.
(i) Represents time-based RSUs that cliff vest upon the earlier of September 5, 2022 and a termination of employment without cause within the twelve
months following or six months preceding a change of control.
(j) Represents time-based RSUs that cliff vest upon the earlier of February 20, 2022 and a termination of employment due to death or disability, a
termination of employment without cause, and a termination of employment without cause within the twelve months following or six months preceding
a change of control.
(k) Represents time-based RSUs that cliff vest upon the earlier of February 20, 2022 and a termination of employment without cause within the twelve
months following or six months preceding a change of control.
57
Option Exercises and Stock Vested in 2019
The following table presents information pertaining to any outstanding RSU awards held by the NEOs that vested during
2019. There were no option awards outstanding during 2019.
Name
Jeremy B. Ford
Alan B. White
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
Stock Awards
Number of
Shares Acquired
on Vesting (#)
Value
Realized on
Vesting ($)
45,766
60,137
19,572
—
22,883
19,614
912,116 (a)
1,179,848 (b)
413,799 (c)
—
456,058 (a)
390,907 (a)
(a) Value based upon the closing price of $19.93 for our common stock on February 23, 2019 multiplied by the number of vested RSUs.
(b) Value based upon the closing prices of $19.93 and $18.63 for our common stock on February 23, 2019 and April 1, 2019, respectively, multiplied by
the respective number of vested RSUs.
(c) Value based upon the closing prices of $18.93, $19.93 and $2,376 for our common stock on February 15, 2019, February 23, 2019 and September 6,
2019, respectively, multiplied by the respective number of vested RSUs.
Non-Qualified Deferred Compensation
The following table shows the non-qualified deferred compensation activity for our NEOs during the fiscal year ended
December 31, 2019.
Name
Jeremy B. Ford
Alan B. White
William B. Furr
M. Bradley Winges
Todd L. Salmans
Hill A. Feinberg
Executive
Aggregate
Registrant
Contributions Contributions Earnings in
Last Fiscal
in Last Fiscal
in Last Fiscal
Year (a) ($)
Year ($)
Year ($)
Aggregate
Aggregate
Withdrawals/
Balance at Last
Distributions Fiscal Year End
($)
End (b) ($)
—
—
—
—
—
—
—
—
—
—
96,295
6,768,668
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) Represents interest earned on 2012 deferred compensation contributions of $6,430,890 for Mr. White. All amounts reported as aggregate earnings in
the last fiscal year are reported as compensation in the last completed fiscal year in the Summary Compensation Table.
(b) All amounts were reported as compensation in the Summary Compensation Table for the last completed fiscal year or prior fiscal years.
In connection with our acquisition of PlainsCapital, we entered into the White Retention Agreement. Pursuant to the
White Retention Agreement, we agreed to contribute an amount in cash equal to $6,430,890 as deferred compensation to
Mr. White in satisfaction of his rights under Section 6 (Termination Upon Change of Control) of his previous employment
agreement with PlainsCapital. Such amount accrued interest at the prevailing money market rates and was payable to
Mr. White following termination of his employment, subject to any delay required by Section 409A of the Internal Revenue
58
Code. As of a result of the termination of Mr. White’s employment on April 1, 2019, Mr. White received such amount on or
about October 1, 2019.
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. For equity
grants after January 1, 2019, all equity award agreements contain “double trigger” provisions, which require termination of
employment 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.
White Separation and Release Agreement
A description of payments made to Mr. White under the Separation Agreement in connection with his termination of
employment effective April 1, 2019 is provided above under “Narrative Disclosure to Summary Compensation Table and
Grants of Plan-Based Awards Table.”
Employment Contracts
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 granted to him upon commencement of his employment also will 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 also will vest.
If Mr. Furr’s employment is terminated without “cause” within the twelve 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 also will 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. Winges
If Mr. Winges’s employment agreement is terminated (1) by Mr. Winges, (2) by the Company for “cause” (as such term
is defined in the employment agreement), or (3) in the event of Mr. Winges’s death or disability, Mr. Winges (or his estate, as
applicable) will be entitled to receive his base salary through the effective date of such termination, all earned and unpaid
59
and/or vested, nonforfeitable amounts owed to him at such time under the Employment Agreement, restricted stock unit
award agreements 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. Winges’s death or
disability, the unvested portion of the 83,000 TRSUs grant will vest, subject to certain conditions.
If Mr. Winges’s employment is terminated by the Company without “cause” (other than pursuant to a “change in
control” (as such term is defined in his employment agreement)), Mr. Winges will be entitled to receive the amounts set forth
in the foregoing paragraph and, subject to his execution and delivery to the Company of a release, the following amount:
(1) before the first anniversary of the effective date of his employment, $2,000,000, less the aggregate amount of any salary
and Incentive Bonus paid to Mr. Winges prior to such date in lieu of the vesting of 83,000 TRSUs grant, which will forfeit in
full; or (2) on or after the first anniversary of the effective date of his employment, 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 83,000 TRSUs grant also will vest in full if such termination occurs on or after the first anniversary of
the effective date of his employment.
If Mr. Winges’s employment is terminated without “cause” within the twleve months immediately following, or the six
months immediately preceding, a “change in control,” Mr. Winges will be entitled to receive the amounts set forth in the first
paragraph of this section and, if such change in control is on or after the first anniversary of the effective date of his
employment, 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. Winges executes and delivers a release to the
Company. Any unvested RSU awards, including the specifically set forth in his employment agreement, also will vest if
Mr. Winges is terminated without “cause” within the twelve months immediately following, or the six months immediately
preceding, a “change in control.” Notwithstanding, any amounts payable to Mr. Winges upon a “change in control” shall not
constitute a “parachute payment” and will be reduced accordingly.
Definitions of “Cause” and “Disability” Under Employment Contracts
For the purposes of the employment agreements of Messrs. Furr and Winges, “cause” means:
•
•
•
•
•
•
•
•
•
an act of fraud, embezzlement or theft;
the Company is required to remove or replace executive by formal order or formal or informal instruction, including
a requested consent order or agreement, from the Federal Reserve or any other regulatory authority having
jurisdiction;
intentional wrongful damage to property of the Company;
intentional wrongful disclosure of trade secrets or confidential information of the Company;
intentional violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and
desist order;
intentional breach of fiduciary duty involving personal profit;
intentional action or inaction that causes material economic harm to the Company;
a material violation of the Company’s written policies, standards or guidelines applicable to executive; or
the failure or refusal of executive to follow the reasonable lawful directives of the Board or, in case of Mr. Furr, his
supervisors.
For the purposes of the employment agreement with Messrs. Furr and Winges, “disability” is defined in accordance with
our disability policy in effect at the time of the disability.
60
Set forth below are the amounts that Messrs. Jeremy B. Ford, Furr, Winges, Salmans and Feinberg would have received
if the specified events had occurred on December 31, 2019.
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
$
$
— $
—
—
—
—
— $
— $
—
—
2,899,550
—
—
—
—
5,218,996
—
2,899,550 $ 2,899,550 $ 5,218,996
— $
—
—
2,899,550
—
(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, 2019. If a change of control under the 2012 Equity Incentive Plan occurs and
assuming participant is terminated without cause on the date of the change in control, all unvested RSUs vest upon such event, which for purposes of
the foregoing assumes December 31, 2019. 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
$
$
— $
—
—
—
—
— $
— $
—
—
799,579
—
—
—
1,750,000
775,996
—
799,579 $ 1,674,579 $ 2,525,996
— $
—
875,000
799,579
—
(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 without cause 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) 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, 2019. If a change of control under the 2012 Equity Incentive Plan occurs and
assuming participant is terminated without cause on the date of the change in control, all unvested RSUs vest upon such event, which for purposes of
the foregoing assumes December 31, 2019. 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.”
M. Bradley Winges
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
$
$
— $
—
1,580,769
2,327,540
—
— $
—
—
—
—
—
—
2,327,540
—
—
— $ 3,908,309 $ 3,908,309 $ 2,327,540
— $
—
1,580,769
2,327,540
—
(a)
If Mr. Winges is terminated without cause prior to the first anniversary of the date of his employment, he is entitled to $2.0 million, less the amount of
any salary or Incentive Bonus paid to him prior to such termination of employment.
(b) 83,000 time-based RSUs vest upon the death or disability of the participant or termination of the participant without cause. Remaining RSUs granted to
Mr. Winges vest pro rata upon his death or disability or termination without cause. The foregoing assumes the death or disability or termination of the
participant without cause on December 31, 2019. If a change of control under the 2012 Equity Incentive Plan occurs and assuming participant is
terminated without cause on the date of the change of control,, all unvested RSUs vest upon such event, which for purposes of the foregoing assumes
December 31, 2019. 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.”
61
Todd L. Salmans
Accrued amounts
Cash payment (a)
Cash severance
Restricted stock units (b)
Welfare benefits
Total
Termination due
to Death or
Disability or by
Termination for Executive for any Termination
without cause
Reason
Cause
Change of
Control
$
— $
1,250,000
—
—
—
$ 1,250,000 $
— $
— $
1,250,000
—
647,522
—
—
1,250,000
—
1,173,031
—
1,897,522 $ 1,897,522 $ 2,423,031
1,250,000
—
647,522
—
(a) Cash payment refers to a one-time lump-sum cash payment on January 31, 2020 in connection with Mr. Salmans’s retention agreement.
(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, 2019. If a change of control under the 2012 Equity Incentive Plan occurs and
assuming participant is terminated without cause on the date of the change in control, all unvested RSUs vest upon such event, which for purposes of
the foregoing assumes December 31, 2019. In each case, it is assumed the target award is achieved or utilized to calculate vesting of performance
awards. The form of award governing a portion of the RSUs includes a non-solicitation provision that is triggered upon the participant’s termination.
For additional information, see “—Incentive Plans.”
Hill A. Feinberg
Accrued amounts
Cash payment (a)
Cash severance
Restricted stock units (b)
Welfare benefits
Total
Termination for
Cause
Termination due
to Death or
Disability
Termination
Without Cause
Change of
Control
$
$
— $
— $
— $
500,000
—
—
—
—
500,000
—
708,436
—
500,000 $ 1,035,204 $ 1,035,204 $ 1,208,436
500,000
—
535,204
—
500,000
—
535,204
—
(a) Cash payment refers to a one-time lump-sum cash payment prior to March 31, 2020 in connection with the Feinberg Retention Agreement.
(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, 2019. 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, 2019. In each case, it is assumed the target award is
achieved or utilized to calculate vesting of performance awards. The form of award governing a portion of the RSUs includes a non-solicitation
provision that is triggered upon the participant’s termination. For additional information, see “—Incentive Plans.”
Incentive Plans
Each of the incentive plans has a complex definition of “change in control.” Generally speaking under the 2012 Equity
Incentive Plan, a change in control occurs if: (i) with certain exceptions, any person becomes the owner of 33% or more of
the outstanding shares of our common stock or the combined voting power of our outstanding stock and other voting
securities; (ii) a majority of the directors serving on our Board of Directors are replaced other than by new directors approved
by at least two-thirds of the members of our Board of Directors; (iii) we are not the surviving company after a merger or
consolidation or sale of all or substantially all of our assets; or (iv) with certain exceptions, our stockholders approve a plan
of complete liquidation or dissolution.
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
62
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. In order to avoid ambiguity, in 2020, we removed
the non-solicitation provisions from the form agreement for time-based and performance-based RSUs as a result of obtaining
separate non-solicitation agreements from our employees.
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 our CEO.
In order to determine the median employee, we prepared a list of all employees as of December 31, 2019, along with
their gross income as reported on IRS form W-2 for 2019. 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 2019 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 2019 for Jeremy B. Ford, who served as our President and Chief Executive Officer, was
$2,330,019. The annual compensation for the median employee for 2019 was $66,241. The resulting ratios of Mr. Jeremy B.
Ford’s pay to that of our median employee for 2019 was 35:1.
We believe executive pay must be internally consistent and equitable to motivate our employees to create stockholder
value. We are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay
our executive officers receive and the pay our non-managerial employees receive.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2019, 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 2019:
•
•
•
•
•
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.
63
During 2019, each of Mr. Jeremy Ford, Hilltop’s President and Chief Executive Officer, and Mr. Feinberg, Chairman
Emeritus of Hilltop Securities, served as a director of Hilltop. Mr. White, Hilltop’s former Vice Chairman and Co-Chief
Executive Officer, retired effective April 1, 2019, from all positions with the Company, including 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 and Feinberg and does not believe that these interlocks pose any risks that are likely to have a material
adverse effect on us.
Delinquent Section 16(a) Reports
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.
Based solely on a review of the reports filed with the SEC and representations from our officers and directors, we believe
that all Section 16(a) filing requirements for the year ended December 31, 2019, applicable to our officers, directors and
greater than ten percent beneficial owners were timely satisfied, except that (i) Mr. Sobel, a director, failed to file a Form 3
and three Forms 4 related to the granting of three awards for services provided during 2019, and Mr. Thompson, President
and Chief Executive Officer of PrimeLending, failed to file a Form 3 and a Form 4 related to the grant of a time-based equity
award.
Based on written representations from our officers and directors, we believe that no Forms 5 for directors, officers and
greater than ten percent beneficial owners were required to be filed with the SEC for the period ended December 31, 2019.
64
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
General
Transactions with related persons are governed by our General Code of Ethics and Business Conduct, which applies to
all officers, directors and employees. This code covers a wide range of potential activities, including, among others, conflicts
of interest, self-dealing and related party transactions. 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.
The Company also has adopted the written Related Party Policy, which sets forth the Company’s policies and procedures
for reviewing and approving transactions with related persons – namely, our directors, executive officers, their respective
immediate family members and 5% stockholders. The transactions covered by the Related Party Policy include any financial
transaction, arrangement or relationship in which the Company is a participant, the related person has or will have a direct or
indirect material interest and the aggregate amount involved will or may be expected to exceed $120,000 in any fiscal year.
After becoming aware of any transaction which may be subject to the Related Party Policy, the related person is required
to report all relevant facts with respect to the transaction to the Chief Executive Officer or General Counsel of Hilltop. Upon
determination by the Company’s legal department that a transaction requires review under the Related Party Policy, the
material facts of the transaction and the related person’s interest in the transaction are provided to the Audit Committee. The
transaction is then reviewed by the disinterested members of the Audit Committee, who determine whether approval of the
transaction shall be granted. In reviewing a transaction, the Audit Committee considers facts and circumstances that it deems
relevant to its determination, such as: management’s assessment of the commercial reasonableness of the transaction; the
materiality of the related person’s direct or indirect interest in the transaction; whether the transaction may involve an actual,
or the appearance of, a conflict of interest; and, if the transaction involves a director, the impact of the transaction on the
director’s independence.
Certain types of transactions are pre-approved in accordance with the terms of the Related Party Policy. These include
transactions in the ordinary course of business involving financial products and services provided by, or to, the Company,
including loans, provided such transactions are in compliance with the Sarbanes-Oxley Act of 2002, Federal Reserve Board
Regulation O and other applicable laws and regulations.
Hilltop Plaza Investment
On July 31, 2018, HTH Diamond Hillcrest Land LLC, or 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 Mr. 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, or Park Plaza LLC, an unaffiliated entity which received an
undivided 50% leasehold interest; HTH Hillcrest Project LLC, or HTH Project LLC, a wholly owned subsidiary of Hilltop,
which received an undivided 25% leasehold interest; and Diamond Hillcrest, LLC, or Diamond Hillcrest, an entity owned by
Mr. Gerald J. Ford, which received an undivided 25% leasehold interest, or 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.
65
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, or 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 is being
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 a significant portion of the total rentable corporate office space in Hilltop
Plaza to serve as the headquarters for both companies. Affiliates of Mr. Gerald J. Ford also entered into leases for office
space in the building. The two separate 129-month office and retail leases of Hilltop and the Bank, respectively, have
combined total base rent of approximately $35 million with the first nine months of rent abated. Hilltop Plaza has served as
headquarters for both Hilltop and the Bank since February 2020.
These transactions were reviewed by the Audit Committee and approved by the disinterested members of the Board of
Directors of Hilltop.
Gerald J. Ford, Chairman of the Board of Directors of Hilltop, is the trustee and settlor of Turtle Creek Revocable Trust,
which is the sole member Diamond HTH Stock Company GP, LLC. Diamond HTH Stock Company GP LLC is the sole
general partner of Diamond HTH Stock Company, LP and Turtle Creek Revocable Trust is the sole limited partner of
Diamond HTH Stock Company, LP. The sole general partner of Diamond A Financial, L.P. is Diamond HTH Stock
Company, LP and Turtle Creek Revocable Trust is a 1% limited partner of Diamond A Financial, L.P. Diamond A
Financial, L.P. owns 17.4% of the outstanding Hilltop common stock as of April 28, 2020. Jeremy B. Ford, a director and the
President and Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a 49% limited partnership interest in
Diamond A Financial, L.P. 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 49% limited partnership interest in Diamond A Financial, L.P.
Jeremy B. Ford is the son of Gerald J. Ford. Mr. Prestidge is the son-in-law of Gerald J. Ford. Accordingly,
Messrs. Jeremy B. Ford and Prestidge are brothers-in-law.
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, Hilltop 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. In 2019, that lease of suite was assigned to Hilltop by the Bank. Hilltop paid $515,000 under this lease in
2019.
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.
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. This project was completed in the
second half of 2018, and the Bank paid Lee Lewis Construction $5,883,629 for construction of this branch.
66
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. This project was completed in December 2019, and
the Bank paid Lee Lewis Construction $1,638,735 for the construction of this branch.
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. This project was completed in March 2019, and
the Bank paid Lee Lewis Construction $45,500 for this installation.
During 2019, the Bank contracted with Lee Lewis Construction to renovate a branch in Lubbock, Texas. The Bank
awarded this contract to Lee Lewis Construction following a bid process. This project was completed in November 2019, and
the Bank paid Lee Lewis Construction $925,617 for the renovation of this branch.
DTF Holdings, LLC
Mr. Sobel, a director of Hilltop, 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.
Employment of Certain Family Members
We currently employ, or during 2019 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, Chairman 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 2019,
these individuals received total compensation for their respective services as employees as follows: Corey G. Prestidge
$1,018,305, Lee Ann White $60,088, Logan Passmore $103,252, Kale Salmans $584,607, Ty Tucker $153,772 and Robert
Coke IV $90,421.
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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PROPOSAL TWO — APPROVAL OF THE HILLTOP HOLDINGS INC. 2020 EQUITY INCENTIVE PLAN
Hilltop is asking its stockholders to approve the adoption of the Hilltop Holdings Inc. 2020 Equity Incentive Plan. The
2020 Equity Incentive Plan was adopted, subject to stockholder approval, by the Board of Directors on April 30, 2020 (the
“Effective Date”). If approved by our stockholders, the 2020 Equity Incentive Plan will supersede the Prior Plan (as defined
below), but any awards previously granted under the Prior Plan that are outstanding as of the Effective Date shall continue to
be governed by the terms of the applicable Prior Plan and corresponding award agreements.
Hilltop believes the 2020 Equity Incentive Plan will help Hilltop to focus its directors, officers, and other employees and
contractors on Hilltop’s business performance, which creates stockholder value; to encourage innovative approaches to
Hilltop’s business; to encourage ownership of Hilltop common stock by our non-employee directors, officers, and other
employees and contractors; and to continue to attract and retain key employees, key contractors, and non-employee directors
in a competitive labor market, which is essential to Hilltop’s long-term growth and success.
The following is a summary of the material terms of the 2020 Equity Incentive Plan. The full text of the 2020 Equity
Incentive Plan is attached as Annex A to this Proxy Statement, and the following summary is qualified in its entirety by
reference to the terms of the 2020 Equity Incentive Plan. Stockholders are urged to review the 2020 Equity Incentive Plan
before determining how to vote on this proposal.
Summary of the 2020 Equity Incentive Plan
Purpose. The purpose of the 2020 Equity Incentive Plan is to enable us to remain competitive and innovative in our
ability to attract and retain the services of key employees, key contractors, and non-employee directors of Hilltop and our
subsidiaries. The 2020 Equity Incentive Plan provides for the granting of incentive stock options, nonqualified stock options,
stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance awards, dividend equivalent rights,
and other awards, which may be granted singly or in combination, and that may be paid in cash or shares of our common
stock. The 2020 Equity Incentive Plan is expected to provide flexibility to our compensation methods in order to adapt the
compensation of our key employees, key contractors, and non-employee directors to a changing business environment, after
giving due consideration to competitive conditions and the impact of applicable tax laws.
Effective Date and Expiration. The 2020 Equity Incentive Plan was approved by the Board of Directors on the Effective
Date, subject to approval by our stockholders. The 2020 Equity Incentive Plan will terminate on the tenth anniversary of the
Effective Date, unless sooner terminated by the Compensation Committee of the Board of Directors. No award may be
granted under the 2020 Equity Incentive Plan after its termination date, but awards made prior to the termination date may
extend beyond that date in accordance with their terms.
Shares Available. The 2020 Equity Incentive Plan provides that the aggregate number of shares of our common stock
that may be subject to awards under the 2020 Equity Incentive Plan cannot exceed 3,650,000, plus any Prior Plan Awards (as
defined below), subject to adjustment in certain circumstances to prevent dilution or enlargement. All of the shares available
for issuance as an award under the 2020 Equity Incentive Plan may be delivered pursuant to incentive stock options. Other
than during the first calendar year in which a non-employee director has been elected to serve on the Board of Directors, no
such director may be granted awards under the 2020 Equity Incentive Plan in any calendar year that, when taken together
with all cash retainers and other fees paid to the director for services to Hilltop for the same calendar year, exceed $450,000
in the aggregate (with the value of any equity awards determined as of the date of grant; provided, however, the Chairman
may be granted an award or awards each calendar year in an aggregate amount not to exceed 50,000 shares, which shall be in
addition to the $450,000 annual limit on awards to non-employee directors described above. Only 5% of the shares of our
common stock that may be issued pursuant to awards under the 2020 Equity Incentive Plan may be designated as Exempt
Shares (as defined below). “Prior Plan Awards” means any awards granted pursuant to the 2012 Equity Incentive Plan that
are outstanding on the Effective Date that, on or after the Effective Date, are forfeited, expire, or are canceled; and (ii) any
shares subject to awards relating to common stock under the Prior Plan that, on or after the Effective Date, are settled in cash.
“Exempt Shares” are shares of Hilltop common stock that have been granted with (or that have been amended by the
Committee to include) more favorable vesting conditions that would otherwise apply to awards granted under the 2020
Equity Incentive Plan, as described in the Vesting of Awards; Forfeiture; Assignment section below.
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Administration. Under the terms of the 2020 Equity Incentive Plan, the 2020 Equity Incentive Plan will be administered
by the Compensation Committee (the “Committee”) of the Board of Directors and which, to the extent necessary to satisfy
the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall consist
entirely of two or more “non-employee directors” as defined in Rule 16b-3 under the Exchange Act. At any time there is no
Committee to administer the 2020 Equity Incentive Plan, any reference to the Committee is a reference to the Board of
Directors. The Committee will determine the persons to whom awards are to be made; determine the type, size, and terms of
awards; interpret the 2020 Equity Incentive Plan; establish and revise rules and regulations relating to the 2020 Equity
Incentive Plan and any sub-plans (including sub-plans for awards made to participants who do not reside in the United
States); establish performance goals applicable to awards and certify the extent of their achievement; and make any other
determinations that it believes are necessary for the administration of the 2020 Equity Incentive Plan. The Committee may
delegate certain of its duties to one or more of our officers as provided in the 2020 Equity Incentive Plan.
Shares to be issued under the 2020 Equity Incentive Plan may be made available from authorized but unissued shares of
our common stock, or shares purchased by us on the open market or otherwise. During the term of the 2020 Equity Incentive
Plan, we will at all times reserve and keep enough shares available to satisfy the requirements of the 2020 Equity Incentive
Plan. Shares underlying awards granted under the 2020 Equity Incentive Plan or one of the Prior Plan that expire or are
forfeited or terminated without being exercised, or awards that are settled for cash, will again be available for the grant of
additional awards within the limits provided by the 2020 Equity Incentive Plan. Shares withheld by or delivered to us to
satisfy the exercise price of stock options or tax withholding obligations with respect to any award granted under the 2020
Equity Incentive Plan will nonetheless be deemed to have been issued under the 2020 Equity Incentive Plan and will not
again be available for grant under the 2020 Equity Incentive Plan. Additionally, shares unused in the net settlement of stock-
settled SARs and shares purchased from the open market using the proceeds of the sale of stock received upon the exercise of
stock options will be deemed to have been issued under the 2020 Equity Incentive Plan and will not again be available for
grant under the 2020 Equity Incentive Plan. Awards that may be satisfied either by the issuance of common stock or by cash
or other consideration shall be counted against the maximum number of shares that may be issued under the 2020 Equity
Incentive Plan only during the period that the award is outstanding or to the extent the award is ultimately satisfied by the
issuance of shares. An award will not reduce the number of shares that may be issued pursuant to the 2020 Equity Incentive
Plan if the settlement of the award will not require the issuance of shares, such as, for example, SARs that can only be
satisfied by the payment of cash. Only shares forfeited back to us or shares cancelled on account of termination, expiration, or
lapse of an award shall again be available for grant as incentive stock options under the 2020 Equity Incentive Plan, but shall
not increase the maximum number of shares that may be delivered pursuant to incentive stock options.
If the 2020 Equity Incentive Plan is approved by our stockholders, no new awards may be granted under the Prior Plan,
but such awards will remain in full force and effect under such plans according to their respective terms, and dividend
equivalents may continue to be issued under the Prior Plan in respect of awards granted under such plan that are outstanding
as of the Effective Date.
Eligibility. The 2020 Equity Incentive Plan provides for awards to the directors, officers, employees, and contractors of
Hilltop and our subsidiaries and affiliates and prospective directors, officers, employees, and contractors who have accepted
offers of employment, service, or consultancy from Hilltop or our subsidiaries or affiliates. As of the date of this Proxy
Statement, there were 17 non-employee directors, ten Section 16 officers, and approximately 4,800 other employees eligible
to participate in the 2020 Equity Incentive Plan. Hilltop’s current Section 16 executive officers and each member of the
Board of Directors are among the individuals eligible to receive awards under the 2020 Equity Incentive Plan.
Stock Options. Subject to the terms and provisions of the 2020 Equity Incentive Plan, stock options to purchase shares of
Hilltop common stock may be granted to eligible individuals at any time and from time to time as determined by the
Committee. Stock options may be granted as incentive stock options, which are intended to qualify for favorable treatment to
the recipient under federal tax law, or as nonqualified stock options, which do not qualify for such favorable tax treatment.
Subject to the limits provided in the 2020 Equity Incentive Plan, the Committee determines the number of stock options
granted to each recipient. Each stock option grant will be evidenced by a stock option agreement that specifies the stock
option’s exercise price, whether the stock options are intended to be incentive stock options or nonqualified stock options, the
duration of the stock options, the number of shares to which the stock options pertain, and such additional limitations, terms,
and conditions as the Committee may determine.
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The Committee determines the exercise price for each stock option granted, except that the exercise price may not be less
than 100% of the fair market value of a share of Hilltop common stock on the date of grant; provided, however, that if an
incentive stock option is granted to an employee who owns or is deemed to own more than 10% of the combined voting
power of all classes of our common stock (or of any parent or subsidiary), the exercise price must be at least 110% of the fair
market value of a share of Hilltop common stock on the date of grant. As of April 28, 2020, the fair market value (as that
term is defined under the 2020 Equity Incentive Plan) of a share of Hilltop common stock was $18.54. All stock options
granted under the 2020 Equity Incentive Plan will expire no later than ten years (or, in the case of an incentive stock option
granted to an employee who owns or is deemed to own more than 10% of the combined voting power of all classes of our
common stock (or of any parent or subsidiary), five years) from the date of grant. Stock options are nontransferable except by
will or by the laws of descent and distribution or, in the case of nonqualified stock options, as otherwise expressly permitted
by the Committee. The granting of a stock option does not accord the recipient the rights of a stockholder, and such rights
accrue only after the exercise of a stock option and the registration of shares of Hilltop common stock in the recipient’s name.
Stock Appreciation Rights. The 2020 Equity Incentive Plan authorizes the Committee to grant SARs. A SAR entitles the
holder to receive from us, upon exercise, an amount equal to the excess, if any, of the aggregate fair market value of a
specified number of shares of Hilltop common stock to which such SAR pertains over the aggregate exercise price for the
underlying shares. The exercise price of a SAR shall not be less than 100% of the fair market value of a share of Hilltop
common stock on the date of grant.
Each SAR will be evidenced by an award agreement that specifies the exercise price, the number of shares to which the
SAR pertains, and such additional limitations, terms, and conditions as the Committee may determine. We may make
payment of the amount to which the participant exercising SARs is entitled by delivering shares of Hilltop common stock,
cash, or a combination of stock and cash as set forth in the award agreement relating to the SARs. SARs are not transferable
except as expressly permitted by the Committee. No dividend or dividend equivalent rights may be paid or granted with
respect to any SARs granted under the 2020 Equity Incentive Plan.
Restricted Stock. The 2020 Equity Incentive Plan provides for the award of shares of Hilltop common stock that are
subject to forfeiture and restrictions on transferability as set forth in the 2020 Equity Incentive Plan, the applicable award
agreement, and as may be otherwise determined by the Committee. Except for these restrictions and any others imposed by
the Committee, upon the grant of restricted stock, the recipient will have rights of a stockholder with respect to the restricted
stock, including the right to vote the restricted stock and to receive all dividends and other distributions paid or made with
respect to the restricted stock on such terms as will be set forth in the applicable award agreement; provided, however, such
dividends or distributions shall be withheld by us for a participant’s account until the restrictions lapse with respect to such
restricted stock. During the restriction period set by the Committee, the recipient may not sell, transfer, pledge, exchange, or
otherwise encumber the restricted stock.
Restricted Stock Units. The 2020 Equity Incentive Plan authorizes the Committee to grant restricted stock units.
Restricted stock units are not shares of Hilltop common stock and do not entitle the recipients to the rights of a stockholder,
although the award agreement may provide for rights with respect to dividends or dividend equivalents. The recipient may
not sell, transfer, pledge, or otherwise encumber restricted stock units granted under the 2020 Equity Incentive Plan prior to
their vesting. Restricted stock units will be settled in cash, shares of Hilltop common stock, or a combination thereof as
provided in the applicable award agreement, in an amount based on the fair market value of Hilltop common stock on the
settlement date. If the right to receive dividends on restricted stock units is awarded, then such dividends shall be withheld by
us for a participant’s account until the restrictions lapse with respect to such restricted units.
Dividend Equivalent Rights. The Committee may grant a dividend equivalent right either as a component of another
award or as a separate award. The terms and conditions of the dividend equivalent right will be specified by the grant and,
when granted as a component of another award, may have terms and conditions different from such other award; provided,
however, that (i) any dividend equivalent rights with respect to such other award will be withheld by us for a participant’s
account until such other award is vested, subject to such terms as determined by the Committee; and (ii) such dividend
equivalent rights so withheld and attributable to another award will be distributed to such participant in cash or, at the
discretion of the Committee, in common stock having a fair market value equal to the amount of such dividend equivalent
rights, if applicable, upon vesting of the other award and, if such other award is forfeited, the right to dividend equivalent
rights attributable to such forfeited award also will be forfeited. No dividend equivalent rights may be paid or granted with
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respect to any stock option or SAR. Dividend equivalent rights granted as a separate award also may be paid currently or may
be deemed to be reinvested in additional common stock. Any such reinvestment will be at the fair market value at the time
thereof. Dividend equivalent rights may be settled in cash or common stock.
Performance Awards. The Committee may grant performance awards payable at the end of a specified performance
period in cash, shares of common stock, units, or other rights based upon, payable in, or otherwise related to our common
stock. Payment will be contingent upon achieving pre-established performance goals (as described below) by the end of the
applicable performance period. The Committee will determine the length of the performance period, the maximum payment
value of an award, and the minimum performance goals required before payment will be made, so long as such provisions are
not inconsistent with the terms of the 2020 Equity Incentive Plan, and to the extent an award is subject to Section 409A of the
Code, are in compliance with the applicable requirements of Section 409A of the Code and any applicable regulations or
authoritative guidance issued thereunder. In certain circumstances, the Committee may, in its discretion, determine that the
amount payable with respect to certain performance awards will be reduced from the maximum amount of any potential
awards. If the Committee determines, in its sole discretion, that the established performance measures or objectives are no
longer suitable because of a change in our business, operations, corporate structure, or for other reasons that the Committee
deems satisfactory, the Committee may modify the performance measures or objectives and/or the performance period. In the
event of a change in control, performance awards will vest in full at the greater of “target” achievement of the applicable
performance goal or the projected actual achievement of the applicable performance goal, based upon results achieved
through the date of the change in control or, if applicable, the date of a participant’s termination of service by us without
“cause” or by the participant for “good reason” (as each term is defined in the participant’s award agreement), in either case,
if such termination occurs within six months prior to or 12 months following the change in control.
Performance Goals. The 2020 Equity Incentive Plan provides that performance goals may be established by the
Committee in connection with the grant of any award under the 2020 Equity Incentive Plan. Such goals shall be based on the
attainment of specified levels of one or more measures determined, which may include, without limitation: stock price; book
value; book value per share; tangible book value; tangible book value per share; earnings (including earnings before taxes,
earnings before interest and taxes or earnings before interest, taxes, depreciation and amortization); earnings per share
(whether on pre-tax, after-tax, operations or other basis); operating earnings; total return to stockholders; return on assets or
operating assets; asset quality; net interest margin, in each case with respect to Hilltop or any one or more of our subsidiaries,
divisions, business units, or business segments, either in absolute terms or relative to the performance of one or more other
companies (including an index covering multiple companies).
Other Awards. The Committee may grant other forms of awards, based upon, payable in, or that otherwise relate to, in
whole or in part, shares of our common stock, if the Committee determines that such other form of award is consistent with
the purpose and restrictions of the 2020 Equity Incentive Plan. The terms and conditions of such other form of award shall be
specified in the grant. Such other awards may be granted for no cash consideration, for such minimum consideration as may
be required by applicable law, or for such other consideration as may be specified in the grant.
Vesting of Awards; Forfeiture; Assignment. Except as otherwise provided below, the Committee, in its sole discretion,
may determine that an award will be immediately vested, in whole or in part, or that all or any portion may not be vested until
a date, or dates, subsequent to its date of grant, or until the occurrence of one or more specified events, subject in any case to
the terms of the 2020 Equity Incentive Plan. Except to the extent an award is for Exempt Shares, no award (nor any portion
of an award, even on a pro rata basis) may vest earlier than one year after the date of grant (other than Substitute Incentives
(as defined below); provided, however, with respect to grants of awards made on the date an annual meeting of stockholders
to our non-employee directors, such one year vesting period shall be deem satisfied if such awards vest on the earlier of the
first anniversary of the date of grant or the date of the first annual meeting of stockholders if such meeting is held at least 50
weeks following the award’s date of grant. Notwithstanding the foregoing, the Committee may, in its sole discretion, grant
awards with more favorable vesting provisions at any time, provided that the common stock subject to such awards will be
designated as Exempt Shares. As discussed above, only 5% of the shares of our common stock that may be issued pursuant to
an award under the 2020 Equity Incentive Plan may be designated as Exempt Shares. In addition, no awards shall become
partially or fully vested, nor shall any portion of the applicable restriction period be waived, in connection with a change in
control unless a participant also incurs a termination of service by us without “cause” or by the participant for “good reason”
(as each term is defined in the participant’s award agreement) within six months prior to or 12 months following the change
in control. “Substitute Incentives” are awards that are granted under the 2020 Equity Incentive Plan in substitution for similar
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awards held by employees, contractors, and non-employee directors of another entity who became employees, contractors, or
non-employee directors of Hilltop or our subsidiaries in connection with a corporate transaction in which Hilltop is the
surviving entity.
The Committee may impose on any award, at the time of grant or thereafter, such additional terms and conditions as the
Committee determines, including terms requiring forfeiture of awards in the event of a participant’s termination of service.
The Committee will specify the circumstances under which performance awards may be forfeited in the event of a
termination of service by a participant prior to the end of a performance period or settlement of awards. Except as otherwise
determined by the Committee, restricted stock will be forfeited upon a participant’s termination of service during the
applicable restriction period.
Awards granted under the 2020 Equity Incentive Plan generally are not assignable or transferable except by will or by
the laws of descent and distribution, except that the Committee may, in its discretion and pursuant to the terms of an award
agreement, permit transfers of nonqualified stock options or SARs to: (i) the spouse (or former spouse), children, or
grandchildren of the participant (“Immediate Family Members”); (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members; (iii) a partnership in which the only partners are (a) such Immediate Family Members and/or (b)
entities that are controlled by the participant and/or his or her Immediate Family Members; (iv) an entity exempt from federal
income tax pursuant to Section 501(c)(3) of the Code or any successor provision; or (v) a split interest trust or pooled income
fund described in Section 2522(c)(2) of the Code or any successor provision, provided that (x) there shall be no consideration
for any such transfer, (y) the applicable award agreement pursuant to which such nonqualified stock options or SARs are
granted must be approved by the Committee and must expressly provide for such transferability, and (z) subsequent transfers
of transferred nonqualified stock options or SARs shall be prohibited except those by will or the laws of descent and
distribution.
Change in Control. As discussed in the Vesting of Awards; Forfeiture; Assignment section above, upon a change in
control of Hilltop, awards will not vest unless the participant incurs a termination of service by us without cause or by the
participant for good reason within six months prior to or 12 months following the change in control. A change in control
generally includes (i) the acquisition by a third-party of 33% of more of the outstanding voting stock or equity securities of
Hilltop, (ii) a merger, reorganization, consolidation, or similar transaction with a third-party after which the stockholders of
Hilltop do not retain over 50% of the outstanding voting stock or equity securities following the transaction, (iii) a majority
of the members of our Board of Directors are members who were not appointed by the then existing Board of Directors, or
(iv) the complete liquidation or dissolution of Hilltop. In connection with a change in control, outstanding awards may be
converted into new awards; exchanged or substituted for with new awards; or canceled for no consideration, provided
participants were given notice and an opportunity to purchase or exercise such awards, or cancelled and cashed out based on
the positive difference between the per share amount to be received in connection with the transaction and the
purchase/exercise price per share of the award, if any.
The description of a change in control and its effects on awards granted under the 2020 Equity Incentive Plan is qualified
in its entirety by reference to the relevant terms and provisions of the 2020 Equity Incentive Plan, which is attached as Annex
A to this Proxy Statement
Recoupment for Restatements. The Committee may recoup all or any portion of any shares of our common stock or cash
paid to a participant in connection with an award, in the event of a restatement of our financial statements as set forth in our
clawback policy in effect from time to time.
Adjustments Upon Changes in Capitalization. In the event that any dividend or other distribution (whether in the form of
cash, shares of our common stock, other securities, or other property), recapitalization, stock split, reverse stock split, rights
offering, reorganization, merger, consolidation, split-up, spin-off, split-off, combination, subdivision, repurchase, or
exchange of shares of our common stock or other securities, issuance of warrants or other rights to purchase shares of our
common stock or other securities, or other similar corporate transaction or event affects the fair market value of an award, the
Committee shall adjust any or all of the following so that the fair market value of the award immediately after the transaction
or event is equal to the fair market value of the award immediately prior to the transaction or event: (i) the number of shares
and type of common stock (or other securities or property) that thereafter may be made the subject of awards; (ii) the number
of shares and type of common stock (or other securities or property) subject to outstanding awards; (iii) the exercise price of
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each outstanding stock option; (iv) the amount, if any, we pay for forfeited shares in accordance with the terms of the 2020
Equity Incentive Plan; and (v) the number of or exercise price of shares then subject to outstanding SARs previously granted
and unexercised under the 2020 Equity Incentive Plan, to the extent that the same proportion of our issued and outstanding
shares of common stock in each instance shall remain subject to exercise at the same aggregate exercise price; provided,
however, that the number of shares of common stock (or other securities or property) subject to any award shall always be a
whole number. Notwithstanding the foregoing, no such adjustment shall be made or authorized to the extent that such
adjustment would cause the 2020 Equity Incentive Plan or any stock option to violate Section 422 of the Code or Section
409A of the Code. All such adjustments must be made in accordance with the rules of any securities exchange, stock market,
or stock quotation system to which we are subject.
Amendment or Discontinuance of the 2020 Equity Incentive Plan. The Committee may, at any time and from time to
time, without the consent of participants, alter, amend, revise, suspend, or discontinue the 2020 Equity Incentive Plan, in
whole or in part; provided, however, that (i) no amendment that requires stockholder approval in order for the 2020 Equity
Incentive Plan and any awards under the 2020 Equity Incentive Plan to continue to comply with Sections 421 and 422 of the
Code (including any successors to such sections or other applicable law) or any applicable requirements of any securities
exchange or inter-dealer quotation system on which our stock is listed or traded shall be effective unless such amendment is
approved by the requisite vote of our stockholders entitled to vote on the amendment; and (ii) unless required by law, no
action by the Committee regarding the amendment or discontinuance of the 2020 Equity Incentive Plan may adversely affect
any rights of any participants or our obligations to any participants with respect to any outstanding awards granted under the
2020 Equity Incentive Plan without the consent of the affected participant.
No Repricing of Stock Options or SARs. The Committee may not “reprice” any stock option or SAR, without stockholder
approval. For purposes of the 2020 Equity Incentive Plan, “reprice” means any of the following or any other action that has
the same effect: (i) amending a stock option or SAR to reduce its exercise price; (ii) canceling a stock option or SAR at a
time when its exercise price exceeds the fair market value of a share of our common stock in exchange for cash or a stock
option, SAR, award of restricted stock, or other equity award; or (iii) taking any other action that is treated as a repricing
under generally accepted accounting principles, provided that nothing will prevent the Committee from (x) making
adjustments to awards upon changes in capitalization, (y) exchanging or cancelling awards upon a merger, consolidation, or
recapitalization, or (z) substituting awards for awards granted by other entities, to the extent permitted by the 2020 Equity
Incentive Plan.
Federal Income Tax Consequences
The following is a brief summary of certain federal income tax consequences relating to the transactions described under
the 2020 Equity Incentive Plan as set forth below. This summary does not purport to address all aspects of federal income
taxation and does not describe any potential state, local, or foreign tax consequences. This discussion is based upon
provisions of the Code and the applicable Treasury Regulations issued thereunder, as well as judicial and administrative
interpretations under the Code and Treasury Regulations, all as in effect as of the date hereof, and all of which are subject to
change (possibly on a retroactive basis) or different interpretation.
Law Affecting Deferred Compensation. In 2004, Section 409A was added to the Code to regulate all types of deferred
compensation. If the requirements of Section 409A of the Code are not satisfied, deferred compensation and earnings thereon
will be subject to tax as it vests, plus (i) an interest charge at the then-current underpayment rate plus 1% and (ii) a 20%
penalty tax. Certain performance awards, stock options, SARs, restricted stock units, and certain types of restricted stock are
subject to Section 409A of the Code.
Incentive Stock Options. A participant will not recognize income at the time an incentive stock option is granted. When a
participant exercises an incentive stock option, a participant also generally will not be required to recognize income (either as
ordinary income or capital gain). However, to the extent that the fair market value (determined as of the date of grant) of the
shares with respect to which the participant’s incentive stock options are exercisable for the first time during any year
exceeds $100,000, the incentive stock options for the shares over $100,000 will be treated as nonqualified stock options, and
not incentive stock options, for federal tax purposes, and the participant will recognize income as if the incentive stock
options were nonqualified stock options. In addition to the foregoing, if the fair market value of the shares received upon
exercise of an incentive stock option exceeds the exercise price, then the excess may be deemed a tax preference adjustment
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for purposes of the federal alternative minimum tax calculation. The federal alternative minimum tax may produce significant
tax repercussions depending upon the participant’s particular tax status.
The tax treatment of any shares acquired by exercise of an incentive stock option will depend upon whether the
participant disposes of his or her shares prior to the later of: (i) two years after the date the incentive stock option was granted
and (ii) one year after the shares were transferred to the participant (referred to as the “Holding Period”). If a participant
disposes of shares acquired by exercise of an incentive stock option after the expiration of the Holding Period, any amount
received in excess of the participant’s tax basis for such shares will be treated as a short-term or long-term capital gain,
depending upon how long the participant has held the shares. If the amount received is less than the participant’s tax basis for
such shares, the loss will be treated as a short-term or long-term capital loss, depending upon how long the participant has
held the shares. If the participant disposes of shares acquired by exercise of an incentive stock option prior to the expiration
of the Holding Period, the disposition will be considered a “disqualifying disposition.” If the amount received for the shares
is greater than the fair market value of the shares on the exercise date, then the difference between the incentive stock
option’s exercise price and the fair market value of the shares at the time of exercise will be treated as ordinary income for
the tax year in which the “disqualifying disposition” occurs. The participant’s basis in the shares will be increased by an
amount equal to the amount treated as ordinary income due to such “disqualifying disposition.” In addition, the amount
received in such “disqualifying disposition” over the participant’s increased basis in the shares will be treated as capital gain.
However, if the price received for shares acquired by exercise of an incentive stock option is less than the fair market value of
the shares on the exercise date and the disposition is a transaction in which the participant sustains a loss that otherwise
would be recognizable under the Code, then the amount of ordinary income that the participant will recognize is the excess, if
any, of the amount realized on the “disqualifying disposition” over the basis in the shares.
Nonqualified Stock Options. A participant generally will not recognize income at the time a nonqualified stock option is
granted. When a participant exercises a nonqualified stock option, the difference between the exercise price and any higher
market value of the shares of common stock on the date of exercise will be treated as compensation taxable as ordinary
income to the participant. The participant’s tax basis for the shares acquired under a nonqualified stock option will be equal
to the exercise price paid for such shares, plus any amounts included in the participant’s taxable income as compensation.
When a participant disposes of shares acquired by exercise of a nonqualified stock option, any amount received in excess of
the participant’s tax basis for such shares will be treated as short-term or long-term capital gain, depending upon how long
the participant has held the shares. If the amount received is less than the participant’s tax basis for such shares, the loss will
be treated as a short-term or long-term capital loss, depending upon how long the participant has held the shares.
Special Rule if Exercise price is Paid for in Shares. If a participant pays the exercise price of a nonqualified stock option
with previously-owned shares of our common stock and the transaction is not a disqualifying disposition of shares previously
acquired under an incentive stock option, the shares received equal to the number of shares surrendered are treated as having
been received in a tax-free exchange. The participant’s tax basis and holding period for these shares received will be equal to
the participant’s tax basis and holding period for the shares surrendered. The number of shares received in excess of the
number of shares surrendered will be treated as compensation taxable as ordinary income to the participant to the extent of
their fair market value. The participant’s tax basis in these shares will be equal to their fair market value on the date of
exercise, and the participant’s holding period for such shares will begin on the date of exercise.
If the use of previously acquired shares to pay the exercise price of a nonqualified stock option constitutes a
disqualifying disposition of shares previously acquired under an incentive stock option, the participant will have ordinary
income as a result of the disqualifying disposition in an amount equal to the excess of the fair market value of the shares
surrendered, determined at the time such shares were originally acquired upon exercise of the incentive stock option, over the
aggregate exercise price paid for such shares. As discussed above, a disqualifying disposition of shares previously acquired
under an incentive stock option occurs when the participant disposes of such shares before the end of the Holding Period. The
other tax results from paying the exercise price with previously-owned shares are as described above, except that the
participant’s tax basis in the shares that are treated as having been received in a tax-free exchange will be increased by the
amount of ordinary income recognized by the participant as a result of the disqualifying disposition.
Restricted Stock. A participant who receives restricted stock generally will recognize as ordinary income the excess, if
any, of the fair market value of the shares granted as restricted stock at such time as the shares are no longer subject to
forfeiture or restrictions, over the amount paid, if any, by the participant for such shares. However, a participant who receives
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unvested restricted stock may make an election under Section 83(b) of the Code within 30 days of the date of transfer of the
shares to recognize ordinary income on the date of transfer of the shares equal to the excess of the fair market value of such
shares (determined without regard to the restrictions on such shares) over the purchase price, if any, for such shares. If a
participant does not make an election under Section 83(b) of the Code, then the participant will recognize as ordinary income
any dividends received with respect to such shares. At the time of sale of such shares, any gain or loss realized by the
participant will be treated as either short-term or long-term capital gain (or loss) depending upon how long the participant has
held the shares. For purposes of determining any gain or loss realized, the participant’s tax basis will be the amount
previously taxable as ordinary income, plus the purchase price paid by the participant, if any, for such shares.
Stock Appreciation Rights. Generally, a participant who receives a stand-alone SAR will not recognize taxable income at
the time the stand-alone SAR is granted, provided that the SAR is exempt from or complies with Section 409A of the Code.
If an individual receives the appreciation inherent in the SARs in cash, the cash will be taxed as ordinary income to the
recipient at the time it is received. If a recipient receives the appreciation inherent in the SARs in stock, the spread between
the then-current market value and the grant price, if any, will be taxed as ordinary income to the participant at the time it is
received.
Other Awards. In the case of an award of restricted stock units, performance awards, dividend equivalent rights, or other
stock or cash awards, the recipient will generally recognize ordinary income in an amount equal to any cash received and the
fair market value of any shares received on the date of payment or delivery, provided that the award is exempt from or
complies with Section 409A of the Code. In that taxable year, we will receive a federal income tax deduction in an amount
equal to the ordinary income that the participant has recognized.
Federal Tax Withholding. Any ordinary income realized by a participant upon the granting, vesting, exercise, or
conversion of an award under the 2020 Equity Incentive Plan, as applicable, is subject to withholding of federal, state, and
local income tax and to withholding of the participant’s share of tax under the Federal Insurance Contribution Act and the
Federal Unemployment Tax Act. To satisfy our federal income tax withholding requirements, we (or, if applicable, any of
our subsidiaries) will have the right to require, as a condition to delivery of any certificate for shares of our common stock or
the registration of the shares in the participant’s name, that the participant remit to us an amount sufficient to satisfy the
withholding requirements. Alternatively, we may withhold a portion of the shares (valued at fair market value) that otherwise
would be issued to the participant to satisfy all or part of the withholding tax obligations or may, if we consent, accept
delivery of shares (that the participant has not acquired from us within six months prior to the date of exercise) with an
aggregate fair market value that equals or exceeds the required tax withholding payment. Withholding does not represent an
increase in the participant’s total income tax obligation because it is fully credited toward his or her tax liability for the year.
Additionally, withholding does not affect the participant’s tax basis in the shares. Compensation income realized and tax
withheld will be reflected on Forms W-2 supplied by us to employees no later than January 31 of the succeeding year.
Deferred compensation that is subject to Section 409A of the Code will also be subject to certain federal income tax
withholding and reporting requirements.
Tax Consequences to Us. To the extent a participant recognizes ordinary income in the circumstances described above,
we will be entitled to a corresponding deduction provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of
Section 280G of the Code, and is not disallowed by the $1,000,000 limitation on certain executive compensation under
Section 162(m) of the Code.
Million Dollar Deduction Limit and Other Tax Matters. We may not deduct compensation of more than $1,000,000 that
is paid to “covered employees” (as defined in Section 162(m) of the Code), which include (i) an individual (or, in certain
circumstances, his or her beneficiaries) who, at any time during the taxable year, is either our principal executive officer or
principal financial officer; (ii) an individual who is among our three highest compensated officers for the taxable year (other
than an individual who was either our principal executive officer or principal financial officer at any time during the taxable
year); or (iii) anyone who was a covered employee for purposes of Section 162(m) of the Code for any tax year beginning on
or after January 1, 2017. This limitation on deductions (x) only applies to compensation paid by a publicly-traded corporation
(and not compensation paid by non-corporate entities) and (z) may not apply to certain types of compensation, such as
qualified performance-based compensation that is payable pursuant to a written, binding contract that was in effect as of
November 2, 2017, so long as the contract is not materially modified after that date.
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If an individual’s rights under the 2020 Equity Incentive Plan are accelerated as a result of a change in control and the
individual is a “disqualified individual” under Section 280G of the Code, the value of any such accelerated rights received by
such individual may be included in determining whether or not such individual has received an “excess parachute payment”
under Section 280G of the Code, which could result in (i) the imposition of a 20% federal excise tax (in addition to federal
income and employment taxes, if applicable) payable by the individual on the value of such accelerated rights and (ii) the loss
by us of a compensation deduction.
The foregoing general tax discussion is intended for the information of stockholders considering how to vote with
respect to this proposal and not as tax guidance to participants in the 2020 Equity Incentive Plan. Participants are strongly
urged to consult their own tax advisors regarding the federal, state, local, foreign, and any other tax consequences to them of
participating in the 2020 Equity Incentive Plan.
Interest of Directors and Executive Officers.
All members of the Board of Directors and all of our executive officers are eligible for awards under the 2020 Equity
Incentive Plan and, thus, have a personal interest in the approval of the 2020 Equity Incentive Plan.
New Plan Benefits
We cannot currently determine the benefits or number of shares subject to awards that may be granted in the future to
eligible participants under the 2020 Equity Incentive Plan because the grant of awards and the terms of such awards are to be
determined in the sole discretion of the Committee at the time of grant.
The fair market value of our common stock is $18.54 per share based on the closing price of our common stock on
April 28, 2020.
Required Vote
Approval of the adoption of the 2020 Equity Incentive Plan requires the affirmative vote of the holders of at least a
majority of the shares of Hilltop common stock cast on the proposal. For purposes of the adoption of the 2020 Equity
Incentive Plan, 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 HILLTOP HOLDINGS INC. 2020 EQUITY INCENTIVE PLAN.
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Equity Compensation Plan Information
The following table sets forth as of December 31, 2019, information concerning Hilltop's equity compensation plans,
including the number of shares issued and available for issuance under our plans, options, warrants and rights; weighted
average exercise price of outstanding options, warrants and rights; and the number of securities remaining available for future
issuance.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders*
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
—
—
—
— $
—
— $
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in first
column)
556,368
—
556,368
* 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, 2019, 3,873,386 awards had been granted pursuant to the 2012 Equity Incentive Plan, while 429,754 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.
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PROPOSAL THREE — APPROVAL OF THE HILLTOP HOLDINGS INC.
EMPLOYEE STOCK PURCHASE PLAN
On April 30, 2020, our Board of Directors adopted the Hilltop Holdings Inc. Employee Stock Purchase Plan, or the
Employee Stock Purchase Plan or the ESPP, subject to the approval of our stockholders. If approved, the ESPP will become
effective on January 1, 2021.
Purpose of the Employee Stock Purchase Plan
The Employee Stock Purchase Plan is intended to provide eligible employees of Hilltop and certain designated Related
Corporations with an opportunity to purchase shares of our common stock at a discount and possibly with favorable tax
consequences, and thereby provide an additional incentive for such employees to contribute to the prosperity of the Company.
Our Board of Directors believes that the ESPP promotes the interests of the Company and its stockholders by attracting,
retaining, and motivating talented employees and aligning the interests of participating employees with those of our
stockholders. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue
Code and will be treated as such for U.S. federal tax purposes. The ESPP is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
Summary of the Employee Stock Purchase Plan
Described below is a summary of the material features of the ESPP. This summary does not purport to be a complete
description of all of the provisions of the ESPP. It is qualified in its entirety by reference to the full text of the ESPP, a copy of
which is attached as Annex B to this proxy statement and is incorporated herein by reference. Capitalized terms used but not
otherwise defined herein have the respective meanings ascribed to such terms in the ESPP.
Purpose. The purpose of the ESPP is to provide a means by which eligible employees of Hilltop and certain designated
Related Corporations may be given an opportunity to purchase shares of our common stock and to assist the Company in
retaining the services of its employees and securing and retaining the services of new employees, thereby providing incentives
for such persons to exert maximum efforts for the success of the Company and its Related Corporations. The rights to purchase
shares of Hilltop common stock granted under the ESPP are intended to qualify as options issued under an “employee stock
purchase plan,” as that term is defined in Section 423(b) of the Internal Revenue Code, or Options.
Shares Subject to the ESPP. Subject to the terms of the ESPP, an aggregate of 600,000 shares of Hilltop common stock
will be reserved for issuance under the ESPP. If Options granted under the ESPP expire, lapse, or otherwise terminate without
being exercised, the shares of common stock not purchased under such Options will again become available for issuance under
the ESPP. The stock purchasable under the ESPP may consist, in whole or in part, of authorized and unissued common stock,
treasury stock, or common stock purchased on the open market.
As of April 28, 2020, the closing price of a share of Hilltop common stock on the NYSE was $18.54. As of the date hereof,
no shares of common stock have been issued under the ESPP.
Administration. The ESPP will be administered by the Board of Directors or such committee or committees of the Board
of Directors as is designated by the Board of Directors to administer the ESPP, or the Committee. The Board of Directors will
have the power to (i) determine how and when Options to purchase shares of common stock will be granted and the provisions
of each Offering of such Options (which need not be identical); (ii) designate from time to time which Related Corporations of
Hilltop will be eligible to participate in the ESPP; (iii) construe and interpret the ESPP and Options, and establish, amend, and
revoke rules and regulations for its administration (the Board of Directors, in the exercise of this power, may correct any defect,
omission, or inconsistency in the ESPP, in a manner and to the extent it deems necessary or expedient to make the ESPP fully
effective); (iv) settle all controversies regarding the ESPP and Options granted under it; (v) suspend or terminate the ESPP at
any time as provided for under the ESPP; and (vi) exercise such powers and perform such acts as it deems necessary or
expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the ESPP
be treated as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.
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The Board of Directors may delegate some or all of the administration of the ESPP to a Committee or Committees. If
administration is delegated to a Committee, the Committee will have, in connection with the administration of the ESPP, the
powers theretofore possessed by the Board of Directors that have been delegated to the Committee, including the power to
delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise, subject, however, to such
resolutions, not inconsistent with the provisions of the ESPP, as may be adopted from time to time by the Board of Directors.
The Board of Directors may retain the authority to concurrently administer the ESPP with the Committee and may, at any time,
revest in the Board of Directors some or all of the powers previously delegated. Whether or not the Board of Directors has
delegated administration of the ESPP to a Committee, the Board of Directors will have the final power to determine all questions
of policy and expediency that may arise in the administration of the ESPP. All determinations, interpretations, and
constructions made by the Board of Directors in good faith in its discretion will be final, binding, and conclusive on all persons.
Offerings. The Board of Directors may, from time to time, grant or provide for the grant of Options to purchase shares of
common stock under the ESPP to eligible employees in an Offering (consisting of one or more Purchase Periods) on an Offering
Date or Offering Dates selected by the Board of Directors. Each Offering shall be in such form and will contain such terms
and conditions as the Board of Directors deems appropriate, which shall comply with the requirement of Section 423(b)(5) of
the Internal Revenue Code that all employees granted Options have the same rights and privileges. The terms and conditions
of an Offering will be incorporated by reference into the ESPP and treated as part of the ESPP. The provisions of separate
Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of the ESPP by
reference in the document comprising the Offering or otherwise) the period during which the Offering will be effective, which
period shall not exceed 27 months beginning with the Offering Date, and the substance of the provisions of the ESPP pertaining
to (i) eligibility; (ii) the grant of Options; (iii) the purchase price; (iv) participation, withdrawal, and termination; and (v) the
exercise of Options.
If a participant has more than one Option outstanding under the ESPP, unless he or she otherwise indicates in agreements
or notices delivered by such participant: (i) each agreement or notice delivered by that participant will be deemed to apply to
all of his or her Options under the ESPP; and (ii) an Option with a lower exercise price (or an earlier-granted Option, if different
Options have identical exercise prices) will be exercised to the fullest possible extent before an Option with a higher exercise
price (or a later-granted Option if different Options have identical exercise prices) will be exercised.
Eligibility. Options may be granted only to employees of Hilltop or, as the Board of Directors may designate, to employees
of a Related Corporation. Except as provided below, an employee is not eligible to be granted Options under the ESPP unless,
on the Offering Date, such employee has been in the employ of Hilltop or the Related Corporation, as the case may be, for such
continuous period preceding such Offering Date as the Board of Directors may require (but in no event greater than two years).
In addition, the Board of Directors may provide that no employee is eligible to be granted Options under the ESPP unless, on
the Offering Date, such employee’s customary employment with Hilltop or the Related Corporation is for more than 20 hours
per week and/or for more than five months per calendar year, or such other criteria as the Board of Directors may determine
consistent with Section 423 of the Internal Revenue Code.
No employee is eligible to participate in the ESPP if, immediately after the grant of the Option, (i) the employee would
own, directly or indirectly, stock possessing 5% or more of the total combined voting power or value of all classes of stock of
Hilltop or of any Related Corporation (including any stock which such employee may purchase under all outstanding rights
and options); or (ii) such Option would permit such employee’s rights to purchase stock under all “employee stock purchase
plans” (described in Section 423 of the Internal Revenue Code) of Hilltop and any Related Corporation to accrue at a rate that
exceeds $25,000 of the Fair Market Value (or such other maximum as may be prescribed from time to time by the Internal
Revenue Code) of such stock (determined at the Offering Date of the Option) for each calendar year in which such Option is
outstanding at any time, in accordance with the provisions of Section 423(b)(8) of the Internal Revenue Code. Officers of
Hilltop and any designated Related Corporation, if they are otherwise eligible employees, will be eligible to participate in
Offerings under the ESPP. Notwithstanding the foregoing, the Board of Directors, in its sole discretion, may exclude from
participation in the ESPP or any Offering any employees who are “highly compensated employees” (within the meaning of
Section 423(b)(4)(D) of the Internal Revenue Code).
As of March 31, 2020, there were approximately 4,800 employees eligible to participate in the ESPP.
Participation in the ESPP. A participant may elect to authorize payroll deductions pursuant to an Offering under the ESPP
by completing and delivering to the Company, within the time specified in the Offering, an enrollment form (in such form as
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the Company may provide). Each such enrollment form will authorize an amount of Contributions expressed as a percentage
of the submitting participant’s Compensation (as defined in each Offering) during the Offering (not to exceed the maximum
percentage specified by the Board of Directors). Each participant’s Contributions will be credited to a bookkeeping account
for such participant under the ESPP and be deposited with the general funds of the Company, except where applicable law
requires that contributions be deposited with an independent third party. To the extent provided in the Offering, a participant
may begin such contributions after the beginning of the Offering. To the extent provided in the Offering, a participant may
thereafter reduce (including to zero) or increase his or her contributions. To the extent specifically provided in the Offering,
in addition to making contributions by payroll deductions, a participant may make contributions through the payment by cash
or check prior to each Purchase Date of the Offering.
Grant of Options. On each Offering Date of an Offering made under the ESPP, each eligible employee will be granted an
Option to purchase up to that number of shares of common stock purchasable with a percentage of such employee’s
Compensation (not exceeding the percentage set forth in the Offering) during the period that begins on the Offering Date (or
such later date as the Board of Directors determines for a particular Offering) and ends on the date stated in the Offering. The
Board of Directors will establish one or more Purchase Dates during an Offering on which Options granted pursuant to that
Offering will be exercised and purchases of shares of common stock will be carried out in accordance with such Offering.
In connection with each Offering made under the ESPP, the Board of Directors may specify a maximum number of shares
of common stock that may be purchased by any participant on any Purchase Date during such Offering, and a maximum
aggregate number of shares of common stock that may be purchased by all participants pursuant to such Offering. In addition,
in connection with each Offering that contains more than one Purchase Dates, the Board of Directors may specify a maximum
aggregate number of shares of common stock that may be purchased by all participants on any or each Purchase Date under
the Offering. If the aggregate purchase of shares of common stock issuable upon exercise of Options granted under the Offering
would exceed any such maximum aggregate number, then, in the absence of any Board of Directors action otherwise, a pro
rata allocation of the shares of common stock available will be made in as nearly a uniform manner as practicable and equitable.
Purchase Price. The purchase price of shares of common stock acquired pursuant to Options may not be less than the
lesser of: (i) an amount equal to 85% of the Fair Market Value of the shares of common stock on the Offering Date; or (ii) an
amount equal to 85% of the Fair Market Value of the shares of common stock on the applicable Purchase Date, as set forth in
the Offering.
Exercise of Options. On each Purchase Date during an Offering, each participant’s accumulated Contributions will be
applied to the purchase of shares of common stock, up to the maximum number of shares of common stock permitted pursuant
to the terms of the ESPP and the applicable Offering, at the purchase price specified in the Offering. No fractional shares will
be issued upon the exercise of Options unless specifically provided for in the Offering. If any amount of accumulated
Contributions remains in a participant’s account after the purchase of shares of common stock and such remaining amount is
less than the amount required to purchase one share of common stock on the final Purchase Date of an Offering, then such
remaining amount will be held in such participant’s account for the purchase of shares of common stock under the next Offering
under the ESPP, unless such participant withdraws from such next Offering, as provided in the ESPP, or is not eligible to
participate in such Offering, as provided in the ESPP, in which case such amount will be distributed to such participant after
the final Purchase Date, without interest (unless required by applicable law).
No Options may be exercised unless the shares of common stock to be issued upon such exercise under the ESPP are
covered by an effective registration statement pursuant to the Securities Act and the ESPP is in material compliance with all
applicable federal, state and foreign laws, and any other securities laws and other laws applicable to the ESPP. If, on a Purchase
Date the shares of common stock are not so registered or the ESPP is not in such compliance, no Options may be exercised on
such Purchase Date, and the Purchase Date will be delayed until the shares of common stock are subject to such an effective
registration statement and the ESPP is in such compliance, except that the Purchase Date may not be delayed more than twelve
months and the Purchase Date may in no event be more than 27 months from the Offering Date.
Shares of common stock obtained by exercise of Options must be held by the participant for at least 90 days prior to the
participant’s sale of such common stock. The terms and conditions of Options granted to, and the purchase of shares of common
stock by, persons subject to Section 16 of the Exchange Act must comply with the applicable provisions of Rule 16b-3. The
ESPP and all Options granted thereunder are deemed to contain, and the shares of common stock issued upon exercise of
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Options will be subject to, such additional conditions and restrictions, if any, as may be required by Rule 16b-3 to qualify for
the maximum exemption from Section 16 of the Exchange Act with respect to ESPP transactions.
Withdrawal. During an Offering, a Participant may cease making Contributions and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company may provide. Such withdrawal may be elected
at any time prior to the end of the Offering, except as provided otherwise in the Offering. Upon such withdrawal from the
Offering by a participant, the Company will distribute to such participant all of his or her accumulated Contributions (reduced
to the extent, if any, such Contributions have been used to acquire shares of common stock for the participant) under the
Offering, and such participant’s Option in that Offering will terminate. A participant’s withdrawal from an Offering will not
affect such participant’s eligibility to participate in any other Offerings under the ESPP, but such participant will be required
to deliver a new enrollment form in order to participate in subsequent Offerings.
Termination of Employment. A participant’s Option granted pursuant to an Offering under the ESPP will terminate
immediately upon such participant ceasing to be an employee or other lack of eligibility. The Company will distribute to such
terminated or otherwise ineligible employee all of his or her accumulated Contributions (reduced to the extent, if any, such
Contributions have been used to acquire shares of common stock) under the Offering. An employee will be deemed to have
terminated employment for purposes of the ESPP when the employee begins a leave of absence, unless the employee is on an
approved leave of absence or is entitled to disability benefits, in which case participation will be suspended until a return to
active employment.
Restrictions on Transfer. Options are not transferable by a participant except by will, the laws of descent and distribution,
or by a beneficiary designation as provided in the ESPP. During a participant’s lifetime, Options may be exercised only by
such participant. Any attempt to assign, transfer, pledge, or otherwise dispose of such rights or amounts will be null and void
and without effect.
Interest. Unless otherwise specified in an Offering, the Company will have no obligation to pay interest on Contributions.
Adjustments. In the event of a Capitalization Adjustment, the Board of Directors will appropriately and proportionately
adjust: (i) the class(es) and maximum number of securities subject to the ESPP; (ii) the class(es) and maximum number of
securities reserved under the ESPP; (iii) the class(es) and number of securities subject to, and the purchase price applicable to,
outstanding Offerings and Options; and (iv) the class(es) and number of securities imposed by purchase limits under each
ongoing Offering. The Board of Directors’ determination will be final, binding, and conclusive.
Effect of Certain Corporate Events. In the event of a Corporate Transaction (whether by merger, consolidation, asset or
stock sale), then: (i) any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent
company) may assume or continue Options outstanding under the ESPP or may substitute similar rights (including a right to
acquire the same consideration paid to the stockholders in the Corporate Transaction) for those outstanding under the ESPP; or
(ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue such Options or does not
substitute similar rights for Options outstanding under the ESPP, then the participants’ accumulated Contributions will be used
to purchase shares of common stock within ten business days prior to the Corporate Transaction under any ongoing Offerings,
and the participants’ Options under the ongoing Offerings will terminate immediately after such purchase.
Amendment, Termination, or Suspension of the ESPP. The Board of Directors may amend the ESPP at any time as the
Board of Directors deems necessary or advisable. Except for Capitalization Adjustments, stockholder approval will, however,
be required for any amendment of the ESPP for which stockholder approval is required by applicable law or listing
requirements, including any amendment that (i) materially increases the number of shares of common stock available for
issuance under the ESPP; (ii) materially expands the class of individuals eligible to become participants and receive Options
under the ESPP; (iii) materially increases the benefits accruing to participants under the ESPP or materially reduces the price
at which shares of common stock may be purchased under the ESPP; (iv) materially extends the term of the ESPP; or (v)
expands the types of awards available for issuance under the ESPP, but in each of (i) through (v) above, only to the extent
stockholder approval is required by applicable law or listing requirements. The Board of Directors may suspend or terminate
the ESPP at any time. No Options may be granted under the ESPP while the ESPP is suspended or after it is terminated. Any
benefits, privileges, entitlements, and obligations under any outstanding Options granted before an amendment, suspension, or
termination of the ESPP may not be impaired by any such amendment, suspension, or termination except (i) with the consent
of the participant to whom such Options were granted; (ii) as necessary to comply with any laws, listing requirements, or
81
governmental regulations (including, without limitation, the provisions of Section 423 of the Internal Revenue Code); or (iii)
as necessary to obtain or maintain favorable tax, listing, or regulatory treatment.
Effective Date. The ESPP will become effective on January 1, 2021, but no Options may be exercised unless and until the
ESPP has been approved by the stockholders of the Company, which approval shall be within twelve months before or after
the date the ESPP is adopted by the Board of Directors.
U.S. Federal Income Tax Effects
Tax Effects for Participants. The information set forth in the paragraph below is a summary only and does not purport to
be complete. In addition, the information is based upon current U.S. federal income tax rules and, therefore, is subject to
change if those rules change. Moreover, because the tax consequences to any participant may depend on his or her particular
situation, each participant should consult his or her tax adviser as to the federal, state, local and other tax consequences of the
acquisition or disposition of common stock under the ESPP. This summary is general in nature and does not purport to be legal
or tax advice.
Options granted under the ESPP are intended to qualify for favorable federal income tax treatment associated with options
granted under an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A participant will be taxed
on amounts withheld by payroll deductions for the purchase of shares of common stock as if such amounts were actually
received. Except as described in the preceding sentence, no income relating to Options granted or shares purchased under the
ESPP will be taxable to a participant until disposition of the acquired shares, and the method of taxation will depend upon the
holding period of the acquired shares. If the stock is disposed of at least two years after the Offering Date and at least one year
after the stock is transferred to the participant, then the lesser of (i) the excess of the Fair Market Value of the stock at the time
of such disposition over the purchase price of such stock, or (ii) the excess of the Fair Market Value of the stock as of the grant
date of such Option (typically the Offering Date) over the purchase price (applied and determined as of the grant date of such
Option), will be treated as ordinary income. If the stock is sold or disposed of before the expiration of either of the holding
periods described above, then the excess of the Fair Market Value of the stock on the Purchase Date over the purchase price
will be treated as ordinary income at the time of such disposition. Even if the stock is later disposed of for less than its Fair
Market Value on the Purchase Date, the same amount of ordinary income will be attributed to the participant, and a capital loss
will be recognized equal to the difference between the sales price and the Fair Market Value of the stock on such Purchase
Date. The participant’s basis in the stock will be equal to the amount paid for such stock, plus any ordinary income included
for such stock. Any capital gain or loss will be short-term or long-term, depending on how long the stock has been held.
Tax Effects for the Company. There are no federal income tax consequences to the Company by reason of the grant or
exercise of Options under the ESPP. The Company will, however, be entitled to a deduction to the extent amounts are taxed
as ordinary income to a participant (subject to the requirement of reasonableness and the satisfaction of tax reporting
obligations). Any ordinary income that is required to be recognized will not be subject to income or payroll tax withholding.
New Plan Benefits
Participation in the ESPP is voluntary and depends on each eligible employee’s election to participate. Accordingly, the
benefits or amounts that will be received with respect to future purchases under the ESPP are not determinable. For the same
reasons and because this is the first time a plan of this nature has been adopted by us, we cannot determine what benefits or
amounts would have been received if the ESPP had been in place during the last completed fiscal year.
Required Vote
The approval of the adoption of the Hilltop Holdings Inc. Employee Stock Purchase Plan requires the affirmative vote of
the holders of at least a majority of the shares of Hilltop common stock cast on the proposal. For purposes of the approval of
the ESPP, 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 HILLTOP HOLDINGS INC. EMPLOYEE STOCK PURCHASE PLAN.
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PROPOSAL FOUR — 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 Four and the compensation paid to our named
executive officers as disclosed commencing on page 29 of this Proxy Statement by voting FOR, on a non-binding 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 a Non-Binding Advisory Basis, Executive Compensation
The affirmative vote of a majority of the votes cast on the matter is required to approve, on a non-binding 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 non-binding 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.
83
PROPOSAL FIVE — RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP served as our independent registered public accounting firm during 2019 and has been
selected to serve in that capacity for 2020, 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 2020 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, 2019, 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 the applicable requirements of the Public Company Accounting Oversight Board and the
SEC.
The Audit Committee received from PricewaterhouseCoopers LLP the written disclosures and the letter required by the
applicable requirements of the Public Company Accounting Oversight Board, 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, 2019.
This report has been furnished by the members of the Audit Committee.
Charles R. Cummings (Chairman)
Tracy A. Bolt
J. Markham Green
84
Independent Auditor’s Fees
For the fiscal years ended December 31, 2019 and 2018, 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
2019
5,792,550
638,000
—
2,700
6,433,250
2018
6,356,200
391,500
—
2,700
6,750,400
$
$
$
$
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, 2019 and 2018, 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 2019 and 2018 these fees primarily related to procedures associated with recently issued accounting standards and
attestation reports required under various services agreements.
Tax Fees
No tax fees were incurred during 2019 or 2018.
All Other Fees
In 2019 and 2018, 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 2019 and 2018.
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
2019 or 2018 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 2020.
85
STOCKHOLDER PROPOSALS FOR 2021
Stockholder proposals intended to be presented at our 2021 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 February 12, 2021 and must otherwise comply with the requirements of Rule 14a-8 in order to be considered for
inclusion in the 2021 Proxy Statement and proxy. However, pursuant to such rule, if the 2021 Annual Meeting is not held
within 30 days of July 23, 2021, then a stockholder proposal submitted for inclusion in our Proxy Statement for the 2021
Annual Meeting must be received by us a reasonable time before we begin to print and mail our Proxy Statement for the 2021
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 December 31, 2020,
and not later than 5:00 p.m. Dallas, Texas local time, on January 30, 2021; provided, however, that in the event that the date
of the 2021 annual meeting is advanced by more than 30 days or delayed by more than 60 days from July 23, 2021, notice by
the stockholder in order to be timely must be received no earlier than the 120th day prior to the date of the 2021 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 2021 annual
meeting or, if the first public announcement of the 2021 Annual Meeting is less than 100 days prior to the date of the 2021
Annual Meeting, the 10th day following the day on which public announcement of the date of the 2021 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., 6565 Hillcrest Avenue, Dallas, Texas 75205, 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, 2019 ALSO IS AVAILABLE WITHOUT
CHARGE FROM OUR COMPANY WEBSITE AT WWW.HILLTOP-HOLDINGS.COM OR UPON WRITTEN
REQUEST TO: INVESTOR RELATIONS, HILLTOP HOLDINGS INC., 6565 HILLCREST AVENUE, DALLAS, TEXAS
75205.
86
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.
6565 Hillcrest Avenue
Dallas, Texas 75205
You may also call us at (214) 855-2177. We also invite you to visit our website at www.hilltop-holdings.com.
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HILLTOP HOLDINGS INC.
2020 EQUITY INCENTIVE PLAN
Annex A
The Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “Plan”) was adopted by the Board of Directors of Hilltop
Holdings Inc., a Maryland corporation (the “Company”), effective as of April 30, 2020 (the “Effective Date”), subject to
approval by the Company’s stockholders.
ARTICLE 1.
PURPOSE
The purpose of the Plan is to attract and retain the services of key Employees, key Contractors, and Outside Directors
of the Company and its Subsidiaries and to provide such persons with a proprietary interest in the Company through the granting
of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Awards, Dividend Equivalent Rights, and Other Awards, whether granted singly, or in combination, that will:
(a)
(b)
and
increase the interest of such persons in the Company’s welfare;
furnish an incentive to such persons to continue their services for the Company or its Subsidiaries;
(c)
and Outside Directors.
provide a means through which the Company may attract able persons as Employees, Contractors,
With respect to Reporting Participants, the Plan and all transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 promulgated under the Exchange Act. To the extent any provision of the Plan or action
by the Committee fails to so comply, such provision or action shall be deemed null and void ab initio, to the extent permitted
by law and deemed advisable by the Committee.
ARTICLE 2.
DEFINITIONS
For the purpose of the Plan, unless the context requires otherwise, the following terms shall have the meanings
indicated:
2.1
“Applicable Law” means all legal requirements relating to the administration of equity incentive plans and
the issuance and distribution of shares of Common Stock, if any, under applicable corporate laws, applicable securities laws,
the rules of any exchange or inter-dealer quotation system upon which the Company’s securities are listed or quoted, the rules
of any foreign jurisdiction applicable to Incentives granted to residents therein, and any other applicable law, rule or restriction.
2.2
“Authorized Officer” is defined in Section 3.2(b) hereof.
2.3
“Award” means the grant of any Incentive Stock Option, Nonqualified Stock Option, Restricted Stock, SAR,
Restricted Stock Unit, Performance Award, Dividend Equivalent Right or Other Award, whether granted singly or in
combination (each individually referred to herein as an “Incentive”).
2.4
“Award Agreement” means a written agreement between a Participant and the Company that sets out the
terms of the grant of an Award.
2.5
“Award Period” means the period set forth in the Award Agreement during which one or more Incentives
granted under an Award may be exercised.
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2.6
2.7
2.8
“Board” means the board of directors of the Company.
“Cause” shall have the meaning set forth in the Participant’s Award Agreement.
“Change in Control” means the happening of any of the following events:
(a)
The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 33% or more of either (i) the then outstanding shares of common stock of the Company
(the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting
Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute
a Change in Control: (v) any acquisition directly from the Company, (w) any acquisition by the Company, (x) any
acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity
controlled by the Company, (y) any acquisition by a Person who holds or controls entities that, in the aggregate
(including the holdings of such Person), hold or control 10% or more of the Outstanding Company Common Stock or
the Outstanding Company Voting Securities on the Effective Date or (z) any acquisition by any entity pursuant to a
transaction which complies with clauses (i), (ii), and (iii) of subsection (c) of this Section 2.8; or
(b)
Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease
for any reason to constitute at least a majority of the members of the Board; provided, however, that any individual
becoming a director subsequent to the Effective Date, whose election, or nomination for election by the Company’s
stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board,
shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest
with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(d)
Consummation of a reorganization, merger, statutory share exchange or consolidation or similar
transaction involving the Company or any of its Subsidiaries with a third party or sale or other disposition of all or
substantially all of the assets of the Company to a third party, or the acquisition of assets or securities of another entity
by the Company or any of its Subsidiaries from a third party (a “Business Combination”), in each case, unless,
following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and
the combined voting power of the then outstanding voting securities entitled to vote generally in the election of
directors (or, for a non-corporate entity, equivalent securities), as the case may be, of the entity resulting from such
Business Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company
or all or substantially all of the Company’s assets either directly or through one or more of its subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person
(excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the
Company or such entity resulting from such Business Combination, or any Person who holds or controls entities that,
in the aggregate (including the holdings of such Person), hold or control 10% or more of the Outstanding Company
Common Stock or the Outstanding Company Voting Securities on the Effective Date) beneficially owns, directly or
indirectly, 33% or more of, respectively, the then outstanding shares of common stock (or, for a non-corporate entity,
equivalent securities) of the entity resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business
Combination, and (iii) at least a majority of the members of the board of directors (or, for a non-corporate entity,
equivalent securities) of the entity resulting from such Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business
Combination; or
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(e)
The approval by the stockholders of the Company of a complete liquidation or dissolution of the
Company.
Notwithstanding the foregoing provisions of this Section 8, if an Award issued under the Plan is subject to Section 409A of the
Code, then an event shall not constitute a Change in Control for purposes of such Award under the Plan unless such event also
constitutes a change in the Company’s ownership, its effective control, or the ownership of a substantial portion of its assets
within the meaning of Section 409A of the Code.
2.9
“Claim” means any claim, liability or obligation of any nature, arising out of or relating to this Plan or an
alleged breach of this Plan or an Award Agreement.
2.10
“Code” means the United States Internal Revenue Code of 1986, as amended.
2.11
“Committee” means the committee appointed or designated by the Board to administer the Plan in accordance
with Article 3 of this Plan.
2.12
“Common Stock” means the common stock, par value $0.01 per share, which the Company is currently
authorized to issue or may in the future be authorized to issue, or any securities into which or for which the common stock of
the Company may be converted or exchanged, as the case may be, pursuant to the terms of this Plan.
2.13
“Company” means Hilltop Holdings Inc., a Maryland corporation, and any successor entity.
2.14
“Contractor” means any natural person, who is not an Employee, rendering bona fide services to the
Company or a Subsidiary, with compensation, pursuant to a written independent contractor agreement between such person
and the Company or a Subsidiary, provided that such services are not rendered in connection with the offer or sale of securities
in a capital raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.
2.15
“Corporation” means any entity that (a) is defined as a corporation under Section 7701 of the Code and (b)
is the Company or is in an unbroken chain of corporations (other than the Company) beginning with the Company, if each of
the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total combined
voting power of all classes of stock in one of the other corporations in the chain. For purposes of clause (b) hereof, an entity
shall be treated as a “corporation” if it satisfies the definition of a corporation under Section 7701 of the Code.
2.16
“Date of Grant” means the effective date on which an Award is made to a Participant as set forth in the
applicable Award Agreement; provided that all corporate actions necessary to grant such an Award have been taken on or prior
to the date set forth in the applicable Award Agreement. Notwithstanding the foregoing, solely for purposes of Section 16 of
the Exchange Act and the rules and regulations promulgated thereunder, the Date of Grant of an Award shall be the date of
stockholder approval of the Plan if such date is later than (a) the effective date of such Award as set forth in the Award
Agreement or (b) the date that all corporate actions necessary to grant such an Award have been taken.
2.17
“Dividend Equivalent Right” means the right of the holder thereof to receive credits based on the cash
dividends that would have been paid on the shares of Common Stock specified in the Award if such shares were held by the
Participant to whom the Award is made.
2.18
“Employee” means a common law employee (as defined in accordance with the Regulations and Revenue
Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary of the Company; provided,
however, in the case of individuals whose employment status, by virtue of their employer or residence, is not determined under
Section 3401(c) of the Code, “Employee” shall mean an individual treated as an employee for local payroll tax or employment
purposes by the applicable employer under Applicable Law for the relevant period.
2.19
“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.
2.20
“Executive Officer” means an officer of the Company or a Subsidiary subject to Section 16 of the Exchange
Act.
A-3
2.21
“Exempt Shares” means shares of Common Stock subject to an Award that has been granted with (or that
has been amended by the Committee to include) more favorable vesting provisions than those set forth in Section 7.2. No more
than five percent (5%) of the shares of Common Stock that may be delivered pursuant to Awards may be shares designated as
“Exempt Shares.”
2.22
“Exercise Date” is defined in Section 8.3(b) hereof.
2.23
“Exercise Notice” is defined in Section 8.3(b) hereof.
2.24
“Fair Market Value” means, as of a particular date, (a) if the shares of Common Stock are listed on any
established national securities exchange, the closing sales price per share of Common Stock on the consolidated transaction
reporting system for the principal securities exchange for the Common Stock on that date (as determined by the Committee, in
its discretion), or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale
was so reported; (b) if the shares of Common Stock are not so listed, but are quoted on an automated quotation system, the
closing sales price per share of Common Stock reported on the automated quotation system on that date, or, if there shall have
been no such sale so reported on that date, on the last preceding date on which such a sale was so reported; (c) if the Common
Stock is not so listed or quoted, the mean between the closing bid and asked price on that date, or, if there are no quotations
available for such date, on the last preceding date on which such quotations shall be available, as reported by the National
Association of Securities Dealer, Inc.’s OTC Bulletin Board or the Pink OTC Markets, Inc. (previously known as the National
Quotation Bureau, Inc.); or (d) if none of the above is applicable, such amount as may be determined by the Committee (acting
on the advice of an Independent Third Party, should the Committee elect in its sole discretion to utilize an Independent Third
Party for this purpose), in good faith, to be the fair market value per share of Common Stock. The determination of Fair Market
Value shall, where applicable, be in compliance with Section 409A of the Code.
2.25
“Good Reason” shall have the meaning set forth in the Participant’s Award Agreement.
2.26
“Immediate Family Members” is defined in Section 15.8 hereof.
2.27
“Incentive” is defined in Section 2.3 hereof.
2.28
“Incentive Stock Option” means an incentive stock option within the meaning of Section 422 of the Code,
granted pursuant to this Plan.
2.29
“Independent Third Party” means an individual or entity independent of the Company having experience in
providing investment banking or similar appraisal or valuation services and with expertise generally in the valuation of
securities or other property for purposes of this Plan. The Committee may utilize one or more Independent Third Parties.
2.30
“Nonqualified Stock Option” means a nonqualified stock option, granted pursuant to this Plan, which is not
an Incentive Stock Option.
2.31
“Option Price” means the price which must be paid by a Participant upon exercise of a Stock Option to
purchase a share of Common Stock.
2.32
“Other Award” means an Award issued pursuant to Section 6.9 hereof.
2.33
“Outside Director” means a director of the Company who is not an Employee or a Contractor.
2.34
“Parent” means a parent corporation as defined in Section 424 of the Code.
2.35
“Participant” means an Employee, Contractor or an Outside Director to whom an Award is granted under
this Plan.
2.36
“Performance Award” means an Award hereunder of cash, shares of Common Stock, units or rights based
upon, payable in, or otherwise related to, Common Stock pursuant to Section 6.7 hereof.
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2.37
“Performance Goal” means any of the Performance Criteria set forth in Section 6.10 hereof.
2.38
“Plan” means this Hilltop Holdings Inc. 2020 Equity Incentive Plan, as amended from time to time.
2.39
“Prior Plan Awards” means (a) any awards under the Prior Plan that are outstanding on the Effective Date,
and that on or after the Effective Date, are forfeited, expire or are canceled; and (b) any shares subject to awards relating to
Common Stock under the Prior Plan that, on or after the Effective Date are settled in cash.
2.40
“Prior Plan” means the Hilltop Holdings Inc. 2012 Equity Incentive Plan.
2.41
“Reporting Participant” means a Participant who is subject to the reporting requirements of Section 16 of
the Exchange Act.
2.42
“Restricted Stock” means shares of Common Stock issued or transferred to a Participant pursuant to Section
6.4 of this Plan which are subject to restrictions or limitations set forth in this Plan and in the related Award Agreement.
“Restricted Stock Units” means units awarded to Participants pursuant to Section 6.6 hereof, which are
convertible into Common Stock at such time as such units are no longer subject to restrictions as established by the Committee.
2.43
2.44
“Restriction Period” is defined in Section 6.4(b)(i) hereof.
2.45
“Retirement” shall have the meaning set forth in the Participant’s Award Agreement.
2.46
“SAR” or “Stock Appreciation Right” means the right to receive an amount, in cash and/or Common Stock,
equal to the excess of the Fair Market Value of a specified number of shares of Common Stock as of the date the SAR is
exercised (or, as provided in the Award Agreement, converted) over the SAR Price for such shares.
2.47
“SAR Price” means the exercise price or conversion price of each share of Common Stock covered by a
SAR, determined on the Date of Grant of the SAR.
2.48
“Spread” is defined in Section 12.4(b) hereof.
2.49
“Stock Option” means a Nonqualified Stock Option or an Incentive Stock Option.
2.50
“Subsidiary” means (a) any corporation in an unbroken chain of corporations beginning with the Company,
if each of the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total
combined voting power of all classes of stock in one of the other corporations in the chain, (b) any limited partnership, if the
Company or any corporation described in item (a) above owns a majority of the general partnership interest and a majority of
the limited partnership interests entitled to vote on the removal and replacement of the general partner, and (c) any partnership
or limited liability company, if the partners or members thereof are composed only of the Company, any corporation listed in
item (a) above or any limited partnership listed in item (b) above. “Subsidiaries” means more than one of any such
corporations, limited partnerships, partnerships or limited liability companies.
2.51
“Substitute Incentives” is defined in Article 14 hereof.
2.52
“Termination of Service” occurs when a Participant who is (a) an Employee of the Company or any
Subsidiary ceases to serve as an Employee of the Company and its Subsidiaries, for any reason; (b) an Outside Director of the
Company or a Subsidiary ceases to serve as a director of the Company and its Subsidiaries for any reason; or (c) a Contractor
of the Company or a Subsidiary ceases to serve as a Contractor of the Company and its Subsidiaries for any reason. Except as
may be necessary or desirable to comply with applicable federal or state law, a “Termination of Service” shall not be deemed
to have occurred when a Participant who is an Employee becomes an Outside Director or Contractor or vice versa. If, however,
a Participant who is an Employee and who has an Incentive Stock Option ceases to be an Employee but does not suffer a
Termination of Service, and if that Participant does not exercise the Incentive Stock Option within the time required under
Section 422 of the Code upon ceasing to be an Employee, the Incentive Stock Option shall thereafter become a Nonqualified
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Stock Option. Notwithstanding the foregoing provisions of this Section 2.52, in the event an Award issued under the Plan is
subject to Section 409A of the Code, then, in lieu of the foregoing definition and to the extent necessary to comply with the
requirements of Section 409A of the Code, the definition of “Termination of Service” for purposes of such Award shall be the
definition of “separation from service” provided for under Section 409A of the Code and the regulations or other guidance
issued thereunder.
2.53
“Total and Permanent Disability” means a Participant is qualified for long-term disability benefits under the
Company’s, a Parent’s, or a Subsidiary’s disability plan or insurance policy; or, if no such plan or policy is then in existence
or if the Participant is not eligible to participate in such plan or policy, that the Participant, because of a physical or mental
condition resulting from bodily injury, disease, or mental disorder, is unable to perform his or her duties of employment for a
period of six (6) continuous months, as determined in good faith by the Committee, based upon medical reports or other
evidence satisfactory to the Committee; provided that, with respect to any Incentive Stock Option, Total and Permanent
Disability shall have the meaning given it under the rules governing Incentive Stock Options under the Code. Notwithstanding
the foregoing provisions of this Section 2.53 in the event an Award issued under the Plan is subject to Section 409A of the
Code, then, in lieu of the foregoing definition and to the extent necessary to comply with the requirements of Section 409A of
the Code, the definition of “Total and Permanent Disability” for purposes of such Award shall be the definition of “disability”
provided for under Section 409A of the Code and the regulations or other guidance issued thereunder.
2.54
“Withheld Dividends” is defined in Section 6.4(b)(ii) hereof.
ARTICLE 3.
ADMINISTRATION
Subject to the terms of this Article 3, the Plan shall be administered by the Compensation Committee of the Board or
such committee of the Board as is designated by the Board to administer the Plan (the “Committee”). At any time there is no
Committee to administer the Plan, any references in this Plan to the Committee shall be deemed to refer to the Board.
The Committee shall determine and designate from time to time the eligible persons to whom Awards will be granted
and shall set forth in each related Award Agreement, where applicable, the Award Period, the Date of Grant, and such other
terms, provisions, limitations, and performance requirements, as are approved by the Committee, but not inconsistent with the
Plan. The Committee shall determine whether an Award shall include one type of Incentive or two or more Incentives granted
in combination. Subject to the other restrictions and limitations set forth in this Plan, the Committee may, in its sole discretion,
accelerate the vesting or waive any restrictions of any Award. Although the members of the Committee shall be eligible to
receive Awards, all decisions with respect to any Award, and the terms and conditions thereof, to be granted under the Plan to
any member of the Committee shall be made solely and exclusively by the other members of the Committee, or if such member
is the only member of the Committee, by the Board.
The Committee, in its discretion, shall (a) interpret the Plan and Award Agreements, (b) prescribe, amend, and rescind
any rules and regulations and sub-plans (including sub-plans for Awards made to Participants who are not resident in the United
States), as necessary or appropriate for the administration of the Plan, (c) establish performance goals for an Award and certify
the extent of their achievement, and (d) make such other determinations or certifications and take such other action as it deems
necessary or advisable in the administration of the Plan. Any interpretation, determination, or other action made or taken by
the Committee shall be final, binding, and conclusive on all interested parties.
The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any officer or employee of the Company or a Parent or Subsidiary of the Company; the
Company’s legal counsel, independent auditors, or consultants; or any other agents assisting in the administration of this Plan.
Members of the Committee and any officer or employee of the Company or a Parent or Subsidiary of the Company acting at
the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good
faith with respect to this Plan and shall, to the fullest extent permitted by law, be indemnified and held harmless by the Company
with respect to any such action or determination.
The Committee may delegate to officers of the Company, pursuant to a written delegation, the authority to perform
specified functions under the Plan. Any actions taken by any officers of the Company pursuant to such written delegation of
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authority shall be deemed to have been taken by the Committee. Notwithstanding the foregoing, to the extent necessary to
satisfy the requirements of Rule 16b-3 promulgated under the Exchange Act, any function relating to a Reporting Participant
shall be performed solely by the Committee.
With respect to restrictions in the Plan that are based on the requirements of Rule 16b-3 promulgated under the
Exchange Act, Section 422 of the Code, the rules of any exchange or inter-dealer quotation system upon which the Company’s
securities are listed or quoted, or any other Applicable Law, to the extent that any such restrictions are no longer required by
Applicable Law, the Committee shall have the sole discretion and authority to grant Awards that are not subject to such
mandated restrictions and/or to waive any such mandated restrictions with respect to outstanding Awards.
ARTICLE 4.
ELIGIBILITY
Any Employee (including an Employee who is also a director or an officer), Contractor or Outside Director of the
Company whose judgment, initiative, and efforts contributed or may be expected to contribute to the successful performance
of the Company is eligible to participate in the Plan; provided that only Employees of a Corporation shall be eligible to receive
Incentive Stock Options. The Committee, upon its own action, may grant, but shall not be required to grant, an Award to any
Employee, Contractor or Outside Director. Awards may be granted by the Committee at any time and from time to time to
new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine. Except as required by this Plan, Awards need not contain similar provisions.
The Committee’s determinations under the Plan (including without limitation determinations of which Employees, Contractors
or Outside Directors, if any, are to receive Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among Participants
who receive, or are eligible to receive, Awards under the Plan.
ARTICLE 5.
SHARES SUBJECT TO PLAN
5.1
Number Available for Awards. Subject to adjustment as provided in Articles 11 and 12 and any increase
by any Prior Plan Awards eligible for reuse pursuant to Section 5.2, maximum number of shares of Common Stock that may
be delivered pursuant to Awards granted under the Plan is Three Million Six Hundred Fifty Thousand (3,650,000) shares, of
which one hundred percent (100%) may be delivered pursuant to Incentive Stock Options. Shares to be issued may be made
available from authorized but unissued Common Stock, or Common Stock purchased by the Company on the open market or
otherwise. During the term of this Plan, the Company will at all times reserve and keep available the number of shares of
Common Stock that shall be sufficient to satisfy the requirements of this Plan. After the Effective Date of the Plan, no awards
may be granted under the Prior Plan.
5.2
Reuse of Shares. To the extent that any Award under this Plan or any Prior Plan Award shall be forfeited,
shall expire or be canceled, in whole or in part, then the number of shares of Common Stock covered by the Award or Prior
Plan Award so forfeited, expired or canceled may again be awarded pursuant to the provisions of this Plan. Awards that may
be satisfied either by the issuance of shares of Common Stock or by cash or other consideration shall be counted against the
maximum number of shares of Common Stock that may be issued under this Plan only during the period that the Award is
outstanding or to the extent the Award is ultimately satisfied by the issuance of shares of Common Stock. Shares of Common
Stock otherwise deliverable pursuant to an Award that are (i) withheld upon exercise or vesting of an Award for purposes of
paying the exercise price or tax withholdings, (ii) unused in the net settlement of stock-settled SARs, and (iii) purchased from
the open market using proceeds from the sale of Common Stock received upon exercise of Stock Options, shall be treated as
delivered to the Participant and shall be counted against the maximum number of shares of Common Stock that may be issued
under this Plan. Awards will not reduce the number of shares of Common Stock that may be issued pursuant to this Plan if the
settlement of the Award will not require the issuance of shares of Common Stock, as, for example, a SAR that can be satisfied
only by the payment of cash. Notwithstanding any provisions of the Plan to the contrary, only shares forfeited back to the
Company, shares canceled on account of termination, expiration or lapse of an Award, shall again be available for grant of
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Incentive Stock Options under the Plan, but shall not increase the maximum number of shares described in Section 5.1 above
as the maximum number of shares of Common Stock that may be delivered pursuant to Incentive Stock Options.
5.3
Limitation on Outside Director Awards. Other than during the first calendar year in which an Outside
Director has been elected to serve on the Board, no Outside Director may be granted any Award or Awards denominated in
shares in any calendar year, when taken together with all cash retainers and other fees paid for services for the same calendar
year, that exceed in the aggregate $450,000 (with the value of equity-based Awards computed as of the Date of Grant in
accordance with applicable financial accounting rules); provided, however, the Chairman may be granted, in addition to such
limit, an Award or Awards each calendar year in an aggregate amount not to exceed 50,000 shares (or an Award or Awards
representing such amount). For the avoidance of doubt, any compensation that is deferred shall be counted toward this limit
for the year in which it was earned, and not a later year of settlement.
ARTICLE 6.
GRANT OF AWARDS
6.1
In General.
(a)
The grant of an Award shall be authorized by the Committee and shall be evidenced by an Award
Agreement setting forth the Incentive or Incentives being granted, the total number of shares of Common Stock subject
to the Incentive(s), the Option Price (if applicable), the Award Period, the Date of Grant, and such other terms,
provisions, limitations, and performance objectives, as are approved by the Committee, but (i) not inconsistent with
the Plan and (ii) to the extent an Award issued under the Plan is subject to Section 409A of the Code, in compliance
with the applicable requirements of Section 409A of the Code and the regulations or other guidance issued thereunder.
The Company shall execute an Award Agreement with a Participant after the Committee approves the issuance of an
Award. Any Award granted pursuant to this Plan must be granted within ten (10) years of the date of adoption of this
Plan by the Board. The Plan shall be submitted to the Company’s stockholders for approval; however, the Committee
may grant Awards under the Plan prior to the time of stockholder approval. Any such Award granted prior to such
stockholder approval shall be made subject to such stockholder approval. The grant of an Award to a Participant shall
not be deemed either to entitle the Participant to, or to disqualify the Participant from, receipt of any other Award
under the Plan.
(b)
If the Committee establishes a purchase price for an Award, the Participant must accept such Award
within a period of thirty (30) days (or such shorter period as the Committee may specify) after the Date of Grant by
executing the applicable Award Agreement and paying such purchase price.
(c)
Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide
for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and
shall be paid upon such terms and conditions as may be specified by the grant.
6.2
Option Price. The Option Price for any share of Common Stock which may be purchased under a
Nonqualified Stock Option for any share of Common Stock must be equal to or greater than the Fair Market Value of the share
on the Date of Grant. The Option Price for any share of Common Stock that may be purchased under an Incentive Stock Option
must be at least equal to the Fair Market Value of the share on the Date of Grant; if an Incentive Stock Option is granted to an
Employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than ten
percent (10%) of the combined voting power of all classes of stock of the Company (or any parent or Subsidiary), the Option
Price shall be at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the Date of Grant.
No dividends or Dividend Equivalent Rights may be paid or granted with respect to any Stock Option granted hereunder.
6.3
Maximum ISO Grants. The Committee may not grant Incentive Stock Options under the Plan to any
Employee which would permit the aggregate Fair Market Value (determined on the Date of Grant) of the Common Stock with
respect to which Incentive Stock Options (under this and any other plan of the Company and its Subsidiaries) are exercisable
for the first time by such Employee during any calendar year to exceed $100,000. To the extent any Stock Option granted
under this Plan that is designated as an Incentive Stock Option exceeds this limit or otherwise fails to qualify as an Incentive
Stock Option, such Stock Option (or any such portion thereof) shall be a Nonqualified Stock Option. In such case, the
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Committee shall designate which stock will be treated as Incentive Stock Option stock by causing the issuance of a separate
stock certificate and identifying such stock as Incentive Stock Option stock on the Company’s stock transfer records.
6.4
Restricted Stock. If Restricted Stock is granted to or received by a Participant under an Award (including
a Stock Option), the Committee shall set forth in the related Award Agreement: (a) the number of shares of Common Stock
awarded, (b) the price, if any, to be paid by the Participant for such Restricted Stock and the method of payment of the price,
(c) the time or times within which such Award may be subject to forfeiture, (d) specified Performance Goals of the Company,
a Subsidiary, any division thereof or any group of Employees of the Company, or other criteria, if any, which the Committee
determines must be met in order to remove any restrictions (including vesting) on such Award, and (e) all other terms,
limitations, restrictions, and conditions of the Restricted Stock, which shall be consistent with this Plan, to the extent applicable
and, to the extent Restricted Stock granted under the Plan is subject to Section 409A of the Code, in compliance with the
applicable requirements of Section 409A of the Code and the regulations or other guidance issued thereunder. The provisions
of Restricted Stock need not be the same with respect to each Participant.
(a)
Legend on Shares. The Company shall electronically register the Restricted Stock awarded to a
Participant in the name of such Participant, which shall bear an appropriate legend referring to the terms, conditions,
and restrictions applicable to such Restricted Stock, substantially as provided in Section 15.10 of the Plan. No stock
certificate or certificates shall be issued with respect to such shares of Common Stock, unless, following the expiration
of the Restriction Period (as defined in Section 6.4(b)(i)) without forfeiture in respect of such shares of Common
Stock, the Participant requests delivery of the certificate or certificates by submitting a written request to the
Committee (or such party designated by the Company) requesting delivery of the certificates.
(b)
Restrictions and Conditions. Shares of Restricted Stock shall be subject to the following
restrictions and conditions:
(i)
Subject to the other provisions of this Plan and the terms of the particular Award
Agreements, during such period as may be determined by the Committee commencing on the Date of Grant
or the date of exercise of an Award (the “Restriction Period”), the Participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock. Except for these limitations, and any other applicable
limitations set forth in this Plan, the Committee may in its sole discretion, remove any or all of the restrictions
on such Restricted Stock whenever it may determine that, by reason of changes in Applicable Laws or other
changes in circumstances arising after the date of the Award, such action is appropriate.
(ii)
Except as provided in sub-paragraph (i) above or in the applicable Award Agreement, the
Participant shall have, with respect to his or her Restricted Stock, all of the rights of a stockholder of the
Company, including the right to vote the shares, and the right to receive any dividends thereon; provided that,
if the right to receive dividends is awarded, then (A) any cash dividends and stock dividends with respect to
the Restricted Stock shall be withheld by the Company for the Participant’s account, and interest may be
credited on the amount of the cash dividends withheld at a rate and subject to such terms as determined by
the Committee (collectively, “Withheld Dividends”); and (B) such Withheld Dividends attributable to any
particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to such
Participant in cash or, at the discretion of the Committee, in shares of Common Stock having a Fair Market
Value equal to the amount of such Withheld Dividends, if applicable, upon the release of restrictions on such
share (i.e., upon vesting), and if such share is forfeited, the Participant shall forfeit and have no right to such
Withheld Dividends. Certificates for shares of Common Stock free of restriction under this Plan shall be
delivered to the Participant promptly after, and only after, the Restriction Period shall expire without
forfeiture in respect of such shares of Common Stock or after any other restrictions imposed on such shares
of Common Stock by the applicable Award Agreement or other agreement have expired. Certificates for the
shares of Common Stock forfeited under the provisions of the Plan and the applicable Award Agreement
shall be promptly returned to the Company by the forfeiting Participant. Each Award Agreement shall require
that each Participant, in connection with the issuance of a certificate for Restricted Stock, shall endorse such
certificate in blank or execute a stock power in form satisfactory to the Company in blank and deliver such
certificate and executed stock power to the Company.
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(iii)
The Restriction Period of Restricted Stock shall commence on the Date of Grant or the date
of exercise of an Award, as specified in the Award Agreement, and, subject to Article 12 of the Plan, unless
otherwise established by the Committee in the Award Agreement setting forth the terms of the Restricted
Stock, shall expire upon satisfaction of the conditions set forth in the Award Agreement; such conditions
may provide for vesting based on length of continuous service or such Performance Goals, as may be
determined by the Committee in its sole discretion.
(iv)
In the event a Participant has paid any consideration to the Company for such forfeited
Restricted Stock, the Committee shall specify in the Award Agreement that either (1) the Company shall be
obligated to, or (2) the Company may, in its sole discretion, elect to, pay to the Participant, as soon as
practicable after the event causing forfeiture, in cash, an amount equal to the lesser of the total consideration
paid by the Participant for such forfeited shares or the Fair Market Value of such forfeited shares as of the
date of Termination of Service, as the Committee, in its sole discretion shall select. Upon any forfeiture, all
rights of a Participant with respect to the forfeited shares of the Restricted Stock shall cease and terminate,
without any further obligation on the part of the Company.
6.5
SARs. The Committee may grant SARs to any Participant. SARs shall be subject to such terms and
conditions as the Committee shall impose, provided that such terms and conditions are (a) not inconsistent with the Plan, and
(b) to the extent a SAR issued under the Plan is subject to Section 409A of the Code, in compliance with the applicable
requirements of Section 409A of the Code and the regulations or other guidance issued thereunder. The grant of the SAR may
provide that the holder may be paid for the value of the SAR either in cash or in shares of Common Stock, or a combination
thereof. In the event of the exercise of a SAR payable in shares of Common Stock, the holder of the SAR shall receive that
number of whole shares of Common Stock having an aggregate Fair Market Value on the date of exercise equal to the value
obtained by multiplying (a) the difference between the Fair Market Value of a share of Common Stock on the date of exercise
over the SAR Price as set forth in such SAR (or other value specified in the agreement granting the SAR), by (b) the number
of shares of Common Stock as to which the SAR is exercised, with a cash settlement to be made for any fractional shares of
Common Stock. The SAR Price for any share of Common Stock subject to a SAR may be equal to or greater than the Fair
Market Value of the share on the Date of Grant. The Committee, in its sole discretion, may place a ceiling on the amount
payable upon exercise of a SAR, but any such limitation shall be specified at the time that the SAR is granted. No dividends
or Dividend Equivalent Rights may be paid or granted with respect to any SARs granted hereunder.
6.6
Restricted Stock Units. Restricted Stock Units may be awarded or sold to any Participant under such terms
and conditions as shall be established by the Committee, provided, however, that such terms and conditions are (a) not
inconsistent with the Plan, and (b) to the extent a Restricted Stock Unit issued under the Plan is subject to Section 409A of the
Code, in compliance with the applicable requirements of Section 409A of the Code and the regulations or other guidance issued
thereunder. Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without
limitation, (a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified
period; or (b) a requirement that the holder forfeit (or in the case of shares of Common Stock or units sold to the Participant,
resell to the Company at cost) such shares or units in the event of Termination of Service during the period of restriction. If
the right to receive dividends on a Restricted Stock Unit is awarded, then any such dividends shall be Withheld Dividends.
6.7
Performance Awards.
(a)
The Committee may grant Performance Awards to one or more Participants. The terms and
conditions of Performance Awards shall be specified at the time of the grant and may include provisions establishing
the performance period, the Performance Goals to be achieved during a performance period, and the maximum or
minimum settlement values, provided that such terms and conditions are (i) not inconsistent with the Plan and (ii) to
the extent a Performance Award issued under the Plan is subject to Section 409A of the Code, in compliance with the
applicable requirements of Section 409A of the Code and the regulations or other guidance issued thereunder. If the
Performance Award is to be in shares of Common Stock, the Performance Awards may provide for the issuance of
the shares of Common Stock at the time of the grant of the Performance Award or at the time of the certification by
the Committee that the Performance Goals for the performance period have been met; provided, however, if shares of
Common Stock are issued at the time of the grant of the Performance Award and if, at the end of the performance
period, the Performance Goals are not certified by the Committee to have been fully satisfied, then, notwithstanding
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any other provisions of this Plan to the contrary, the Common Stock shall be forfeited in accordance with the terms of
the grant to the extent the Committee determines that the Performance Goals were not met. The forfeiture of shares
of Common Stock issued at the time of the grant of the Performance Award due to failure to achieve the established
Performance Goals shall be separate from and in addition to any other restrictions provided for in this Plan that may
be applicable to such shares of Common Stock. Each Performance Award granted to one or more Participants shall
have its own terms and conditions.
If the Committee determines, in its sole discretion, that the established performance measures or objectives
are no longer suitable because of a change in the Company’s business, operations, corporate structure, or for other
reasons that the Committee deemed satisfactory, the Committee may modify the performance measures or
objectives and/or the performance period.
(b)
Performance Awards may be valued by reference to the Fair Market Value of a share of Common
Stock or according to any formula or method deemed appropriate by the Committee, in its sole discretion, including,
but not limited to, achievement of Performance Goals or other specific financial, production, sales or cost performance
objectives that the Committee believes to be relevant to the Company’s business and/or remaining in the employ of
the Company or a Subsidiary for a specified period of time. Performance Awards may be paid in cash, shares of
Common Stock, or other consideration, or any combination thereof. If payable in shares of Common Stock, the
consideration for the issuance of such shares may be the achievement of the performance objective established at the
time of the grant of the Performance Award. Performance Awards may be payable in a single payment or in
installments and may be payable at a specified date or dates or upon attaining the performance objective. The extent
to which any applicable performance objective has been achieved shall be conclusively determined by the Committee.
(c)
In the event of a Change in Control, Performance Awards will vest in full at the greater of “target”
achievement of the applicable Performance Goal or the projected actual achievement of the applicable Performance
Goal, based upon results achieved through the date of the Change in Control or, if applicable, the date of a Participant’s
Termination of Service by the Company without Cause or by the Participant for Good Reason, in either case, provided
that such Termination of Service occurs within six (6) months prior to or twelve (12) months following the Change in
Control.
6.8
Dividend Equivalent Rights. The Committee may grant a Dividend Equivalent Right to any Participant,
either as a component of another Award or as a separate Award. The terms and conditions of the Dividend Equivalent Right
shall be specified by the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid
currently or may be deemed to be reinvested in additional shares of Common Stock (which may thereafter accrue additional
dividend equivalents). Any such reinvestment shall be at the Fair Market Value at the time thereof. Dividend Equivalent
Rights may be settled in cash or shares of Common Stock, or a combination thereof, in a single payment or in installments. A
Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall
be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other Award, and that such Dividend
Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other
Award; provided that (a) any Dividend Equivalent Rights with respect to such Award shall be withheld by the Company for
the Participant’s account until such Award is vested, subject to such terms as determined by the Committee; and (b) such
Dividend Equivalent Rights so withheld by the Company and attributable to any particular Award shall be distributed to such
Participant in cash or, at the discretion of the Committee, in shares of Common Stock having a Fair Market Value equal to the
amount of such Dividend Equivalent Rights, if applicable, upon vesting of the Award, and if such Award is forfeited, the
Participant shall have no right to such Dividend Equivalent Rights. No Dividend Equivalent Rights may be paid or granted
with respect to any Stock Option or SAR.
6.9
Other Awards. The Committee may grant to any Participant other forms of Awards, based upon, payable
in, or otherwise related to, in whole or in part, shares of Common Stock, if the Committee determines that such other form of
Award is consistent with the purpose and restrictions of this Plan. The terms and conditions of such other form of Award shall
be specified by the grant. Such Other Awards may be granted for no cash consideration, for such minimum consideration as
may be required by Applicable Law, or for such other consideration as may be specified by the grant.
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6.10
Performance Goals. Awards of Restricted Stock, Restricted Stock Units, Performance Award and Other
Awards (whether relating to cash or shares of Common Stock) under the Plan may be made subject to the attainment of
Performance Goals relating to one or more business criteria that may consist of, but are not limited to, one or more or any
combination of the following criteria: stock price; book value; book value per share; tangible book value; tangible book value
per share; earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes,
depreciation and amortization); earnings per share (whether on pre-tax, after-tax, operations or other basis); operating earnings;
total return to stockholders; return on assets or operating assets; asset quality; net interest margin; or stockholder value added
(“Performance Criteria”). Any Performance Criteria may be used to measure the performance of the Company as a whole or
any business unit of the Company and may be measured relative to a peer group or index. Any Performance Criteria may
include or exclude (a) events that are of an unusual nature or indicate infrequency of occurrence, (b) gains or losses on the
disposition of a business, (c) changes in tax or accounting regulations or laws, (d) the effect of a merger or acquisition, as
identified in the Company’s quarterly and annual earnings releases, or (e) other similar occurrences. In all other respects,
Performance Criteria shall be calculated in accordance with the Company’s financial statements, under generally accepted
accounting principles, or under a methodology established by the Committee prior to the issuance of an Award which is
consistently applied and identified in the audited financial statements, including footnotes, or the Compensation Discussion
and Analysis section of the Company’s annual report.
6.11
No Repricing of Stock Options or SARs. The Committee may not “reprice” any Stock Option or SAR
without stockholder approval. For purposes of this Section 6.11, “reprice” means any of the following or any other action that
has the same effect: (a) amending a Stock Option or SAR to reduce its exercise price or base price, (b) canceling a Stock
Option or SAR at a time when its exercise price or base price exceeds the Fair Market Value of a share of Common Stock in
exchange for cash or a Stock Option, SAR, award of Restricted Stock or other equity award, or (c) taking any other action that
is treated as a repricing under generally accepted accounting principles, provided that nothing in this Section 6.11 shall prevent
the Committee from making adjustments pursuant to Article 11, from exchanging or cancelling Incentives pursuant to Article
12, or substituting Incentives in accordance with Article 14.
6.12
Recoupment for Restatements. Notwithstanding any other language in this Plan to the contrary, the
Company may recoup all or any portion of any shares or cash paid to a Participant in connection with an Award, in the event
of a restatement of the Company’s financial statements as set forth in the Company’s clawback policy, if any, approved by the
Company’s Board from time to time.
ARTICLE 7.
AWARD PERIOD; VESTING
7.1
Award Period. Subject to the other provisions of this Plan, the Committee may, in its discretion, provide
that an Incentive may not be exercised in whole or in part for any period or periods of time or beyond any date specified in the
Award Agreement. Except as provided in the Award Agreement, an Incentive may be exercised in whole or in part at any time
during its term. The Award Period for an Incentive shall be reduced or terminated upon Termination of Service. No Incentive
granted under the Plan may be exercised at any time after the end of its Award Period. No portion of any Incentive may be
exercised after the expiration of ten (10) years from its Date of Grant. However, if an Employee owns or is deemed to own (by
reason of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the combined voting power of all
classes of stock of the Company (or any parent or Subsidiary) and an Incentive Stock Option is granted to such Employee, the
term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five (5)
years from the Date of Grant.
7.2
Vesting. The Committee, in its sole discretion, shall establish the vesting terms applicable to an Incentive,
provided that any such vesting terms shall not be inconsistent with the terms of the Plan, including, without limitation, this
Section 7.2. Except as otherwise provided herein, no Incentive (nor any portion of an Incentive, even on a pro rata basis) may
vest earlier than one (1) year after the Date of Grant (other than Substitute Incentives); provided, however, with respect to
grants of Awards made on the date of an Annual Stockholders Meeting to Outside Directors, such one (1) year vesting period
shall be deemed satisfied if such Awards vest on the earlier of the first anniversary of the Date of Grant or the first Annual
Stockholders Meeting held at least 50 weeks following the Date of Grant. Notwithstanding the foregoing, (a) the Committee
may, in its sole discretion, grant Awards with more favorable vesting provisions than set forth in this Section 7.2, provided that
the shares of Common Stock subject to such Awards shall be Exempt Shares, but (b) in connection with a Change in Control,
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the Committee may not accelerate the date on which all or any portion of any Award may be vested or waive the Restriction
Period with respect to any Award, except to provide that an Award may be partially or fully vested upon the Participant’s
Termination of Service by the Company without Cause or by the Participant for Good Reason, in either case, on or within six
(6) months prior to or twelve (12) months following a Change in Control. Notwithstanding anything to the contrary in this Plan,
all Awards shall vest upon a Change in Control in the event all outstanding Awards are not assumed by an acquiror or surviving
or resulting corporation in accordance with Article 12, and any Performance Awards will vest in full at the greater of “target”
achievement of the applicable Performance Goal or the projected actual achievement of the applicable Performance Goal, based
upon results achieved through the date of Change in Control.
ARTICLE 8.
EXERCISE OR CONVERSION OF INCENTIVE
8.1
In General. A vested Incentive may be exercised or converted, during its Award Period, subject to
limitations and restrictions set forth in the Award Agreement.
8.2
Securities Law and Exchange Restrictions. In no event may an Incentive be exercised or shares of
Common Stock issued pursuant to an Award if a necessary listing or quotation of the shares of Common Stock on a stock
exchange or inter-dealer quotation system or any registration under state or federal securities laws required under the
circumstances has not been accomplished.
8.3
Exercise of Stock Option.
(a)
In General. If a Stock Option is exercisable prior to the time it is vested, the Common Stock
obtained on the exercise of the Stock Option shall be Restricted Stock that is subject to the applicable provisions of
the Plan and the Award Agreement. If the Committee imposes conditions upon exercise, then subsequent to the Date
of Grant, the Committee may, in its sole discretion and subject to the other restrictions and limitations set forth in this
Plan, accelerate the date on which all or any portion of the Stock Option may be exercised. No Stock Option may be
exercised for a fractional share of Common Stock. The granting of a Stock Option shall impose no obligation upon
the Participant to exercise that Stock Option.
(b)
Notice and Payment. Subject to such administrative regulations as the Committee may from time
to time adopt, a Stock Option may be exercised by the delivery of written notice to the Committee setting forth the
number of shares of Common Stock with respect to which the Stock Option is to be exercised (the “Exercise Notice”)
and the date of exercise thereof (the “Exercise Date”) with respect to any Stock Option shall be the date that the
Participant has delivered both the Exercise Notice and consideration to the Company with a value equal to the total
Option Price of the shares to be purchased (plus any employment tax withholding or other tax payment due with
respect to such Award), payable as provided in the Award Agreement, which may provide for payment in any one or
more of the following ways: (i) cash or check, bank draft, or money order payable to the order of the Company, (ii)
Common Stock (including Restricted Stock) owned by the Participant on the Exercise Date, valued at its Fair Market
Value on the Exercise Date, and which the Participant has not acquired from the Company within six (6) months prior
to the Exercise Date, (iii) by delivery (including by electronic transmission) to the Company or its designated agent
of an executed irrevocable option exercise form (or, to the extent permitted by the Company, exercise instructions,
which may be communicated in writing, telephonically, or electronically) together with irrevocable instructions from
the Participant to a broker or dealer, reasonably acceptable to the Company, to sell certain of the shares of Common
Stock purchased upon exercise of the Stock Option, (iv) by requesting the Company to withhold the number of shares
otherwise deliverable upon exercise of the Stock Option by the number of shares of Common Stock having an
aggregate Fair Market Value equal to the aggregate Option Price at the time of exercise (i.e., a cashless net exercise),
and/or (v) in any other form of valid consideration that is acceptable to the Committee in its sole discretion. In the
event that shares of Restricted Stock are tendered as consideration for the exercise of a Stock Option, a number of
shares of Common Stock issued upon the exercise of the Stock Option equal to the number of shares of Restricted
Stock used as consideration therefor shall be subject to the same restrictions and provisions as the Restricted Stock so
tendered. If the Participant fails to deliver the consideration described in this Section 8.3(b) within three (3) business
days of the date of the Exercise Notice, then the Exercise Notice shall be null and void and the Company will have no
obligation to deliver any shares of Common Stock to the Participant in connection with such Exercise Notice.
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(c)
Issuance of Certificate. Except as otherwise provided in Section 6.4 hereof (with respect to shares
of Restricted Stock) or in the applicable Award Agreement, upon payment of all amounts due from the Participant,
the Company shall cause the Common Stock then being purchased to be registered in the Participant’s name (or the
person exercising the Participant’s Stock Option in the event of his or her death), but shall not issue certificates for
the Common Stock unless the Participant or such other person requests delivery of the certificates for the Common
Stock, in writing in accordance with the procedures established by the Committee. The Company shall deliver
certificates to the Participant (or the person exercising the Participant’s Stock Option in the event of his or her death)
as soon as administratively practicable following the Company’s receipt of a written request from the Participant or
such other person for delivery of the certificates. Notwithstanding the forgoing, if the Participant has exercised an
Incentive Stock Option, the Company may at its option retain physical possession of the certificate evidencing the
shares acquired upon exercise until the expiration of the holding periods described in Section 422(a)(1) of the Code.
Any obligation of the Company to deliver shares of Common Stock shall, however, be subject to the condition that,
if at any time the Committee shall determine in its discretion that the listing, registration, or qualification of the Stock
Option or the Common Stock upon any securities exchange or inter-dealer quotation system or under any state or
federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in
connection with, the Stock Option or the issuance or purchase of shares of Common Stock thereunder, the Stock
Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval
shall have been effected or obtained free of any conditions not reasonably acceptable to the Committee.
(d)
Failure to Pay. Except as may otherwise be provided in an Award Agreement, if the Participant
fails to pay for any of the Common Stock specified in such notice or fails to accept delivery thereof, that portion of
the Participant’s Stock Option and right to purchase such Common Stock may be forfeited by the Participant.
8.4
SARs. Subject to the conditions of this Section 8.4 and such administrative regulations as the Committee
may from time to time adopt, a SAR may be exercised by the delivery (including by electronic transmission) of written notice
to the Committee setting forth the number of shares of Common Stock with respect to which the SAR is to be exercised and
the date of exercise thereof (the “Exercise Date”), which shall be at least three (3) days after giving such notice, unless an
earlier time shall have been mutually agreed upon. Subject to the terms of the Award Agreement and only if permissible under
Section 409A of the Code and the regulations or other guidance issued thereunder (or, if not so permissible, at such time as
permitted by Section 409A of the Code and the regulations or other guidance issued thereunder), the Participant shall receive
from the Company in exchange therefor in the discretion of the Committee, and subject to the terms of the Award Agreement:
(a)
cash in an amount equal to the excess (if any) of the Fair Market Value (as of the Exercise Date, or
if provided in the Award Agreement, conversion, of the SAR) per share of Common Stock over the SAR Price per
share specified in such SAR, multiplied by the total number of shares of Common Stock of the SAR being surrendered;
(b)
that number of shares of Common Stock having an aggregate Fair Market Value (as of the Exercise
Date, or if provided in the Award Agreement, conversion, of the SAR) equal to the amount of cash otherwise payable
to the Participant, with a cash settlement to be made for any fractional share interests; or
(c)
the Company may settle such obligation in part with shares of Common Stock and in part with cash.
The distribution of any cash or Common Stock pursuant to the foregoing sentence shall be made at such time as set
forth in the Award Agreement.
8.5
Disqualifying Disposition of Incentive Stock Option. If shares of Common Stock acquired upon exercise
of an Incentive Stock Option are disposed of by a Participant prior to the expiration of either two (2) years from the Date of
Grant of such Stock Option or one (1) year from the transfer of shares of Common Stock to the Participant pursuant to the
exercise of such Stock Option, or in any other disqualifying disposition within the meaning of Section 422 of the Code, such
Participant shall notify the Company in writing of the date and terms of such disposition. A disqualifying disposition by a
Participant shall not affect the status of any other Stock Option granted under the Plan as an Incentive Stock Option within the
meaning of Section 422 of the Code.
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ARTICLE 9.
AMENDMENT OR DISCONTINUANCE
Subject to the limitations set forth in this Article 9, the Board may at any time and from time to time, without the
consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part; provided, however, that
no amendment for which stockholder approval is required either (a) by any securities exchange or inter-dealer quotation system
on which the Common Stock is listed or traded or (b) in order for the Plan and Incentives awarded under the Plan to continue
to comply with Sections 421 and 422 of the Code, including any successors to such Code Sections, or other Applicable Law,
shall be effective unless such amendment shall be approved by the requisite vote of the stockholders of the Company entitled
to vote thereon. Any such amendment shall, to the extent deemed necessary or advisable by the Committee, be applicable to
any outstanding Incentives theretofore granted under the Plan, notwithstanding any contrary provisions contained in any Award
Agreement. In the event of any such amendment to the Plan, the holder of any Incentive outstanding under the Plan shall, upon
request of the Committee and as a condition to the exercisability thereof, execute a conforming amendment in the form
prescribed by the Committee to any Award Agreement relating thereto. Notwithstanding anything contained in this Plan to the
contrary, unless required by law, no action contemplated or permitted by this Article 9 shall adversely affect any rights of
Participants or obligations of the Company to Participants with respect to any Incentive theretofore granted under the Plan
without the consent of the affected Participant.
ARTICLE 10.
TERM
The Plan shall be effective from the date that this Plan is adopted by the Board. Unless sooner terminated by action
of the Board, the Plan will terminate on the tenth anniversary of the Effective Date, but Incentives granted before that date will
continue to be effective in accordance with their respective terms and conditions.
ARTICLE 11.
CAPITAL ADJUSTMENTS
In the event that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split, rights offering, reorganization, merger, consolidation, split-up,
spin-off, split-off, combination, subdivision, repurchase, or exchange of Common Stock or other securities of the Company,
issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate
transaction or event affects the fair value of an Award, then the Committee shall adjust any or all of the following so that the
fair value of the Award immediately after the transaction or event is equal to the fair value of the Award immediately prior to
the transaction or event (a) the number of shares and type of Common Stock (or the securities or property) that thereafter may
be made the subject of Awards, (b) the number of shares and type of Common Stock (or other securities or property) subject
to outstanding Awards, (c) the Option Price of each outstanding Award, (d) the amount, if any, the Company pays for forfeited
shares of Common Stock in accordance with Section 6.4, and (e) the number of or SAR Price of shares of Common Stock then
subject to outstanding SARs previously granted and unexercised under the Plan, to the end that the same proportion of the
Company’s issued and outstanding shares of Common Stock in each instance shall remain subject to exercise at the same
aggregate SAR Price; provided, however, that the number of shares of Common Stock (or other securities or property) subject
to any Award shall always be a whole number. Notwithstanding the foregoing, no such adjustment shall be made or authorized
to the extent that such adjustment would cause the Plan or any Stock Option to violate Section 422 of the Code or Section 409A
of the Code. Such adjustments shall be made in accordance with the rules of any securities exchange, stock market, or stock
quotation system to which the Company is subject.
Upon the occurrence of any such adjustment, the Company shall provide notice to each affected Participant of its
computation of such adjustment, which shall be conclusive and shall be binding upon each such Participant.
ARTICLE 12.
RECAPITALIZATION, MERGER AND CONSOLIDATION
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12.1
No Effect on Company’s Authority. The existence of this Plan and Incentives granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company’s capital structure and its business, or any Change in
Control, or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or preference stocks
ranking prior to or otherwise affecting the Common Stock or the rights thereof (or any rights, options, or warrants to purchase
same), or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
12.2
Conversion of Incentives Where Company Survives. Subject to any required action by the stockholders
and except as otherwise provided by Section 12.4 hereof or as may be required to comply with Section 409A of the Code and
the regulations or other guidance issued thereunder, if the Company shall be the surviving or resulting corporation in any
merger, consolidation or share exchange, any Incentive granted hereunder shall pertain to and apply to the securities or rights
(including cash, property, or assets) to which a holder of the number of shares of Common Stock subject to the Incentive would
have been entitled.
12.3
Exchange or Cancellation of Incentives Where Company Does Not Survive. Except as otherwise
provided by Section 12.4 hereof or as may be required to comply with Section 409A of the Code and the regulations or other
guidance issued thereunder, in the event of any merger, consolidation or share exchange pursuant to which the Company is not
the surviving or resulting corporation, there shall be substituted for each share of Common Stock subject to the unexercised
portions of outstanding Incentives, that number of shares of each class of stock or other securities or that amount of cash,
property, or assets of the surviving, resulting or consolidated company which were distributed or distributable to the
stockholders of the Company in respect to each share of Common Stock held by them, such outstanding Incentives to be
thereafter exercisable for such stock, securities, cash, or property in accordance with their terms.
12.4
Cancellation of Incentives. Notwithstanding the provisions of Sections 12.2 and 12.3 hereof, and except
as may be required to comply with Section 409A of the Code and the regulations or other guidance issued thereunder, in the
event the acquiror or the surviving or resulting corporation does not agree to assume or substitute the Incentives, all Incentives
granted hereunder may be canceled by the Company, in its sole discretion, as of the effective date of any Change in Control,
merger, consolidation or share exchange, or any issuance of bonds, debentures, preferred or preference stocks ranking prior to
or otherwise affecting the Common Stock or the rights thereof (or any rights, options, or warrants to purchase same), or of any
proposed sale of all or substantially all of the assets of the Company, or of any dissolution or liquidation of the Company, by
either:
(a)
giving notice to each holder thereof or his personal representative of its intention to cancel those
Incentives for which the issuance of shares of Common Stock involved payment by the Participant for such shares,
and permitting the purchase during the thirty (30) day period next preceding such effective date of any or all of the
shares of Common Stock subject to such outstanding Incentives, including, in the Board’s discretion but subject to
Section 7.2, some or all of the shares as to which such Incentives would not otherwise be vested and exercisable; or
(b)
in the case of Incentives that are either (i) settled only in shares of Common Stock, or (ii) at the
election of the Participant, settled in shares of Common Stock, paying the holder thereof an amount equal to a
reasonable estimate of the difference between the net amount per share payable in such transaction or as a result of
such transaction, and the price per share of such Incentive to be paid by the Participant (hereinafter the “Spread”),
multiplied by the number of shares subject to the Incentive. In cases where the shares constitute, or would after
exercise, constitute Restricted Stock, the Company, in its discretion but subject to Section 7.2, may include some or
all of those shares in the calculation of the amount payable hereunder. In estimating the Spread, appropriate
adjustments to give effect to the existence of the Incentives shall be made, such as deeming the Incentives to have
been exercised, with the Company receiving the exercise price payable thereunder, and treating the shares receivable
upon exercise of the Incentives as being outstanding in determining the net amount per share. In cases where the
proposed transaction consists of the acquisition of assets of the Company, the net amount per share shall be calculated
on the basis of the net amount receivable with respect to shares of Common Stock upon a distribution and liquidation
by the Company after giving effect to expenses and charges, including but not limited to taxes, payable by the
Company before such liquidation could be completed.
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An Award that by its terms would be fully vested or exercisable upon a Change in Control will be considered vested
or exercisable for purposes of Section 12.4(a) hereof.
ARTICLE 13.
LIQUIDATION OR DISSOLUTION
Subject to Section 12.4 hereof, in case the Company shall, at any time while any Incentive under this Plan shall be in
force and remain unexpired, (a) sell all or substantially all of its property, or (b) dissolve, liquidate, or wind up its affairs, then
each Participant shall be entitled to receive, in lieu of each share of Common Stock of the Company which such Participant
would have been entitled to receive under the Incentive, the same kind and amount of any securities or assets as may be issuable,
distributable, or payable upon any such sale, dissolution, liquidation, or winding up with respect to each share of Common
Stock of the Company. If the Company shall, at any time prior to the expiration of any Incentive, make any partial distribution
of its assets, in the nature of a partial liquidation, whether payable in cash or in kind (but excluding the distribution of a cash
dividend payable out of earned surplus and designated as such) and an adjustment is determined by the Committee to be
appropriate to prevent the dilution of the benefits or potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable, make such adjustment in accordance with the provisions of Article
11 hereof.
ARTICLE 14.
INCENTIVES IN SUBSTITUTION FOR
INCENTIVES GRANTED BY OTHER ENTITIES
Incentives may be granted under the Plan from time to time in substitution for similar instruments held by employees,
independent contractors or directors of a corporation, partnership, or limited liability company who become or are about to
become Employees, Contractors, or Outside Directors of the Company or any Subsidiary as a result of a merger or consolidation
of the employing corporation with the Company, the acquisition by the Company of equity of the employing entity, or any
other similar transaction pursuant to which the Company becomes the successor employer (“Substitute Incentives”). The terms
and conditions of the Substitute Incentives so granted may vary from the terms and conditions set forth in this Plan to such
extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the
incentives in substitution for which they are granted. Substitute Incentives shall not reduce the shares authorized for issuance
under the Plan nor shall such shares subject to an Incentive be added to the shares available for issuance under the Plan as
provided in Article 5. Additionally, in the event that an entity acquired by the Company or any Parent or Subsidiary, or with
which the Company or any Parent or Subsidiary combines has shares available under a pre-existing plan approved by its
stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to
the terms of such pre-existing equity compensation plan (as adjusted, to the extent appropriate, using the exchange ratio or
other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable
to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the
Plan and shall not reduce the shares authorized for issuance under the Plan (and shares subject to such Awards shall not be
added to the shares available for issuance under the Plan as provided in Article 5); provided that Awards using such available
shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent
the acquisition or combination, and shall only be made to individuals who were not Employees, Contractors, or Outside
Directors prior to such acquisition or combination.
ARTICLE 15.
MISCELLANEOUS PROVISIONS
15.1
Investment Intent. The Company may require that there be presented to and filed with it by any Participant
under the Plan, such evidence as it may deem necessary to establish that the Incentives granted or the shares of Common Stock
to be purchased or transferred are being acquired for investment and not with a view to their distribution.
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15.2
No Right to Continued Employment. Neither the Plan nor any Incentive granted under the Plan shall confer
upon any Participant any right with respect to continuance of employment by the Company or any Subsidiary.
15.3
Indemnification of Board and Committee. No member of the Board or the Committee, nor any officer or
Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board and the
Committee, each officer of the Company, and each Employee of the Company acting on behalf of the Board or the Committee
shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action,
determination, or interpretation to the fullest extent provided by law. Except to the extent required by any unwaiveable
requirement under applicable law, no member of the Board or the Committee (and no Subsidiary of the Company) shall have
any duties or liabilities, including without limitation any fiduciary duties, to any Participant (or any Person claiming by and
through any Participant) as a result of this Plan, any Award Agreement or any Claim arising hereunder and, to the fullest extent
permitted under applicable law, each Participant (as consideration for receiving and accepting an Award Agreement)
irrevocably waives and releases any right or opportunity such Participant might have to assert (or participate or cooperate in)
any Claim against any member of the Board or the Committee and any Subsidiary of the Company arising out of this Plan.
15.4
Effect of the Plan. Neither the adoption of this Plan nor any action of the Board or the Committee shall be
deemed to give any person any right to be granted an Award or any other rights except as may be evidenced by an Award
Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then
only to the extent and upon the terms and conditions expressly set forth therein.
15.5
Compliance with Other Laws and Regulations. Notwithstanding anything contained herein to the
contrary, the Company shall not be required to sell or issue shares of Common Stock under any Incentive if the issuance thereof
would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental
authority or any national securities exchange or inter-dealer quotation system or other forum in which shares of Common Stock
are quoted or traded (including without limitation Section 16 of the Exchange Act); and, as a condition of any sale or issuance
of shares of Common Stock under an Incentive, the Committee may require such agreements or undertakings, if any, as the
Committee may deem necessary or advisable to assure compliance with any such law or regulation. The Plan, the grant and
exercise of Incentives hereunder, and the obligation of the Company to sell and deliver shares of Common Stock, shall be
subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory
agency as may be required.
15.6
Foreign Participation. To assure the viability of Awards granted to Participants employed in foreign
countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to, or amendments,
restatements or alternative versions of, this Plan as it determines is necessary or appropriate for such purposes. Any such
amendment, restatement or alternative versions that the Committee approves for purposes of using this Plan in a foreign country
will not affect the terms of this Plan for any other country.
15.7
Tax Requirements. The Company or, if applicable, any Parent or Subsidiary (for purposes of this Section
15.7, the term “Company” shall be deemed to include any applicable Parent or Subsidiary), shall have the right to deduct from
all amounts paid in cash or other form in connection with the Plan, any federal, state, local, or other taxes required by law to
be withheld in connection with an Award granted under this Plan. The Company may, in its sole discretion, also require the
Participant receiving shares of Common Stock issued under the Plan to pay the Company the amount of any taxes that the
Company is required to withhold in connection with the Participant’s income arising with respect to the Award. Such payments
shall be required to be made when requested by the Company and may be required to be made prior to the delivery of any
certificate representing shares of Common Stock. Such payment may be made by (a) the delivery of cash to the Company in
an amount that equals or exceeds (to avoid the issuance of fractional shares under (c) below) the required tax withholding
obligations of the Company; (b) if the Company, in its sole discretion, so consents in writing, the actual delivery by the
exercising Participant to the Company of shares of Common Stock that the Participant has not acquired from the Company
within six (6) months prior to the date of exercise, which shares so delivered have an aggregate Fair Market Value that equals
or exceeds (to avoid the issuance of fractional shares under (c) below) the required tax withholding payment (up to any
Company-imposed limit as described below); (c) if the Company, in its sole discretion, so consents in writing, the Company’s
withholding of a number of shares to be delivered upon the exercise of the Stock Option, which shares so withheld have an
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aggregate fair market value that equals (but does not exceed) the required tax withholding payment (up to any Company-
imposed limit as described below); or (d) any combination of (a), (b), or (c). To the extent any withholding obligation is
satisfied by the withholding of shares of Common Stock, such withholding shall be limited to the minimum statutory required
withholding rate for the Participant, or such other rate that will not cause an adverse accounting consequence or cost, subject
to the discretion of the Committee and any applicable Company policy that may be in place from time to time; provided,
however, that any shares of Common Stock that are withheld in excess of the minimum statutory rate shall not be recycled
back into the shares authorized for issuance as Awards under the Plan in accordance with Section 5.2. The Company may, in
its sole discretion, withhold any such taxes from any other cash remuneration otherwise paid by the Company to the Participant.
The Committee may in the Award Agreement impose any additional tax requirements or provisions that the Committee deems
necessary or desirable.
15.8
Assignability. Incentive Stock Options may not be transferred, assigned, pledged, hypothecated or otherwise
conveyed or encumbered other than by will or the laws of descent and distribution and may be exercised during the lifetime of
the Participant only by the Participant or the Participant’s legally authorized representative, and each Award Agreement in
respect of an Incentive Stock Option shall so provide. The designation by a Participant of a beneficiary will not constitute a
transfer of the Stock Option. The Committee may waive or modify any limitation contained in the preceding sentences of this
Section 15.8 that is not required for compliance with Section 422 of the Code.
Except as otherwise provided herein, Awards may not be transferred, assigned, pledged, hypothecated or otherwise
conveyed or encumbered other than by will or the laws of descent and distribution. Notwithstanding the foregoing, the
Committee may, in its discretion, authorize all or a portion of a Nonqualified Stock Option or SAR to be granted to a Participant
on terms which permit transfer by such Participant to (a) the spouse (or former spouse), children or grandchildren of the
Participant (“Immediate Family Members”), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members,
(c) a partnership in which the only partners are (1) such Immediate Family Members and/or (2) entities which are controlled
by the Participant and/or Immediate Family Members, (d) an entity exempt from federal income tax pursuant to Section
501(c)(3) of the Code or any successor provision, or (e) a split interest trust or pooled income fund described in Section
2522(c)(2) of the Code or any successor provision, provided that (x) there shall be no consideration for any such transfer, (y)
the Award Agreement pursuant to which such Nonqualified Stock Option or SAR is granted must be approved by the
Committee and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers
of transferred Nonqualified Stock Options or SARs shall be prohibited except those by will or the laws of descent and
distribution.
Following any transfer, any such Nonqualified Stock Option and SAR shall continue to be subject to the same terms
and conditions as were applicable immediately prior to transfer, provided that for purposes of Articles 8, 9, 11, 13 and 15 hereof
the term “Participant” shall be deemed to include the transferee. The events of Termination of Service shall continue to be
applied with respect to the original Participant, following which the Nonqualified Stock Options and SARs shall be exercisable
or convertible by the transferee only to the extent and for the periods specified in the Award Agreement. The Committee and
the Company shall have no obligation to inform any transferee of a Nonqualified Stock Option or SAR of any expiration,
termination, lapse or acceleration of such Stock Option or SAR. The Company shall have no obligation to register with any
federal or state securities commission or agency any Common Stock issuable or issued under a Nonqualified Stock Option or
SAR that has been transferred by a Participant under this Section 15.8.
15.9
Use of Proceeds. Proceeds from the sale of shares of Common Stock pursuant to Incentives granted under
this Plan shall constitute general funds of the Company.
15.10 Legend. Each certificate representing shares of Restricted Stock issued to a Participant shall bear the
following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions hereof (any
such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed):
On the face of the certificate:
“Transfer of this stock is restricted in accordance with conditions printed on the
reverse of this certificate.”
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On the reverse:
“The shares of stock evidenced by this certificate are subject to and transferable
only in accordance with that certain Hilltop Holdings Inc. 2020 Equity Incentive
Plan, a copy of which is on file at the principal office of the Company in Dallas,
Texas. No transfer or pledge of the shares evidenced hereby may be made
except in accordance with and subject to the provisions of said Plan. By
acceptance of this certificate, any holder, transferee or pledgee hereof agrees to
be bound by all of the provisions of said Plan.”
The following legend shall be inserted on a certificate evidencing Common Stock issued under the Plan if the shares
were not issued in a transaction registered under the applicable federal and state securities laws:
“Shares of stock represented by this certificate have been acquired by the holder
for investment and not for resale, transfer or distribution, have been issued
pursuant to exemptions from the registration requirements of applicable state
and federal securities laws, and may not be offered for sale, sold or transferred
other than pursuant to effective registration under such laws, or in transactions
otherwise in compliance with such laws, and upon evidence satisfactory to the
Company of compliance with such laws, as to which the Company may rely
upon an opinion of counsel satisfactory to the Company.”
15.11 Governing Law. The Plan shall be governed by, construed, and enforced in accordance with the laws of the
State of Maryland (excluding any conflict of laws, rule or principle of Maryland law that might refer the governance,
construction, or interpretation of this Plan to the laws of another state). A Participant’s sole remedy for any Claim shall be
against the Company, and no Participant shall have any claim or right of any nature against any Subsidiary of the Company or
any stockholder or existing or former director, officer or Employee of the Company or any Subsidiary of the Company. The
individuals and entities described above in this Section 15.11 (other than the Company) shall be third-party beneficiaries of
this Plan for purposes of enforcing the terms of this Section 15.11.
A copy of this Plan shall be kept on file in the principal office of the Company in Dallas, Texas.
***************
IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of ___________, 2020, by its
General Counsel and Secretary pursuant to prior action taken by the Board.
HILLTOP HOLDINGS INC.
By:
Name:
Title:
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HILLTOP HOLDINGS INC.
EMPLOYEE STOCK PURCHASE PLAN
Annex B
The Hilltop Holdings Inc. Employee Stock Purchase Plan (the “Plan”) was adopted by the Board of Directors of
Hilltop Holdings Inc., a Maryland corporation (the “Company”), effective as of April 30, 2020 (the “Effective Date”), subject
to approval by the Company’s stockholders.
1.
General.
(a)
The purpose of the Plan is to provide a means by which Eligible Employees of the Company and certain
designated Related Corporations may be given an opportunity to purchase shares of Common Stock. The Plan is intended to
permit the Company to grant a series of Purchase Rights to Eligible Employees under an Employee Stock Purchase Plan.
(b)
The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the
services of new Employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company
and its Related Corporations.
2.
Administration.
(a)
The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a
Committee or Committees, as provided in Section 2(c).
(b)
The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i)
To determine how and when Purchase Rights to purchase shares of Common Stock shall be granted
and the provisions of each Offering of such Purchase Rights (which need not be identical).
(ii)
participate in the Plan.
To designate from time to time which Related Corporations of the Company shall be eligible to
(iii)
To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules
and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully
effective.
(iv)
To settle all controversies regarding the Plan and Purchase Rights granted under it.
(v)
To suspend or terminate the Plan at any time as provided in Section 12.
(vi)
To amend the Plan at any time as provided in Section 12.
(vii) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to
promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be
treated as an Employee Stock Purchase Plan.
(c)
The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If
administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the
Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently
administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously
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delegated. Whether or not the Board has delegated administration of the Plan to a Committee, the Board shall have the final
power to determine all questions of policy and expediency that may arise in the administration of the Plan.
(d)
All determinations, interpretations and constructions made by the Board or, if delegated to a Committee, such
Committee, in good faith in its discretion shall be final, binding, and conclusive on all persons.
3.
Shares of Common Stock Subject to the Plan.
(a)
Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the shares of Common
Stock that may be sold pursuant to Purchase Rights shall not exceed in the aggregate Six Hundred Thousand (600,000) shares
of Common Stock.
(b)
If any Purchase Right granted under the Plan shall for any reason terminate without having been exercised,
the shares of Common Stock not purchased under such Purchase Right shall again become available for issuance under the
Plan.
(c)
The stock purchasable under the Plan may consist, in whole or in part, of authorized and unissued Common
Stock, treasury stock or Common Stock purchased on the open market.
4.
Grant of Purchase Rights; Offering.
(a)
The Board may from time to time grant or provide for the grant of Purchase Rights to purchase shares of
Common Stock under the Plan to Eligible Employees in an Offering (consisting of one or more Purchase Periods) on an
Offering Date or Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate, which shall comply with the requirement of Section 423(b)(5) of the Code that
all Employees granted Purchase Rights shall have the same rights and privileges. The terms and conditions of an Offering shall
be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document
comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 5 through
8, inclusive.
(b)
If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise
indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant shall be
deemed to apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or
an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) shall be exercised to the fullest
possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase
Rights have identical exercise prices) shall be exercised.
5.
Eligibility.
(a)
Purchase Rights may be granted only to Employees of the Company or, as the Board may designate as
provided in Section 2(b), to Employees of a Related Corporation. Except as provided in Section 5(b), an Employee shall not
be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee has been in the employ
of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as
the Board may require, but in no event shall the required period of continuous employment be greater than two (2) years. In
addition, the Board may provide that no Employee shall be eligible to be granted Purchase Rights under the Plan unless, on the
Offering Date, such Employee's customary employment with the Company or the Related Corporation is for more than twenty
(20) hours per week and/or for more than five (5) months per calendar year, or such other criteria as the Board may determine
consistent with Section 423 of the Code.
(b)
The Board may provide that each person who, during the course of an Offering, first becomes an Eligible
Employee shall, on a date or dates specified in the Offering that coincides with the day on which such person becomes an
Eligible Employee or that occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right shall thereafter
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be deemed to be a part of that Offering. Such Purchase Right shall have the same characteristics as any Purchase Rights
originally granted under that Offering, as described herein, except that:
(i)
the date on which such Purchase Right is granted shall be the “Offering Date” of such Purchase
Right for all purposes, including determination of the exercise price of such Purchase Right;
(ii)
the period of the Offering with respect to such Purchase Right shall begin on its Offering Date and
end coincident with the end of such Offering; and
(iii)
the Board may provide that if such person first becomes an Eligible Employee within a specified
period of time before the end of the Offering, he or she shall not receive any Purchase Right under that Offering.
(c)
No Employee shall be eligible for the grant of any Purchase Rights under the Plan if, immediately after any
such Purchase Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 5(c),
the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such
Employee may purchase under all outstanding Purchase Rights and options shall be treated as stock owned by such Employee.
(d)
As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights under
the Plan only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the
Company and any Related Corporations, do not permit such Eligible Employee's rights to purchase stock of the Company or
any Related Corporation to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value of such
stock (determined at the time such rights are granted, and which, with respect to the Plan, shall be determined as of their
respective Offering Dates) for each calendar year in which such rights are outstanding at any time.
(e)
Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees,
shall be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering
that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6.
Purchase Rights; Purchase Price.
(a)
On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be
granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable with a percentage of such
Employee's Compensation (as defined by the Board in each Offering) not exceeding fifteen percent (15%) during the period
that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the Offering.
(b)
The Board shall establish one (1) or more Purchase Dates during an Offering as of which Purchase Rights
granted pursuant to that Offering shall be exercised and purchases of shares of Common Stock shall be carried out in accordance
with such Offering.
(c)
In connection with each Offering made under the Plan, the Board may specify a maximum number of shares
of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering. In connection with
each Offering made under the Plan, the Board may specify a maximum aggregate number of shares of Common Stock that may
be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more
than one Purchase Date, the Board may specify a maximum aggregate number of shares of Common Stock that may be
purchased by all Participants on any or each Purchase Date under the Offering. If the aggregate purchase of shares of Common
Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate
number, then, in the absence of any Board action otherwise, a pro rata allocation of the shares of Common Stock available shall
be made in as nearly a uniform manner as shall be practicable and equitable.
The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be not less than
the lesser of: (i) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the
(d)
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Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock
on the applicable Purchase Date.
7.
Participation; Withdrawal; Termination.
(a)
A Participant may elect to authorize payroll deductions pursuant to an Offering under the Plan by completing
and delivering to the Company, within the time specified in the Offering, an enrollment form (in such form as the Company
may provide). Each such enrollment form shall authorize an amount of Contributions expressed as a percentage of the
submitting Participant's Compensation (as defined in each Offering) during the Offering (not to exceed the maximum
percentage specified by the Board). Each Participant's Contributions shall be credited to a bookkeeping account for such
Participant under the Plan and shall be deposited with the general funds of the Company except where applicable law requires
that Contributions be deposited with an independent third party. To the extent provided in the Offering, a Participant may begin
such Contributions after the beginning of the Offering. To the extent provided in the Offering, a Participant may thereafter
reduce (including to zero) or increase his or her Contributions. To the extent specifically provided in the Offering, in addition
to making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check
prior to each Purchase Date of the Offering.
(b)
During an Offering, a Participant may cease making Contributions and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company may provide. Such withdrawal may be elected
at any time prior to the end of the Offering, except as provided otherwise in the Offering. Upon such withdrawal from the
Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated Contributions (reduced
to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the Participant) under the
Offering, and such Participant's Purchase Right in that Offering shall thereupon terminate. A Participant's withdrawal from an
Offering shall have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan, but such
Participant shall be required to deliver a new enrollment form in order to participate in subsequent Offerings.
(c)
Purchase Rights granted pursuant to any Offering under the Plan shall terminate immediately upon a
Participant ceasing to be an Employee or other lack of eligibility. The Company shall distribute to such terminated or otherwise
ineligible Employee all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been
used to acquire shares of Common Stock for the terminated or otherwise ineligible Employee) under the Offering. An Employee
will be deemed to have terminated employment for purposes of the Plan when the employee begins a leave of absence, unless
the Employee is on an approved leave of absence or is entitled to disability benefits, in which case participation shall be
suspended until a return to active employment.
(d)
Purchase Rights shall not be transferable by a Participant except by will, the laws of descent and distribution,
or by a beneficiary designation as provided in Section 10. During a Participant's lifetime, Purchase Rights shall be exercisable
only by such Participant.
(e)
Unless otherwise specified in an Offering, the Company shall have no obligation to pay interest on
Contributions.
8.
Exercise of Purchase Rights.
(a)
On each Purchase Date during an Offering, each Participant's accumulated Contributions shall be applied to
the purchase of shares of Common Stock up to the maximum number of shares of Common Stock permitted pursuant to the
terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be
issued upon the exercise of Purchase Rights unless specifically provided for in the Offering.
(b)
If any amount of accumulated Contributions remains in a Participant's account after the purchase of shares
of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the
final Purchase Date of an Offering, then such remaining amount shall be held in such Participant's account for the purchase of
shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from such next Offering,
as provided in Section 7(b), or is not eligible to participate in such Offering, as provided in Section 5, in which case such
amount shall be distributed to such Participant after the final Purchase Date, without interest (unless required by applicable
law). If the amount of Contributions remaining in a Participant's account after the purchase of shares of Common Stock is at
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least equal to the amount required to purchase one (1) whole share of Common Stock on the final Purchase Date of the Offering,
then such remaining amount shall be distributed in full to such Participant at the end of the Offering without interest.
(c)
No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon
such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in
material compliance with all applicable federal, state and foreign laws, and any other securities laws and other laws applicable
to the Plan. If on a Purchase Date during any Offering hereunder the shares of Common Stock are not so registered or the Plan
is not in such compliance, no Purchase Rights or any Offering shall be exercised on such Purchase Date, and the Purchase Date
shall be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in such
compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in
no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date under any Offering hereunder,
as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in such
compliance, no Purchase Rights or any Offering shall be exercised and all Contributions accumulated during the Offering
(reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock) shall be distributed to
the Participants without interest (unless required by applicable law).
(d)
Shares of Common Stock obtained by exercise of Purchase Rights must be held by the Participant for at least
ninety (90) days prior to Participant’s sale of such Common Stock. The terms and conditions of Purchase Rights granted
hereunder to, and the purchase of shares of Common Stock by, persons subject to Section 16 of the Exchange Act shall comply
with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such Purchase Rights shall contain,
and the shares of Common Stock issued upon exercise thereof shall be subject to, such additional conditions and restrictions,
if any, as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
9.
Covenants of the Company.
The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having
jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the
Purchase Rights. If, after commercially reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common
Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise
of such Purchase Rights unless and until such authority is obtained.
10.
Designation of Beneficiary.
(a)
A Participant may file a written designation of a beneficiary who is to receive any shares of Common Stock
and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end
of an Offering but prior to delivery to the Participant of such shares of Common Stock or cash. In addition, a Participant may
file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event
of such Participant's death during an Offering. Any such designation shall be on a form provided by or otherwise acceptable to
the Company.
(b)
The Participant may change such designation of beneficiary at any time by written notice to the Company.
In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at
the time of such Participant's death, the Company shall deliver such shares of Common Stock and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or cash to the spouse or to
any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
11.
Adjustments upon Changes in Common Stock; Corporate Transactions.
(a)
In the event of a Capitalization Adjustment, the Board shall appropriately and proportionately adjust: (i) the
class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number
of securities by which the share reserve is to increase automatically each year pursuant to Section 3(a), (iii) the class(es) and
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number of securities subject to, and the purchase price applicable to, outstanding Offerings and Purchase Rights, and (iv) the
class(es) and number of securities imposed by purchase limits under each ongoing Offering. The Board shall make such
adjustments in compliance with applicable law, and its determination shall be final, binding, and conclusive.
(b)
In the event of a Corporate Transaction, then: (i) any surviving corporation or acquiring corporation (or the
surviving or acquiring corporation's parent company) may assume or continue Purchase Rights outstanding under the Plan or
may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the Corporate
Transaction) for those outstanding under the Plan, or (ii) if any surviving or acquiring corporation (or its parent company) does
not assume or continue such Purchase Rights or does not substitute similar rights for Purchase Rights outstanding under the
Plan, then the Participants’ accumulated Contributions shall be used to purchase shares of Common Stock within ten (10)
business days prior to the Corporate Transaction under any ongoing Offerings, and the Participants’ Purchase Rights under the
ongoing Offerings shall terminate immediately after such purchase.
12.
Amendment, Termination or Suspension of the Plan.
(a)
The Board may amend the Plan at any time in any respect the Board deems necessary or advisable. However,
except as provided in Section 11(a) relating to Capitalization Adjustments, stockholder approval shall be required for any
amendment of the Plan for which stockholder approval is required by applicable law or listing requirements, including any
amendment that either (i) materially increases the number of shares of Common Stock available for issuance under the Plan,
(ii) materially expands the class of individuals eligible to become Participants and receive Purchase Rights under the Plan, (iii)
materially increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares of
Common Stock may be purchased under the Plan, (iv) materially extends the term of the Plan, or (v) expands the types of
awards available for issuance under the Plan, but in each of (i) through (v) above only to the extent stockholder approval is
required by applicable law or listing requirements.
(b)
The Board may suspend or terminate the Plan at any time. No Purchase Rights may be granted under the Plan
while the Plan is suspended or after it is terminated.
(c)
Any benefits, privileges, entitlements and obligations under any outstanding Purchase Rights granted before
an amendment, suspension or termination of the Plan shall not be impaired by any such amendment, suspension or termination
except (i) with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any
laws, listing requirements or governmental regulations (including, without limitation, the provisions of Section 423 of the
Code), or (iii) as necessary to obtain or maintain favorable tax, listing or regulatory treatment.
13.
Effective Date of Plan.
The Plan shall become effective on January 1, 2021, but no Purchase Rights shall be exercised unless and until the
Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after
the date the Plan is adopted by the Board.
14. Miscellaneous Provisions.
(a)
Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights shall constitute general funds
of the Company.
(b)
A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to,
shares of Common Stock subject to Purchase Rights unless and until the Participant's shares of Common Stock acquired upon
exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent).
(c)
The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering shall
in any way (i) alter the at will nature of a Participant's employment, or (ii) be deemed to create in any way whatsoever any
obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of
the Company or a Related Corporation to continue the employment of a Participant.
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(d)
conflicts of laws rules.
The provisions of the Plan shall be governed by the laws of the State of Maryland without resort to that state's
15.
Definitions.
As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:
(a)
“Board” means the Board of Directors of the Company.
(b)
“Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the
Common Stock subject to the Plan or subject to any Purchase Right after the Effective Date without the receipt of consideration
by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate
structure, or other similar transaction). Notwithstanding the foregoing, the conversion of any convertible securities of the
Company shall not be treated as a Capitalization Adjustment.
(c)
“Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and
other guidance thereunder.
(d)
“Committee” means a committee of one (1) or more members of the Board to whom authority has been
delegated by the Board in accordance with Section 2(c).
(e)
“Common Stock” means the common stock of the Company.
(f)
“Company” means Hilltop Holdings Inc, a Maryland corporation.
(g)
“Contributions” means the payroll deductions, and other additional payments specifically provided for in the
Offering, that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make additional payments
into his or her account, if specifically provided for in the Offering, and then only if the Participant has not already had the
maximum permitted amount withheld during the Offering through payroll deductions.
(h)
“Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions,
of any one or more of the following events:
(i)
the consummation of a sale or other disposition of all or substantially all, as determined by the Board
in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)
the consummation of a sale or other disposition of at least fifty percent (50%) of the outstanding
securities of the Company;
(iii)
the consummation of a merger, consolidation or similar transaction following which the Company
is not the surviving corporation; or
(iv)
the consummation of a merger, consolidation or similar transaction following which the Company
is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar
transaction into other property, whether in the form of securities, cash or otherwise.
(i)
“Director” means a member of the Board.
(j)
“Eligible Employee” means an Employee who meets the requirements set forth in the Offering for eligibility
to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in
the Plan.
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(k)
“Employee” means any person, including Officers and Directors, who is employed for purposes of Section
423(b)(4) of the Code by the Company or a Related Corporation. However, service solely as a Director, or payment of a fee
for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.
(l)
“Employee Stock Purchase Plan” means a plan that grants Purchase Rights intended to be options issued
under an “employee stock purchase plan,” as that term is defined in Section 423(b) of the Code.
(m)
promulgated thereunder.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations
(n)
“Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i)
If the Common Stock is listed on any established stock exchange or traded on any established
market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock as quoted
on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on
the date of determination, as reported in such source as the Board deems reliable.
(ii)
Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on
the date of determination, then the Fair Market Value shall be the closing selling price (or closing bid if no sales were
reported) on the last preceding date for which such quotation exists.
(iii)
In the absence of such markets for the Common Stock, the Fair Market Value shall be determined
by the Board in good faith.
(o)
Eligible Employees.
“Offering” means the grant of Purchase Rights to purchase shares of Common Stock under the Plan to
(p)
“Offering Date” means a date selected by the Board for an Offering to commence.
(q)
“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange
Act and the rules and regulations promulgated thereunder.
(r)
“Participant” means an Eligible Employee who holds an outstanding Purchase Right granted pursuant to the
Plan.
(s)
“Plan” means this Hilltop Holdings Inc. Employee Stock Purchase Plan.
(t)
“Purchase Date” means one or more dates during an Offering established by the Board on which Purchase
Rights shall be exercised and as of which purchases of shares of Common Stock shall be carried out in accordance with such
Offering.
(u)
“Purchase Period” means a period of time specified within an Offering beginning on the Offering Date or on
the next day following a Purchase Date within an Offering and ending on a Purchase Date. An Offering may consist of one or
more Purchase Periods.
(v)
“Purchase Right” means an option to purchase shares of Common Stock granted pursuant to the Plan.
(w)
“Related Corporation” means any “parent corporation” or “subsidiary corporation” of the Company whether
now or subsequently established, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(x)
thereunder.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated
(y)
“Trading Day” means any day on which the exchange(s) or market(s) on which shares of Common Stock are
listed is open for trading.
B-8
6565 Hillcrest Avenue
Dallas, Texas 75205
Telephone: (214) 855-2177
Facsimile: (214) 855-2173
(This page has been left blank intentionally)
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2019
☒
☐
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)
6565 Hillcrest Avenue
Dallas, TX
(Address of principal executive offices)
84-1477939
(I.R.S. Employer
Identification No.)
75205
(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
Trading symbol
HTH
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 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, 2019, was approximately $1.54 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 27, 2020 was 90,798,946.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement pertaining to the 2020 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
53
53
53
53
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . 107
Item 9.
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . 110
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
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 “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 includes “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 revenue, our liquidity and sources of funding, market trends,
operations and business, taxes, the pending sale of NLC and the regulatory approval thereof, information technology
expenses, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations
concerning mortgage loan origination volume and interest rate compression, mortgage loans originated to be retained by
the Bank, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage
loans originated, loss estimates related to natural disasters, 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, including as a result of the “current expected
credit losses” (CECL) model, 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 and increases to the allowance
for loan losses as a result of the implementation of CECL, 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;
the failure of the NLC sale transaction to close on the expected timeline or at all, including the ability to obtain
regulatory approvals and meet other closing conditions to the sale of NLC, as well as the effect of the
announcement of the NLC transaction on agent or customer relationships and operating results;
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.
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, 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, 2019, on a consolidated basis, we had total assets of $15.2 billion, total deposits of $9.0 billion, total
loans, including loans held for sale, of $9.4 billion and stockholders’ equity of $2.1 billion.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HTH.”
Our principal office is located at 6565 Hillcrest Avenue, Dallas, Texas 75205, 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
“Investor Relations - 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 the large metropolitan markets 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, with 51% of the broker-dealer segment’s net revenues during 2019 generated through locations in
Texas, California and Oklahoma.
PrimeLending provides residential mortgage origination products and services from over 300 locations in 44 states.
During 2019, an aggregate of 62.4% of PrimeLending’s origination volume was concentrated in ten states, with 36.4%
concentrated in Texas, California and Florida, collectively. Other than these ten states, none of the states in which
PrimeLending operated during 2019 represented more than 3% of PrimeLending’s origination volume.
Our insurance products are distributed through a broad network of independent agents. During 2019, total gross premiums
written were concentrated in five states (Texas, Arizona, Tennessee, Oklahoma and Georgia), with Texas insureds
representing 69.6% of the aggregate. None of the other states in which we operated during 2019 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, our President and Chief Executive Officer, to
evaluate segment performance, develop strategy and allocate resources.
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.
6
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 31 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, 2019, had $11.1 billion in assets and
total deposits of $8.8 billion. The primary sources of our deposits are residents and businesses located in Texas. At
December 31, 2019, the Bank employed approximately 1,150 people.
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.
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, 2019 (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 $2.2 billion in warehouse lines of credit extended to PrimeLending, of
which $1.8 billion was drawn at December 31, 2019. 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
$ 1,696,506 $ 12,846 $
1,278,435
3,860,909
940,487
741,500
—
47,046
12,736
5,260
77
51,412
—
—
$ 8,564,883 $ 82,331 $
1,709,352
1,291,171
3,866,169
940,564
792,912
—
47,046
8,647,214
19.8 %
14.9 %
44.7 %
10.9 %
9.2 %
- %
0.5 %
100.0 %
The loans acquired in the FDIC-assisted transaction in 2013 in which we assumed substantially all of the liabilities and
acquired substantially all of the assets of FNB (the “FNB Transaction”) were subject to loss-share agreements with the
FDIC, which were terminated on October 17, 2018. 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, healthcare, 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
services as determined on a customer-by-customer basis. Our treasury management services, which are designed to reduce
7
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 term loans, 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. 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
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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, 2019, the Bank had $47.0
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. 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, 2019, Hilltop
Securities had consolidated assets of $3.5 billion and net capital of $318.7 million, which was $310.9 million in excess of
its minimum net capital requirement of $7.8 million. At December 31, 2019, the Hilltop Broker-Dealers employed
approximately 790 people and maintained 52 locations in 20 states.
Our broker-dealer segment has four primary lines of business: (i) public finance services, (ii) structured finance, (iii) fixed
income services, and (iv) wealth management, which includes retail, clearing services and securities lending. These lines
of business and the respective services provided reflect the current manner in which the broker-dealer segment’s
operations are managed.
Public Finance Services. The public finance services line of business assists public entities 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 finance services 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.
Additionally, through its arbitrage rebate, treasury management and government investment pools management
departments, the public finance services line of business provides state and local governments with advice and guidance
with respect to arbitrage rebate compliance, portfolio management and local government investment pool administration.
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
services business. 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.
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Fixed Income Services. The fixed income services 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 client activities. The fixed
income services line of business also provides limited equity trading and option order delivery 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 fixed income services line of business provides asset and liability management
advisory services to community banks.
Wealth Management. The wealth management line of business is comprised of our retail, clearing services and securities
lending groups.
Retail. The retail group acts as a securities broker for retail investors in the purchase and sale of securities, options,
commodities and futures contracts that are traded on various exchanges or in the over-the-counter market through our
employee-registered representatives or independent contractor arrangements. 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, 2019, we employed 126 registered representatives in 17 retail brokerage offices and had contracts with 195
independent retail representatives for the administration of their securities business.
Clearing Services. The clearing services group offers fully disclosed clearing services to FINRA- and SEC-registered
member firms for trade execution and clearance as well as back office services such as record keeping, trade reporting,
accounting, general back-office support, securities and margin lending, reorganization assistance and custody of
securities. At December 31, 2019, we provided services to 145 financial organizations, including correspondent firms,
correspondent broker-dealers, registered investment advisers, discount and full-service brokerage firms, and institutional
firms.
Securities Lending. The securities lending group performs activities that include borrowing and lending securities for
other broker-dealers, lending institutions, and internal clearing and retail operations. These activities involve borrowing
securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required
settlement date, and lending securities to other broker-dealers for similar purposes.
Mortgage Origination
Our mortgage origination segment operates through a wholly owned subsidiary of the Bank, PrimeLending, 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 2019, funded loan volume through ABAs was approximately 8% of the
mortgage origination segment’s total loan volume. At December 31, 2019, our mortgage origination segment operated
from over 300 locations in 44 states, originating 19.3%, 10.0% and 7.2%, 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 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.
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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. During 2019, 2018, and
2017, the mortgage origination segment originated approximately $149 million, $97 million, and $10 million,
respectively, in loans on behalf of the banking segment, representing up to 1% of PrimeLending’s total loan origination
volume during each year. We expect loan volume originated on behalf of the banking segment to increase during 2020
based on approved authority for up to 5% of the mortgage origination segment’s total loan volume. 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:
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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 also acts as a primary servicer for loans originated prior to sale, loans sold to the banking segment and
loans sold with servicing retained.
PrimeLending had a staff of approximately 2,500 people, including approximately 1,280 mortgage loan officers, as of
December 31, 2019 that produced $15.6 billion in closed mortgage loan volume during 2019, 75% 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 May
2019. 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.
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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.
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 recruiting and retaining securities traders, investment bankers, and other financial advisors is
intense. Our broker-dealer business competes directly with numerous other financial advisory and investment banking
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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 and certain free services. We seek to distinguish ourselves from our competitors through our commitment to
personalized customer service and responsiveness to customer needs while providing a range of investment banking,
advisory and other related financial brokerage services.
Our competitors in the mortgage origination business include large financial institutions as well as independent mortgage
banking companies, commercial banks, savings banks and savings and loan associations. Our mortgage origination
segment competes on a number of factors including customer service, quality and range of products and services offered,
price, reputation, interest rates, closing process and duration, and loan origination fees. The ability to attract and retain
skilled mortgage origination professionals is critical to our mortgage origination business. We seek to distinguish
ourselves from our competitors through our commitment to personalized customer service and responsiveness to customer
needs while providing a range of competitive mortgage loan products and services.
Our insurance business competes with a large number of other companies in its selected lines of business, including major
U.S. and non-U.S. insurers, regional companies, mutual companies, specialty insurance companies, underwriting agencies
and diversified financial services companies. The personal lines market in Texas is dominated by a few large carriers and
their subsidiaries and affiliates. We seek to distinguish ourselves from our competitors by targeting underserved market
segments that provide us with the best opportunity to obtain favorable policy terms, conditions and pricing.
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, 2019, we employed approximately 4,950 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.
The Dodd-Frank Act, which significantly altered the regulation of financial institutions and the financial services industry,
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, capital requirements, 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
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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
by the Dodd-Frank Act with respect to company-run stress testing, resolutions plans, the 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. Additionally, the accounting standards setter, Financial Accounting Standards Board (“FASB”) recently
proposed guidance that would help ease the potential effects of reference rate reform on financial reporting. The proposed
guidance would offer optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other
transactions affected by reference rate reform. Additionally, the FASB issued specific accounting guidance which permits
the use of the OIS rate based on the SOFR to be designated as a benchmark interest rate for hedge accounting purposes.
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.
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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 and subject to certain limitations, could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
Scope of Permissible Activities. Under the Bank Holding Company Act, Hilltop and PCC generally may not acquire a
direct or indirect interest in, or control of more than 5% of, the voting shares of any company that is not a bank or bank
holding company. Additionally, the Bank Holding Company Act may prohibit Hilltop from engaging in activities other
than those of banking, managing or controlling banks or furnishing services to, or performing services for, its subsidiaries,
except that it may engage in, directly or indirectly, certain activities that the Federal Reserve Board has determined to be
closely related to banking or managing and controlling banks as to be a proper incident thereto. In approving acquisitions
or the addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the
additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated the barriers to
affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank
holding companies to become financial holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. The Gramm-Leach-Bliley Act defines “financial in
nature” to include: securities underwriting; dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board
has determined to be closely related to banking. Prior to enactment of the Dodd-Frank Act, regulatory approval was not
required for a financial holding company to acquire a company, other than a bank or savings association, engaged in
activities that were financial in nature or incidental to activities that were financial in nature, as determined by the Federal
Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company by filing a
declaration with the Federal Reserve Board if each of its subsidiary banks is “well capitalized” under the Federal Deposit
Insurance Corporation Improvement Act prompt corrective action provisions, is “well managed”, and has at least a
“satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Dodd-Frank Act underscores the
criteria for becoming a financial holding company by amending the Bank Holding Company Act to require that bank
holding companies be “well capitalized” and “well managed” in order to become financial holding companies. Hilltop
became a financial holding company on December 1, 2012.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking
practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its equity securities, if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of
the company’s consolidated net worth. In addition, bank holding companies are required to consult with the Federal
Reserve Board prior to making any redemption or repurchase, even within the foregoing parameters. The Federal Reserve
Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or
would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the
position that paying a dividend would constitute an unsafe or unsound banking practice.
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.
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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 was 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 “OCC”).
The federal banking agencies’ risk-based capital and leverage ratios are minimum supervisory ratios generally applicable
to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating.
Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum
ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are
higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Final rules published by the Federal Reserve, the FDIC, and the OCC 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.
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The following table summarizes the Basel III requirements fully phased-in as of the period beginning January 1, 2019.
Item
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
Requirement
4.5 %
2.5 %
7.0 %
6.0 %
8.5 %
8.0 %
10.5 %
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 were fully phased-in in 2019, the minimum capital requirements plus the capital
conservation buffer should have exceeded the prompt corrective action well-capitalized thresholds.
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 were fully phased in as of January 1, 2019. During 2019,
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
2020.
At December 31, 2019, Hilltop had a total capital to risk-weighted assets ratio of 17.55%, Tier 1 capital to risk-weighted
assets ratio of 17.13% and a common equity Tier 1 capital to risk-weighted assets ratio of 16.70%. 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.
At December 31, 2019, PlainsCapital had a total capital to risk-weighted assets ratio of 14.13%, Tier 1 capital to risk-
weighted assets ratio of 13.45% and a common equity Tier 1 capital to risk-weighted assets ratio of 13.45%.
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.
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 became
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. We have elected to not exercise the option for phase-in.
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
17
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 July 22, 2019, the federal banking agencies, among other agencies, published a final rule
implementing provisions of EGRRCPA that 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 Bank does not qualify for this regulatory exclusion.
On November 14, 2019, the federal banking agencies, among other agencies, published a separate final rule to provide
greater clarity and certainty about the activities prohibited by the Volcker Rule and to improve supervision and
implementation of the Volcker Rule based on the agencies’ experience implementing these provisions since 2013.
Banking entities must comply with the final rule by January 1, 2021, however, banking entities may voluntarily comply
with the final rule in whole or in part prior to the compliance date, subject to the agencies’ completion of necessary
technological changes.
While management continues to assess compliance with the Volcker Rule, we have reviewed our processes and
procedures in regard to proprietary trading and covered funds activities and we believe we are currently complying with
the provisions of the Volcker Rule. However, it remains uncertain how the scope of applicable restrictions and exceptions
will be interpreted and administered by the relevant regulators. Absent further regulatory guidance, we are required to
make certain assumptions as to the degree to which our activities, processes and procedures in these areas comply with
the requirements of the Volcker Rule. If these assumptions are not accurate or if our implementation of compliance
processes and procedures is not consistent with regulatory expectations, we may be required to make certain changes to
our business activities, processes or procedures, which could further increase our compliance and regulatory risks and
costs.
Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any
bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies,
the Federal Reserve Board is required to consider, among other things, the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be
served, and various competitive factors. In addition, the Dodd-Frank Act requires the Federal Reserve Board to consider
“the risk to the stability of the U.S. banking or financial system” when evaluating acquisitions of banks and nonbanks
under the Bank Holding Company Act. With respect to interstate acquisitions, the Dodd-Frank Act amends the Bank
Holding Company Act by raising the standard by which interstate bank acquisitions are permitted from a standard that the
acquiring bank holding company be “adequately capitalized” and “adequately managed”, to the higher standard of being
“well capitalized” and “well managed”.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of
a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act,
would, under the circumstances set forth in the presumption, constitute acquisition of control of such company.
Banking
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation,
supervision and regular examination by the Texas Department of Banking. The Bank, as a state member bank, is also
subject to regulation and examination by the Federal Reserve Board. 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, 2019 and December 31, 2019, the Bank’s total assets were $10.9
billion and $11.1 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 expects that it will be subject to CFPB supervisory and enforcement authority starting in the second quarter of
2020.
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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.”
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,
19
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,
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, 2019.
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 $0.5 million during 2019.
20
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
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.
On January 1, 2019, PlainsCapital fully transitioned to the final rules that substantially amended 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. At December 31, 2019, PlainsCapital’s ratio of total risk-based capital to risk-weighted assets was14.13%,
PlainsCapital’s ratio of Tier 1 capital to risk-weighted assets was 13.45%, PlainsCapital’s common equity Tier 1 capital to
risk-weighted assets ratio was 13.45%, and PlainsCapital’s ratio of Tier 1 capital to average total assets was 11.61%
On December 13, 2019, the Federal Reserve, the FDIC and the OCC published a final rule modifying the treatment of
high volatility commercial real estate (“HVCRE”) exposures as required by EGRRCPA. The final rule clarifies certain
defined terms in the HVCRE exposure definition in a manner generally consistent with the call report instructions as well
as the treatment of credit facilities that finance one- to four-family residential properties and the development of land.
The final rule becomes effective on April 1, 2020.
21
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 such bank. Pursuant to a provision in EGRRCPA, the
FDIC published a final rule on February 4, 2019 excepting a capped amount of reciprocal deposits from being considered
as brokered deposits for certain insured depository institutions. The FDIC also published a proposed rule seeking
comments on the FDIC’s overall brokered deposit regulations. At December 31, 2019, PlainsCapital was “well
capitalized” and therefore not subject to any limitations with respect to its brokered deposits.
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, 2019. On December 12, 2019, the Federal Reserve published its annual adjustment to the
consolidated asset threshold, increasing it to $10.715 billion in assets through December 31, 2020. As of December 31,
2019, the Bank’s total assets were $11.1 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, including obtaining beneficial
ownership information on new legal entity customers and otherwise has implemented policies and procedures intended to
comply with the foregoing rules.
22
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.
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, profit disgorgement, monetary
penalties, 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, 2019, 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,
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and suspension or expulsion by these regulators could ultimately lead to the broker-dealer’s liquidation. Additionally, the
Net Capital Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer
from distributing or withdrawing capital and requiring prior notice to, and approval from, the SEC and FINRA for certain
capital withdrawals.
Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital. Such rules
require that a certain percentage of our assets be maintained in relatively liquid form and therefore act to restrict our
ability to withdraw capital from our broker-dealer entities, which in turn may limit our ability to pay dividends, repay debt
or redeem or purchase shares of our outstanding common stock. Any change in such rules or the imposition of new rules
affecting the scope, coverage, calculation or amount of capital requirements, or a significant operating loss or any
unusually large charge against capital, could adversely affect our ability to pay dividends, repay debt, meet our debt
covenant requirements or to expand or maintain our operations. In addition, such rules may require us to make substantial
capital contributions into one or more of the Hilltop Broker-Dealers in order for such subsidiaries to comply with such
rules, either in the form of cash or subordinated loans made in accordance with the requirements of all applicable net
capital rules.
Customer Protection Rule. The Hilltop Broker-Dealers that hold customers’ funds and securities are subject to the SEC’s
customer protection rule (Rule 15c3-3 under the Exchange Act), which generally provides that such broker-dealers
maintain physical possession or control of all fully-paid securities and excess margin securities carried for the account of
customers and maintain certain reserves of cash or qualified securities.
Securities Investor Protection Corporation (“SIPC”). The Hilltop Broker-Dealers are subject to the Securities Investor
Protection Act and belong to SIPC, whose primary function is to provide financial protection for the customers of failing
brokerage firms. SIPC provides protection for customers up to $500,000, of which a maximum of $250,000 may be in
cash.
Anti-Money Laundering. The Hilltop Broker-Dealers must also comply with the USA PATRIOT Act and other rules and
regulations, including FINRA requirements, designed to fight international money laundering and to block terrorist access
to the U.S. financial system. We are required to have systems and procedures to ensure compliance with such laws and
regulations.
CFTC Oversight. Hilltop Securities and HTS Independent Network are registered as introducing brokers with the CFTC
and NFA. The CFTC also has net capital regulations (CFTC Rule 1.17) that must be satisfied. Our futures business is also
regulated by the NFA, a registered futures association. Violation of the rules of the CFTC, the NFA or the commodity
exchanges could result in remedial actions including fines, registration restrictions or terminations, trading prohibitions or
revocations of commodity exchange memberships.
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.”
Regulation BI and Form CRS Relationship Summary (“Form CRS”). On June 5, 2019, the SEC adopted Regulation Best
Interest (“Regulation BI”), elevating the standard of care for broker-dealers from the current “suitability” requirement to a
“best interest” standard when making a recommendation of any securities transaction to a retail customer. The “best
interest” standard requires a broker-dealer to make recommendations without putting its financial interests ahead of the
interests of a retail customer. The SEC also adopted Form CRS, which requires registered investment advisors (“RIAs”)
and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services
24
provided by the firm and the required standard of conduct associated with the relationship and services. In connection
with adopting Regulation BI, the SEC added new record-making and recordkeeping rules. The compliance date for
Regulation BI and the related rules is June 30, 2020. Regulation BI heightens the standard of care for broker-dealers when
making investment recommendations and would impose disclosure and policy and procedural obligations that could
impact the compensation our wealth management line of business and its representatives receive for selling certain types
of products, particularly those that offer different compensation across different share classes (such as mutual funds and
variable annuities). In addition, Regulation BI prohibits a broker-dealer and its associated persons from using the term
“adviser” or “advisor” if the broker-dealer is not an RIA or the associated person is not a supervised person of an RIA.
Changing Regulatory Environment. The regulatory environment in which the Hilltop Broker-Dealers operate is subject to
frequent change. Our business, financial condition and operating results may be adversely affected as a result of new or
revised legislation or regulations imposed by the U.S. Congress, the SEC, FINRA or other U.S. and state governmental
and regulatory authorities. The business, financial condition and operating results of the Hilltop Broker-Dealers also may
be adversely affected by changes in the interpretation and enforcement of existing laws and rules by these governmental
and regulatory authorities. In the current era of heightened regulation of financial institutions, the Hilltop Broker-Dealers
can expect to incur increasing compliance costs, along with the industry as a whole.
Mortgage Origination
PrimeLending and the Bank are subject to the rules and regulations of the CFPB, FHA, VA, FNMA, FHLMC and GNMA
with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-
backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting
guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix
maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Fair Housing Act, Federal Truth-in-Lending Act, Secure and
Fair Enforcement of Mortgage Licensing Act, Home Mortgage Disclosure Act, Fair Credit Reporting Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to borrowers concerning credit terms and settlement
costs. PrimeLending and the Bank are also subject to regulation by the Texas Department of Banking with respect to,
among other things, the establishment of maximum origination fees on certain types of mortgage loan products.
PrimeLending and the Bank are also subject to the provisions of the Dodd-Frank Act. Among other things, the Dodd-
Frank Act established the CFPB and provides mortgage reform provisions regarding a customer’s ability to repay,
restrictions on variable-rate lending, loan officers’ compensation, risk retention, and new disclosure requirements. The
Dodd-Frank Act also clarifies that applicable state laws, rules and regulations related to the origination, processing,
selling and servicing of mortgage loans continue to apply to PrimeLending.
The final rules concerning mortgage origination and servicing address the following topics:
Ability to Repay. This final rule requires 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 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
25
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 requires a minimum duration of five years for an escrow account on certain higher-
priced mortgage loans, 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.
Servicing. Two final rules, the Truth in Lending Act and the Real Estate Settlement Procedures Act, protect consumers
from detrimental actions by mortgage servicers and to provide consumers with better tools and information when dealing
with mortgage servicers. 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 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 requires 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.
Any additional regulatory requirements affecting our mortgage origination operations will result in increased compliance
costs and may impact revenue.
Insurance
NLC’s insurance subsidiaries, NLIC and ASIC, are subject to regulation and supervision in each state where they are
licensed to do business. This regulation and supervision is vested in state agencies having broad administrative power
over the various aspects of the business of NLIC and ASIC.
State insurance holding company regulation. NLC controls two operating insurance companies, NLIC and ASIC, and is
subject to the insurance holding company laws of Texas, the state in which those insurance companies are domiciled.
These laws generally require NLC to register with the Texas Department of Insurance (“TDI”) and periodically to furnish
financial and other information about the operations of companies within its holding company structure. Generally under
these laws, all transactions between an insurer and an affiliated company in its holding company structure, including
sales, loans, reinsurance agreements and service agreements, must be fair and reasonable and, if satisfying a specified
threshold amount or of a specified category, require prior notice and approval or non-objection by the TDI.
National Association of Insurance Commissioners. The National Association of Insurance Commissioners (“NAIC”) is a
group consisting of state insurance commissioners that discuss issues and formulate policy with respect to regulation,
reporting and accounting for insurance companies. Although the NAIC has no legislative authority and insurance
companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in
which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Certain
Model Insurance Laws, Regulations and Guidelines, or Model Laws, have been promulgated by the NAIC as a minimum
standard by which state regulatory systems and regulations are measured. Adoption of state laws that provide for
substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC.
The NAIC provides authoritative guidance to insurance regulators on current statutory accounting issues by promulgating
and updating a codified set of statutory accounting practices in its Accounting Practices and Procedures Manual. The TDI
has generally adopted these codified statutory accounting practices.
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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, 2019, NLIC and ASIC capital
and surplus levels exceeded the minimum RBC requirements that would trigger regulatory attention. In their 2019
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.
Federal Office of Insurance. The Dodd-Frank Act established within the Treasury Department a Federal Office of
Insurance (“FIO”) and vested FIO with the authority to monitor all aspects of the insurance sector, monitor the extent to
which traditionally underserved communities and consumers have access to affordable non-health insurance products, and
to represent the United States on prudential aspects of international insurance matters. Management is monitoring the
activities of the FIO for any possible federal regulation of the insurance industry.
Legislative changes. From time to time, various regulatory and legislative changes have been, or are, proposed that would
adversely affect the insurance industry. Among the proposals that have been, or are being, considered are the possible
introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and
proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance
laws and regulations to various Model Laws adopted by the NAIC. NLC is unable to predict whether any of these laws
and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any,
these developments would have on its financial condition or results of operations.
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 $0.5 million for 2019 and is estimated to be $0.1 million in
2020. 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 2019.
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.
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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, 2019, the extraordinary dividend limit for NLIC and ASIC was
$11.2 million and $1.9 million, respectively. In addition, NLC’s insurance companies may only pay dividends out of their
earned surplus.
Statutory accounting principles. Statutory accounting principles (“SAP”) are a comprehensive basis of accounting
developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP rules are
different from GAAP, and are intended to reflect a more conservative view of the insurer. SAP is primarily concerned
with measuring an insurer’s surplus to policyholders. Accordingly, SAP focuses on valuing assets and liabilities of
insurers at financial reporting dates in accordance with insurance laws and regulatory provisions applicable in each
insurer’s domiciliary state.
While GAAP is concerned with a company’s solvency, it also stresses other financial measurements, such as income and
cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenues and expenses and
accounting for management’s stewardship of assets than does SAP. As a direct result, different amounts of assets and
liabilities will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP. SAP, as
established by the NAIC and adopted by Texas regulators, determines the statutory surplus and statutory net income of
the NLC insurance companies and, thus, determines the amount they have available to pay dividends.
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 2019, 2018 or 2017. 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
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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.
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 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 (the “FASB”) issued the Current Expected Credit Loss
(“CECL”) standard, which became effective on January 1, 2020 and will require financial institutions to estimate and
29
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 is 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. New model development
has increased expenses associated with the collection and processing of data during 2018 and 2019. Upon adoption, and
based on the current loan portfolio and the range of current forecasts of future economic conditions, we estimate that the
allowance for credit losses will be between $80 million and $100 million, inclusive of the estimate of change in reserve
for unfunded commitments of between $6 million and $9 million, currently included in other liabilities within the
consolidated balance sheets, when adopted on January 1, 2020. This estimated increase, net of tax, will be reflected within
our banking segment and as a decrease to opening retained earnings at January 1, 2020. While not material, the impact of
the adoption of CECL also affects our regulatory capital, performance and other asset quality ratios. Moreover, the CECL
model could create more volatility in the Bank’s level of allowance for loan losses.
While Bank management will endeavor to estimate the allowance to cover anticipated losses in our loan portfolio, no
underwriting and credit monitoring policies and procedures that we could adopt to address credit risk could provide
complete assurance that we will not incur unexpected losses. These losses could have a material adverse effect on our
business, financial condition, results of operations and cash flows. In addition, federal regulators periodically evaluate the
adequacy of our allowance for loan losses and may require us to increase our provision for loan losses or recognize
further loan charge-offs based on judgments different from those of Bank management. Any such increase in our
provision for loan losses or additional loan charge-offs could have a material adverse effect on our results of operations
and financial condition.
Our business 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 during 2019 it decreased interest rates by
75 basis points. 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. Asymmetrical changes in
interest rates, such as if short-term rates increase or decrease at a faster rate than long-term rates, can affect the slope of
the yield curve. A flatter or inverted yield curve, which occurred at various times throughout 2019, as measured by the
difference between 10-year U.S. Treasury bond yields and 3-month yields, could adversely impact the net interest income
of our banking segment as the spread between interest-earning assets and interest-bearing liabilities becomes compressed.
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 over time.
An increase in the absolute 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 absolute level of interest rates, among other
things, may lead to prepayments in our loan and mortgage-backed securities portfolios as well as 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, trading and
underwriting activities. 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.
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At December 31, 2019, approximately 81% of our insurance segment’s invested assets were invested in fixed maturity
assets such as bonds and mortgage-backed securities. Because bond trading prices decrease as interest rates rise, a
significant increase in interest rates could have a material adverse effect on our insurance segment’s financial condition
and results of operations. On the other hand, decreases in interest rates could have an adverse effect on our insurance
segment’s investment income and results of operations. For example, if interest rates decline, investment of new
premiums received and funds reinvested will earn less. Additionally, mortgage-backed securities are typically prepaid
more quickly when interest rates fall and the holder must reinvest the proceeds at lower interest rates. In periods of
increasing interest rates, mortgage-backed securities are typically prepaid more slowly, which may result in our insurance
segment receiving interest payments that are below the then-prevailing interest rates for longer time periods than
expected. The volatility of our insurance segment’s claims may force it to liquidate securities, which may cause it to incur
capital losses. If our insurance segment’s investment portfolio is not appropriately matched with its insurance liabilities, it
may be forced to liquidate investments prior to maturity at a significant loss to cover these liabilities. In addition, if we
experience market disruption and volatility, such as that experienced in 2009 and 2010, we may experience additional
losses on our investments and reductions in our earnings. Investment losses could significantly decrease the asset base and
statutory surplus of our insurance segment, thereby adversely affecting its ability to conduct business and potentially its
A.M. Best financial strength rating.
In addition, we hold securities that may be sold in response to changes in market interest rates, changes in securities’
prepayment risk, increases in loan demand, general liquidity needs and other similar factors. Such securities are classified
as available for sale and are carried at estimated fair value, which may fluctuate with changes in market interest rates. The
effects of an increase in market interest rates may result in a decrease in the value of our available for sale investment
portfolio.
Market interest rates are affected by many factors outside of our control, including inflation, recession, unemployment,
money supply, international disorder and instability in domestic and foreign financial markets. We may not be able to
accurately predict the likelihood, nature and magnitude of such changes or how and to what extent such changes may
affect our business. We also may not be able to adequately prepare for, or compensate for, the consequences of such
changes. Any failure to predict and prepare for changes in interest rates, or adjust for the consequences of these changes,
may adversely affect our earnings and capital levels and overall results of operations and financial condition.
The pending sale of NLC is subject to closing conditions, the failure of any of which could result in our inability to
consummate the transaction and, consequently, adversely affect our business, financial condition, results of operations
or our stock price.
On January 30, 2020, we entered into a stock purchase agreement for the sale of NLC in an all-cash transaction. The
closing of the sale is subject to the satisfaction of customary closing conditions, including the receipt of required
regulatory approvals from the Texas Department of Insurance. No assurance can be given as to when or whether these
approvals will be received. The failure to satisfy this or any other closing condition could result in our inability to
consummate the transaction. Furthermore, the stock purchase agreement may be terminated prior to the closing by us or
the buyer in certain circumstances, including if (i) the closing has not occurred by July 30, 2020 (unless extended to
October 30, 2020, pursuant to the terms and under the circumstances set forth in the stock purchase agreement); (ii) a
required governmental approval that is a condition to the closing is denied or a governmental authority has issued a
permanent injunction or other judgment preventing the closing; or (iii) the other party materially breaches the stock
purchase agreement (and fails to cure such breach within a specified period) such that the closing conditions would not be
satisfied.
We expect to incur transaction costs in connection with the pending sale whether or not it is completed. In addition, under
the stock purchase agreement, we are subject to certain restrictions on the conduct of NLC’s business prior to the
completion of the pending sale, which restrictions could adversely affect our ability to realize certain of our business
strategies or take advantage of certain business opportunities. Finally, the current trading price of our common stock may
reflect a market assumption that the sale of NLC will be completed. If we are unable to consummate the sale of NLC, we
may be unable to find another party willing to purchase NLC on equally favorable terms or at all. The failure to complete
the sale of NLC may adversely affect our business, financial condition, results of operations or our stock price.
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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 trade wars, restrictions and tariffs; slowing
growth in emerging economies; geopolitical matters, including international political unrest, disturbances and conflicts;
acts of war and terrorism; epidemics; changes 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.
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 at both the state and
federal levels. 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.
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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 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
assure you that we will be fully protected from a cybersecurity incident, the occurrence of which could adversely affect
our reputation and financial condition.
The financial services industry is characterized by rapid technological change, and if we fail to keep pace, our business
may suffer.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. Many of our competitors have substantially greater resources to invest in
technological improvements. We may not be able to effectively or timely implement new technology-driven products and
services or be successful in marketing these products and services to our customers and clients. Failure to successfully
keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays
could have a material adverse impact on our business, financial condition, results of operations or cash flows.
We are 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
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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, 2019, substantially all of the real estate loans in
our loan portfolio were secured by properties located in our four largest markets within Texas, with 40%, 21%, 16% and
6% 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 2019, 19.3% and 10.0% of our mortgage loans originated (by
dollar volume) were collateralized by properties located in Texas and California, respectively. Further, Texas insureds
accounted for 69.6% and 68.2% of our insurance segment’s gross premiums written in 2019 and 2018, respectively. Also,
in our broker-dealer segment, 66% of public finance services net revenues were from entities located in Texas, and 90%
of retail brokerage service revenues were generated through locations in Texas, California and Oklahoma. Any regional or
local economic downturn that affects Texas or, to a lesser extent, California or Oklahoma, whether caused by recession,
inflation, unemployment, changing oil prices, natural disasters or other factors, may affect us and our profitability more
significantly and more adversely than our competitors that are less geographically concentrated, and could have a material
adverse effect on our results of operations and financial condition.
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, 2019, 43% of the loan portfolio of our banking segment was comprised of loans with commercial or
residential 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 commercial or residential real estate values generally, and in Texas specifically, could impair the value of the
collateral underlying a significant portion of the Bank’s loan portfolio and our ability to sell the collateral upon any
foreclosure. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral
may be insufficient to recover the outstanding principal and interest on the loan. As a result, our results of operations and
financial condition may be materially adversely affected by a decrease in real estate market values.
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. At this time, no consensus exists as to what rate or rates may become acceptable
alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based
securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in
determining market interest rates globally. The ARRC has proposed that SOFR is the rate that represents best practice as
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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. In addition, as a result of these actions, we may
incur significant expenses in effecting the transition, including, but not limited to, changes to our agreements and our
agreements with customers that do not contemplate LIBOR being unavailable, systems and processes, and may be subject
to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices,
which could have a material adverse effect on our financial condition or results of operations.
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;
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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
2019, Texas accounted for 69.6%, Arizona accounted for 11.6%, Tennessee accounted for 8.2%, Oklahoma accounted for
5.6% and Georgia accounted for 3.1% 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
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 $95
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 hedging strategies may not be successful in mitigating our exposure to interest rate risk.
We use derivative financial instruments, primarily consisting of interest rate swaps, to limit our exposure to interest rate
risk within the banking and mortgage origination segments. No hedging strategy can completely protect us, and the
derivative financial instruments we elect may not have the effect of reducing our interest rate risk. Poorly designed
strategies, improperly executed and documented transactions, inaccurate assumptions or the failure of a counterparty to
fulfill its obligations could actually increase our risks and losses. In addition, hedging strategies involve transaction and
other costs. Our hedging strategies and the derivatives that we use may not adequately offset the risks of interest rate
volatility and could result in or magnify losses, which could have an adverse effect on our financial condition and results
of operations.
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.
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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.
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, 2019, on a consolidated basis, we had total deposits of $9.0 billion and other indebtedness of $1.8
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;
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increasing our vulnerability to a downturn in general economic conditions or a decrease in pricing of our
products; and
limiting our ability to react to changing market conditions in our industry and in our customers’ industries.
In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our
ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital
and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to
provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is
subject to prevailing economic conditions and financial, business, competitive, legal and other factors.
Subject to the restrictions in the indenture governing the Senior Notes, we may incur significant additional indebtedness,
including secured indebtedness. If new debt is added to our current debt levels, the risks described above could increase.
We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior Notes, and may
be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to satisfy our debt obligations will depend upon, among other things:
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our future financial and operating performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, many of which are beyond our control; and
our future ability to refinance the Senior Notes, which depends on, among other things, our compliance with the
covenants in the indenture governing the Senior Notes.
We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to
obtain financing in an amount sufficient to fund our liquidity needs.
If our cash flows and capital resources are insufficient to service our indebtedness, including the Senior Notes, we may be
forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our
indebtedness, including the Senior Notes. These alternative measures may not be successful and may not permit us to
meet our scheduled debt service obligations, including our obligations under the Senior Notes. Our ability to restructure
or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any
refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations. In addition, the terms of existing or future debt agreements may
restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material assets or operations, sell equity and/or
negotiate with our lenders and other creditors to restructure the applicable debt in order to meet our debt service and other
obligations. We may not be able to consummate those dispositions for fair market value or at all. The indenture governing
the Senior Notes may restrict, or market or business conditions may limit, our ability to avail ourselves of some or all of
these options. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet
our debt service obligations then due.
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.
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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.
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. Further, 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
expects that it will be subject to CFPB supervisory and enforcement authority starting in the second quarter of 2020.
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
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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.
We may be subject to more stringent capital requirements in the future.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain. From
time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these minimum capital
guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may
conduct and we may be prohibited from taking certain capital actions, such as paying dividends and repurchasing or
redeeming capital securities.
In particular, under the Basel III capital framework, we are now required to satisfy additional, more stringent, capital
adequacy standards than we had in the past. Further, because we had less than $15 billion in assets as of December 31,
2009, we have been allowed to include the debentures issued to the PCC Statutory Trusts I, II, III and IV (the “Trusts”),
less the common stock of the Trusts, in Tier 1 capital. However, because Hilltop has grown above $15 billion in assets, if
we make an acquisition in the future, the debentures issued to the Trusts may be phased out of Tier 1 and into Tier 2
capital. Failure to meet minimum capital requirements could result in certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition
and results of operations. The application of more stringent capital requirements for Hilltop and PlainsCapital could,
among other things, adversely affect our results of operations and growth, require the raising of additional capital, restrict
our ability to pay dividends or repurchase shares and result in regulatory actions if we were to be unable to comply with
such requirements.
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 adoption of CECL on January 1, 2020 will also impact our capital ratios as we anticipate that it will result in a
reduction of our regulatory capital. Based upon the current loan portfolio, we estimate that the allowance for credit losses
will be between $80 million and $100 million, inclusive of the estimate of change in reserve for unfunded commitments
of between $6 million and $9 million, when adopted on January 1, 2020. This estimated increase, net of tax, will be
reflected as a decrease to opening retained earnings at January 1, 2020. Although we are permitted to elect a three-year
phase-in of this adverse impact on our regulatory capital, we have elected to not exercise this option. The federal banking
agencies will also require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle
for certain banking organizations.
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 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.
40
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. 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 bank 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 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 existing correspondents may choose to perform their own clearing services or move their clearing business to one
of our competitors or exit the business.
As the operations of our correspondents grow, our correspondents may 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
become more attractive as the transaction volume of a broker-dealer grows. The cost of implementing the necessary
infrastructure 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, moving their clearing business to a competitor or 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 services line of business.
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Our mortgage origination segment is subject to investment risk on loans that it originates.
We intend to sell, and not hold for investment, substantially all residential mortgage loans that we originate through
PrimeLending. At times, however, we may originate a loan or execute an interest rate lock commitment (“IRLC”) with a
customer pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate without
having identified a purchaser for such loan. An identified purchaser may also decline to purchase a loan for a variety of
reasons. In these instances, we will bear interest rate risk on an IRLC until, and unless, we are able to find a buyer for the
loan underlying such IRLC and the risk of investment on a loan until, and unless, we are able to find a buyer for such
loan. In addition, in the event of a breach of any representation or warranty concerning a loan, an agency, investor or other
third party could, among other things, require us to repurchase the full amount of the loan or seek indemnification for
losses from us, even if the loan is not in default. Further, if a customer defaults on a mortgage payment shortly after the
loan is originated, the purchaser of the loan may have a put right, whereby the purchaser can require us to repurchase the
loan at the full amount that it paid. During periods of market downturn, we may choose to hold mortgage loans when the
identified purchasers have declined to purchase such loans because we may not obtain an acceptable substitute bid price
for such loan. The failure of mortgage loans that we hold on our books to perform adequately could have a material
adverse effect on our financial condition, liquidity and results of operations. Moreover, if a property securing a mortgage
loan on which we own the servicing rights is damaged, including from flooding, we may be responsible for repairs for
uninsured damage.
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.
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, 2019, the mortgage origination segment’s MSR asset had a fair value of $56.7 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
42
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.
We identified a material weakness in our internal controls over financial reporting and determined that our disclosure
controls and procedures were not effective. If we fail to develop, implement and maintain an effective system of
internal control over financial reporting, the accuracy and timing of our financial reporting in future periods may be
adversely affected.
The Sarbanes-Oxley Act and related rules and regulations require that management report annually on the effectiveness of
our internal control over financial reporting and assess the effectiveness of our disclosure controls and procedures on a
quarterly basis. 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.
Based on management’s assessment, we concluded that our disclosure controls and procedures were not effective as of
December 31, 2019 and that we had as of such date a material weakness in our internal control over financial reporting.
The specific factors leading to this conclusion are described in Part II - Item 9A. “Controls and Procedures” of this
Annual Report on Form 10-K and in “Management’s Report on Internal Control over Financial Reporting” appearing
elsewhere in this Annual Report on Form 10-K. A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our
annual or interim consolidated financial statements would not be prevented or detected on a timely basis. During the
fourth quarter of 2019, management identified a control deficiency that constituted a material weakness as of December
31, 2018 and determined that Hilltop did not design and maintain effective controls over certain aspects relating to the
determination of the qualitative factors considered by management in the allowance for loan losses estimation process,
specifically control activities to adequately support the analysis and the impact of such support on the loss measurement.
This control deficiency could result in misstatements of the interim or annual consolidated financial statements and
disclosures that would result in a material misstatement that would not be prevented or detected. As of December 31,
2019, this material weakness was not remediated. If the remedial measures intended to address the material weakness and
related disclosure controls we have implemented are insufficient, or if additional material weakness or significant
deficiencies in our internal control over financial reporting or in our disclosure controls occur in the future, our future
consolidated financial statements or other information filed with the SEC may contain material misstatements. Any
material misstatements could require a restatement of our consolidated financial statements, cause us to fail to meet our
reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the
market value of our securities.
Income that we recognize in connection with the purchase discount of the credit-impaired loans acquired in the Bank
Transactions 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. 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 $28.7 million on loans purchased at a discount in the Bank Transactions was recorded as interest income
during 2019. As of December 31, 2019, the balance of our discount on loans in the aggregate was $72.3 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, 2019,
included goodwill of $291.4 million and other intangible assets, net of accumulated amortization, of $30.2 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
43
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, 2019, 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.
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 services line of business 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. 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. We have experienced losses resulting from fraud in the past, including loan, wire
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transfer, document and check fraud, and identity theft. 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
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
45
also comes from other commercial bank and thrift institutions, money market mutual funds and corporate and government
securities that may offer more attractive rates than insured depository institutions are willing to pay. Competition for loans
is based on factors such as interest rates, loan origination fees and the range of services offered by the provider. We seek
to distinguish ourselves from our competitors through our commitment to personalized customer service and
responsiveness to customer needs while providing a range of competitive loan and deposit products and other services.
Our profitability depends on our ability to compete effectively in these markets. This competition may reduce or limit our
margins on banking services, reduce our market share and adversely affect our results of operations and financial
condition.
The financial advisory and investment banking industries also are intensely competitive industries and will likely remain
competitive. Our broker-dealer business competes directly with numerous other financial advisory and investment
banking firms, broker-dealers and banks, including large national and major regional firms and smaller niche companies,
some of whom are not broker-dealers and, therefore, not subject to the broker-dealer regulatory framework. In addition to
competition from firms currently in the industry, there has been increasing competition from others offering financial
services, including automated trading and other services based on technological innovations. Our broker-dealer business
competes on the basis of a number of factors, including the quality of advice and service, technology, product selection,
innovation, reputation, client relationships and price. Increased pressure created by any current or future competitors, or
by competitors of our broker-dealer business collectively, could materially and adversely affect our business and results of
operations. Increased competition may result in reduced revenue and loss of market share. Further, as a strategic response
to changes in the competitive environment, our broker-dealer business may from time to time make certain pricing,
service or marketing decisions that also could materially and adversely affect our business and results of operations.
Our mortgage origination business faces vigorous competition from banks and other financial institutions, including large
financial institutions as well as independent mortgage banking companies, commercial banks, savings banks and savings
and loan associations. Our mortgage origination segment competes on a number of factors including customer service,
quality and range of products and services offered, price, reputation, interest rates, closing process and duration, and loan
origination fees. The ability to attract and retain skilled mortgage origination professionals is critical to our mortgage
origination business. We seek to distinguish ourselves from our competitors through our commitment to personalized
customer service and responsiveness to customer needs while providing a range of competitive mortgage loan products
and services.
The insurance industry also is highly competitive and has, historically, been characterized by periods of significant price
competition, alternating with periods of greater pricing discipline during which competitors focus on other factors,
including service, experience, the strength of agent and policyholder relationships, reputation, speed and accuracy of
claims payment, perceived financial strength, ratings, scope of business, commissions paid and policy and contract terms
and conditions. Our insurance business competes with many other insurers, including large national companies that have
greater financial, marketing and management resources than our insurance segment. Many of these competitors also have
better ratings and market recognition than our insurance business.
In addition, 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
46
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 effect on our financial condition and results
of operations.
If the actual losses and loss adjustment expenses of our insurance segment exceed its loss and expense estimates, its
financial condition and results of operations could be materially adversely affected.
The financial condition and results of operations of our insurance segment depend upon its ability to assess accurately the
potential losses associated with the risks that it insures. Our insurance segment establishes reserve liabilities to cover the
payment of all losses and loss adjustment expenses (“LAE”) incurred under the policies that it writes. These liability
estimates include case estimates, which are established for specific claims that have been reported to our insurance
segment, and liabilities for claims that have been incurred but not reported (“IBNR”). LAE represent expenses incurred to
investigate and settle claims. To the extent that losses and LAE exceed estimates, NLIC and ASIC will be required to
increase their reserve liabilities and reduce their income in the period in which the deficiency is identified. In addition,
increasing reserves causes a reduction in policyholders’ surplus and could cause a downgrade in the ratings of NLIC and
ASIC. This, in turn, could diminish our ability to sell insurance policies.
The liability estimation process for our insurance segment’s casualty insurance coverage possesses characteristics that
make case and IBNR reserving inherently less susceptible to accurate actuarial estimation than is the case with property
coverages. Unlike property losses, casualty losses are claims made by third-parties of which the policyholder may not be
aware and, therefore, may be reported a significant time after the occurrence, including sometimes years later. As casualty
claims most often involve claims of bodily injury, assessment of the proper case estimates is a far more subjective process
than claims involving property damage. In addition, in determining the case estimate for a casualty claim, information
develops slowly over the life of the claim and can subject the case estimation to substantial modification well after the
claim was first reported. Numerous factors impact the casualty case reserving process, such as venue, the amount of
monetary damage, legislative activity, the permanence of the injury and the age of the claimant.
The effects of inflation could cause the severity of claims from catastrophes or other events to rise in the future. Increases
in the values and geographic concentrations of policyholder property and the effects of inflation have resulted in increased
severity of industry losses in recent years, and our insurance segment expects that these factors will increase the severity
of losses in the future. The severity of some catastrophic weather events, including the scope and extent of damage and
the inability to gain access to damaged properties, and the ensuing shortages of labor and materials and resulting demand
surge, provide additional challenges to estimating ultimate losses. Our insurance segment’s liabilities for losses and LAE
include assumptions about future payments for settlement of claims and claims handling expenses, such as medical
treatments and litigation costs. To the extent inflation causes these costs to increase above liabilities established for these
costs, our insurance segment expects to be required to increase its liabilities, together with a corresponding reduction in its
net income in the period in which the deficiency is identified.
Estimating an appropriate level of liabilities for losses and LAE is an inherently uncertain process. Accordingly, actual
loss and LAE paid will likely deviate, perhaps substantially, from the liability estimates reflected in our insurance
segment’s consolidated financial statements. Claims could exceed our insurance segment’s estimate for liabilities for
losses and LAE, which could have a material adverse effect on its financial condition and results of operations.
If our insurance segment cannot obtain adequate reinsurance protection for the risks it underwrites or its reinsurers
do not pay losses in a timely fashion, or at all, our insurance segment will suffer greater losses from these risks or may
reduce the amount of business it underwrites, which may materially adversely affect its financial condition and results
of operations.
Our insurance segment purchases reinsurance to protect itself from certain risks and to share certain risks it underwrites.
During 2019, our insurance segment’s personal lines ceded 5.7% of its direct insurance premiums written (primarily
through excess of loss, quota share and catastrophe reinsurance treaties) and its commercial lines ceded none 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 17.8% during 2019, compared with 2018, which was
primarily attributable to reinstatement premiums in 2018 associated with Hurricane Harvey. 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
47
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, 2019, our insurance segment had $1.0 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
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. Our insurance segment paid no assessments during 2019, 2018 and 2017. 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.
48
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
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.
Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Acquisitions by financial institutions are subject to approval by a variety of federal and state regulatory agencies. The
process for obtaining these required regulatory approvals has become substantially more difficult in recent years.
Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory
issues we have, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act
compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair,
deceptive, or abusive acts or practices regulations and other similar laws and regulations. We may fail to pursue, evaluate
or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or
49
anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties
associated with potential acquisitions that may result from these factors could have a material adverse effect on our
business, financial condition and results of operations.
We may be subject to environmental liabilities in connection with the foreclosure on real estate assets securing the
loan portfolio of our banking segment.
Hazardous or toxic substances or other environmental hazards may be located on the real estate that secures our loans. If
we acquire such properties as a result of foreclosure, or otherwise, we could become subject to various environmental
liabilities. For example, we could be held liable for the cost of cleaning up or otherwise addressing contamination at or
from these properties. We could also be held liable to a governmental entity or third party for property damage, personal
injury or other claims relating to any environmental contamination at or from these properties. In addition, we could be
held liable for costs relating to environmental contamination at or from our current or former properties. We may not
detect all environmental hazards associated with these properties. If we ever became subject to significant environmental
liabilities, our business, financial condition, liquidity and results of operations could be harmed.
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.
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
indentures governing the notes. Other agreements that NLC or its insurance company subsidiaries may enter into in the
future may contain covenants imposing significant restrictions on their respective businesses that are similar to, or in
addition to, the covenants under their respective existing agreements. These restrictions may affect NLC’s ability to
operate its business and may limit its ability to take advantage of potential business opportunities as they arise.
Risks Related to Our 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.
50
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
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, 2019, 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;
51
•
•
•
•
•
•
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 2019, we
declared and paid cash dividends of $0.32 per common share.
In January 2019, the Hilltop board of directors authorized a stock repurchase program through January 2020, pursuant to
which the Company was authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding common stock,
inclusive of repurchases to offset dilution related to grants of stock-based compensation. During 2019, the Company paid
$73.4 million to repurchase an aggregate of 3,390,247 shares of common stock at a weighted average price of $21.64 per
share. These amounts are inclusive of the repurchase of shares by Hilltop from Oak Hill Capital discussed below. These
shares were returned to Hilltop’s pool of authorized but unissued shares of common stock.
On August 19, 2019, we entered into a Securities Purchase Agreement to purchase 2,175,404 shares of our common stock
from Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P. and Oak Hill Capital
Management, LLC (collectively, “Oak Hill Capital”). The purchase was consummated on August 20, 2019 at a purchase
price of $48.4 million, or $22.25 per share. The repurchase of shares by Hilltop from Oak Hill Capital fully utilized all
remaining availability of the stock repurchase program previously authorized in January 2019.
In January 2020, our board of directors authorized a new stock repurchase program through January 2021, pursuant to
which we are authorized to repurchase, in the aggregate, up to $75.0 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
52
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 has served as headquarters for both Hilltop and the Bank since February 2020.
Banking. At December 31, 2019, our banking segment conducted business at 68 locations throughout Texas, including
five support facilities. We lease 35 banking locations, including our principal offices, and we own the remaining 33
banking locations.
Broker-Dealer. At December 31, 2019, our broker-dealer segment conducted business from 52 locations in 20 states.
Each of these locations is leased by Hilltop Securities.
Mortgage Origination. At December 31, 2019, 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, 2019, our insurance segment leases office space for its corporate, claims and customer
service operations. Our insurance segment’s principal office is leased from an affiliate, Hilltop Securities.
Item 3. Legal Proceedings.
For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in
Note 19 to our Consolidated Financial Statements, which is incorporated by reference herein.
Item 4. Mine Safety Disclosures.
Not applicable.
53
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 27, 2020, there
were 90,798,946 shares of our common stock outstanding with 413 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 2019, we declared and
paid cash dividends of $0.32 per common share. On January 30, 2020, we announced that our board of directors increased
our quarterly dividend to $0.09 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, 2019 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 21, Stock-Based Compensation, in the notes to our consolidated financial statements.
Equity Compensation Plan Information
Number of securities
Plan Category
Equity compensation plans approved by security holders*
Total
Number of securities
to be issued upon
exercise of
Weighted-average
exercise price of
remaining available for
future issuance under
equity compensation plans
(excluding securities
outstanding options, outstanding options,
warrants and rights warrants and rights reflected in first column)
556,368
556,368
— $
— $
—
—
*
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, 2019, 3,873,386 awards had been granted pursuant to
the 2012 Plan, while 429,754 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.
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Issuer Repurchases of Equity Securities
The following table details our repurchases of shares of common stock during the three months ended December 31,
2019.
Period
October 1 - October 31, 2019
November 1 - November 30, 2019
December 1 - December 31, 2019
Total
Total Number
of Shares
Purchased
Average
Price Paid
per Share
—
—
—
—
$
$
—
—
—
—
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
— $
—
—
—
—
—
—
(1)
In January 2020, we announced that our board of directors authorized a stock repurchase program under which we may repurchase, in the
aggregate, up to $75.0 million of our outstanding common stock through January 2021, which is inclusive of repurchases to offset dilution related
to grants of stock-based compensation.
Recent Sales of Unregistered Securities
On December 31, 2019, we issued an aggregate of 5,853 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 2019. The
shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.
55
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2019 and 2018 and our consolidated statement of
operations data for the years ended December 31, 2019, 2018 and 2017 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 BORO Acquisition are included in our operating results beginning
August 1, 2018 (dollars in thousands, except per share data and weighted average shares outstanding).
$
$
$
$
$
$
$
$
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
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
2019
2018
2017
2016
2015
614,829
173,523
441,306
7,206
434,100
1,206,016
1,339,807
300,309
67,332
232,977
7,686
225,291
—
225,291
$
$
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
$
$
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
$
$
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
$
$
2.44
92,345
2.44
92,394
$
23.20
$
19.65
0.32
$
13.12 %
$
$
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 %
$
$
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
—
— %
$
15,172,448
484,959
2,094,301
2,106,361
7,381,400
(61,136)
321,590
9,032,214
283,769
67,012
2,128,796
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
11.18 %
1.66 %
3.48 %
3.48 %
6.33 %
0.93 %
3.55 %
3.56 %
7.00 %
1.03 %
3.61 %
3.63 %
8.13 %
1.21 %
3.68 %
3.71 %
0.73 %
169.28 %
0.83 %
0.08 %
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 %
13.86 %
12.00 %
14.25 %
12.13 %
14.31 %
12.42 %
14.68 %
12.65 %
14.64 %
12.37 %
56
Regulatory Capital Ratios:
Hilltop - Leverage ratio
Hilltop - Common equity Tier 1 risk-based capital ratio
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
PlainsCapital - Tier 1 risk-based capital ratio
PlainsCapital - Total risk-based capital ratio
Other Data:
Banking Segment:
Efficiency ratio (8)
Return on average assets (5)
Net interest margin (6)
Net interest margin (taxable equivalent) (7)
Broker-Dealer Segment:
Net revenue (9)
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 - Total
Insurance Segment:
Net loss and LAE ratio
Expense ratio
Combined ratio
Statutory surplus (10)
Statutory premiums to surplus ratio
2019
2018
2017
2016
2015
12.71 %
16.70 %
17.13 %
17.55 %
11.61 %
13.45 %
13.45 %
14.13 %
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 %
54.99 %
1.36 %
4.00 %
4.01 %
61.93 %
1.23 %
4.23 %
4.24 %
58.24 %
0.85 %
4.31 %
4.33 %
58.87 %
0.94 %
4.65 %
4.68 %
12.65 %
17.87 %
18.48 %
18.89 %
13.22 %
16.23 %
16.25 %
16.99 %
56.45 %
1.36 %
5.05 %
5.08 %
$
$
$
455,719
$
58.7 %
352,592
$
62.0 %
412,156
$
60.8 %
416,938
$
60.6 %
367,466
69.6 %
$
11,718,772
3,860,665
15,579,437
14,591,727
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
52.1 %
39.7 %
91.8 %
89,313
$
146.8 %
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 %
152,342
105.4 %
(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 2019 and 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 $0.6 million, $0.9 million, $2.2
million, $2.4 million and $3.0 million, respectively, and for the banking segment were $0.6 million, $0.8 million, $1.6 million, $1.5 million and
$1.8 million, respectively.
(8) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(9) Net revenue is defined as the sum of total broker-dealer net interest income plus total broker-dealer noninterest income.
(10) Statutory surplus includes combined surplus of NLIC and ASIC.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We present certain measures in our selected financial data that are not measures of financial performance recognized by
GAAP. “Tangible book value per common share” is defined as our total stockholders’ equity, excluding preferred stock,
reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity
to tangible assets” is defined as our total stockholders’ equity, excluding preferred stock, reduced by goodwill and other
intangible assets divided by total assets reduced by goodwill and other intangible assets. These measures are important to
investors interested in changes from period to period in tangible common equity per share exclusive of changes in
intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result
in the recording of significant amounts of goodwill and other intangible assets related to those transactions.
You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is
not necessarily comparable to that of other companies that use non-GAAP measures.
57
The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures,
“book value per common share” and “equity to total assets” (dollars in thousands, except per share data).
2019
2018
December 31,
2017
2016
2015
Book value per common share
Effect of goodwill and intangible assets per
share
Tangible book value per common share
$
23.20
$
$
(3.55)
19.65
$
$
$
20.83
(3.52)
17.31
$
$
$
19.92
(3.00)
16.92
$
$
$
18.98
(3.01)
15.97
$
$
$
17.56
(3.10)
14.46
Hilltop stockholders’ equity
Less: goodwill and intangible assets, net
Tangible common equity
$ 2,103,039
$
321,590
$ 1,781,449
$ 1,949,470
$
329,440
$ 1,620,030
$ 1,912,081
$
288,240
$ 1,623,841
$ 1,870,509
$
296,503
$ 1,574,006
$ 1,736,954
$
306,676
$ 1,430,278
Total assets
Less: goodwill and intangible assets, net
Tangible assets
$ 15,172,448
$
321,590
$ 14,850,858
$ 13,683,572
$
329,440
$ 13,354,132
$ 13,365,786
$
288,240
$ 13,077,546
$ 12,738,062
$
296,503
$ 12,441,559
$ 11,867,001
$
306,676
$ 11,560,325
Equity to assets
Tangible common equity to tangible assets
13.86 %
12.00 %
14.25 %
12.13 %
14.31 %
12.42 %
14.68 %
12.65 %
14.64 %
12.37 %
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 “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).
58
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, 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 2019, our net income to common stockholders was $225.3 million, or $2.44 per diluted share. We declared and
paid total common dividends of $0.32 per share, or $29.6 million, during 2019, which resulted in a dividend payout ratio
of 13.12%. 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 $73.4 million to repurchase shares of our common stock during 2019.
We reported $300.3 million of consolidated income before income taxes during 2019, including the following
contributions from our four reportable business segments.
• The banking segment contributed $182.2 million of income before income taxes during 2019;
• The broker-dealer segment contributed $89.8 million of income before income taxes during 2019;
• The mortgage origination segment contributed $64.7 million of income before income taxes during 2019; and
• The insurance segment contributed $17.5 million of income before income taxes during 2019.
At December 31, 2019, on a consolidated basis, we had total assets of $15.2 billion, total deposits of $9.0 billion, total
loans, including loans held for sale, of $9.4 billion and stockholders’ equity of $2.1 billion.
On January 30, 2020, our board of directors declared a quarterly cash dividend of $0.09 per common share, payable on
February 28, 2020 to all common stockholders of record as of the close of business on February 14, 2020.
Recent Developments
On January 30, 2020, we entered into an agreement to sell all of the outstanding capital stock of NLC, which comprises
the operations of our insurance segment, for a cash purchase price of $150.0 million, subject to post closing adjustments.
Consummation of the transaction, which we expect to occur in the second quarter of 2020, is subject to customary closing
conditions, including required regulatory approvals. We also agreed to enter into an agreement at closing to refrain for a
specified period from certain activities that compete with the business of NLC.
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,
regulatory, and compliance requirements and competition. All of these factors have the potential to impact our financial
59
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.
Factors Affecting the Current Year
Changes in Management and Efficiency Initiative-Related Charges
On October 25, 2019, we entered into a retention agreement with Todd Salmans to set forth the terms of his ongoing role
with PrimeLending. Pursuant to the retention agreement, Mr. Salmans continues to serve as the Chairman of the Board of
Directors of PrimeLending and received a one-time cash payment of $1.25 million on January 31, 2020. As of January 1,
2020, Mr. Salmans is not entitled to participate in our annual incentive bonus program or long-term incentive award
program; provided, however, (i) he will be entitled to receive his annual incentive bonus pursuant to his performance
under the annual incentive bonus program for fiscal 2019, which is payable on or before March 15, 2020, and (ii) the
restricted stock units previously granted to him will continue to vest until he resigns or is terminated. On October 29,
2019, PrimeLending promoted Steve Thompson to Chief Executive Officer of PrimeLending, effective as of January 1,
2020. At the time of promotion, Mr. Thompson served, and he has since continued to serve, as President of
PrimeLending. The mortgage origination segment’s financial results reflect a pre-tax charge within employees’
compensation and benefits noninterest expenses of $1.25 million in the fourth quarter of 2019 associated with Mr.
Salman’s retention agreement.
On February 21, 2019, we entered into a Separation and Release Agreement (the “Separation Agreement”) with Alan B.
White, our Vice Chairman and Co-Chief Executive Officer, in connection with his retirement effective April 1, 2019 (the
“Retirement Date”). Pursuant to the Separation Agreement, effective as of the Retirement Date, Mr. White resigned from
all positions with Hilltop and its subsidiaries, including, without limitation, Vice Chairman of our Board of Directors and
Co-Chief Executive Officer of Hilltop. The Separation Agreement also provides that Mr. White’s retention agreement
with the Company, as amended, terminated on the Retirement Date, except for certain provisions that addressed, among
other items, non-competition, non-solicitation, confidential information and arbitration. Effective April 1, 2019, Jeremy
B. Ford became Hilltop’s sole Chief Executive Officer, Chairman of the Executive Committee of the Board of Directors
of Hilltop and the Chairman of the Bank. The Separation Agreement, in accordance with Mr. White’s retention
agreement, provided for aggregate payments of $12.4 million to Mr. White. During 2019, our financial results included
the recognition within corporate of a pre-tax charge within employees’ compensation and benefits noninterest expenses of
$5.8 million in the first quarter of 2019 associated with Mr. White’s retirement.
On February 19, 2019, we entered into a retention agreement with Hill A. Feinberg (the “Feinberg Retention Agreement")
to set forth the terms of his ongoing role with the Company. Pursuant to the Feinberg Retention Agreement, as of
February 20, 2019, Mr. Feinberg resigned as President and Chief Executive Officer of Hilltop Securities and from all
other positions with Hilltop and its subsidiaries, other than as Chairman of the Board of Directors of Hilltop Securities, as
a member of the Board of Directors of Hilltop and a member of Executive Committee of the Board of Directors of
Hilltop. Pursuant to the Feinberg Retention Agreement, Mr. Feinberg served as the Chairman of the Board of Directors of
Hilltop Securities until June 30, 2019, at which time he became Chairman Emeritus of Hilltop Securities and resigned
from his membership on the Executive Committee of the Board of Directors of Hilltop. The Feinberg Retention
Agreement provides for aggregate payments of $1.4 million to Mr. Feinberg upon his termination, resignation or death, of
which $0.9 million was paid during the first quarter of 2019. Mr. Feinberg may resign or be terminated at any time. We
appointed M. Bradley Winges to succeed Mr. Feinberg as President and Chief Executive Officer of Hilltop Securities
effective February 20, 2019. In connection with the appointment of Mr. Winges, Hilltop and Mr. Winges entered into an
employment agreement providing for a sign-on cash bonus of $1.5 million, among other benefits, on the effective date of
his employment. During 2019, the broker-dealer segment’s financial results reflect aggregate pre-tax charges within
employees’ compensation and benefits noninterest expenses of $2.2 million related to these items, all of which were
recognized in the first quarter of 2019.
During 2019, the total impact of the above noted changes in management was $9.3 million before income taxes, $8.0
million of which was recognized during the first quarter of 2019, while the remainder was recognized during the fourth
quarter of 2019. These changes and the related impact on our results of operations are collectively referred to as the
“Leadership Changes.”
60
In addition to the costs associated with Leadership Changes during 2019, corporate and the broker-dealer segment
recognized $1.0 million and $0.7 million, respectively, in efficiency initiative-related charges resulting in aggregate
charges of $1.7 million.
Factors Affecting Prior Years
BORO Acquisition
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.
Termination of FDIC Loss-Share Agreements
At the close of business on September 30, 2018, the loss-share agreement for commercial assets with the Federal Deposit
Insurance Corporation (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 amounts receivable from the FDIC under the loss-share agreements (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 was 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.
Hilltop Plaza Investment
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, the construction of which was recently completed, and $19.3
million for the land on which the building was constructed. Joining Hilltop in the transaction is our chairman and largest
shareholder, Gerald J. Ford, who is an equal investing partner in the project. Hilltop and the Ford family each own 25% of
the commercial office building and 50% of the 1.7-acre tract on which the building sits. 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 a majority of the available corporate office space in the building as well as retail space for a
PlainsCapital Bank branch for an average cost of $3.7 million per year and $0.3 million per year, respectively, over the
initial 129-month terms. The building, Hilltop Plaza, has served as headquarters for both Hilltop and the Bank since
February 2020.
PrimeLending Settlement Agreement and Indemnification Agreement
On October 23, 2018, PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the
Department of Justice (“DOJ”) and U.S. Department of Housing and Urban Development (“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
61
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.
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 improve operational efficiencies throughout our organization. During 2018, we began
the significant investment in new technological solutions, substantial core system upgrades and other technology
enhancements. Such significant investments specifically include single enterprise-wide general ledger and procurement
solutions, a mortgage loan origination system and a core system replacement with our broker-dealer segment (collectively
referred to as “Core System Improvements”). In combination with these technology enhancements, we are continuing our
efforts to consolidate common back office functions. We believe that costs incurred related to these Core System
Improvements and the consolidation of common back office functions will continue to represent an increasingly
significant portion of our noninterest expenses throughout 2020 and into 2021, but we are making such investments with
the expectation that they will result in cost savings over the long term. Costs related to our Core System Improvements,
disaggregated by segment between internal-use software costs that were capitalized as premises and equipment and costs
that were recorded to noninterest expense, were as follows (in thousands).
Year Ended December 31, 2019
Premises and equipment
Noninterest expense
Total
Year Ended December 31, 2018
Premises and equipment
Noninterest expense
Total
Company Background
$
$
$
$
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
— $
—
— $
3,854 $
4,856
8,710 $
6,101 $
2,780
8,881 $
— $
—
— $
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
— $
—
— $
2,639 $
3,924
6,563 $
3,140 $
2,491
5,631 $
— $
—
— $
Hilltop
Consolidated
13,337
13,768
27,105
3,382 $
6,132
9,514 $
Hilltop
Consolidated
8,489
8,606
17,095
2,710 $
2,191
4,901 $
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.
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 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 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 January 1, 2015, we acquired SWS in a stock and cash transaction (the “SWS Merger”), whereby SWS’s broker-
dealer subsidiaries became subsidiaries of Securities Holdings and SWS’s banking subsidiary, Southwest Securities, FSB,
was merged into the Bank. On October 5, 2015, Southwest Securities, Inc. was renamed “Hilltop Securities Inc.”
On August 1, 2018, we acquired privately-held, Houston-based BORO in an all-cash transaction as discussed above. In
connection with the BORO Acquisition, we merged BORO into the Bank, and all customer accounts were converted to
the PlainsCapital Bank platform.
62
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. 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 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.
63
The elimination of intercompany transactions is included in “All Other and Eliminations.” Additional information
concerning our reportable segments is presented in Note 31, Segment and Related Information, in the notes to our
consolidated financial statements. The following table presents certain information about the operating results of our
reportable segments (in thousands). This table serves as a basis for the discussion and analysis in the segment operating
results section that follow.
Year Ended December 31,
2018
2019
Variance 2019 vs 2018
2017
Amount
Percent
Variance 2018 vs 2017
Percent
Amount
Net interest income (expense):
Banking
Broker-Dealer
Mortgage Origination
Insurance
Corporate
All Other and Eliminations
Hilltop Consolidated
Provision (recovery) for loan losses:
Banking
Broker-Dealer
Mortgage Origination
Insurance
Corporate
All Other and Eliminations
Hilltop Consolidated
Noninterest income:
Banking
Broker-Dealer
Mortgage Origination
Insurance
Corporate
All Other and Eliminations
Hilltop Consolidated
Noninterest expense:
Banking
Broker-Dealer
Mortgage Origination
Insurance
Corporate
All Other and Eliminations
Hilltop Consolidated
Income (loss) before income taxes:
Banking
Broker-Dealer
Mortgage Origination
Insurance
Corporate
All Other and Eliminations
Hilltop Consolidated
$
$
$
$
$
$
$
$
$
$
379,258 $
51,308
(6,273)
2,329
(5,541)
20,225
441,306 $
370,732 $
50,878
1,485
3,025
(9,176)
19,380
436,324 $
366,581 $
43,735
(915)
2,861
(10,069)
19,555
421,748 $
7,280 $
(74)
—
—
—
—
7,206 $
5,319 $
(231)
—
—
—
—
5,088 $
14,073 $
198
—
—
—
—
14,271 $
41,753 $
404,411
634,992
143,082
2,221
(20,443)
1,206,016 $
43,588 $
301,714
551,860
142,565
4,893
(21,830)
1,022,790 $
59,904 $
368,421
632,388
151,382
12,798
(19,829)
1,205,064 $
231,524 $
366,031
563,998
127,920
50,968
(634)
1,339,807 $
256,577 $
320,241
540,474
139,921
36,628
(592)
1,293,249 $
248,404 $
347,314
581,899
158,354
33,983
(699)
1,369,255 $
182,207 $
89,762
64,721
17,491
(54,288)
416
300,309 $
152,424 $
32,582
12,871
5,669
(40,911)
(1,858)
160,777 $
164,008 $
64,644
49,574
(4,111)
(31,254)
425
243,286 $
8,526
430
(7,758)
(696)
3,635
845
4,982
1,961
157
—
—
—
—
2,118
(1,835)
102,697
83,132
517
(2,672)
1,387
183,226
(25,053)
45,790
23,524
(12,001)
14,340
(42)
46,558
29,783
57,180
51,850
11,822
(13,377)
2,274
139,532
2 % $
1 %
(522)%
(23)%
40 %
4 %
1 % $
37 % $
68 %
— %
— %
— %
— %
42 % $
(4)% $
34 %
15 %
0 %
(55)%
6 %
18 % $
(10)% $
14 %
4 %
(9)%
39 %
(7)%
4 % $
20 % $
175 %
403 %
209 %
(33)%
122 %
87 % $
4,151
7,143
2,400
164
893
(175)
14,576
(8,754)
(429)
-
-
-
-
(9,183)
(16,316)
(66,707)
(80,528)
(8,817)
(7,905)
(2,001)
(182,274)
8,173
(27,073)
(41,425)
(18,433)
2,645
107
(76,006)
(11,584)
(32,062)
(36,703)
9,780
(9,657)
(2,283)
(82,509)
1 %
16 %
262 %
6 %
9 %
(1)%
3 %
(62)%
(217)%
- %
- %
- %
- %
(64)%
(27)%
(18)%
(13)%
(6)%
(62)%
(10)%
(15)%
3 %
(8)%
(7)%
(12)%
8 %
15 %
(6)%
(7)%
(50)%
(74)%
238 %
(31)%
(537)%
(34)%
Key Performance Indicators
We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our
business. In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other
financial measures and non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our
capital based on regulatory reporting requirements, measure the effectiveness of our operations and assess operational
efficiencies. These indicators change from time to time as the opportunities and challenges in our businesses change.
Specifically, performance ratios and asset quality ratios are typically used for measuring the performance of banking and
financial institutions. We consider return on average stockholders’ equity, return on average assets and net interest margin
to be important supplemental measures of operating performance that are commonly used by securities analysts, investors
and other parties interested in the banking and financial industry. The net charge-offs to average loans outstanding ratio is
also considered a key measure for our banking segment as it indicates the performance of our loan portfolio.
In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators,
investors and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other
financial services companies.We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios
64
based on capital requirements administred by the federal banking agencies. The risk-based capital ratios are minimum
supervisory ratios generally applicable to banking organizations, but banking organizations are widely expected to operate
with capital positions well above the minimum ratios. Failure to meet minimum capital requirments can initiate certain
mandatory actions by regulators that, if undertaken, could have a material effect on our financial condition or results of
operations.
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference
between the income earned on our assets, including our loans and investment securities, and our cost of funds, including
the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant
contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning
assets and interest-bearing liabilities we hold, affect net interest income. We generated $441.3 million in net interest
income during 2019, compared with net interest income of $436.3 million and $421.7 million during 2018 and 2017,
respectively. Changes in net interest income during 2019, compared with 2018, primarily included an increase within our
banking segment and corporate segment, partially offset by a decrease in our mortgage origination segment. Changes in
net interest income during 2018, compared with 2017, primarily included increases in 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 $241.5 million, $241.0 million and $266.3 million in
securities brokerage commissions and fees and investment advisory fees and commissions, and $150.0
million, $47.8 million and $91.1 million in gains from derivative and trading portfolio activities
(included within other noninterest income) during 2019, 2018 and 2017, respectively.
Income from mortgage operations. Through PrimeLending, we generate noninterest income by
originating and selling mortgage loans. During 2019, 2018 and 2017, we generated $634.9 million,
$548.7 million and $632.4 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 $132.3 million, $136.8
million and $142.3 million in net insurance premiums earned during 2019, 2018 and 2017, respectively.
In the aggregate, we generated $1.2 billion, $1.0 billion and $1.2 billion in noninterest income during 2019, 2018 and
2017, respectively. The increase in noninterest income during 2019, compared with 2018, was predominantly attributable
to increases of $102.3 million in gains from derivative and trading portfolio activities within our broker-dealer segment
and $86.3 million in net gains from sale of loans, other mortgage production income and mortgage loan origination fees
within our mortgage origination segment.
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 2019 was $225.3 million, or $2.44 per diluted share, compared
with net income applicable to common stockholders of $121.4 million, or $1.28 per diluted share, during 2018, and net
income applicable to common stockholders of $132.5 million, or $1.36 per diluted share, during 2017. The 2019 period
included costs associated with the Leadership Changes and efficiency initiative-related charges which, in the aggregate,
totaled $11.0 million before income taxes. See “Factors Affecting Results of Operations” above for details regarding
significant items that affected our operating results in 2019 and 2018.
Our consolidated operating results during 2018 also included $8.2 million of pre-tax transaction costs related to the
BORO Acquisition, while our consolidated operating results during 2017 included $2.1 million of pre-tax transaction
costs related to the SWS Merger.
65
Certain items included in net income for 2019, 2018 and 2017 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 2019, 2018 and 2017 included the following purchase accounting
items related to the Bank Transactions (in thousands).
Year Ended December 31, 2019
Net accretion on earning assets and liabilities
Amortization of identifiable intangibles
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
PlainsCapital
Merger
FNB Transaction
SWS Merger
BORO
Acquisition
2,544 $
(3,954)
19,550 $
(260)
1,796 $
(695)
4,637 $
(2,659)
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)
— $
—
$
$
$
Total
28,527
(7,568)
Total
37,630
(8,026)
Total
56,090
(7,753)
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. 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
the FDIC Indemnification Asset due to lower projected collections from the FDIC than were initially estimated at the
acquisition date.
The information shown in the table below includes certain key performance indicators on a consolidated basis.
Return on average stockholders' equity (1)
Return on average assets (2)
Net interest margin (3) (4)
Leverage ratio (5)
Common equity Tier 1 risk-based capital ratio (6)
2019
Year Ended December 31,
2018
2017
11.18 %
1.66 %
3.48 %
12.71 %
16.70 %
6.33 %
0.93 %
3.55 %
12.53 %
16.58 %
7.00 %
1.03 %
3.61 %
12.94 %
17.71 %
(1) Return on average stockholders’ equity ratio is defined as consolidated income attributable to Hilltop divided by average total Hilltop
stockholders’ equity.
(2) Return on average assets ratio is defined as consolidated net income divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator
of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred.
(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 40 basis points, 42 basis points and 48 basis points during 2019, 2018 and 2017, respectively.
(5) The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.
(6) The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by
risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the
equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain
qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated
debt).
We present net interest margin and net interest income below, on a taxable-equivalent basis. 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
2019 and 2018, and 35% for 2017. 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 2019, 2018 and 2017, purchase accounting contributed 25, 34 and 52 basis points to our consolidated taxable
equivalent net interest margin of 3.48%, 3.56% and 3.63%, respectively, and primarily related to the following purchase
accounting items associated with the Bank Transactions (in thousands).
66
Year Ended December 31, 2019
Accretion of discount on loans
Accretion (amortization) of discount (premium) on acquired securities
PlainsCapital
Merger
FNB
Transaction
SWS Merger
BORO
Acquisition
$
3,113 $
(568)
19,550 $
—
1,687 $
33
4,395 $
242
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
PlainsCapital
Merger
FNB
Transaction
SWS Merger
BORO
Acquisition
$
3,689 $
(1,263)
28,373 $
—
2,123 $
—
4,909 $
—
PlainsCapital
Merger
FNB
Transaction
SWS Merger
BORO
Acquisition
$
7,879 $
(2,407)
47,677 $
—
2,889 $
—
— $
—
Total
28,745
(293)
Total
39,094
(1,263)
Total
58,444
(2,407)
The table below provides additional details regarding our consolidated net interest income (dollars in thousands).
2019
Average
Interest
Outstanding Earned or Yield or
Balance
Rate
Paid
Annualized Average
Annualized Average
Year Ended December 31,
2018
Interest
Outstanding Earned or Yield or
2017
Interest
Outstanding Earned or Yield or
Annualized
Balance
Paid
Rate
Balance
Paid
Rate
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
Total interest-bearing liabilities
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and stockholders'
equity
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 1,501,154 $ 64,830
4.32 % $ 1,472,772 $ 68,536
4.65 % $ 1,541,000 $ 64,344
4.18 %
7,088,208 395,641
5.58 %
6,601,453 368,189
5.58 %
6,177,933 347,644
5.63 %
1,803,622
61,983
3.44 %
1,680,976
50,860
3.03 % 1,399,379
36,378
2.60 %
233,713
6,803
2.91 %
247,651
7,752
3.13 %
234,741
8,012
3.41 %
63,598
1,236
1.94 %
189,183
2,831
1.50 %
140,337
923
0.66 %
371,312
1,550,322
8,469
69,582
6,869
12,687,227 615,413
75,298
(57,690)
12,629,537
1,397,420
$14,026,957
74,684
1,542,539
459,628
8,683
2.28 %
66,914
4.49 %
9.12 %
6,535
4.85 % 12,268,886 580,300
(62,681)
12,206,205
1,288,718
$ 13,494,923
85,550
1,518,041
572,829
6,114
1.89 %
41,048
4.34 %
8.75 %
4,897
4.73 % 11,669,810 509,360
(59,153)
11,610,657
1,345,174
$12,955,831
$ 5,916,491 $ 71,509
60,086
1,423,847
1.21 % $ 5,568,473 $ 46,002
56,733
1,395,947
4.22 %
0.83 % $ 5,220,359 $ 24,695
32,337
1,378,748
4.06 %
1,398,559
41,928
8,738,897 173,523
3.00 %
1.99 %
1,477,966
40,369
8,442,386 143,104
2.73 % 1,515,874
1.70 % 8,114,981
28,376
85,408
2,635,924
614,164
11,988,985
2,014,535
23,437
$
14,026,957
2,504,599
617,227
11,564,212
1,919,940
10,771
$ 13,494,923
2,309,776
634,630
11,059,387
1,894,009
2,435
$
12,955,831
1.07 %
2.70 %
5.72 %
4.36 %
0.47 %
2.35 %
1.87 %
1.05 %
$ 441,890
$ 437,196
$ 423,952
2.86 %
3.48 %
3.03 %
3.56 %
3.31 %
3.63 %
(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 2019 and 2018, and a 35%
federal income tax rate for 2017. The adjustment to interest income was $0.6 million, $0.9 million and $2.2 million during 2019, 2018 and 2017,
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
67
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 during 2019, compared with 2018, primarily due to changes
attributable to both volumes and yields within our banking segment, partially offset by a decrease in accretion of discount
on loans within the banking segment and declining net yields on mortgage loans held for sale within our mortgage
origination segment. 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, partially offset by a decrease in accretion of discount on loans and changes attributable to both
volumes and yields within our banking segment. Refer to the discussion in the “Banking Segment” section that follows
for more details on the changes in net interest income, 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.
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. Substantially all of
our consolidated provision (recovery) for loan losses is related to the banking segment. During 2019, the provision for
loan losses was impacted by the banking segment’s release of a $2.0 million reserve associated with previously estimated
hurricane loss exposures due to improved customer performance. The provision for loan losses was comprised of the
following (in thousands).
Provision relating to newly originated loans and acquired loans
without credit impairment at acquisition
Provision (recovery) on PCI loans
Provision for loan losses
$
$
2,978
4,228
7,206
$
$
6,978
(1,890)
5,088
$
$
12,433
1,838
14,271
2019
Year Ended December 31,
2018
2017
Consolidated noninterest income increased during 2019, compared with 2018, due to increases in noninterest income
within our mortgage origination and broker-dealer segments. The decrease in noninterest income during 2018, compared
with 2017, was primarily due to decreases in noninterest income in our mortgage origination, broker-dealer and insurance
segments. Additioally, 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.
Consolidated noninterest expense increased $46.6 million during 2019, compared with 2018, primarily due to increases in
noninterest expense within our broker-dealer and mortgage origination segments as well as corporate, partially offset by
decreases within our banking and insurance segments. The decrease in noninterest expense during 2018, compared with
2017, primarily included decreases in noninterest expense within our mortgage origination, broker-dealer and insurance
segments, partially offset by an increase within our banking segment.
Consolidated effective income tax rates were 22.4%, 21.8% and 45.3% for 2019, 2018 and 2017, respectively. The 2019
and 2018 effective tax rates approximated statutory rates and includes the effect of investments in tax-exempt instruments,
offset by nondeductible expenses. 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.
68
Segment Results
Banking Segment
The following table presents certain information about the operating results of our banking segment (in thousands).
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
2019
Year Ended December 31,
2018
2017
2019 vs 2018
2018 vs 2017
Variance
$
$
379,258 $
7,280
41,753
231,524
182,207 $
370,732 $
5,319
43,588
256,577
152,424 $
366,581 $
14,073
59,904
248,404
164,008 $
8,526 $
1,961
(1,835)
(25,053)
29,783 $
4,151
(8,754)
(16,316)
8,173
(11,584)
Income before income taxes increased during 2019, compared with 2018, primarily due to an increase in net interest
income associated with net volume and yield changes, and a decrease in noninterest expense associated with BORO
Acquisition-related transaction expenses of $8.2 million and a wire fraud loss of $4.5 million from a “spear phishing”
attack were recognized during 2018. Such items were partially offset by an increase in deposit rates and a decline in
accretion of discount on loans. Changes to net interest income related to 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 are discussed
in more detail below.
The decrease in income before income taxes during 2018, compared with 2017, was primarily due to a decline in
accretion, increases in deposit rates, the previously mentioned BORO Acquisition-related transaction expenses and a loss
attributable to wire fraud recognized during 2018, as well as $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 information shown in the table below includes certain key indicators of the performance and asset quality of our
banking segment.
Efficiency ratio (1)
Return on average assets (2)
Net interest margin (3)
Net charge-offs to average loans outstanding (4)
Year Ended December 31,
Year Ended December 31,
2019
54.91 %
1.17 %
3.77 %
(0.08)%
2018
56.79 %
1.31 %
4.50 %
— %
2019
54.99 %
1.36 %
4.00 %
0.08 %
2018
61.93 %
1.23 %
4.23 %
0.15 %
2017
58.24 %
0.85 %
4.31 %
0.09 %
(1) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We
consider the efficiency ratio to be a measure of the banking segment’s profitability.
(2) Return of average assets ratio is defined as net income divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicators
of profitability, as it represents interest earned on interest-earning assets compared to interest incurred.
(4) The net charge-offs to average loans outstanding ratio is defined as charge-offs during the reported period minus recoveries divided by average
loans outstanding. We use the ratio to measure the credit performance of our loan portfolio.
The banking segment presents net interest margin and net interest income in the following discussion and tables below, on
a taxable equivalent basis. 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 2019 and 2018, and 35% for 2017. 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 2019, 2018 and 2017, purchase accounting contributed 33, 48 and 72 basis points, respectively, to the banking
segment’s taxable equivalent net interest margin of 4.01%, 4.24% and 4.33%, respectively. These purchase accounting
69
Federal funds sold and
securities purchased under
agreements to resell
Interest-bearing deposits in
other financial institutions
Other
Interest-earning assets, gross (2)
Allowance for loan losses
Interest-earning assets, net
Noninterest-earning assets
Total assets
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
items are primarily related to the Bank Transactions as detailed in the tables presented in the Consolidated Operating
Results section.
The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
2019
Year Ended December 31,
2018
2017
Average
Outstanding Earned or Yield or
Interest Annualized Average
Interest Annualized Average
Interest Annualized
Outstanding Earned or Yield or
Outstanding Earned or Yield or
Assets
Interest-earning assets
Loans held for investment,
gross (1)
Subsidiary warehouse lines of
Balance
Paid
Rate
Balance
Paid
Rate
Balance
Paid
Rate
$ 6,564,748 $ 367,903
5.60 % $ 6,032,767 $ 342,098
5.67 % $ 5,695,927 $ 326,906
5.74 %
credit
Investment securities - taxable
Investment securities - non-
taxable (2)
1,374,051
1,181,198
61,812
29,879
4.50 % 1,364,577
965,937
2.53 %
58,551
22,451
4.29 % 1,436,401
851,066
2.32 %
54,701
16,275
3.81 %
1.91 %
96,186
3,267
3.40 %
110,386
3,707
3.36 %
123,969
4,747
3.83 %
447
1
0.17 %
1,049
16
1.54 %
5,947
50
0.85 %
202,478
55,403
9,474,511
(57,546)
9,416,965
938,663
$ 10,355,628
4,525
2,534
469,921
4,429
2,282
433,534
241,124
2.23 %
4.57 %
51,906
4.96 % 8,767,746
(62,306)
8,705,440
906,586
$ 9,612,026
316,186
1.84 %
4.40 %
70,123
4.94 % 8,499,619
(59,007)
8,440,612
947,484
$ 9,388,096
3,499
2,412
408,590
1.11 %
3.44 %
4.81 %
$ 5,654,663 $ 79,805
1.41 % $ 5,237,014 $ 55,060
1.05 % $ 4,932,689 $ 33,420
0.68 %
481,924
10,233
2.12 %
417,534
7,000
1.68 %
741,561
6,953
0.94 %
6,136,587
90,038
1.47 % 5,654,548
62,060
1.10 % 5,674,250
40,373
0.71 %
2,622,229
93,861
8,852,677
1,502,951
Total liabilities and stockholders’
equity
$ 10,355,628
2,492,728
48,847
8,196,123
1,415,903
$ 9,612,026
2,297,390
48,303
8,019,943
1,368,153
$ 9,388,096
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 379,883
$ 371,474
$ 368,217
3.49 %
4.01 %
3.85 %
4.24 %
4.10 %
4.33 %
(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
2019 and 2018 and 35% for 2017. The adjustment to interest income was $0.6 million, $0.8 million and $1.6 million during 2019, 2018 and 2017,
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.
70
The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below,
including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and
changes in the rates earned or paid on those items (in thousands).
Year Ended December 31,
2019 vs. 2018
Change Due To (1)
Volume Yield/Rate Change
2018 vs. 2017
Change Due To (1)
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
$ 7,603 $ 18,202 $ 25,805 $ 19,324 $ (4,132) $ 15,192
3,850
6,176
(1,040)
(2,735)
2,197
(520)
3,159
6,167
(320)
102
1,261
(120)
6,585
3,979
(520)
3,261
7,428
(440)
(2)
(179)
39
8,704
(13)
275
213
27,683
(15)
96
252
36,387
(42)
(831)
(627)
16,766
8
1,761
497
8,178
(34)
930
(130)
24,944
$ 1,107 $ 23,638 $ 24,745 $ 2,062 $ 19,578 $ 21,640
47
21,687
3,233
26,599 27,978
3,085
22,663
(3,038)
(976)
272
1,379
2,961
Net interest income (2)
$ 7,325 $
1,084 $ 8,409 $ 17,742 $ (14,485) $ 3,257
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Taxable equivalent.
Changes in the yields earned on interest-earning assets increased taxable equivalent net interest income, compared with
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 $10.3 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. Changes in the volume of interest-earning
assets, primarily due to an increase in the loan portfolio as a result of the BORO Acquisition and seasonal increases in
mortgage warehouse lending volume, increased taxable equivalent net interest income during 2019, compared with 2018.
Changes in rates paid on interest-bearing liabilities decreased taxable equivalent net interest income during 2019,
compared with 2018, due to increases in market interest rates and increased competitive pressure for deposits. Our
portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-
rate loans remain at applicable rate floors, which may delay and/or limit changes in net interest income during a period of
changing rates. If interest rates were to fall further, the impact on our net interest income for certain variable-rate loans
would be limited by these rate floors. In addition, declining interest rates may reduce our cost of funds on deposits. The
extent of this impact will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve
movements, as well as changes in market conditions and timing of management strategies. If interest rates were to rise,
yields on the portion of our loan portfolio that remain at applicable rate floors would rise more slowly than increases in
market interest rates. 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.
Changes in the yields earned on interest-earning assets increased taxable equivalent net interest income during 2018,
compared with 2017, 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. Changes in the volume of interest-earning assets, primarily due to an
increase in the loan portfolio, increased taxable equivalent net interest income during 2018, compared with 2017. Changes
in rates paid on interest-bearing liabilities decreased taxable equivalent net interest income during 2018, compared with
2017, due to increases in market interest rates.
During 2019, 2018, and 2017, the banking segment retained approximately $149 million, $97 million, and $10 million,
respectively, in mortgage loans originated by the mortgage origination segment. These loans are purchased by the banking
segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for
direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The
correspondent fees are eliminated in consolidation. We expect loans originated by the mortgage origination segment on
71
behalf of and retained by the banking segment to increase during 2020 based on approved authority for up to 5% of the
mortgage origination segment’s total origination volume. The determination of mortgage loan retention levels by the
banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance
sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.
The banking segment’s noninterest income decreased during 2019, compared to 2018, primarily due to sales activity in
our available-for-sale investment portfolio. The decrease in noninterest income 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 coverage provided by an insurance policy for forgery related to a single, large loan
previously charged off by the Bank.
The banking segment’s noninterest expenses decreased during 2019, compared to 2018, primarily due to a reduction in
the previously mentioned BORO Acquisition-related transaction and wire fraud expenses, as well as a reduction in net
expenses related to previously covered assets.
Broker-Dealer Segment
The following table provides additional details regarding our broker-dealer operating results (in thousands).
2019
Year Ended December 31,
2018
2017
2019 vs 2018
2018 vs 2017
Variance
Net interest income:
Wealth management:
Securities lending
Clearing services
Structured finance
Other
Total net interest income
Noninterest income:
Securities commissions and fees by business line (1):
Fixed income services (5)
Wealth management:
Retail
Clearing services
Other (5)
Investment and securities advisory fees and commissions by
business line:
Public finance services (5)
Fixed income services (5)
Wealth management:
Retail
Clearing services
Structured finance
Other
Other:
Structured finance
Fixed income services (5)
Other (5)
Total noninterest income
Net revenue (2)
Noninterest expense:
Variable compensation (3)
Non-variable compensation and benefits
Segment operating costs (4)
Total noninterest expense
$
$
9,496
11,530
6,686
23,596
51,308
$
10,181
13,038
10,304
17,355
50,878
8,711 $
10,728
9,600
14,696
43,735
(685) $
(1,508)
(3,618)
6,241
430
38,516
41,928
46,668
(3,412)
73,713
33,786
3,160
149,175
70,321
7,609
20,820
1,264
3,644
129
103,787
114,190
35,859
1,400
151,449
404,411
455,719
163,840
103,823
98,294
365,957
80,625
35,605
4,065
162,223
60,798
4,552
19,037
1,190
4,354
135
90,066
34,957
12,881
1,587
49,425
301,714
352,592
115,948
102,519
101,543
320,010
81,075
34,008
3,722
165,473
86,145
637
16,306
1,152
5,675
5
109,920
66,233
24,883
1,912
93,028
368,421
412,156
143,688
106,926
96,898
347,512
(6,912)
(1,819)
(905)
(13,048)
9,523
3,057
1,783
74
(710)
(6)
13,721
79,233
22,978
(187)
102,024
102,697
103,127
47,892
1,304
(3,249)
45,947
1,470
2,310
704
2,659
7,143
(4,740)
(450)
1,597
343
(3,250)
(25,347)
3,915
2,731
38
(1,321)
130
(19,854)
(31,276)
(12,002)
(325)
(43,603)
(66,707)
(59,564)
(27,740)
(4,407)
4,645
(27,502)
Income before income taxes
$
89,762
$
32,582
$
64,644 $
57,180 $
(32,062)
(1) Securities commissions and fees includes income of $11.4 million, $11.3 million, and $9.1 million during 2019, 2018, and 2017, respectively, that
is eliminated in consolidation.
(2) Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance
measure in the evaluation of the broker-dealer segment’s financial position and operating performance as it includes noninterest income comprised
of investment and securities advisory fees and commissions, as well as net interest income. We assess the broker-dealer segment’s performance on
a revenue basis for comparability with our banking segment. Additionally, net revenue is used by investors and analysts as it allows for some level
of comparability of trends across the financial services industry.
(3) Variable compensation represents performance-based commissions and incentives.
(4) Segment operating costs include provision for loan losses associated with the broker-dealer segment within other noninterest expenses.
(5) Noted balances during all prior periods include certain reclassifications to conform with current period presentation.
72
The increase in income before income taxes during 2019, compared with 2018, was primarily the result of an increase of
$102.3 million in trading gains earned from our derivative and trading portfolio activities, most notably in our structured
finance business. This increase in trading gains was primarily due to a more favorable market environment resulting in a
26% increase in trading volumes, enhanced spreads and a 22% increase in the structured finance business line’s to-be-
announced (“TBA”) mortgage-backed securities volume. We have experienced a more robust business environment in
2019 than we observed in 2018 primarily as a result of recent decreases in interest rates in 2019, increased customer
demand, improved product distribution and other strategic enhancements. These increases were offset by a $47.9 million
increase in variable compensation based on more robust financial results during 2019, a decrease in securities
commissions and fees and the $2.9 million in pre-tax costs associated with the Leadership Changes and efficiency
initiative-related charges as noted in the “Factors Affecting Results of Operations” section above.
The change 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 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 finance services
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 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.
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 2019, compared with 2018, was primarily due to an increase in net
interest earned on trading securities as a result of increases in market interest rates. The increase in net interest income
was partially offset by decreases in net interest income from our structured finance operations due to a decline in pool
inventory from December 31, 2018 to December 31, 2019 and decreases in average customer margin balances within the
segment’s clearing business of 19% during 2019. 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.
Noninterest income increased during 2019 compared to 2018 primarily due to increases in other noninterest income and
investment and securities advisory fees and commissions, partially offset by decreases in securities commissions and fees.
The decrease in noninterest income 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.
Securities commissions and fees decreased during 2019 compared to 2018 primarily due to decreases in commissions
earned in our retail group and fixed income services business line and fees related to our FDIC insured investment
products, as well as commissions earned on insurance and mutual fund transactions, and fees earned from correspondent
transactions. Securities commissions and fees decreased during 2018, compared with 2017. The decrease was primarily
attributable to decreases in commissions earned by our retail group and fixed income services business line 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 services and retail groups resulting from the 107-basis point increase in the
federal funds rate during 2018.
73
Investment banking and advisory fees increased during 2019, compared with 2018, primarily due to the increase in the
number of issues and the aggregate amount of those issues by our public finance services business line. Investment
banking and advisory fees decreased in 2018, compared with 2017, 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. 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.
The increase in other noninterest income during 2019, compared with 2018, was primarily the result of a $102.3 million
increase in trading gains earned from our derivative and trading portfolio activities, most notably in our structured finance
business, which accounted for $79.2 million of the increase, as well as our fixed income services business line, which
accounted for $23.0 million of the increase. The increases in our structured finance business were primarily due to the 77
basis-point decline in the 10-year treasury bond yield during 2019 compared to a 29 basis-point increase during 2018, and
a 22% increase in the business line’s TBA mortgage-backed securities volume. The $23.0 million increase in our fixed
income services business line was attributable to an improved market environment, improved spreads and a 26% increase
in trading volume. The decrease in other noninterest income during 2018, compared with 2017, was primarily due to 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.
Noninterest expenses increased during 2019, compared with 2018, primarily due to an increase in variable compensation
and $2.9 million in pre-tax costs associated with the Leadership Changes and efficiency initiative-related charges as noted
in the “Factors Affecting Results of Operations” section above. The decrease in noninterest expenses 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.
Selected information concerning the broker-dealer segment follows (dollars in thousands).
Pre-tax margin (1)
Total compensation as a % of net revenue (2)
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 finance services:
Number of issues
Aggregate amount of offerings
Structured finance:
Lock production/TBA volume
Fixed income services:
Total volumes
Net inventory (end of period)
Wealth management (Retail group):
Retail employee representatives (end of period)
Independent registered representatives (end of period)
Wealth management (Clearing services group):
Total tickets
Correspondents (end of period)
Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)
Interest-bearing liabilities - stock loaned (end of period)
2019
Year Ended December 31,
2018
2017
19.7 %
58.7 %
$
$
$
$
1,304,333
666,418
310,752
329,743
9.2 %
62.0 %
$
$
$
$
1,302,558
905,503
333,054
394,005
15.7 %
60.8 %
1,301,148
1,093,493
349,794
411,989
1,179
54,394,943
$
1,123
53,559,396
$
1,561
83,907,144
$
$
$
$
$
$
5,876,466
$
4,829,687
$
5,938,788
$
$
83,571,542
643,371
$
$
66,370,939
659,237
$
$
65,559,604
491,370
126
195
124
208
120
218
1,847,217
145
1,661,535
152
1,325,760
162
$
$
1,634,782
1,555,964
$
$
1,365,547
1,186,073
$
$
1,386,821
1,215,093
(1) Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure
given its use as a profitability metric representing the percentage of revenue earned that results in a profit.
(2) Total compensation includes the sum of non-variable compensation and benefits and variable compensation. Variable compensation represents
performance-based commissions and incentives. We consider total compensation as a percentage of net revenue to be a key performance measure
and indicator of segment profitability.
74
Mortgage Origination Segment
The following table presents certain information regarding the operating results of our mortgage origination segment (in
thousands).
Net interest income (expense)
Noninterest income
Noninterest expense
2019
Year Ended December 31,
2018
$
(6,273) $
1,485 $
634,992
563,998
551,860
540,474
Income (loss) before income taxes
$
64,721 $
12,871 $
Variance
2017
2019 vs 2018
2018 vs 2017
(915) $
632,388
581,899
49,574 $
(7,758) $
83,132
23,524
51,850 $
2,400
(80,528)
(41,425)
(36,703)
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 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 decreased between 2018 and 2019, refinancing volume as a percentage of total origination volume
increased. Between 2017 and 2018, average mortgage interest rates increased which resulted in refinancing volume as a
percentage of total origination volume decreasing. See details regarding refinancing volume in the table below. Changes
in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.
An increase in mortgage interest rates during 2020 could impact the percentage mix of refinancing and purchase volumes
relative to total loan origination volume compared to 2019.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending
through its affiliated business relationships (“ABAs”). For 2019, funded loan volume through ABAs was approximately
8% of the mortgage origination segment’s total loan volume. At December 31, 2019, PrimeLending owned a 51%
membership interest in four ABAs. We expect production within the ABA channel to increase to approximately 10% of
the total loan volume of the mortgage origination segment during 2020.
The following table provides further details regarding our mortgage loan originations and sales for the periods indicated
below (dollars in thousands).
Mortgage Loan Originations - units
61,045
57,186
62,058
2019
Year Ended December 31,
2018
2017
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Variance
2019 vs 2018 2018 vs 2017
(4,872)
3,859
Mortgage Loan Originations - volume
$ 15,579,437
$ 13,692,484
$ 14,457,913
$
1,886,953 $
(765,429)
Mortgage Loan Originations:
Conventional
Government
Jumbo
Other
Home purchases
Refinancings
Texas
California
Florida
Arizona
Ohio
Washington
South Carolina
Missouri
North Carolina
Maryland
All other states
Mortgage Loan Sales - volume:
External third parties
Banking segment
$
9,503,044
3,860,802
1,309,317
906,274
59.95 % $
23.80 %
9.79 %
6.46 %
$ 15,579,437 100.00 % $ 13,692,484 100.00 % $ 14,457,913 100.00 % $
8,262,800
3,413,300
1,181,353
835,031
8,666,935
3,440,264
1,415,682
935,032
61.00 % $
24.78 %
8.40 %
5.82 %
60.35 % $
24.93 %
8.63 %
6.09 %
$ 11,718,772
3,860,665
82.82 % $
17.18 %
$ 15,579,437 100.00 % $ 13,692,484 100.00 % $ 14,457,913 100.00 % $
75.22 % $ 11,798,804
1,893,680
24.78 %
86.17 % $ 11,974,571
13.83 %
2,483,342
$
2,999,633
1,561,926
1,113,827
681,486
642,130
631,549
604,546
510,025
485,682
485,098
5,863,535
21.64 % $
12.77 %
5.90 %
3.84 %
4.39 %
3.22 %
3.27 %
3.10 %
3.05 %
2.98 %
35.84 %
$ 15,579,437 100.00 % $ 13,692,484 100.00 % $ 14,457,913 100.00 % $
2,594,585
1,511,931
1,026,157
567,202
588,199
520,543
474,844
454,517
413,686
403,086
5,137,734
3,129,008
1,846,172
853,727
554,463
634,142
465,501
472,935
448,565
440,456
430,668
5,182,276
19.25 % $
10.03 %
7.15 %
4.37 %
4.12 %
4.05 %
3.88 %
3.27 %
3.12 %
3.11 %
37.65 %
18.95 % $
11.04 %
7.49 %
4.14 %
4.30 %
3.80 %
3.47 %
3.32 %
3.02 %
2.94 %
37.53 %
$ 14,442,929
148,798
99.93 % $
0.07 %
$ 14,591,727 100.00 % $ 13,735,885 100.00 % $ 14,454,260 100.00 % $
98.98 % $ 13,639,215
96,670
99.30 % $ 14,444,529
9,731
0.70 %
1.02 %
1,240,244 $
447,502
127,964
71,243
1,886,953 $
(404,135)
(26,964)
(234,329)
(100,001)
(765,429)
(80,032) $
1,966,985
1,886,953 $
(175,767)
(589,662)
(765,429)
405,048 $
49,995
87,670
114,284
53,931
111,006
129,702
55,508
71,996
82,012
725,801
1,886,953 $
(534,423)
(334,241)
172,430
12,739
(45,943)
55,042
1,909
5,952
(26,770)
(27,582)
(44,542)
(765,429)
803,714 $
52,128
855,842 $
(805,314)
86,939
(718,375)
75
We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan
origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans,
resulting in net gains from the sale of loans, other mortgage production income and mortgage loan origination fees. Total
loan origination volume is a measure utilized by management, our investors and analysts in assessing market share and
growth of the mortgage origination segment.
The mortgage origination segment’s total loan origination volume during 2019 increased 13.8% compared with 2018,
while income before income taxes during 2019 increased 402.8%, compared with 2018. The increase in income before
income taxes during 2019 was primarily due to an increase in the change in net fair value of interest rate lock
commitments (“IRLCs”) and loans held for sale, an increase in mortgage loan origination fees and other related income,
an increase in net gains from sale of loans and a decrease in segment operating costs. These changes were partially offset
by an increase in compensation that varies with the volume of mortgage loan originations (“variable compensation”), a
decrease in change in net fair value of mortgage servicing rights (“MSR”) assets, and an increase in net interest expense.
The mortgage origination segment’s total loan origination volume decreased 5.3% between 2018 and 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 decreases in net gains from sale of loans, and the change in net fair value of IRLCs and
loans held for sale. These changes were partially offset by a decrease in variable compensation, a decrease in segment
operating costs, an increase in lender paid closing costs, and an increase in mortgage loan origination fees earned.
Net interest expense was comprised of interest income earned on loans held for sale, offset by interest incurred on
warehouse lines of credit held with the Bank and related intercompany financing costs. The increase in net interest
expense during 2019, compared with 2018, included the effects of declining net yields on mortgage loans held for sale.
The increase in net interest income during 2018, compared with 2017, included the effects of improved net yields on
mortgage loans held for sale.
Noninterest income 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
2019
Year Ended December 31,
2018
450,515 $
473,380 $
2017
536,007 $
Variance
2019 vs 2018 2018 vs 2017
(85,492)
22,865 $
130,208
104,463
94,244
25,745
10,219
activity:
IRLCs and loans held for sale
Mortgage servicing rights asset
Servicing fees
Total noninterest income
21,253
(15,166)
25,317
(20,608)
(5,856)
23,346
(14,451)
(4,132)
20,720
$
634,992 $
551,860 $
632,388 $
41,861
(9,310)
1,971
83,132 $
(6,157)
(1,724)
2,626
(80,528)
The increase in net gains from sale of loans during 2019, compared with 2018, was primarily a result of an increase in
total loans sales volume of 6.2%. The average loan sales margin was relatively unchanged between 2019 and 2018. The
increase in mortgage loan origination fees and other related income was primarily the result of an increase in total loan
origination volume of 13.8% and an increase in average mortgage loan origination during 2019, compared with 2018.
The decrease in net gains from sale of loans during 2018, compared with 2017, was primarily the result of a decrease in
average loan sales margin, in addition to a decrease in total loan sales volume of 5.0%. 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.
During 2019, 2018, and 2017, the mortgage origination segment originated approximately $149 million, $97 million, and
$10 million, respectively, in loans on behalf of the banking segment, representing up to 1% of PrimeLending’s total loan
origination volume during each respective year. These loans are sold to the banking segment at par. For origination
services provided, the mortgage origination segment is reimbursed direct origination costs associated with these loans, in
addition to payment of a correspondent fee. The reimbursed origination costs and correspondent fee are included in the
mortgage origination segment operating results, and the correspondent fees are eliminated in consolidation. The mortgage
76
origination segment’s net gains from sale of loans margins, including loans sold to the banking segment, during 2019,
2018, and 2017 were 324 bps, 328 bps and 371 bps, respectively. The impact of loans sold to the banking segment at par
was to reduce this margin 3 bps in 2019, while the impact on 2018 and 2017 was de minimis. We expect loan volume
originated on behalf of and retained by the banking segment to increase during 2020 based on approved authority for up
to 5% of the mortgage origination segment’s total loan volume. We consider the previously noted mortgage origination
segment’s net gains from sale of loans margin, in basis points, to be a key performance measure. Net gains from sale of
loans margin is defined as net gains from sale of loans divided by loan sales volume. The net gains from sale of loans is
central to the segment’s generation of income.
Noninterest income included changes 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 increase during 2019 was the result of an increase
in the total volume of individual IRLCs and loans held for sale, partially offset by a decrease in the average value of
individual 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 held for sale at the end of these periods.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary
market, the majority servicing released. During 2019, 2018 and 2017, the mortgage origination segment retained servicing
on approximately 6%, 13% and 11% of loans sold, respectively. The mortgage origination segment’s determination of
whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage
interest rates and refinancing and market activity. The related MSR asset was valued at $56.7 million on $5.1 billion of
serviced loan volume at December 31, 2019, compared with a value of $67.9 million on $5.3 billion of serviced loan
volume at December 31, 2018. 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 as noted in the table above. Additionally, net servicing income
was $12.3 million, $10.9 million and $8.6 million during 2019, 2018 and 2017, respectively. In March 2018 and May
2017, the mortgage origination segment sold MSR assets of $9.3 million and $17.5 million, respectively, which
represented, $834.3 million and $1.7 billion, respectively, of its serviced loan volume at the time. In December 2019, the
mortgage origination segment executed a letter of intent to sell MSR assets with a serviced loan volume totaling $1.5
billion. The sale of these MSR assets was completed on February 14, 2020, at a price of $18.7 million.
Noninterest expenses were comprised of the items set forth in the table below (in thousands).
Year Ended December 31,
2018
2017
2019
Variable compensation
Non-variable compensation and benefits
Segment operating costs
Lender paid closing costs
Servicing expense
Total noninterest expense
$
$
252,956 $
166,179
112,128
19,698
13,037
563,998 $
216,038 $
173,093 $
118,630
20,294
12,419
540,474 $
Variance
2019 vs 2018 2018 vs 2017
(20,638)
173,093
(188,480)
(5,737)
337
(41,425)
36,918 $
(6,914)
(6,502)
(596)
618
23,524 $
236,676 $
—
307,110
26,031
12,082
581,899 $
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 was to better align resources and
lower PrimeLending’s cost structure. The decreases in non-variable compensation and benefits and segment operating
costs during 2019, compared with 2018, were primarily the result of this initiative. Decreases in noninterest expense as a
result of this initiative have been partially offset by costs related to the “Technology Enhancements and Corporate
Initiatives” discussed in detail within the “Overview” above.
Total employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all
periods presented. Specifically, variable compensation comprised 60.4% and 55.5% of the total employees’ compensation
and benefits expenses during 2019 and 2018, respectively. Variable compensation increased during 2019, compared to
2018, while it decreased $20.6 million during 2018, compared with 2017. Variable compensation, which is primarily driven
77
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 an increase in loan origination volume, an increase in the average incentive rate paid and
the impact of incentive plans driven by non-mortgage production criteria contributed to the increase in variable
compensation between 2019 and 2018. In addition to the decreases in loan origination volume, the decrease in the average
incentive rate paid and the impact of incentive plans driven by non-mortgage production criteria contributed to the decrease
in variable compensation between 2018 and 2017.
While total loan origination volumes increased 13.8% during 2019, compared with 2018, the mortgage origination
segment’s operating costs decreased 5.0%. The decrease in segment operating costs during 2019, compared to 2018, was
primarily due to decreases in non-variable compensation and related benefits, depreciation, professional fees, and business
development. These decreases were partially offset by increases in loan origination costs, as well as software license and
maintenance expense. The decrease in non-variable compensation and benefits during 2019, compared to 2018, was due
to reductions in corporate headcount, loan processing, and loan fulfillment primarily resulting from PrimeLending’s cost
reduction plan initiated during the third quarter of 2018, partially offset by $1.25 million in pre-tax costs associated with
the Leadership Changes discussed in the “Factors Affecting Results of Operations” section. 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 to 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 initiative discussed above and
implemented during the third quarter of 2018.
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, 2010 and December 31, 2019, the mortgage origination segment sold mortgage loans totaling $122.2
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 2010, it does not anticipate experiencing significant losses in the future on loans originated prior to
2010 because of investor claims under these provisions of its sales contracts.
When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination
segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other
deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with
the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or
reimbursement to the claimant for losses incurred on the loan.
78
Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between
January 1, 2010 and December 31, 2019 (dollars in thousands).
Claims resolved with no payment
$
217,153 0.18% $
% of
Loans
Sold
Amount
Amount
% of
Loans
Sold
— 0.00%
Original Loan Balance
Loss Recognized
Claims resolved because of a loan
repurchase or payment to an investor
for losses incurred (1)
211,190 0.17%
428,343 0.35% $
9,794 0.01%
9,794 0.01%
$
(1) Losses incurred include refunded purchased servicing rights.
For each loan it concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination
segment has established a specific claims indemnification liability reserve. 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, 2019 and 2018, the mortgage origination segment’s total indemnification liability reserve totaled $11.8
million and $10.7 million, respectively. The related provision for indemnification losses was $3.1 million, $3.2 million,
and $4.0 million during 2019, 2018 and 2017, 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.
Insurance Segment
The following table presents certain information regarding the operating results of our insurance segment (in thousands).
Net interest income (expense)
Noninterest income
Noninterest expense
Income (loss) before income taxes
2019
Year Ended December 31,
2018
2017
2019 vs 2018
2018 vs 2017
Variance
$
$
2,329 $
143,082
127,920
17,491 $
3,025 $
2,861 $
142,565
139,921
151,382
158,354
5,669 $
(4,111) $
(696) $
517
(12,001)
11,822 $
164
(8,817)
(18,433)
9,780
The improvement in income (losses) before income taxes during 2019, compared with 2018, was primarily driven by a
decrease in loss and LAE and larger increases in fair value associated with the equity securities held by the insurance
segment partially offset by declines in net insurance premiums earned. The improvement in income (loss) 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 included
those associated with Hurricane Michael, which occurred during the fourth quarter of 2018, however, the significance of
Hurricane Harvey and other non-catastrophic weather-related losses that occurred during 2017 were the primary drivers of
the reduction in loss and LAE during 2018, compared to 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.
79
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 insurance segment’s operations resulted in a combined ratio of 91.8% during 2019, compared with 97.0% and
106.5% during 2018 and 2017, respectively. The decrease in the combined ratio during 2019, compared with 2018, was
primarily driven by decreases in the loss and LAE ratio. The decrease in the combined ratio during 2018, compared with
2017, included decreases in the loss and LAE ratio due to fewer weather-related events. We consider the insurance
segment’s combined ratio to be a key performance measure. 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.
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
2019
Year Ended December 31,
2018
2017
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
Gross Written % of
Total
Premiums
$
$
96,195
16,177
11,368
7,694
4,237
2,634
138,305
69.6 % $
11.6 %
8.2 %
5.6 %
3.1 %
1.9 %
100.0 % $
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
7,099
149,241
68.8 %
11.0 %
6.2 %
5.9 %
3.4 %
4.7 %
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 2019 totaled $19.5 million through December 31, 2019. During 2018, and 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 totaled $38.1 million through December 31, 2017,
with a net loss, after reinsurance, of $33.5 million during 2017.
Noninterest income during 2019, 2018 and 2017 was primarily comprised of net insurance premiums earned of $132.3
million, $136.8 million and $142.3 million, respectively. The year-over-year decreases in net insurance premiums earned
during 2019 and 2018, compared with 2018 and 2017, respectively, were driven by the effect of decreases in direct
insurance premiums written as discussed below.
Direct insurance premiums written by major product line are presented in the table below (in thousands).
Year Ended December 31,
2018
2017
2019
Variance
2019 vs 2018
2018 vs 2017
Direct Insurance Premiums Written:
Homeowners
Fire
Mobile Home
Other
$
$
50,932 $
39,319
34,906
—
125,157 $
50,689 $
40,544
36,288
2,090
129,611 $
54,706 $
42,414
36,925
3,046
137,091 $
243
(1,225)
(1,382)
(2,090)
(4,454)
$
$
(4,017)
(1,870)
(637)
(956)
(7,480)
80
The aggregate direct insurance premiums written for our three largest insurance product lines decreased by $2.4 million
during 2019, compared with 2018, and $6.5 million during 2018, compared with 2017. The decrease in insurance
premiums written was due to competition, rationalization of product offerings, including the non-renewal of commercial
policies, 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. The premiums written and earned related to the commercial policies and the five non-core states is included
within “Other” in the table above and the table that follows. Approximately 1% of total net insurance premiums earned
during 2019 were from these five non-core states, compared to approximately 3% during 2018.
Net insurance premiums earned by major product line are presented in the table below (in thousands).
Net Insurance Premiums Earned:
Homeowners
Fire
Mobile Home
Other
Year Ended December 31,
2018
2019
2017
2019 vs 2018
2018 vs 2017
Variance
$
$
53,831 $
41,558
36,895
—
132,284 $
53,482 $
42,777
38,287
2,205
136,751 $
56,784 $
44,025
38,328
3,161
142,298 $
349
(1,219)
(1,392)
(2,205)
(4,467)
$
$
(3,302)
(1,248)
(41)
(956)
(5,547)
Net insurance premiums earned during 2019 and 2018 decreased, compared to 2018 and 2017, respectively, primarily due
to the decreases in direct insurance premiums written noted above.
Noninterest expenses during 2019, 2018 and 2017 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 2019 was $68.9 million, compared
to $79.3 million and $94.7 million during 2018 and 2017, respectively, resulting in loss and LAE ratios during 2019, 2018
and 2017 of 52.1%, 58.0% and 66.6%, respectively. The decrease in the loss and LAE ratio during 2019, compared with
2018, was primarily driven by a 13.1% decrease in loss and LAE expense and a decrease in net insurance premiums
earned of 3.3%. 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%.
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
$
$
$
Variance
2018 vs 2017
$
Year Ended December 31,
2018
34,683
22,698
57,381
(4,036)
53,345
136,751
2019
33,206
23,062
56,268
(3,771)
52,497
132,284
$
$
$
39.7 %
$
$
39.0 %
$
$
2017
36,549
23,930
60,479
(3,745)
56,734
142,298
2019 vs 2018
(1,477)
364
(1,113)
265
(848)
(4,467)
$
$
39.9 %
$
$
0.7 %
(1,866)
(1,232)
(3,098)
(291)
(3,389)
(5,547)
(0.9) %
81
Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
Net interest income (expense)
Noninterest income
Noninterest expense
Income (loss) before income taxes
$
$
(5,541) $
2,221
50,968
(54,288) $
(9,176)
4,893
36,628
(40,911)
$
$
(10,069)
12,798
33,983
(31,254)
$
$
2019
Year Ended December 31,
2018
2017
2019 vs 2018
Variance
3,635 $
(2,672)
14,340
(13,377) $
2018 vs 2017
893
(7,905)
2,645
(9,657)
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.
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 during 2019 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.
Interest expense during 2019, 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 $3.9 million, $3.7 million and $3.0 million during 2019, 2018 and 2017,
respectively, on junior subordinated debentures of $67.0 million issued by PCC (the “Debentures”).
Noninterest income during 2019 was primarily associated with activity related to the Hilltop Plaza investment.
Noninterest income during 2018 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 expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and
professional fees, including corporate governance, legal and transaction costs. During 2019, compared with 2018, the
$14.3 million increase in noninterest expenses was primarily due to the Core System Improvements and corporate
initiatives discussed in the “Overview” section. In addition to costs incurred related to the aforementioned Core System
Improvements and corporate initiatives, the increase during 2019 was due to $6.8 million of aggregate pre-tax costs
associated with the Leadership Changes and efficiency initiative-related charges discussed in the “Factors Affecting
Results of Operations” section. During 2018, compared with 2017, the $2.6 million increase in noninterest expenses was
primarily related to increased corporate headcount associated with corporate initiatives and, to a lesser extent, Core
System Improvements initiatives, partially offset by a $2.1 million decrease in transaction costs during 2017 in connection
with the SWS Merger.
82
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2019 as compared
to December 31, 2018 and December 31, 2017.
Securities Portfolio
At December 31, 2019, 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
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
2019
December 31,
2018
2017
$
—
$
7,945
$
—
24,680
331,601
2,145
191,154
36,973
93,117
3,468
2,992
3,446
689,576
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
10,057
11,538
24,669
85,575
466,989
12,031
335,692
46,806
41,242
998,392
85,611
385,074
11,772
276,399
53,302
51,962
875,658
96,640
243,505
12,023
233,812
68,662
65,008
744,319
—
9,903
—
24,020
17,776
161,624
113,894
69,012
386,326
39,018
21,903
87,065
142,474
50,649
351,012
39,015
16,130
71,373
173,928
55,403
355,849
20,007
19,679
21,241
$
2,094,301
$
1,991,815
$
1,852,094
83
We had net unrealized gains of $14.2 million at December 31, 2019, compared with net unrealized losses of $11.1 million
and $3.9 million at December 31, 2018 and December 31, 2017, respectively, related to the available for sale investment
portfolio. We had net unrealized gains of $2.6 million at December 31, 2019, compared with net unrealized losses
associated with the securities held to maturity portfolio of $9.9 million and $5.9 million at December 31, 2018 and
December 31, 2017, respectively. We had net unrealized gains of $1.2 million and $1.6 million at December 31, 2019 and
2017, respectively, compared with net unrealized losses of $0.9 million at December 31, 2018 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, 2019, the banking segment’s securities portfolio of $1.3 billion
was comprised of trading securities of $2.4 million, available for sale securities of $911.5 million, held to maturity
securities of $386.3 million and equity securities of $0.1 million, in addition to $13.4 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 $687.2 million at December 31, 2019. 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 sheets, had a value of $43.8
million at December 31, 2019.
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, 2019, the insurance segment’s securities portfolio was comprised of $86.9 million in available for sale
securities, $19.8 million of equity securities and $6.2 million of other investments included in other assets within the
consolidated balance sheets.
84
The following table sets forth the estimated maturities of our debt securities, excluding trading securities, at December 31,
2019. 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
Collateralized mortgage obligations:
Amortized cost
Fair value
Weighted average yield
Corporate debt securities:
Amortized cost
Fair value
Weighted average yield
States and political subdivisions:
Amortized cost
Fair value
Weighted average yield
Total securities portfolio:
Amortized cost
Fair value
Weighted average yield
Loan Portfolio
One Year One Year to Five Years to Greater Than
Or Less
Ten Years
Five Years
Ten Years
Total
$
$
$
4,894
4,907
$
2.03 %
4,975
5,150
2.65 %
$
$
—
—
— %
$
$
—
—
—
$
$
9,869
10,057
2.34 %
$
$
$
1,251
1,265
$
2.85 %
98,154
99,001
$
$
2.26 %
9,205
9,304
2.40 %
$
$
—
—
— %
$
$
108,610
109,570
2.28 %
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
$
— %
127
137
5.35 %
$
$
41,939
42,727
$
$
435,809
442,196
$
$
477,875
485,060
2.75 %
2.65 %
2.66 %
—
—
—
$
$
28,926
29,033
$
$
133,637
136,259
2.37 %
2.82 %
$
—
—
$
— %
245
248
2.44 %
$
2,147
2,164
$
2.74 %
35,835
37,344
3.37 %
891
$
$
892
2.16 %
8,056
8,219
3.21 %
9,183
9,228
2.32 %
$ 176,318
$ 179,132
$
$
$
$
$
$
18,752
18,697
1.98 %
5,966
6,290
3.51 %
20,823
21,329
3.29 %
$
$
230,322
234,606
$
$
$
$
$
$
$
$
$
$
10,549
10,518
$
$
173,112
175,810
2.79 %
2.74 %
428,225
429,963
$
$
447,222
448,908
2.41 %
2.39 %
920
1,008
6.24 %
$
$
44,868
46,806
3.42 %
79,211
80,671
$
$
108,981
111,111
3.62 %
3.51 %
954,714
964,356
$ 1,370,537
$ 1,387,322
2.56 %
2.78 %
2.63 %
2.64 %
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 and 2015. The majority of
the loans previously covered by the FDIC loss-share agreements were commercial real estate and 1-4 family residential
loans.
85
Loans held for investment, net of allowance
$
Loans held for investment, net of allowance
$
December 31, 2019
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Loans held for investment, gross
Allowance for loan losses
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Loans held for investment, gross
Allowance for loan losses
December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
December 31, 2016
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
$
PCI
Loans
Loans, excluding
PCI Loans
2,974,941 $ 25,582 $
2,020,460
940,487
739,608
47,046
576,527
7,299,069
(53,966)
5,260
77
51,412
—
—
82,331
(7,170)
Total Loans Held
for Investment
3,000,523
2,025,720
940,564
791,020
47,046
576,527
7,381,400
(61,136)
7,320,264
7,245,103 $ 75,161 $
$
PCI
Loans
Loans, excluding
PCI Loans
2,912,407 $ 27,713 $
1,745,698
932,445
620,936
47,537
578,363
6,837,386
(56,594)
6,559
464
58,327
9
—
93,072
(2,892)
Total Loans Held
for Investment
2,940,120
1,752,257
932,909
679,263
47,546
578,363
6,930,458
(59,486)
6,870,972
6,780,792 $ 90,180 $
$
Loans, excluding
PCI Loans
2,557,008 $
1,675,106
961,167
424,976
40,319
577,889
95,016
6,331,481
(58,951)
PCI
Loans
25,159 $
6,099
1,438
4,381
127
—
87,113
124,317
(4,735)
Total Loans Held
for Investment
2,582,167
1,681,205
962,605
429,357
40,446
577,889
182,129
6,455,798
(63,686)
6,392,112
6,272,530 $ 119,582 $
$
Loans, excluding
PCI Loans
2,308,867 $
1,832,906
783,383
323,776
41,058
502,077
122,373
5,914,440
(51,158)
PCI
Loans
34,080 $
8,672
3,467
4,919
294
—
133,754
185,186
(3,441)
Total Loans Held
for Investment
2,342,947
1,841,578
786,850
328,695
41,352
502,077
256,127
6,099,626
(54,599)
6,045,027
5,863,282 $ 181,745 $
Loans held for investment, net of allowance
$
Loans held for investment, net of allowance $
86
December 31, 2015
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Loans held for investment, gross
Allowance for loan losses
$
Loans, excluding
PCI Loans
1,808,857 $
1,674,325
700,206
316,737
44,893
590,545
158,320
5,293,883
(40,961)
PCI
Loans
46,780 $
13,350
5,150
5,995
779
—
221,974
294,028
(5,986)
Total Loans Held
for Investment
1,855,637
1,687,675
705,356
322,732
45,672
590,545
380,294
5,587,911
(46,947)
5,540,964
5,252,922 $ 288,042 $
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 $8.6 billion, $7.5 billion
and $7.2 billion at December 31, 2019, 2018 and 2017, respectively. The banking segment’s loan portfolio includes
warehouse lines of credit extended to PrimeLending of $2.2 billion, of which $1.8 billion, $1.2 billion and $1.5 billion was
drawn at December 31, 2019, 2018 and 2017, 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, 2019, 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 44.1%, 13.8% and 11.6%, respectively, of the banking segment’s total loans held for
investment at December 31, 2019. The banking segment’s loan concentrations were within regulatory guidelines at
December 31, 2019.
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 $576.5 million, $578.2 million and $577.5 million at
December 31, 2019, 2018 and 2017, respectively. The decrease during 2019, compared to 2018, was primarily
attributable to a decrease of $22.3 million in borrowings on margin accounts, partially offset by an increase of $20.5
million in receivables from clients. The increase during 2018, compared to 2017, was primarily attributable to an increase
of $17.2 million in receivables from clients, partially offset by a decrease of $16.7 million in borrowings on margin
accounts.
87
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
2019
December 31,
2018
2017
$
$
$
$
1,878,231
57,482
1,935,713
$ 1,213,068
44,707
$ 1,257,775
$ 1,528,834
52,770
$ 1,581,604
914,526
18,222
932,748
$
$
677,267
17,421
694,688
$
$
850,850
18,851
869,701
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, 2019, 2018 and 2017 were
$2.2 billion, $1.4 billion and $2.0 billion, respectively, while the related estimated fair values were $(3.8) million, $(11.6)
million and $(0.2) 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. 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 certain amounts with respect to the covered assets (including covered loans), and
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.
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 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, 2019 and December 31, 2018.
88
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, 2019
Real estate
Commercial and industrial
Total
Fixed rate loans
Floating rate loans
Total
$ 1,293,342 $ 1,924,777 $ 1,515,880 $ 4,733,999
3,866,169
$ 4,641,096 $ 2,303,386 $ 1,655,686 $ 8,600,168
3,347,754
378,609
139,806
$ 3,340,376 $ 2,000,071 $ 1,647,612 $ 6,988,059
1,612,109
$ 4,641,096 $ 2,303,386 $ 1,655,686 $ 8,600,168
1,300,720
303,315
8,074
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.
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
89
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:
•
•
•
•
•
•
•
•
the loss emergence period is applied to both the general allowance and adjustments for qualitative risk factors,
which represents the average amount of time between when loss events occur for specific loan types and when
such problem loans are identified and the related loss amounts are confirmed through charge-offs;
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. Periodically, management conducts an analysis to estimate the
loss emergence period for each loan portfolio segment based on historical charge-offs, loan type and loan payment history
and considers available industry peer bank data. Model output by loan category is reviewed to evaluate the reasonableness
of the reserve levels in comparison to the estimated loss emergence period applied to historical loss experience.
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
$72.3 million and $99.8 million at December 31, 2019 and 2018, 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
90
discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a
provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce
any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance
established for that loan.
Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed
appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted,
the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the
results of recent regulatory examinations, GAAP, 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 $7.2 million, $5.1
million and $14.3 million during 2019, 2018 and 2017, respectively. The significant change in the provision for loan
losses during 2018, compared with 2017, was 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 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, 2019, 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:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Total recoveries
Loans charged off:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
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
Year Ended December 31,
2019
$ 59,486
7,206
2018
$ 63,686
5,088
2017
$ 54,599
14,271
2016
$ 46,947
40,620
2015
$ 41,652
12,715
6
2,829
—
61
37
—
—
2,933
—
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
1,160
5,924
—
907
498
—
—
8,489
(5,556)
$ 61,136
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
0.83 %
0.86 %
0.99 %
0.90 %
0.84 %
91
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).
2019
2018
December 31,
2017
2016
2015
% of
Gross
Loans
Reserve
% of
Gross
Loans
Reserve
% of
Gross
Loans
Reserve
% of
Gross
Loans
Reserve
% of
Gross
Loans
Reserve
Commercial real
estate
Commercial and
industrial
Construction and land
development
1-4 family residential
Consumer
Broker-dealer
Covered
Total
$ 31,595
40.65 % $ 27,100
42.42 % $ 26,413
40.00 % $ 22,262
38.41 % $ 15,669
33.21 %
17,964
27.44 % 21,980
25.28 % 23,674
26.04 %
21,369
30.19 %
19,845
30.20 %
4,878
6,386
265
48
—
$ 61,136
12.74 %
10.72 %
0.64 %
7.81 %
— %
6,061
3,956
267
122
—
100.00 % $ 59,486
13.46 %
9.80 %
0.69 %
8.35 %
— %
7,844
2,362
311
353
2,729
100.00 % $ 63,686
14.91 %
6.65 %
0.63 %
8.95 %
2.82 %
7,002
2,974
424
155
413
100.00 % $ 54,599
12.90 %
5.39 %
0.68 %
8.23 %
4.20 %
6,064
3,314
314
209
1,532
100.00 % $ 46,947
12.62 %
5.78 %
0.82 %
10.57 %
6.81 %
100.00 %
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 five credit
relationships totaling $16.8 million of potential problem loans at December 31, 2019, compared with seven credit
relationships totaling $17.8 million of potential problem loans at December 31, 2018 and six credit relationships totaling
$27.6 million of potential problem loans at December 31, 2017.
92
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 and 2015 (dollars in thousands).
Loans accounted for on a non-accrual basis:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
2019
2018
December 31,
2017
2016
$
7,308
15,262
1,316
12,204
26
—
—
$ 36,116
$
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
2015
$
$
17,764
7,160
114
7
—
—
8,978
34,023
Non-performing loans as a percentage of total loans
0.38 %
0.41 %
0.56 %
0.36 %
0.48 %
Other real estate owned
Other repossessed assets
Non-performing assets
$ 18,202
$ 27,578
$ 40,627
$ 56,149
$
99,484
$
—
$
68
$
323
$
1,117
$
—
$ 54,318
$ 61,596
$ 86,577
$ 85,548
$ 133,507
Non-performing assets as a percentage of total assets
0.36 %
0.45 %
0.65 %
0.67 %
1.13 %
Non-PCI loans past due 90 days or more and still accruing
$ 102,707
$ 83,131
$ 85,396
$ 47,659
$
50,776
Troubled debt restructurings included in accruing loans
held for investment
$
2,173
$
1,339
$
1,433
$
1,699
$
1,933
At December 31, 2019, non-accrual loans included 23 commercial and industrial relationships with loans secured by
accounts receivable, life insurance, oil and gas, livestock and equipment. Non-accrual loans at December 31, 2019 also
included $4.8 million of loans secured by residential real estate which were classified as loans held for sale. At December
31, 2018, non-accrual loans included 16 commercial and industrial relationships with loans secured by accounts
receivable, life insurance, livestock, oil and gas, and equipment. Non-accrual loans at December 31, 2018 also included
$3.4 million of loans secured by residential real estate which were classified as loans held for sale. At December 31, 2017,
non-accrual loans included 19 commercial and industrial relationships with loans secured by accounts receivable, life
insurance, livestock, oil and gas, and equipment. Non-accrual loans at December 31, 2017 also included $2.7 million of
loans secured by residential real estate which were classified as loans held for sale.
OREO as of December 31, 2019 decreased from December 31, 2018 due to $14.0 million of disposals and fair value
decreases related to 74 properties, partially offset by the addition of 41 properties totaling $4.6 million. OREO as of
December 31, 2018 decreased from December 31, 2017 due to $16.7 million of disposals related to 111 properties and
fair value decreases of $2.8 million, partially offset by the addition of 50 properties totaling $6.7 million. OREO as of
December 31, 2017 decreased from December 31, 2016 due to $19.7 million of disposals related to 171 properties and
fair value decreases of $4.5 million, partially offset by the addition of 54 properties totaling $8.7 million. At both
December 31, 2019 and 2018, OREO was primarily comprised of commercial real estate properties.
Non-PCI loans past due 90 days or more and still accruing at December 31, 2019, 2018 and 2017 were primarily
comprised of loans held for sale and guaranteed by U.S. government agencies, including Government National Mortgage
Association loans subject to repurchase within our mortgage origination segment. The increase in Non-PCI past due loans
90 days or more and still accruing at December 31, 2019, compared to December 31, 2018, was partially due to the aging
of the mortgage origination segment’s servicing portfolio and the length of the loan foreclosure process, which can often
exceed one year.
93
At December 31, 2019, troubled debt restructurings (“TDRs”) were comprised of $2.2 million of loans that were
considered to be performing and non-performing loans of $11.9 million reported in non-accrual loans. At December 31,
2018, 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 were comprised of $1.4 million related to loans
that were considered to be performing and non-performing loans of $10.4 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 requires 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 “incurred loss” model, the allowance
for loan losses is based only on estimates of loan losses that exist in the portfolio as of the reporting date. The new model
became effective for us on January 1, 2020, and applies to most debt instruments, trade receivables, lease receivables,
reinsurance receivables, financial guarantees and loan commitments. Our implementation efforts have included, among
other activities, the development, testing and validation of credit forecasting models and a new credit scoring system for
significant loan portfolio segments, reassessment of risk rating grades and matrix, as well as development of the policies,
systems and controls required to fully implement CECL. New model development has increased expenses associated with
the collection and processing of data, which will continue in future periods. Upon adoption, and based on the current loan
portfolio and the range of current forecasts of future economic conditions, we estimate that the allowance for credit losses
will be between approximately $80 million and $100 million, inclusive of the estimate of change in reserve for unfunded
commitments of between $6 million and $9 million, currently included in other liabilities within the consolidated balance
sheets, when adopted on January 1, 2020. The estimated increase is driven by the fact that under CECL the allowance
covers expected credit losses over the entire expected life of the loan portfolios and also takes into account forecasts of
expected future macroeconomic conditions. This estimated increase, net of tax, will largely be reflected within our
banking segment and as a decrease to opening retained earnings at January 1, 2020. While not material, the impact of the
adoption of CECL will also affect our regulatory capital, performance and other asset quality ratios. The estimated range
noted above and ultimate magnitude of the increase in allowance for credit losses upon adoption is expected to be volatile
given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant
drivers, including prepayment assumptions and macroeconomic conditions and forecasts at the time of adoption.
Insurance Losses and Loss Adjustment Expenses
At December 31, 2019, 2018 and 2017, our gross reserve for unpaid losses and LAE was $15.3 million, $20.6 million,
and $30.2 million, respectively, including estimated recoveries from reinsurance of $1.0 million, $3.2 million, and $11.5
million, respectively. The liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all
losses incurred, including losses for claims that have not yet been reported, less a reduction for reinsurance recoverables
related to those liabilities. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the
liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to
recognizing the impact of reinsurance. The amount of liabilities for reported claims is based primarily on a claim-by-
claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered
relevant to estimating exposure presented by the claim.
The methods that our actuaries utilize to estimate ultimate loss and LAE amounts are the paid and reported loss
development method and the paid and reported Bornhuetter-Ferguson method (the “BF method”). Significant periods of
time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer’s
payment of that loss. NLC’s liabilities for unpaid losses represent the best estimate at a given point in time of what it
expects to pay claimants, based on facts, circumstances and historical trends then known. During the loss settlement
period, additional facts regarding individual claims may become known and, consequently, it often becomes necessary to
refine and adjust the estimates of liability. This process is commonly referred to as loss development. To project ultimate
losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these
values by a loss development factor. The selected loss development factors are based upon a review of the loss
development patterns indicated in the companies’ historical loss triangles (which utilize historical trends, adjusted for
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.
94
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, 2019, this
equates to approximately plus or minus $1.5 million, or 1.3% of insurance segment equity, and 2.2% of calendar year
2019 insurance losses.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investments
in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and
overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and
savings), as discussed in more detail within the section entitled “Liquidity and Capital Resources — Banking Segment”
below, is constantly changing due to the banking segment’s needs and market conditions. 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).
2019
Average
Balance
Average
Rate Paid
Year Ended December 31,
2018
Average
Balance
Average
Rate Paid
2017
Average
Balance
Average
Rate Paid
Noninterest-bearing demand deposits $ 2,635,924
4,283,642
Interest-bearing demand deposits
186,235
Savings deposits
1,446,614
Time deposits
$ 8,552,415
0.00 % $ 2,504,599
0.98 % 4,025,259
0.19 %
201,328
2.02 % 1,341,886
0.84 % $ 8,073,072
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 %
0.29 %
0.10 %
1.05 %
0.33 %
The maturity of consolidated interest-bearing time deposits of $100,000 or more at December 31, 2019 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
$
$
402,131
259,403
155,862
297,437
1,114,833
The banking segment experienced an increase of $95.6 million in interest-bearing time deposits of $100,000 or more at
December 31, 2019, compared to December 31, 2018. The increase during 2019, compared to 2018, was primarily due to
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customers locking in higher rates before the federal funds interest rate started to decrease during 2019 and a more
competitive deposit pricing environment. This is compared to 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. At December 31, 2019,
there were $1.2 billion in interest-bearing time deposits scheduled to mature within one year.
Borrowings
Our borrowings are shown in the table below (dollars in thousands).
2019
December 31,
2018
2017
Short-term borrowings
Notes payable
Junior subordinated debentures
Balance
$ 1,424,010
283,769
67,012
$ 1,774,791
Average
Rate Paid
Balance
Average
Rate Paid
Balance
Average
Rate Paid
2.41 % $ 1,065,807
228,872
4.94 %
5.75 %
67,012
2.97 % $ 1,361,691
2.15 % $ 1,206,424
208,809
4.95 %
5.47 %
67,012
2.70 % $ 1,482,245
1.20 %
3.65 %
4.50 %
1.84 %
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 $358.2 million increase in short-term
borrowings at December 31, 2019 compared with December 31, 2018 included a net increase of $363.7 million in our
banking segment primarily associated with increases in FHLB notes, partially offset by a net decrease of $5.5 million in
short-term bank loans, securities sold under agreements to repurchase and commercial paper used by the Hilltop Broker-
Dealers to finance their activities. 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, 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. Notes payable at December 31,
2019 of $283.8 million was comprised of $148.8 million related to Senior Notes, net of loan origination fees, FHLB
borrowings with an original maturity greater than one year within our banking segment of $28.8 million, insurance
segment line of credit and term notes of $27.5 million, and mortgage origination segment borrowings of $78.7 million.
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 year 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. The increase in notes payable at December 31, 2019 compared to December 31, 2018 is
primarily the result of higher outstanding balances on lines of credit held by the mortgage segment’s ABAs and FHLB
borrowings by the banking segment. 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
year held 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, was primarily the result of higher outstanding balances on lines of credit held by the mortgage
segment’s ABAs.
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, 2019,
Hilltop had $105.6 million in cash and cash equivalents, an increase of $61.7 million from $43.9 million at December 31,
2018. This increase in cash and cash equivalents was primarily due to $173.0 million of dividends from subsidiaries,
partially offset by $73.4 million of stock repurchases, $29.6 million in cash dividends declared and other general
corporate expenses. 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.
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NLC Sale
On January 30, 2020, we entered into an agreement to sell all of the outstanding capital stock of NLC, which comprises
the operations of our insurance segment, for a cash purchase price of $150.0 million, subject to post closing adjustments.
Consummation of the transaction, which we expect to occur in the second quarter of 2020, is subject to customary closing
conditions, including required regulatory approvals. We also agreed to enter into an agreement at closing to refrain for a
specified period from certain activities that compete with the business of NLC.
Dividend Program and Declaration
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 2019, we
declared and paid cash dividends of $0.32 per common share, or $29.6 million.
On January 30, 2020, our board of directors declared a quarterly cash dividend of $0.09 per common share, payable on
February 28, 2020 to all common stockholders of record as of the close of business on February 14, 2020.
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.
Stock Repurchases
In January 2020, our board of directors authorized a new stock repurchase program through January 2021 pursuant to
which we are authorized to repurchase, in the aggregate, up to $75.0 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 2019, we paid $73.4 million to repurchase an aggregate of 3,390,247 shares of common stock at a weighted
average price of $21.64 per share, inclusive of private negotiated transactions. The purchases were funded from available
cash balances.
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
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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,
2019, $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.
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.
Under the comprehensive capital framework (“Basel III”) for U.S. banking organizations, 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 requires banking organizations to maintain a capital
conservation buffer above minimum risk-based capital requirements. The buffer is measured relative to risk-weighted
assets. 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, 2019.
In addition, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed 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, 2019, under guidance issued by the Board of Governors of the Federal
Reserve System.
At December 31, 2019, Hilltop had a total capital to risk weighted assets ratio of 17.55%, Tier 1 capital to risk weighted
assets ratio of 17.13%, common equity Tier 1 capital to risk weighted assets ratio of 16.70% and a Tier 1 capital to
average assets, or leverage, ratio of 12.71%. Accordingly, Hilltop’s actual capital amounts and ratios in accordance with
Basel III exceeded the regulatory capital requirements including conservation buffer currently in effect at the end of the
period.
At December 31, 2019, PlainsCapital had a total capital to risk weighted assets ratio of 14.13%, Tier 1 capital to risk
weighted assets ratio of 13.45%, common equity Tier 1 capital to risk weighted assets ratio of 13.45%, and a Tier 1
capital to average assets, or leverage, ratio of 11.61%. Accordingly, PlainsCapital’s actual capital amounts and ratios in
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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.
We discuss regulatory capital requirements in more detail in Note 22 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.
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, 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.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 9.23% of the
Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively
accounted for 4.71% of the Bank’s total deposits at December 31, 2019. 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 financing,
commercial paper issuances 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, 2019, 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, 2019, Hilltop Securities had borrowed $111.0 million under its
credit arrangements and had no borrowings under its credit facility.
During 2019, Hilltop Securities initiated two commercial paper programs in the ordinary course of its business to fund a
portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days to
270 days from the date of issuance. The CP Notes are issuable under two separate programs, Series 2019-1 CP Notes and
Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP Notes
are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount
to par. The discount to maturity will be based on LIBOR (a rate per annum determined by reference to the British
Bankers’ Association Interest Settlement Rates for deposits in dollars offered on the London interbank dollar market),
plus an applicable margin. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. The net
proceeds (after deducting related issuance expenses) from the sale of the CP Notes will be used for general corporate
purposes, including working capital. As of December 31, 2019, the weighted average maturity of the CP Notes was 90
99
days at a rate of 2.208%. At December 31, 2019, the amount outstanding under these secured arrangements was $19.3
million, which was collateralized by securities held for firm accounts valued at $20.9 million.
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 $2.2 billion, of which $1.8 billion was drawn at December 31, 2019. 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, 2019.
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,
2019, these ABAs had combined available lines of credit totaling $150.0 million, $100.0 million of which was with a
single unaffiliated bank, and the remaining $50.0 million of which was with the Bank. At December 31, 2019, Ventures
Management had outstanding borrowings of $95.0 million, $16.4 million of which was with the Bank. As of December
31, 2019, the net worth of two of the ABAs was less than the amount required by the unaffiliated bank’s debt covenants.
Both ABAs received a waiver for this covenant from the unaffiliated bank as of December 31, 2019.
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 $138.7 million, or 84.2%, equity investments of $19.8 million and other investments of $6.2
million comprised NLC’s $164.7 million in total cash and investments at December 31, 2019. 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, which is owned by current Hilltop director, Jonathan S. Sobel.
Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2019 (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, 2019. 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 5 Years
than 3 Years
5 Years
or More
Reserve for losses and LAE
Short-term borrowings
Long-term debt obligations
Capital lease obligations
Operating lease obligations
Total
$
10,555 $
1,450,274
96,542
1,197
35,676
$ 1,594,244 $
3,667 $
—
26,565
2,453
51,916
84,601 $
Total
15,342
108 $
1,012 $
1,450,274
—
—
479,132
329,892
26,133
8,390
2,297
2,443
151,432
33,879
29,961
59,549 $ 366,176 $ 2,104,570
In addition to the contractual obligations presented above, during 2018, Hilltop and the Bank entered into leases for a
majority of the available corporate office space in Hilltop Plaza to serve as the headquarters for both companies as well as
retail space for a PlainsCapital Bank branch. The two separate 129-month office and retail leases, which commenced in
February 2020, have combined total base rent of approximately $35 million with the first nine months of rent abated.
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Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently
require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative
value of money due to inflation or recession are generally not considered. The primary effect of inflation on our
operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly
influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the
inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the
expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of
the U.S. government, its agencies and various other governmental regulatory authorities.
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in
our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These
transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses,
at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon
customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under
these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated
with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated
financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to
a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third
party, we would be required to fund the commitment. The maximum potential amount of future payments we could be
required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be
entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements
contain security and debt covenants similar to those contained in loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.1 billion at December 31, 2019
and outstanding financial and performance standby letters of credit of $90.9 million at December 31, 2019.
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
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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.
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.
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.
102
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.
103
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, 2019, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and
unamortized debt issuance costs and premiums, were $351.9 million, and included $178.7 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.
104
As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the
Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the
banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of
most of its borrowings under one year as shown in the following table (dollars in thousands).
Interest sensitive assets:
Loans
Securities
Federal funds sold and securities purchased under agreements to
$ 5,263,406
164,723
$
1,216,672
120,447
$ 1,569,875
330,098
$
473,252
296,842
$
124,009
386,314
$
8,647,214
1,298,424
3 Months or > 3 Months to > 1 Year to > 3 Years to
Less
1 Year
3 Years
5 Years
> 5 Years
Total
December 31, 2019
resell
Other interest sensitive assets
Total interest sensitive assets
Interest sensitive liabilities:
Interest bearing checking
Savings
Time deposits
Notes payable and other borrowings
Total interest sensitive liabilities
394
263,663
5,692,186
—
—
1,337,119
—
—
1,899,973
—
—
770,094
—
29,282
539,605
394
292,945
10,238,977
$
$ 4,300,208
199,076
559,324
707,670
5,766,278
—
—
624,567
3,375
627,942
$
$
—
—
292,048
3,733
295,781
—
—
59,914
3,830
63,744
$
$
—
—
—
22,834
22,834
4,300,208
199,076
1,535,853
741,442
6,776,579
Interest sensitivity gap
$
(74,092)
$
709,177
$ 1,604,192
$
706,350
$
516,771
$
3,462,398
Cumulative interest sensitivity gap
$
(74,092)
$
635,085
$ 2,239,277
$ 2,945,627
$
3,462,398
Percentage of cumulative gap to total interest sensitive assets
(0.72)%
6.20 %
21.87 %
28.77 %
33.82 %
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 a range of changes in interest rates on net interest income and on
economic value of equity for the banking segment at December 31, 2019 (dollars in thousands).
Change in
Interest Rates
(basis points)
+200
+100
-50
-100
Changes in
Net Interest Income
Amount
Percent
Changes in
Economic Value of Equity
Amount
Percent
$
$
$
$
30,261
14,776
(1,466)
(1,730)
8.60 %
4.20 %
(0.42)%
(0.49)%
$
$
$
$
274,752
161,765
(119,377)
(295,657)
15.43 %
9.08 %
(6.70)%
(16.60)%
The projected changes in net interest income and economic value of equity to changes in interest rates at December 31,
2019 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
105
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 funding sources, which include customer and correspondent cash balances, bank
borrowings, repurchase agreements and securities lending activities, also expose the broker-dealer to interest rate risk.
Movement in short-tem interest rates could reduce the positive spread between the broker-dealer segment’s interest
income and interest expense.
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, 2019
> 5 Years
to 10 Years
> 10 Years
Total
$
$
35
739
(92)
682
(3,106)
6,914
4,490
$
$
853
6,829
6,621
14,303
—
—
14,303
$
$
9,081
(5,588)
8,051
11,544
—
—
11,544
$
$
83,148
519,238
10,648
613,034
—
—
613,034
$
$
93,117
521,218
25,228
639,563
(3,106)
6,914
643,371
0.00 %
1.61 %
2.17 %
1.27 %
1.69 %
2.19 %
1.58 %
1.91 %
2.84 %
3.27 %
4.54 %
4.75 %
3.08 %
4.34 %
3.16 %
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
106
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 hereof.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial
Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019, the end of the period covered by this
Annual Report.
107
Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end
of such period, our disclosure controls and procedures were not effective because of a material weakness in our internal
control over financial reporting, as described below.
Notwithstanding this material weakness, the Company has concluded that no material misstatements exist in the
consolidated financial statements as included herein, and such financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2019, in conformity with US GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process
designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer and effected by
our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal control over financial reporting at December 31, 2019. In making
this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. As of
December 31, 2019, the Company did not design and maintain effective controls over certain aspects relating to the
determination of the qualitative factors considered by management in the allowance for loan losses estimation process,
specifically control activities to adequately support the analysis and the impact of such support on the loss measurement.
This control deficiency did not result in a misstatement of the Company’s consolidated financial statements. However,
this control deficiency could result in misstatements of the interim or annual consolidated financial statements and
disclosures that would result in a material misstatement that would not be prevented or detected.
Based on our assessment, management concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2019, based on the criteria in Internal Control – Integrated Framework (2013).
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is
included on page F-2.
Plan for Remediation of Material Weakness
The Company and its Board of Directors are committed to maintaining a strong internal control environment. During the
fourth quarter of 2019, management identified a control deficiency that constituted a material weakness as of December
31, 2018. Management has evaluated the material weakness described above and has made significant progress updating
its design and implementation of internal controls to remediate the aforementioned deficiency and enhance the
Company’s internal control environment. The remediation plan was implemented during the fourth quarter of 2019 and
108
included an enhanced analysis to support the qualitative factors considered in the estimation of the allowance for loan
losses as of December 31, 2019. Management believes that those efforts will be effective in remediating the previously
identified material weakness. The material weakness will not be considered remediated until the controls have operated
effectively, as evidenced through testing, for a sufficient amount of time.
Remediation of Previously Reported Material Weakness
Management has completed the remediation efforts of a previously reported material weakness by implementing certain
control enhancements related to the Company’s process for the approval of customer wires that were not operating as
designed.
Changes in Internal Control Over Financial Reporting
The remediation efforts described above were changes in our internal control over financial reporting during the fourth
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
None.
109
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 2020 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 2020 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 2020 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 2020 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 2020 Annual Meeting of
Stockholders, and is incorporated herein by reference.
110
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.
Page
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
F-4
F-5
F-6
F-7
F-8
F-9
2. Financial Statement Schedules.
All 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.
111
Exhibit
Number
2.1#
3.1
3.2
3.2.1
4.1
4.2
4.3.1
4.3.2
4.3.3
4.3.4
4.3.5
Description of Exhibit
Stock Purchase Agreement by and among Hilltop Holdings Inc., ARC Insurance Holdings, Inc., Align NL
Holdings, LLC and, for limited purposes set forth therein, Align Financial Holdings, LLC and MGI
Holdings, Inc., dated January 30, 2020 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed February 5, 2020 (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).
First Amendment to Third Amended and Restated Bylaws of Hilltop Holdings Inc., adopted and effective
April 25, 2019 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed May 1, 2019 (File
No. 001-31987) and incorporated herein by reference).
Form of Certificate of Common Stock of Hilltop Holdings Inc. (filed as Exhibit 4.1 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-31987) and incorporated
herein by reference).
Corporate Charter Certificate of Notice, dated June 6, 2005 (filed as Exhibit 3.2 to the Registrant’s
Registration Statement on Form S-3 (File No. 333-125854) and incorporated herein by reference).
Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among U.S. Bank National
Association (successor in interest to State Street Bank and Trust Company of Connecticut, National
Association), as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from
time to time (filed as Exhibit 4.2 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and
between PlainsCapital Corporation and U.S. Bank National Association, as Institutional Trustee (filed as
Exhibit 4.3 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009
(File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation and U.S. Bank National
Association (successor in interest to State Street Bank and Trust Company of Connecticut, National
Association), as Trustee (filed as Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation and
U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10
filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by
reference).
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).
112
4.3.6
4.3.7
4.3.8
4.4.1
4.4.2
4.4.3
4.4.4
4.4.5
4.5.1
4.5.2
4.5.3
Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital
Corporation, dated as of August 7, 2006, by PlainsCapital Corporation in favor of U.S. Bank National
Association, as Institutional Trustee for PCC Statutory Trust I (filed as Exhibit 4.6 to the Registration
Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and
incorporated herein by reference).
Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital and U.S. Bank National
Association (successor in interest to State Street Bank and Trust Company of Connecticut, National
Association), as Trustee (filed as Exhibit 4.7 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital
Corporation and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.8 to the
Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-
53629) and incorporated herein by reference).
Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National
Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from
time to time (filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S. Bank National
Association, as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National
Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital
Corporation (filed as Exhibit 4.6.3 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and incorporated herein by reference).
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of
March 26, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional
Trustee for PCC Statutory Trust II (filed as Exhibit 4.11 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S.
Bank National Association, as Guarantee Trustee (filed as Exhibit 4.12 to the Registration Statement on
Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein
by reference).
Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank
National Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party
thereto from time to time (filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
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).
113
4.5.4
4.5.5
4.6.1
4.6.2
4.6.3
4.6.4
4.6.5
4.7
4.8
4.8.1
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).
Indenture, dated as of November 22, 2019, by and between Hilltop Securities Inc. and The Bank of New York
Mellon, as indenture trustee (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on
November 27, 2019 (File No. 001-31987) and incorporated herein by reference).
Indenture, dated as of December 6, 2019, by and between Hilltop Securities Inc. and The Bank of New York
Mellon, as indenture trustee (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on
December 11, 2019 (File No. 001-31987) and incorporated herein by reference).
4.9*
Description of the Registrant’s Securities.
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 (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).
114
10.1.3†
10.1.4†
10.1.5†
10.1.6†
10.1.7†
10.1.8†
10.1.9†
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).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in
2019 (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2019 (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 2019 (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on April 25,
2019 (File No. 001-31987) and incorporated herein by reference).
10.1.10†
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for
awards beginning in 2019 (filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on
April 25, 2019 (File No. 001-31987) and incorporated herein by reference).
10.2†
10.3.1†
10.3.2†
10.3.3†
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).
Separation and Release Agreement, dated as of February 21, 2019, by and between Hilltop Holdings Inc. and
any of its parents, predecessors, successors, subsidiaries, affiliates or related companies, organizations,
managers, officers, directors, executives, agents, plan fiduciaries, shareholders, attorneys and/or
representatives, and Alan B. White (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on February 22, 2019 (File No. 001-31987) and incorporated herein by reference).
10.4.1†
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).
115
10.4.2†
10.4.3†
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).
Retention Agreement by and between Hilltop Holdings Inc. and Todd Salmans, dated as of October 25,
2019, but effective January 1, 2020 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed October 30, 2019 (File No. 001-31987) and incorporated herein by reference).
10.5*
Compensation arrangement of Jeremy B. Ford.
10.6.1†
10.6.2†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
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).
First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and William B. Furr,
dated as of August 30, 2019 (filed as Exhibit 10.7.2 to the Registrant’s Current Report on Form 8-K filed
September 6, 2019 (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).
Retention Agreement, dated as of February 19, 2019, by and between Hill A. Feinberg and Hilltop Holdings
Inc. (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2019 (File
No. 001-31987) and incorporated herein by reference).
Employment Agreement by and between Hilltop Holdings Inc. and Steve Thompson, dated as of October 25,
2019, but effective January 1, 2020 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed October 30, 2019 (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.
116
31.1*
31.2
32.1*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
† Exhibit is a management contract or compensatory plan or arrangement.
# Schedules and similar attachments have been omitted from this Exhibit pursuant to Item 601(b)(2) of Regulation S-K.
A copy of any omitted schedule or similar attachment will be furnished to the SEC upon request.
117
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 27, 2020
HILLTOP HOLDINGS INC.
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
118
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/ 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
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/ Kenneth D. Russell
Kenneth D. Russell
/s/ A. Haag Sherman
A. Haag Sherman
/s/ Jonathan S. Sobel
Jonathan S. Sobel
/s/ Robert Taylor, Jr.
Robert Taylor, Jr.
/s/ Carl B. Webb
Carl B. Webb
President, Chief Executive Officer and Director
February 27, 2020
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
February 27, 2020
Executive Vice President, Corporate Controller
February 27, 2020
(Principal Accounting Officer)
Director
Director
February 27, 2020
February 27, 2020
Director and Audit Committee Member
February 27, 2020
Director
Director
February 27, 2020
Director and Chairman of Audit Committee
February 27, 2020
Director
Chairman of the Board
February 27, 2020
February 27, 2020
Director and Audit Committee Member
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
119
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Hilltop Holdings Inc.
Index to Consolidated Financial Statements
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
F-5
F-6
F-7
F-8
F-9
F-1
To the Board of Directors and Stockholders of Hilltop Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Hilltop Holdings Inc. and its subsidiaries (the “Company”) as of December 31,
2019 and 2018, 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, 2019, including the related notes, as listed in the index appearing under Item 15 (a)(1) (collectively
referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in
all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date
related to the Company did not design and maintain effective controls over certain aspects relating to the determination of the qualitative factors
considered by management in the allowance for loan losses estimation process, specifically control activities to adequately support the analysis and
the impact of such support on the loss measurement.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material
weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We
considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial
statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on
those consolidated financial statements.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above.
Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
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
F-2
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Loss Emergence Period Assumption
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses was $61 million as of December 31,
2019. Management’s process for estimating allowance for loan losses consists of three elements: (i) specific allowances established for probable
losses on individually impaired loans; (ii) general allowances calculated based on historical loss experience for homogenous loans with similar
collateral; and (iii) allowances to adjust general reserves based on current economic conditions and other qualitative risk factors both internal and
external to the Company. Both the general allowance and adjustments for qualitative risk factors incorporate a loss emergence period (“LEP”)
assumption for each loan portfolio segment. In determining the LEP assumption, management analyzes the Company’s loss history for each loan
portfolio segment, including charge-off dates, loss causing event dates, loan type and loan payment history and considers available industry peer
bank data.
The principal considerations for our determination that performing procedures relating to the LEP assumption utilized in the allowance for loan
losses is a critical audit matter are (i) there was significant judgment by management in determining the LEP assumption, which in turn led to a high
degree of auditor judgment and subjectivity in performing procedures relating to the LEP assumption, (ii) there was significant auditor judgment in
evaluating audit evidence relating to the LEP assumption, and (iii) the audit effort involved the use of professionals with specialized skill and
knowledge to assist in performing these procedures and evaluating the audit evidence obtained. As described in the “Opinions on the Financial
Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to the determination of the qualitative
factors considered by management in the allowance for loan losses estimation process, specifically control activities to adequately support the
analysis and the impact of such support on the loss measurement, in which LEP is a significant assumption.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. The procedures included, among others, testing management’s process for determining the LEP assumption,
including testing management’s analysis of loss history for identification of loss causing events and consideration of industry or peer bank data and
testing significant data inputs used by management to determine the LEP assumption. Professionals with specialized skill and knowledge were used
to assist in evaluating the appropriateness of the methodology for determining the LEP assumption.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 27, 2020
We have served as the Company’s auditor since 1998.
F-3
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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 $984,211 and $886,799, respectively)
Held to maturity, at amortized cost (fair value of $388,930 and $341,124, 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
Operating lease right-of-use assets
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
Operating lease liabilities
Junior subordinated debentures
Other liabilities
Total liabilities
Commitments and contingencies (see Notes 19 and 20)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 90,640,944 and 93,610,217 shares issued
and outstanding at December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Deferred compensation employee stock trust, net
Employee stock trust (7,794 and 10,894 shares, at cost, at December 31, 2019 and December 31, 2018,
respectively)
Total Hilltop stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes.
F-4
December 31,
2019
2018
$
484,959 $
394
157,436
59,031
644,073
400
133,993
61,611
689,576
998,392
386,326
20,007
2,094,301
2,106,361
7,381,400
(61,136)
7,320,264
745,466
875,658
351,012
19,679
1,991,815
1,393,246
6,930,458
(59,486)
6,870,972
1,780,280
219,982
117,059
510,791
291,435
30,155
15,172,448 $
1,440,287
237,373
—
580,362
291,435
38,005
13,683,572
2,769,556 $
6,262,658
9,032,214
2,560,750
5,975,406
8,536,156
1,605,518
1,424,010
43,817
283,769
128,402
67,012
458,910
13,043,652
1,294,925
1,065,807
81,667
228,872
—
67,012
435,240
11,709,679
$
$
906
1,445,233
11,419
644,860
776
936
1,489,816
(8,627)
466,737
825
(155)
2,103,039
25,757
2,128,796
15,172,448 $
(217)
1,949,470
24,423
1,973,893
13,683,572
$
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2018
2017
2019
$
460,471 $
436,725 $
69,582
66,914
62,104
6,159
16,513
614,829
71,509
60,086
26,778
10,754
3,851
545
173,523
441,306
7,206
434,100
504,935
130,003
137,742
103,787
132,284
197,265
1,206,016
856,265
114,327
96,093
68,940
204,182
1,339,807
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
300,309
67,332
160,777
35,050
232,977
7,686
225,291 $
125,727
4,286
121,441 $
411,988
41,048
36,472
5,807
11,841
507,156
24,695
32,337
13,751
10,931
3,016
678
85,408
421,748
14,271
407,477
538,468
93,944
156,464
109,920
142,298
163,970
1,205,064
816,994
113,943
101,521
94,701
242,096
1,369,255
243,286
110,142
133,144
600
132,544
$
$
$
2.44 $
2.44 $
1.28 $
1.28 $
1.36
1.36
92,345
92,394
94,969
95,067
97,137
97,353
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-5
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
Change in fair value of cash flow hedges, net of tax of $111, $0,
and $0, respectively
Net unrealized gains (losses) on securities available for sale, net
of tax of $6,276, $(1,558), and $(565), respectively
Reclassification adjustment for gains (losses) included in net
income, net of tax of $(573), $0, and $(6), respectively
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
Year Ended December 31,
2018
2019
$ 232,977 $ 125,727 $
2017
133,144
417
—
—
21,599
(5,632)
(869)
(1,970)
253,023
7,686
—
120,095
4,286
(10)
132,265
600
Comprehensive income applicable to Hilltop
$ 245,337 $ 115,809 $
131,665
See accompanying notes.
F-6
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B
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
2019
Year Ended December 31,
2018
2017
$
232,977 $
125,727 $
133,144
Provision for loan losses
Depreciation, amortization and accretion, net
Net realized losses (gains) on securities
Net change in fair value of equity securities
Deferred income taxes
Other, net
Net change in securities purchased under agreements to resell
Net change in trading securities
Net change in broker-dealer and clearing organization receivables
Net change in FDIC indemnification asset
Net change in other assets
Net change in broker-dealer and clearing organization payables
Net change in other liabilities
Net change in securities sold, not yet purchased
Proceeds from sale of mortgage servicing rights asset
Net gains from sales of loans
Loans originated for sale
Proceeds from loans sold
Net cash provided by (used in) operating activities
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity
Proceeds from sales, maturities and principal reductions of securities available for sale
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
Proceeds from redemption of bank owned life insurance
Net cash received from (paid for) Federal Home Loan Bank and Federal Reserve Bank stock
Net cash 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
Payments to repurchase common stock
Dividends paid on common stock
Net cash received 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, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
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
Derecognition of construction in progress related to build-to-suit lease obligations
Conversion of loans to other real estate owned
Additions to mortgage servicing rights
7,206
1,160
2,548
(1,881)
(3,855)
13,017
2,580
55,890
(338,158)
—
53,038
206,170
85,329
(37,850)
—
(504,935)
(16,644,259)
16,438,000
(433,023)
73,924
313,672
1,860
(109,622)
(415,763)
(307)
(423,890)
(42,287)
14,309
904
(17,092)
—
(604,292)
600,481
358,203
1,050,907
(996,095)
(73,385)
(29,627)
(6,352)
(1,979)
(515)
901,638
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
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
(135,677)
778,466
642,789 $
104,506
673,960
778,466 $
484,959 $
394
157,436
642,789 $
644,073 $
400
133,993
778,466 $
168,535 $
56,901 $
143,201 $
8,378 $
— $
4,669 $
13,755 $
27,802 $
6,899 $
25,028 $
$
$
$
$
$
$
$
$
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)
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
(197,797)
871,757
673,960
486,977
405
186,578
673,960
84,309
85,840
—
8,853
16,401
See accompanying notes.
F-8
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company
registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business
and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In
addition, the Company provides an array of financial products and services through its broker-dealer, mortgage
origination and insurance subsidiaries.
The Company, headquartered in Dallas, Texas, provides its products and services through three primary business units,
PlainsCapital Corporation (“PCC”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds
Corporation (“NLC”). PCC is a financial holding company, that provides, through its subsidiaries, traditional banking,
wealth and investment management and treasury management services primarily in Texas and residential mortgage
lending throughout the United States. Securities Holdings is a holding company, that provides, through its subsidiaries,
investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of
taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail
brokerage services throughout the United States. NLC is a property and casualty insurance holding company that
provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes
primarily in Texas and other areas of the southern United States.
Basis of Presentation
Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of
the membership interest in Hilltop Opportunity Partners LLC, 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”)
(collectively, the “Hilltop Broker-Dealers”) and Hilltop Securities 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, is a registered investment adviser under the
Investment Advisers Act of 1940.
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 (“HTH Project LLC”)
and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond
Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC.
These entities are related to the Hilltop Plaza investment discussed in detail in Note 18 to the consolidated financial
statements and are collectively referred to as the “Hilltop Plaza Entities.”
F-9
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, including reclassifications due to the adoption of new accounting pronouncements. 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
involving a similar investment from the same issuer or (iii) an impairment. These remeasurements are reflected in the
consolidated statements of operations.
F-10
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Purchases and sales (and related gain or loss) of securities are recorded on the trade date, based on specific identification.
Declines in the fair value of available-for-sale 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.
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
F-11
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, including projected loss emergence period, 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
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
F-12
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2019, the valuation
allowance for premiums receivable was $0.4 million, while at December 31, 2018, 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, 2019 and 2018, 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.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases with a term of greater than one year
are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s consolidated
balance sheets. Finance leases are included in premises and equipment and other liabilities on the Company’s
consolidated balance sheets. The Company has lease agreements with lease and nonlease components, which are
generally accounted for as a single lease component. Leases of low-value assets are assessed on a lease-by-lease basis to
determine the need for balance sheet capitalization.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the
lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s
F-13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
leases do not provide an implicit rate, the Company uses the incremental borrowing rate commensurate with the lease
term based on the information available at the lease commencement date in determining the present value of lease
payments. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities
as the Company’s operating lease liabilities largely represent the future rental expenses associated with operating leases,
and the incremental borrowing rates are based on publicly available interest rates. The operating lease ROU asset also
includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to
extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU
assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. Rental expense for
lease payments is recognized on a straight-line basis over the lease term and is included in occupancy and equipment, net
within our consolidated statements 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.
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.
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 2019, $0.2 million during 2018, and $0.1 million during 2017 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.
F-14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
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, operating lease ROU assets, 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 portfolio segment 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. 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.
F-15
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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 four primary lines of
business: (i) public finance services, (ii) structured finance, (iii) fixed income services and (iv) wealth management, which
includes retail, clearing services and securities lending groups. 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 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.
F-16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled $3.6 million, $4.6 million and $4.7 million during
2019, 2018 and 2017, 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
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.
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
F-17
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
outstanding during the period, excluding participating nonvested restricted shares. The Company calculated basic earnings
per common share using the treasury method instead of the two-class method because there were no instruments which
qualified as participating securities during 2019, 2018 or 2017.
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 2019, 2018 and 2017,
restricted stock units (“RSUs”) were the only potentially dilutive non-participating instruments issued by Hilltop. Next,
the Company determines and includes in the diluted earnings per common share calculation the more dilutive effect of the
participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to
the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not
contractually obligated to share in the losses of the Company.
2. Acquisition
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.
F-18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
The following table presents details on acquired loans at the acquisition date (in thousands).
Commercial real estate
1 - 4 family residential
Construction and land development
Commercial and industrial
Consumer
Total
$
$
Loans, excluding PCI
Loans
PCI Loans
119,188 $ 5,350 $
55,487
37,134
98,259
9,021
39
—
2,127
13
319,089 $ 7,529 $
Total Loans Held
for Investment
124,538
55,526
37,134
100,386
9,034
326,618
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.
F-19
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
• 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.
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, 2019 and 2018, the aggregate fair value of PrimeLending’s mortgage loans held for sale
accounted for under the Fair Value Option was $1.94 billion and $1.26 billion, respectively, and the unpaid principal
balance of those loans was $1.88 billion and $1.21 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
F-20
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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, 2019
Trading securities
Available for sale securities
Equity securities
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
$
— $ 689,576 $
—
20,007
998,392
—
— $ 689,576
998,392
—
20,007
—
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
—
—
—
29,080
—
1,868,518
33,129
—
14,737
17,140
67,195
—
55,504
—
—
1,935,713
33,129
55,504
43,817
17,140
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
Level 3
Inputs
$
Level 1
Inputs
7,947 $
—
19,679
—
—
—
33,000
—
Level 2
Inputs
737,519 $
875,658
—
1,207,311
35,010
—
48,667
26,355
Total
Fair Value
— $ 745,466
875,658
—
19,679
—
1,257,775
50,464
35,010
—
66,102
66,102
81,667
—
26,355
—
F-21
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
Transfers into Included in Comprehensive
Income (Loss)
Net Income
Level 3
Balance at
End of Year
Total Gains or Losses
(Realized or Unrealized)
Included in Other
Year ended December 31, 2019
Loans held for sale
MSR asset
Total
Year ended December 31, 2018
Loans held for sale
MSR asset
Total
$
50,464 $ 60,475 $ (34,849) $
66,102
13,755
—
1,136 $ (10,031) $
—
(24,353)
$
116,566 $ 74,230 $ (34,849) $
1,136 $ (34,384) $
— $
—
— $
67,195
55,504
122,699
$
$
36,972 $ 61,573 $ (41,801)
54,714
(9,303)
25,028
91,686 $ 86,601 $ (51,104) $
— $
—
— $ (10,617) $
(6,280) $
(4,337)
— $
—
— $
50,464
66,102
116,566
Year ended December 31, 2017
Loans held for sale
MSR asset
Total
$
$
35,801 $ 36,891 $ (26,773) $
61,968
97,769 $ 53,292 $ (44,272) $
(17,499)
16,401
— $
—
— $ (15,103) $
(8,947) $
(6,156)
— $
—
— $
36,972
54,714
91,686
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial
statements. The unrealized gains (losses) relate to financial instruments still held at December 31, 2019.
For Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2019 and 2018, the
significant unobservable inputs used in the fair value measurements were as follows.
Range (Weighted-Average)
December 31,
Financial instrument
Loans held for sale
Valuation Technique
Unobservable Inputs
2019
2018
Discounted cash flows / Market comparable Projected price
92 - 96 % ( 95%) 95 - 96 % ( 95%)
MSR asset
Discounted cash flows
Constant prepayment rate
Discount rate
13.16 %
11.14 %
10.51 %
11.11 %
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, 2019
Other
Total
Year Ended December 31, 2018
Other
Total
Year Ended December 31, 2017
Other
Total
Net
Gains (Losses)
Noninterest Changes in
Net
Noninterest Changes in
Net
Income
Fair Value Gains (Losses)
Income
Fair Value Gains (Losses)
Loans held for sale
MSR asset
$
12,775 $
(24,353)
— $
—
12,775 $
(24,353)
(8,063) $
(4,337)
— $
—
(8,063) $
(4,337)
10,655 $
(6,156)
Income
Noninterest Changes in
Fair Value
10,655
(6,156)
— $
—
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 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
F-22
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2019
Weighted average default rate
Weighted average loss severity rate
Weighted average prepayment speed
PlainsCapital
Merger
PCI Loans
FNB
SWS
BORO
Acquisition
Transaction Merger
30 %
12 %
5 %
83 %
59 %
0 %
66 %
28 %
0 %
59 %
42 %
0 %
Resulting weighted average expected loss on PCI loans
49 %
4 %
18 %
25 %
December 31, 2018
Weighted average default rate
Weighted average loss severity rate
Weighted average prepayment speed
PlainsCapital
Merger
PCI Loans
FNB
SWS
BORO
Acquisition
Transaction Merger
34 %
12 %
6 %
81 %
59 %
0 %
71 %
28 %
0 %
63 %
42 %
0 %
Resulting weighted average expected loss on PCI loans
48 %
4 %
20 %
26 %
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, 2019 and 2018, the
estimated fair value of OREO was $18.2 million and $27.6 million, respectively, and the underlying fair value
measurements utilized Level 2 inputs. 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, 2019
Impaired loans held for investment
Other real estate owned
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
Total Gains (Losses) for the
Year Ended December 31,
2018
2017
2019
$
— $
—
— $
11,560
65,582 $
—
65,582 $
11,560
(4,968) $
(1,387)
2,481 $
(2,757)
(2,402)
(4,436)
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.
F-23
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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 — The estimated 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.
Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit
approximates their fair values.
Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase
agreements, Federal Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.
Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates
for similar types of borrowing arrangements.
Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance
policies and accrued interest receivable and payable with carrying amounts that approximate their fair values using
Level 2 inputs. The fair value of certain other receivables and investments is based on Level 3 inputs.
F-24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables present the carrying values and estimated fair values of financial instruments not measured at fair
value on either a recurring or non-recurring basis (in thousands).
December 31, 2019
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
$ 485,353 $ 485,353 $
157,436
59,031
386,326
170,648
7,320,264
1,780,280
71,040
157,436
—
—
—
—
—
—
— $
—
59,031
388,930
170,648
576,527
1,780,280
69,580
— $ 485,353
157,436
—
59,031
—
388,930
—
170,648
—
7,567,233
6,990,706
1,780,280
—
71,040
1,460
Deposits
Broker-dealer and clearing organization payables
Short-term borrowings
Debt
Other liabilities
9,032,214
1,605,518
1,424,010
350,781
8,473
—
—
—
—
—
9,032,496
1,605,518
1,424,010
348,555
8,473
—
—
—
—
—
9,032,496
1,605,518
1,424,010
348,555
8,473
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
61,611
351,012
135,471
6,870,972
1,440,287
69,720
133,993
—
—
—
—
—
—
— $
—
61,611
341,124
135,471
578,363
1,440,287
68,573
— $ 644,473
133,993
—
61,611
—
341,124
—
135,471
—
7,024,173
6,445,810
1,440,287
—
69,720
1,147
Deposits
Broker-dealer and clearing organization payables
Short-term borrowings
Debt
Other liabilities
8,536,156
1,294,925
1,065,807
295,884
3,482
—
—
—
—
—
8,528,947
1,294,925
1,065,807
293,685
3,482
—
—
—
—
—
8,528,947
1,294,925
1,065,807
293,685
3,482
The Company held equity investments other than securities of $36.6 million and $35.8 million at December 31, 2019
and 2018, respectively, which are included within other assets in the consolidated balance sheets. Of the $36.6 million of
such equity investments held at December 31, 2019, $19.8 million do not have readily determinable fair values 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).
Balance, beginning of year
Additional investments
Upward adjustments
Impairments and downward adjustments
Dispositions
Balance, end of year
Year Ended December 31,
2018
2019
$
$
20,376 $
—
403
(1,008)
—
19,771 $
22,946
8,643
3,663
(4,083)
(10,793)
20,376
F-25
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Securities
The fair value of trading securities are summarized as follows (in thousands).
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,
2019
$
— $
2018
7,945
24,680
331,601
2,145
191,154
36,973
93,117
3,468
2,992
3,446
1,494
309,455
4,239
206,813
59,293
126,748
19,913
5,680
3,886
689,576 $ 745,466
$
In addition to the securities shown above, 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 $43.8 million and $81.7 million at December 31, 2019 and 2018,
respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in
thousands).
December 31, 2019
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, 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
Available for Sale
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
9,869 $
190 $
(2) $
10,057
84,590
460,099
11,488
333,328
44,868
39,969
984,211 $
1,049
7,037
543
3,179
1,938
1,273
15,209 $
(64)
(147)
—
(815)
—
—
(1,028) $
85,575
466,989
12,031
335,692
46,806
41,242
998,392
$
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
(433)
(6,962)
(120)
(5,436)
(580)
(206)
2,640 $ (13,781) $
85,611
385,074
11,772
276,399
53,302
51,962
875,658
$
F-26
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2019
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, 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
Held to Maturity
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
— $
— $
— $
—
24,020
17,776
161,624
113,894
69,012
386,326 $
10
295
2,810
226
1,013
4,354 $
(35)
—
(655)
(904)
(156)
(1,750) $
23,995
18,071
163,779
113,216
69,869
388,930
$
Held to Maturity
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
9,903 $
3 $
— $
9,906
39,018
21,903
87,065
142,474
50,649
351,012 $
—
—
271
—
91
(1,479)
(263)
(1,462)
(5,000)
(2,049)
365 $ (10,253) $
37,539
21,640
85,874
137,474
48,691
341,124
$
Additionally, the Company had unrealized net gains of $1.2 million and unrealized net losses of $0.9 million from equity
securities with fair values of $20.0 million and $19.7 million held at December 31, 2019 and December 31, 2018,
respectively. The Company recognized net gains of $1.9 million and net losses of $3.3 million during 2019 and 2018,
respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During 2019 and
2018, net gains recognized from equity securities sold were nominal.
F-27
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding available for sale, held to maturity and equity securities that were in an unrealized loss position is
shown in the following tables (dollars in thousands).
December 31, 2019
December 31, 2018
Number of
Securities Fair Value Losses
Unrealized Number of
Securities Fair Value Losses
Unrealized
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 $
—
1
1,897 $
—
1,897
2
—
2
37
2
39
1
—
1
15
13
28
—
—
—
—
1
1
24,937
—
24,937
36,187
13,683
49,870
9,967
—
9,967
94,545
46,217
140,762
—
—
—
—
487
487
2
—
2
64
—
64
87
58
145
2
—
2
446
369
815
—
—
—
—
—
—
1 $
3
4
981 $
3,556
4,537
6
39
45
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
167,533
60,387
56
16
72 $ 227,920 $
601
427
1,028
161,784
398,386
60
88
148 $ 560,170 $
1,250
12,531
13,781
F-28
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2019
December 31, 2018
Number of
Securities Fair Value
Unrealized Number of
Losses
Securities Fair Value
Unrealized
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
2 $
—
2
—
—
—
8
—
8
4
8
12
38
4
42
52
12
64 $
9,665 $
—
9,665
—
—
—
44,610
—
44,610
23,904
59,560
83,464
15,996
1,099
17,095
94,175
60,659
154,834 $
35
—
35
—
—
—
656
—
656
287
617
904
124
31
155
— $
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
1,102
648
1,750
21,866
278,770
12
130
142 $ 300,636 $
198
10,055
10,253
During 2019, 2018 and 2017, 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 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
equity securities, at December 31, 2019 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
Fair Value
Amortized
Cost
$ 10,612 $ 10,660 $
— $
121,052
29,697
17,935
179,296
123,759
30,572
18,689
183,680
25,967
5,537
61,528
93,032
Fair Value
—
25,955
5,591
62,318
93,864
460,099
333,328
11,488
18,071
113,216
163,779
$ 984,211 $ 998,392 $ 386,326 $ 388,930
466,989
335,692
12,031
17,776
113,894
161,624
During 2019, 2018 and 2017, the Company recognized net gains from its trading portfolio of $20.5 million, $6.2 million
and $20.2 million, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product
trading activities of $132.7 million, $41.9 million and $62.8 million during 2019, 2018 and 2017, respectively. During
2019, the Company had other realized losses on securities of $2.5 million, while other net realized gains on securities
during 2018 and 2017 were nominal. All such net gains and losses are recorded as a component of other noninterest
income within the consolidated statements of operations.
F-29
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Securities with a carrying amount of $576.0 million and $612.3 million (with a fair value of $583.6 million and $600.0
million, respectively) at December 31, 2019 and 2018, 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, 2019 and 2018.
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, 2019 and 2018, NLC had investments on deposit in custody for various state insurance departments
with carrying values of $9.3 million and $9.5 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. 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. 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
Consumer
Broker-dealer (1)
Allowance for loan losses
Total loans held for investment, net of allowance
December 31,
2019
2018
$ 3,000,523 $ 2,940,120
1,752,257
932,909
679,263
47,546
578,363
6,930,458
(59,486)
$ 7,320,264 $ 6,870,972
2,025,720
940,564
791,020
47,046
576,527
7,381,400
(61,136)
(1)
Primarily represents margin loans to customers and correspondents associated with broker-dealer segment
operations.
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on
stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are
underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the
primary sources of repayment and any collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size and complexity of the credit. The financial
components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and
F-30
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 amounts and the outstanding balances of PCI
loans (in thousands).
Carrying amount
Outstanding balance
December 31,
$
2019
82,331 $
141,615
2018
93,072
172,808
Changes in the accretable yield for PCI loans were as follows (in thousands).
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
Year Ended December 31,
2019
2018
$
$
80,693 $
—
18,353
(1,168)
(31,875)
—
66,003 $
98,846 $
340
26,166
(1,226)
(43,433)
—
80,693 $
2017
156,847
—
12,946
(1,663)
(69,284)
—
98,846
(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 $49.5 million and $64.2 million at December 31, 2019 and
2018, respectively. During 2019, 2018 and 2017, 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.
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.
F-31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The amounts shown in following tables include loans accounted for on an individual basis, as well as acquired Pooled
Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment
measured at the pool level. Impaired loans, segregated between those considered to be PCI loans and those without
credit impairment at acquisition, are summarized by portfolio segment in the following tables (in thousands).
December 31, 2019
PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Non-PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
December 31, 2018
PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Non-PCI
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Unpaid
Contractual
Recorded
Recorded
Investment with Investment with Recorded
Total
Principal Balance No Allowance
Allowance
Related
Investment Allowance
$
28,541 $
27,020
23,281
7,327
89,800
1,695
—
4,254 $
2,816
4,131
1
381
—
—
8,592 $
9,920
1,129
76
51,031
—
—
12,846 $
12,736
5,260
77
51,412
—
—
177,664
11,583
70,748
82,331
3,895
4,706
27,168
1,483
10,320
38
—
47,610
2,790
3,495
10,714
1,316
7,343
26
—
25,684
—
—
2,986
—
—
—
—
2,986
2,790
3,495
13,700
1,316
7,343
26
—
28,670
$
225,274 $
37,267 $
73,734 $ 111,001 $
2,659
1,235
70
27
3,179
—
—
7,170
—
—
1,442
—
—
—
—
1,442
8,612
Unpaid
Contractual
Recorded
Investment with Investment with Recorded Related
Investment Allowance
Recorded
Total
Allowance
Principal Balance No 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
5,549 $
11,657
5,491
74
646
9
—
23,426
—
4,098
9,891
2,711
6,922
42
—
23,664
7,540 $
2,967
1,068
390
57,681
—
—
13,089 $
14,624
6,559
464
58,327
9
—
69,646
93,072
—
—
1,740
535
—
—
—
2,275
—
4,098
11,631
3,246
6,922
42
—
25,939
$
265,779 $
47,090 $
71,921 $ 119,011 $
1,125
304
72
92
1,299
—
—
2,892
—
—
721
31
—
—
—
752
3,644
F-32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Average investment in impaired loans is summarized by portfolio segment in the following table (in thousands).
Year Ended December 31,
2018
2019
2017
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
$ 14,363 $ 14,533 $ 16,623
25,307
19,189
3,136
5,797
361
—
115,085
$ 115,008 $ 141,587 $ 185,498
21,262
21,143
2,880
35,404
117
—
46,248
17,477
18,575
2,552
62,002
39
—
—
Non-accrual loans, excluding those classified as held for sale, are summarized by portfolio segment 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
Consumer
Broker-dealer
December 31,
2019
2018
$
$
3,813 $
3,495
15,262
1,316
7,382
26
—
31,294 $
1,226
4,098
14,870
3,278
7,026
41
—
30,539
At December 31, 2019 and 2018, non-accrual loans included PCI loans of $3.8 million and $4.9 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, $4.8 million and $3.4 million
of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at
December 31, 2019 and 2018, respectively.
Interest income, including recoveries and cash payments, recorded on impaired loans was $1.6 million, $1.4 million and
$1.7 million during 2019, 2018 and 2017, respectively. Except as noted above, PCI loans are considered to be
performing due to the application of the accretion method.
The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and
that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable
payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates
and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans
(“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans,
the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is
not forgiven to the debtor.
F-33
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
There were no TDRs granted during 2018. Information regarding TDRs granted during 2019 and 2017 is shown in the
following table (dollars in thousands). At December 31, 2019 and 2018, the Bank had nominal unadvanced
commitments to borrowers whose loans have been restructured in TDRs.
Year Ended December 31, 2019
Year Ended December 31, 2017
Number of Balance at Balance at
Loans
Extension End of Period Loans
Number of Balance at Balance at
Extension End of Period
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
— $
—
9,618
—
—
—
—
—
— $
—
4
—
—
—
—
—
4 $ 9,618 $
—
—
8,566
—
—
—
—
—
8,566
$
—
2
1
1
—
—
—
—
—
$
4,775
1,357
655
—
—
—
—
4 $ 6,787 $
—
4,629
1,186
611
—
—
—
—
6,426
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 2019, 2018 or 2017.
There were no TDRs granted during the twelve months preceding December 31, 2019 or 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
Consumer
Broker-dealer
Covered
Twelve Months Preceding December 31, 2017
Number of Balance at
Loans
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, 2019
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land
development
1-4 family residential
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
4,559 $ 1,691,947 $ 12,846 $ 1,709,352 $
4,298
10,599
1,274,137
2,009,861
1,291,171
2,025,720
12,736
5,260
9,407
10,481
489
—
931,080
729,127
46,557
576,527
77
51,412
—
—
940,564
791,020
47,046
576,527
39,833 $ 7,259,236 $ 82,331 $ 7,381,400 $
—
—
3
—
—
—
—
3
$
$
1,769 $
1,741
5,672
7,580
6,281
455
—
23,498 $
— $
125
1,735
1,827
1,461
34
—
5,182 $
2,790 $
2,432
3,192
—
2,739
—
—
11,153 $
F-34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2018
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land
development
1-4 family residential
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
$
$
1,174 $
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 $
1,373 $ 1,708,160 $ 13,089 $ 1,722,622 $
5,537
13,892
1,197,337
1,731,806
1,217,498
1,752,257
14,624
6,559
3,549
10,421
401
—
928,896
610,515
47,136
578,363
464
58,327
9
—
932,909
679,263
47,546
578,363
35,173 $ 6,802,213 $ 93,072 $ 6,930,458 $
—
75
3
—
—
—
—
78
In addition to the loans shown in the table above, PrimeLending had $102.7 million and $83.1 million of loans included
in loans held for sale (with an aggregate unpaid principal balance of $104.0 million and $84.0 million, respectively) that
were 90 days past due and accruing interest at December 31, 2019 and 2018, 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.
The following tables present the internal risk grades of loans, as previously described, in the portfolio by class (in
thousands).
December 31, 2019
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Pass
Special Mention Substandard
PCI
Total
810
15,973
—
—
—
—
— $ 57,824 $ 12,846 $ 1,709,352
1,291,171
2,025,720
940,564
791,020
47,046
576,527
16,783 $ 203,390 $ 82,331 $ 7,381,400
12,736
5,260
77
51,412
—
—
38,770
87,037
2,520
16,951
288
—
$ 1,638,682 $
1,238,855
1,917,450
937,967
722,657
46,758
576,527
$ 7,078,896 $
F-35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2018
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Allowance for Loan Losses
Pass
Special Mention Substandard
PCI
Total
$ 1,673,424 $
1,175,225
1,677,033
929,130
601,264
47,416
578,363
$ 6,681,855 $
2,083
15,320
—
393
—
—
— $ 36,109 $ 13,089 $ 1,722,622
1,217,498
1,752,257
932,909
679,263
47,546
578,363
17,796 $ 137,735 $ 93,072 $ 6,930,458
14,624
6,559
464
58,327
9
—
25,566
53,345
3,315
19,279
121
—
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.
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:
•
•
•
•
•
•
•
•
the loss emergence period is applied to both the general allowance and adjustments for qualitative risk factors,
which represents the average amount of time between when loss events occur for specific loan types and when
such problem loans are identified and the related loss amounts are confirmed through charge-offs;
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.
F-36
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. Periodically, management conducts an analysis to estimate the
loss emergence period for each loan portfolio segment based on historical charge-offs, loan type and loan payment
history and considers available industry peer bank data. Model output by loan category is reviewed to evaluate the
reasonableness of the reserve levels in comparison to the estimated loss emergence period applied to historical loss
experience.
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, 2019, additional
provisions for losses on existing loans may be necessary in the future.
Changes in the allowance for loan losses, distributed by portfolio segment, are shown below (in thousands).
Year Ended December 31, 2019
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Balance,
Beginning of Year
$
Provision (Recovery)
for Loan Losses
27,100 $
21,980
6,061
3,956
267
122
59,486 $
$
Loans
Recoveries on
Balance,
5,649 $
(921)
(1,183)
3,276
459
(74)
7,206 $
Charged Off Charged Off Loans End of Year
31,595
17,964
4,878
6,386
265
48
61,136
(1,160) $
(5,924)
—
(907)
(498)
—
(8,489) $
2,829
—
61
37
—
2,933 $
6 $
F-37
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Balance,
Beginning of Year
$
Provision (Recovery)
for Loan Losses
Year Ended December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Total
Year Ended December 31, 2017
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Covered
Total
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 $
$
$
Balance,
Beginning of Year
$
Provision (Recovery)
for Loan Losses
Loans
Recoveries on
Balance,
668 $
— $
(800) $
Charged Off Charged Off Loans End of Year
27,100
21,980
6,061
3,956
267
122
—
59,486
(12,741)
—
(143)
(93)
—
—
(13,777) $
4,273
6
146
64
—
—
4,489 $
6,750
(1,792)
(292)
(15)
(231)
—
5,088 $
Loans
Recoveries on
Balance,
4,320 $
6,725
848
(701)
16
198
2,865
24 $
(193) $
Charged Off Charged Off Loans End of Year
26,413
23,674
7,844
2,362
311
353
2,729
63,686
(6,253)
(13)
(112)
(208)
—
(571)
(7,350) $
1,833
7
201
79
—
22
2,166 $
14,271 $
The loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
December 31, 2019
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Loans Individually Loans Collectively
Evaluated for
Impairment
Evaluated for
Impairment
PCI
Loans
$
$
5,698 $
12,889
1,237
608
—
—
20,432 $
2,969,243 $
2,007,571
939,250
739,000
47,046
576,527
7,278,637 $
25,582
5,260
77
51,412
—
—
82,331
Loans Individually Loans Collectively
Evaluated for
Impairment
Evaluated for
Impairment
PCI
Loans
$
$
3,909 $
10,741
3,241
—
—
—
17,891 $
2,908,498 $
1,734,957
929,204
620,936
47,537
578,363
6,819,495 $
27,713
6,559
464
58,327
9
—
93,072
$
$
$
$
Total
3,000,523
2,025,720
940,564
791,020
47,046
576,527
7,381,400
Total
2,940,120
1,752,257
932,909
679,263
47,546
578,363
6,930,458
The allowance for loan losses was distributed by portfolio segment and impairment methodology as shown below (in
thousands).
December 31, 2019
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Loans Individually Loans Collectively
Evaluated for
Impairment
Evaluated for
Impairment
PCI
Loans
$
$
— $
1,442
—
—
—
—
1,442 $
27,701 $
16,452
4,851
3,207
265
48
52,524 $
3,894
70
27
3,179
—
—
7,170
$
$
Total
31,595
17,964
4,878
6,386
265
48
61,136
F-38
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
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
$
$
Total
27,100
21,980
6,061
3,956
267
122
59,486
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
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.
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.”
F-39
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
Year Ended December 31,
2017
2018
36,744 $
5,284
(10,145)
(2,027)
(29,856)
— $
51,642
6,700
(17,866)
(3,732)
—
36,744
$
$
(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 and 2017, 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.
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
$
$
29,340 $
(6,509)
—
(22,831)
— $
71,313
(17,083)
(24,890)
—
29,340
Year Ended December 31,
2017
2018
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.
F-40
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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,
2019
39,590 $
129,055
232,019
1,458
82,837
484,959 $
2018
47,621
83,949
425,770
1,595
85,138
644,073
$
$
The amounts above include interest-bearing deposits of $271.5 million and $469.4 million at December 31, 2019 and
2018, respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at
December 31, 2019 and 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
$
2019
130,312 $
285,617
415,929
(195,947)
$
219,982 $
2018
147,783
259,082
406,865
(169,492)
237,373
The amounts shown above include gross assets recorded under capital leases of $7.8 million and $7.8 million, with
accumulated amortization of $4.2 million and $3.6 million at December 31, 2019 and 2018, respectively.
Occupancy expense was reduced by rental income of $2.7 million, $1.4 million and $1.8 million during 2019, 2018 and
2017, respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of
capital leases, amounted to $29.6 million, $33.1 million and $34.6 million during 2019, 2018 and 2017, respectively.
9. Goodwill and Other Intangible Assets
At December 31, 2019, the carrying amount of goodwill of $291.4 million was comprised of $39.6 million recorded 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 $30.2 million and $38.0 million at December 31, 2019 and 2018, 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, 2019, 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, at December 31, 2019, 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
F-41
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
of operations and financial condition. As quoted market prices in active stock markets are relevant evidence of fair
value, a significant decline in the Company’s common stock trading price may indicate an impairment of goodwill.
The carrying value of intangible assets subject to amortization was as follows (in thousands).
December 31, 2019
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
December 31, 2018
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Agent relationships
Net
Intangible
Assets
Accumulated Intangible
Amortization Assets
Estimated Gross
Useful Life
(Years)
4 - 12 $ 48,930 $ (36,576) $ 12,354
10,175
—
4,624
2
$ 98,240 $ (71,085) $ 27,155
15 - 20
4 -
6
12 - 14
13
(9,825)
(4,310)
(16,776)
(3,598)
20,000
4,310
21,400
3,600
Net
Intangible
Assets
Accumulated Intangible
Amortization Assets
Estimated Gross
Useful Life
(Years)
4 - 12 $ 48,930 $ (31,062) $ 17,868
11,156
—
5,935
46
$ 105,580 $ (70,575) $ 35,005
15 - 20
4 -
6
12 - 14
13
(8,844)
(11,650)
(15,465)
(3,554)
20,000
11,650
21,400
3,600
Amortization expense related to intangible assets during 2019, 2018 and 2017 was $7.8 million, $8.4 million and $8.3
million, respectively.
The estimated aggregate future amortization expense for intangible assets at December 31, 2019 is as follows (in
thousands).
2020
2021
2022
2023
2024
Thereafter
$
$
6,538
5,313
3,987
2,860
1,825
6,632
27,155
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
2019
Year Ended December 31,
2018
$
$
66,102 $
13,755
—
(16,054)
(8,299)
55,504
$
54,714 $
25,028
(9,303)
159
(4,496)
66,102
$
2017
61,968
16,401
(17,499)
(1,722)
(4,434)
54,714
F-42
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Mortgage loans serviced for others
MSR asset as a percentage of serviced mortgage loans
$
4,948,441 $
1.12 %
December 31,
2019
2018
5,086,461
1.30 %
(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,
2019
13.16 %
11.14 %
6.0
2018
10.51 %
11.11 %
7.1
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,
2019
2018
$
(3,072) $
(5,943)
(2,512)
(4,980)
(2,094)
(4,028)
(2,677)
(5,139)
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 $25.3 million, $23.3 million and $20.7
million during 2019, 2018 and 2017, respectively, were included in other noninterest income within the consolidated
statements of operations.
11. Deposits
Deposits are summarized as follows (in thousands).
Noninterest-bearing demand
Interest-bearing:
NOW accounts
Money market
Brokered - money market
Demand
Savings
Time
Brokered - time
December 31,
2019
2018
$ 2,769,556 $ 2,560,750
1,552,209
2,641,116
5,000
329,405
199,076
1,505,375
30,477
1,358,196
2,725,541
5,000
393,685
184,700
1,308,284
—
$ 9,032,214 $ 8,536,156
F-43
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
At December 31, 2019, deposits include $798.9 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, 2019 are as follows (in
thousands).
2020
2021
2022
2023
2024 and thereafter
12. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank
Short-term bank loans
Commercial paper
$ 1,172,822
183,529
118,529
44,246
16,726
$ 1,535,852
December 31,
$
2019
81,625 $
612,125
600,000
111,000
19,260
2018
100,100
576,707
200,000
189,000
—
$ 1,424,010 $ 1,065,807
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.
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,
2019
605,858 $
2.48 %
693,750
2018
701,622 $
1.96 %
849,568
2017
588,847
1.06 %
904,704
Average interest rate at end of year
Securities underlying the agreements at end of year:
Carrying value
Estimated fair value
December 31,
2019
2018
1.97 %
2.43 %
$
$
612,515
661,023
$
$
587,609
618,231
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, 2019, the Bank had
available collateral of $3.9 billion, substantially all of which was blanket collateral. Other information regarding FHLB
short-term borrowings is shown in the following tables (dollars in thousands).
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
2019
329,356
Year Ended December 31,
2018
214,110
$
$
2.16 %
$
700,000
$
2.09 %
675,000
2017
390,616
1.08 %
850,000
$
$
F-44
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Average interest rate at end of year
December 31,
2019
2018
1.56 %
2.65 %
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, 2019 and 2018 was 2.52% and 3.35%,
respectively.
During 2019, Hilltop Securities initiated two commercial paper programs in the ordinary course of its business to fund a
portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days
to 270 days from the date of issuance. The CP Notes are issuable under two separate programs, Series 2019-1 CP Notes
and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP
Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a
discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. At December 31, 2019,
the amount outstanding under these secured arrangements was collateralized by securities held for firm accounts valued
at $20.9 million. As of December 31, 2019, the weighted average maturity of the CP Notes was 90 days at a rate of
2.208%.
13. Notes Payable
Notes payable consisted of the following (in thousands).
Senior Notes due April 2025, net of discount of $1,232 and $1,393, respectively
FHLB notes, including premium of $146 and $222, 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% (6.01% at
December 31, 2019) with interest payable quarterly
NLIC note payable due September 2033, three-month LIBOR plus 4.05% (5.96%
at December 31, 2019) with interest payable quarterly
ASIC note payable due April 2034, three-month LIBOR plus 4.05% (5.96% at
December 31, 2019) with interest payable quarterly
Ventures Management lines of credit due May 2020
December 31,
$
2019
148,768 $ 148,607
2018
28,848
4,391
10,000
10,000
10,000
10,000
7,500
78,653
7,500
48,374
$
283,769 $ 228,872
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
F-45
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 have interest rates ranging from 1.96% to 5.70%, with a weighted average interest rate of 2.18% at
December 31, 2019. 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 $3.9 billion at December 31, 2019.
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.
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, 2019.
Ventures Management Lines of Credit
At December 31, 2019, Ventures Management’s ABAs had combined available lines of credit totaling $150.0 million,
$100.0 million of which was with a single unaffiliated bank and $50.0 million of which was with the Bank. At December
31, 2019, Ventures Management had outstanding borrowings of $95.0 million, $16.4 million of which was with the
Bank with stated interest rates of the greater of a calculated index rate on mortgage notes or 3.25% to 3.75%. The
weighted average interest rate of these lines of credit at December 31, 2019 was 3.31%. 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. As of
December 31, 2019, the net worth of two of the ABAs was less than the amount required by the unaffiliated bank’s debt
covenants. Both ABAs received a waiver for this covenant from the unaffiliated bank as of December 31, 2019.
F-46
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Scheduled Maturities
Scheduled maturities for notes payable outstanding at December 31, 2019 are as follows (in thousands).
2020
2021
2022
2023
2024
Thereafter
$
$
80,868
413
—
—
—
203,573
284,854
14. Leases
Hilltop and its subsidiaries lease space, primarily for corporate offices, branch facilities and automated teller machines,
under both operating and finance leases. Certain of the Company’s leases have options to extend, with the longest
extension option being ten years, and some of the Company’s leases include options to terminate within one year. The
Company’s leases contain customary restrictions and covenants. The Company has certain intercompany leases and
subleases between its subsidiaries, and these transactions and balances have been eliminated in consolidation and are not
reflected in the tables and information presented below.
Supplemental balance sheet information related to finance leases is as follows (in thousands).
Finance leases:
Premises and equipment
Accumulated depreciation
Premises and equipment, net
December 31,
2019
$
$
7,780
(4,178)
3,602
Operating lease rental cost and finance lease amortization of ROU assets is included within occupancy and equipment,
net in the consolidated statements of operations. Finance lease interest expense is included within other interest expense
in the consolidated statements of operations. The Company does not generally enter into leases which contain variable
payments, other than due to the passage of time. The components of lease costs, including short-term lease costs, are as
follows (in thousands).
Year Ended
Operating lease cost
Less operating lease and sublease income
Net operating lease cost
Finance lease cost:
Amortization of ROU assets
Interest on lease liabilities
Total finance lease cost
December 31, 2019
$
44,331
(2,657)
41,674
590
596
1,186
$
$
$
F-47
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Supplemental cash flow information related to leases is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases
Finance leases
Year Ended
December 31, 2019
$
$
37,527
587
603
27,055
—
Information regarding the lease terms and discount rates of the Company’s leases is as follows.
Lease Classification
Operating
Finance
December 31, 2019
Weighted Average
Remaining Lease Term (Years)
5.9
6.5
Weighted Average
Discount Rate
5.29 %
4.79 %
Maturities of lease liabilities at December 31, 2019, under lease agreements that had commenced as of or subsequent to
January 1, 2019, are presented below (in thousands).
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less amount representing interest
Lease liabilities
Operating Leases
$
35,676 $
28,974
22,942
18,114
11,847
33,879
151,432 $
(23,030)
128,402 $
Finance Leases
1,197
1,212
1,241
1,280
1,163
2,297
8,390
(2,895)
5,495
$
$
As of December 31, 2019, the Company had no additional operating leases that have not yet commenced.
A related party is the lessor in an operating lease with Hilltop. Hilltop’s minimum payment under the lease is $0.5
million annually through 2028, for an aggregate remaining obligation of $4.6 million at December 31, 2019.
The Company adopted ASC 842, Leases on January 1, 2019, using the modified retrospective transition under the option
to apply the new standard at its effective date without adjusting the prior period comparative financial statements. As
such, disclosures for comparative periods under the predecessor standard, ASC 840, Leases, are required in the year of
transition. Future minimum lease payments under ASC 840 as of December 31, 2018, under lease agreements that had
commenced as of December 31, 2018, 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
$
Capital Leases
36,171 $
29,109
21,058
16,386
12,361
18,264
133,349
$
1,186
1,197
1,212
1,241
1,280
3,460
9,576
(1,221)
8,355
$
F-48
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Junior Subordinated Debentures and Trust Preferred Securities
PCC has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which,
PCC Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole
purpose of issuing and selling preferred securities and common securities, using the resulting proceeds to acquire junior
subordinated debentures issued by PCC (the “Debentures”). Accordingly, the Debentures are the sole assets of the
Trusts, and payments under the Debentures are the sole revenue of the Trusts. All of the common securities are owned
by PCC; however, PCC is not the primary beneficiary of the Trusts. Accordingly, the Trusts are not included in the
Company’s consolidated financial statements.
The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have
invested the proceeds from the securities in floating rate Debentures of PCC.
Information regarding the PCC Debentures is shown in the following table (in thousands).
Investor
PCC Statutory Trust I
PCC Statutory Trust II
PCC Statutory Trust III
PCC Statutory Trust IV
Amount
Issue Date
$
July 31, 2001
March 26, 2003
$
September 17, 2003 $
February 22, 2008 $
18,042
18,042
15,464
15,464
The stated term of the Debentures is 30 years with interest payable quarterly. The rate on the Debentures, which resets
quarterly, is 3-month LIBOR plus an average spread of 3.22%. The total average interest rate at December 31, 2019 was
5.14%. 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.
16. Income Taxes
The significant components of the income tax provision are as follows (in thousands).
Year Ended December 31,
2018
2017
2019
Current:
Federal
State
Deferred:
Federal
State
$ 61,934 $
$ 9,253 $
71,187
19,504 $
2,349 $
21,853
63,769
5,440
69,209
$ (2,500) $
$ (1,355) $
(3,855)
$ 67,332 $
40,176
11,352 $
757
1,845 $
13,197
40,933
35,050 $ 110,142
F-49
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The income tax provision differs from the amount that would be computed by applying the statutory Federal income tax
rate to income before income taxes as a result of the following (in thousands). The applicable corporate federal income
tax rates were 21% for 2019 and 2018 and 35% for 2017.
Computed tax at federal statutory rate
Tax effect of:
Tax Legislation
Non-taxable acquisition adjustment
Nondeductible transaction costs
Nondeductible expenses
State income taxes
Tax-exempt income, net
Minority interest
Share-based compensation benefit
Prior year return to provision adjustment
Other
Year Ended December 31,
2018
$ 63,065 $ 33,763 $ 85,150
2019
2017
—
—
—
2,728
6,239
(1,727)
(1,614)
(145)
(980)
(234)
28,363
(6,682)
774
3,089
4,028
(2,758)
(210)
(412)
(943)
(257)
$ 67,332 $ 35,050 $ 110,142
—
263
86
2,864
3,313
(1,432)
(900)
(273)
(1,682)
(952)
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
Operating lease ROU assets
Other
$
Deferred tax liabilities:
Premises and equipment
Intangible assets
Derivatives
Loan servicing
Operating lease liabilities
Other
Net deferred tax asset
$
December 31,
2019
2018
7,823 $
15,851
14,796
17,813
1,272
5,456
29,125
9,774
101,910
10,079
7,684
4,342
13,278
26,498
9,652
71,533
30,377 $
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
The Company’s effective tax rate was 22.4%, 21.8% and 45.3% during 2019, 2018 and 2017, respectively. The 2019 and
2018 effective tax rates approximated statutory rates and includes the effect of investments in tax-exempt instruments,
offset by nondeductible expenses. 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.
At December 31, 2019 and 2018, the Company had net operating loss carryforwards for Federal income tax purposes of
$11.4 million and $20.9 million, respectively (or $2.4 million and $4.4 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
F-50
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
planning strategies, core earnings, and reversal of timing differences. At December 31, 2019, 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 that were 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 RBILs are
expected to be fully realized prior to any expiration.
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, 2019 or 2018.
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, 2019 and 2018, the total amount of gross unrecognized tax benefits was $2.8 million and $3.1 million, respectively,
of which $2.1 million and $2.5 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
Decreases related to expiration of the statute of limitations
Balance, end of year
Year Ended December 31,
2018
2017
2019
$
$
3,056 $
317
(423)
288
(430)
2,808 $
1,574 $
770
—
712
—
3,056 $
1,704
476
(1,273)
667
—
1,574
Specific positions that may be resolved include issues involving apportionment and tax credits. At December 31, 2019,
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 2016. The Company is open for various state tax
audits for tax years 2015 and later.
17. 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 $15.7 million, $15.0 million and $13.9 million during 2019, 2018 and
2017, 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, 2019 and
2018, the recorded liability, including interest, was $2.6 million and $9.2 million, respectively. The decrease in the
recorded liability was in connection with the retirement in April 2019 of Alan B. White, the Company’s former Vice
Chairman and Co-Chief Executive Officer, whereby payments due under Mr. White’s retention agreement were
triggered and paid.
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, 2019 and 2018, the carrying value of the
policies included in other assets was $26.2 million and $26.5 million, respectively. During each of 2019, 2018 and 2017,
F-51
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
the Bank recorded income of $1.0 million, $0.6 million and $0.6 million, respectively, related to the policies that was
reported in other noninterest income within the consolidated statement of operations.
Deferred Compensation Plan
As a result of the SWS Merger, the Company assumed a deferred compensation plan (the “SWS Plan”) that allows
former SWS eligible officers and employees to defer a portion of their bonus compensation and commissions. The SWS
Plan matched 15% of the deferrals made by participants up to a predetermined limit through matching contributions that
vest ratably over four years. Pursuant to the terms of the SWS Plan, the trustee periodically purchased the former SWS
common stock in the open market. As a result of the SWS Merger, the former SWS common shares were converted into
Hilltop common stock based on the terms of the merger agreement. No further contributions can be made to this plan.
The assets of the SWS Plan are held in a rabbi trust and primarily include investments in company-owned life insurance
(“COLI”) and Hilltop common stock. These assets are consolidated with those of the Company. Investments in COLI are
carried at the cash surrender value of the insurance policies and recorded in other assets within the consolidated balance
sheet at December 31, 2019 and 2018, 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, 2019
and 2018, respectively.
18. Related Party Transactions
Jeremy B. Ford, a director and the President and Chief Executive Officer of Hilltop, is the beneficiary of a trust that
owns a 49% limited partnership interest in Diamond A Financial, L.P., which owned 17.3% of the outstanding Hilltop
common stock at December 31, 2019.
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 $5 thousand and $1.2 million at December 31, 2019 and 2018,
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 2019, there were no principal additions and total principal payments were
$1.1 million.
At December 31, 2019 and 2018, the Bank held deposits of related parties of $141.2 million and $126.3 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 $4.6 million at December 31, 2019.
The Bank purchased loans from a company for which a related party served as a director, president and chief executive
officer. At December 31, 2019 and 2018, the outstanding balance of the purchased loans was $0.7 million and $1.2
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, 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 Mr. 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
F-52
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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 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 a significant portion of the total rentable corporate office space in Hilltop
Plaza to serve as the headquarters for both companies. Affiliates of Mr. Gerald J. Ford also entered into leases for office
space in the building. The two separate 129-month office and retail leases of Hilltop and the Bank, respectively, have
combined total base rent of approximately $35 million with the first nine months of rent abated. The accounting
commencement date of both leases was determined to be June 20, 2019, the date the building was delivered in order for
tenant improvement work to commence. The combined operating lease liability, net of lease incentives, recognized
during the second quarter of 2019 as a result of the commencement of these leases was $18.9 million. During 2018, 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 were recognized during the construction period through December 31, 2018, as costs
were 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 were included within premises and
equipment and other liabilities, respectively, in the consolidated balance sheets. The Company reassessed its accounting
ownership of the Hilltop Plaza assets under construction as of January 1, 2019, under the build-to-suit provisions of the
newly adopted ASC 842, Leases and concluded it was not the accounting owner. As such, the assets and liabilities of the
project were derecognized on January 1, 2019, with the $1.4 million offset representing deferred expenses recognized on
the date through December 31, 2018, recorded as an increase to retained earnings.
All intercompany transactions associated with the Hilltop Plaza investment and the related transactions discussed above
are eliminated in consolidation.
F-53
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. 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 2019 and 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.
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.
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.
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,
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
F-54
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2019 and 2018, the mortgage origination segment’s indemnification liability reserve totaled $11.8
million and $10.7 million, respectively. The provision for indemnification losses was $3.1 million, $3.2 million and $4.0
million during 2019, 2018 and 2017, respectively.
The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment
based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification
liability reserve activity (in thousands).
Representation and Warranty Specific Claims
Activity - Origination Loan Balance
Year Ended December 31,
2018
2019
2017
Balance, beginning of year
Claims made
Claims resolved with no payment
Repurchases
Indemnification payments
Balance, end of year
Balance, beginning of year
Additions for new sales
Repurchases
Early payment defaults
Indemnification payments (1)
Change in reserves for loans sold in prior years
Balance, end of year
Reserve for Indemnification Liability:
Specific claims
Incurred but not reported claims
Total
$
$
$
$
$
$
33,784 $
20,054
(14,154)
(6,170)
(1,370)
32,144 $
33,702 $
22,156
(13,169)
(8,250)
(655)
33,784 $
40,669
42,330
(37,439)
(6,490)
(5,368)
33,702
Indemnification Liability Reserve Activity
Year Ended December 31,
2018
2019
2017
10,701 $
3,116
(495)
(380)
(352)
(814)
11,776 $
23,472 $
3,170
(612)
(368)
(13,687)
(1,274)
10,701 $
18,239
3,962
(466)
(228)
(713)
2,678
23,472
December 31,
2019
2018
1,071 $
10,705
11,776 $
676
10,025
10,701
(1)
Indemnification payments in 2018 included $13.5 million related to agreements with the DOJ and HUD in exchange for release of any civil
claims related to certain loans originated by PrimeLending. These claims were included in incurred but not reported claims in prior periods.
F-55
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 17 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger,
Hilltop entered into separate retention agreements with certain executive officers. As of December 31, 2019, a single
retention agreement remains, with an initial term of two years (with automatic one-year renewals at the end of the first
year and each anniversary thereof). This retention agreement provides for severance pay benefits if the executive
officer’s employment is terminated without “cause”.
In addition to this retention agreement, 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.
20. 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 $2.1 billion at December 31, 2019
and outstanding financial and performance standby letters of credit of $90.9 million at December 31, 2019.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans held for
investment. 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.
F-56
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. 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, 2019, 556,368 shares of common stock remain available for issuance pursuant to the 2012 Plan, including
shares that may be delivered pursuant to outstanding awards. Compensation expense related to the 2012 Plan was $11.8
million, $9.1 million and $10.8 million during 2019, 2018 and 2017, respectively.
During 2019, 2018 and 2017, Hilltop granted 26,659, 30,400 and 16,859 shares of common stock, respectively, pursuant
to the 2012 Plan to certain non-employee members of the Company’s board of directors for services rendered to the
Company.
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. During 2017, 3,881 Restricted Stock Awards vested with a weighted average grant date fair value of
$19.95. 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 nonvested RSU activity (shares in thousands).
Balance, December 31, 2016
Granted
Vested/Released
Forfeited
Balance, December 31, 2017
Granted
Vested/Released
Forfeited
Balance, December 31, 2018
Granted
Vested/Released
Forfeited
Balance, December 31, 2019
RSUs
Weighted
Average
Grant Date
Fair Value
Outstanding
1,456
450
(451)
(137)
1,318
510
(406)
(152)
1,270
719
(496)
(56)
1,437
$
$
$
$
$
$
$
$
$
$
$
$
$
19.83
26.37
22.48
22.41
20.89
24.00
19.92
20.97
22.44
20.02
18.17
24.12
22.64
F-57
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Vested/Released RSUs include an aggregate of 303,250 shares withheld to satisfy employee statutory tax obligations
during 2019, 2018 and 2017. Pursuant to certain RSU award agreements, an aggregate of 17,692 vested RSUs at
December 31, 2019 require deferral of the settlement in shares and statutory tax obligations to a future date.
During 2019, the Compensation Committee of the board of directors of the Company awarded certain executives and
key employees an aggregate of 710,425 RSUs pursuant to the 2012 Plan. At December 31, 2019, 603,593 of these
outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the
grant date, and 91,249 of these outstanding RSUs will cliff vest based upon the achievement of certain performance
goals over a three-year period.
At December 31, 2019, in the aggregate, 1,198,953 of the outstanding RSUs are subject to time-based vesting conditions
and generally cliff vest on the third anniversary of the grant date, and 238,145 outstanding RSUs cliff vest based upon
the achievement of certain performance goals over a three-year period. At December 31, 2019, unrecognized
compensation expense related to outstanding RSUs of $16.0 million is expected to be recognized over a weighted
average period of 1.53 years.
22. 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, 2019.
F-58
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2019, under guidance issued by the Board of Governors of the Federal Reserve System.
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 (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, 2019
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
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
$ 1,236,289 11.61 %
1,822,970 12.71 %
4.0 %
4.0 %
4.0 %
4.0 %
5.0 %
N/A
1,236,289 13.45 %
1,776,381 16.70 %
1,236,289 13.45 %
1,822,970 17.13 %
7.0 %
7.0 %
8.5 %
8.5 %
7.0 %
7.0 %
8.5 %
8.5 %
6.5 %
N/A
8.0 %
N/A
1,299,453 14.13 %
1,867,771 17.55 %
10.5 %
10.5 %
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
$ 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
F-59
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A reconciliation of equity capital to common equity Tier 1, Tier 1 and total capital (as defined) is as follows (in thousands).
December 31, 2019
December 31, 2018
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
PlainsCapital
$ 1,523,549 $ 2,103,039 $ 1,459,985 $ 1,949,470
PlainsCapital
Hilltop
Hilltop
(9,452)
(11,419)
7,988
8,627
(276,249)
(1,559)
1,236,289
(313,756)
(1,483)
1,776,381
(282,238)
(2,288)
1,183,447
(319,942)
(3,177)
1,634,978
—
65,000
—
65,000
—
1,236,289
(18,411)
1,822,970
—
1,183,447
(19,614)
1,680,364
63,164
63,212
61,730
61,852
(19,614)
$ 1,299,453 $ 1,867,771 $ 1,245,177 $ 1,722,602
(18,411)
—
—
Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (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, 2019, 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
$
318,732 $
7,750
310,982 $
$
HTS
Independent
Network
3,375
250
3,125
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
82.3 %
$
299,356
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 for regulatory
purposes under the provisions of the Exchange Act are restricted and not available for general corporate purposes. At
December 31, 2019 and 2018, the Hilltop Broker-Dealers held cash of $157.4 million and $134.0 million, respectively,
segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to
segregate cash or securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers
at December 31, 2019 and 2018.
F-60
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Mortgage Origination
As a mortgage originator, PrimeLending and its ABAs are subject to minimum net worth and liquidity requirements
established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its ABAs 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, 2019, PrimeLending and its ABAs’ net worth and liquidity
exceeded the amounts required by HUD and GNMA, as applicable, with two exceptions. As of December 31, 2019, the
net worth of two of the ABAs was less than the amount required by HUD. These instances were reported to HUD and
cured in January 2020, and as of January 31, 2020, each of these ABAs’ net worth exceeded the amount required by
HUD.
Insurance
The statutory financial statements of the Company’s insurance subsidiaries are domiciled in the State of Texas and 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 (loss) of each insurance subsidiary is as follows (in
thousands).
Statutory capital and surplus:
National Lloyds Insurance Company
American Summit Insurance Company
December 31,
2019
2018
$
70,112 $
19,201
78,637
17,908
Year Ended December 31,
2018
2017
2019
Statutory net income (loss):
National Lloyds Insurance Company
American Summit Insurance Company
$
11,389 $
968
9,114 $
(1,304)
(1,785)
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, 2019, 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, 2019, the Company’s insurance subsidiaries’ RBC ratio exceeded the level at which regulatory action
would be required.
23. Stockholders’ Equity
The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval.
At December 31, 2019, $162.6 million of its earnings was available for dividend declaration without prior regulatory
approval.
At December 31, 2019, the maximum aggregate dividend that may be paid to NLC from its insurance company
subsidiaries without regulatory approval was $10.9 million.
F-61
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Dividends
During 2019, 2018 and 2017, the Company declared and paid cash dividends of $0.32, $0.28 and $0.24 per common
share, or $29.6 million, $26.7 million and $23.1 million, respectively.
On January 30, 2020, the Company announced that its board of directors declared a quarterly cash dividend of $0.09 per
common share, payable on February 28, 2020, to all common stockholders of record as of the close of business on
February 14, 2020.
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 a weighted 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 a weighted average price of $21.61 per share. This stock repurchase program
expired in January 2019. The purchases were funded from available cash balances.
In January 2019, the Hilltop board of directors authorized a stock repurchase program through January 2020, pursuant to
which the Company was authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding common
stock. On August 19, 2019, the Company entered into a Securities Purchase Agreement to purchase 2,175,404 shares of
its common stock from Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P. and Oak Hill
Capital Management, LLC (collectively, “Oak Hill Capital”). The Hilltop board of directors, other than Messrs. J. Taylor
Crandall and Gerald J. Ford, considered and approved the purchase of the shares of Hilltop common stock from Oak Hill
Capital. Hilltop director J. Taylor Crandall is a founding Managing Partner of Oak Hill Capital Management, LLC. The
purchase was consummated on August 20, 2019 at a purchase price of $48.4 million, or $22.25 per share. The purchase
price per share was determined by the weighted average of the closing prices of Hilltop common stock as reported by the
New York Stock Exchange for each trading day commencing on August 12, 2019 and ending on August 16, 2019. The
repurchase of shares by Hilltop from Oak Hill Capital fully utilized all remaining availability of the stock repurchase
program previously authorized in January 2019.
During 2019, the Company paid $73.4 million to repurchase an aggregate of 3,390,247 shares of common stock at a
weighted average price of $21.64 per share. These amounts are inclusive of the repurchase of shares by Hilltop from Oak
Hill Capital discussed above. This stock repurchase program expired in January 2020. The purchases were funded from
available cash balances.
In January 2020, the Hilltop board of directors authorized a new stock repurchase program through January 2021,
pursuant to which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of its outstanding
common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation.
F-62
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
24. 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 structured product and
derivative activities
Net gain from trading securities portfolio
Service charges on depositor accounts
Trust fees
Insurance commissions
Insurance direct billing and other policy fees
Revenue from check and stored value cards
Rent and other income from other real estate owned
SWS merger appraisal proceeding
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
Funding fees
Office supplies
OREO and repossessed assets
FDIC indemnification asset amortization
FDIC "true-up"
Other
25. Derivative Financial Instruments
Year Ended December 31,
2018
2017
2019
$
$
$
$
129,571 $
20,521
15,170
10,255
5,325
3,708
2,784
438
—
9,493
197,265 $
53,916 $
20,039
19,892
16,784
12,967
12,526
7,850
5,393
5,121
1,858
—
—
47,836
204,182 $
41,543 $
6,197
14,484
9,807
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
5,414
6,123
3,885
6,509
250
51,183
224,255 $
70,922
20,210
14,429
7,485
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
8,464
7,806
4,004
17,083
2,100
51,362
242,096
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. Additionally, the
Bank manages variability of cash flows associated with its variable rate debt in interest-related cash outflows with
interest rate swap contracts. 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 interest rate swaps and U.S.
Treasury bond futures and options, to hedge this risk. The Hilltop Broker-Dealers use forward commitments to both
purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk
in certain inventory positions. Additionally, Hilltop Securities uses U.S. Treasury bond, Eurodollar futures and
municipal market data, or MMD, rate locks to hedge changes in the fair value of its securities.
F-63
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all
mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently
without applying complex hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward
commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these
derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production
income. These 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 changes in fair value were recorded as a component of other noninterest income.
Changes in the fair value of derivatives are presented in the following table (in thousands).
Increase (decrease) in fair value of derivatives during period:
PrimeLending
Hilltop Broker-Dealers
Bank
Hedging Derivative Instruments
Year Ended December 31,
2018
2019
2017
$
8,550 $
(3,085)
(148)
(12,788) $
(381)
30
(13,108)
8,142
334
During 2019, the Company entered into interest rate swap contracts with the initial notional of $50 million to manage the
variability of cash flows associated with our variable rate borrowings. Under these interest rate swap contract, we receive
a floating rate and pay a fixed rate on the outstanding notional amount.
The Company has designated the interest rate swap as a cash flow hedge and assess the hedge effectiveness both at the
onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the interest rate swap is
highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative are
included as a component of other comprehensive loss on our consolidated balance sheets. Although the Company has
determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term of
the contract, any portion of fair value swap subsequently determined to be ineffective will be recognized in earnings.
Derivative positions are presented in the following table (in thousands).
Derivative instruments (not designated as hedges):
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)
Derivative instruments (designated as hedges):
December 31, 2019
December 31, 2018
Notional
Amount
Estimated Notional
Amount
Fair Value
Estimated
Fair Value
$
914,526 $ 18,222 $
31,200
31,200
3,346,946
5,988,198
15,012
283,500
934,000
—
—
3,321
(5,904)
(178)
—
—
677,267 $
31,200
31,200
2,359,630
3,711,477
15,104
367,200
104,000
17,421
(49)
49
10,467
(19,315)
82
—
—
Interest rate swaps designated as cash flow hedges
$
50,000 $
528 $
— $
—
(1)
Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the Hilltop
Broker-Dealers.
F-64
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
PrimeLending has cash collateral advances totaling $4.5 million and $11.9 million to offset net liability derivative
positions on its commitments to sell MBSs at December 31, 2019 and 2018, respectively. In addition, PrimeLending and
the Hilltop Broker-Dealers advanced cash collateral totaling $3.7 million and $3.4 million on its U.S. Treasury bond
futures and options and Eurodollar futures at December 31, 2019 and 2018, respectively. These amounts are included in
other assets within the consolidated balance sheets.
26. 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, 2019
Securities borrowed:
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Balance Sheet
of Assets
Presented in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Institutional counterparties
$
1,634,782 $
— $
1,634,782 $
(1,586,820) $
— $
47,962
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2018
Securities borrowed:
59,031
—
59,031
(58,619)
—
412
$
3,640
1,697,453 $
—
— $
3,640
1,697,453 $
(3,640)
(1,649,079) $
—
— $
—
48,374
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
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
F-65
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Net Amounts
Gross Amounts Gross Amounts of Liabilities
of Recognized
Liabilities
Offset in the
Balance Sheet
Presented in the
Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Gross Amounts Not Offset in
the Balance Sheet
December 31, 2019
Securities loaned:
Institutional counterparties
$
1,555,964 $
— $
1,555,964 $
(1,509,933) $
— $
46,031
Interest rate swaps:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2018
Securities loaned:
178
586,651
25,474
—
—
—
178
(112)
586,651
25,474
(586,651)
(25,474)
—
—
—
66
—
—
$
6,890
2,175,157 $
(667)
(667) $
6,223
2,174,490 $
(2,384)
(2,124,554) $
—
— $
3,839
49,936
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
Secured Borrowing Arrangements
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
Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold
under repurchase agreements, which are secured borrowings and generally mature one to sixty 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.
F-66
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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, 2019 and 2018.
December 31, 2019
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
$
45,950 $
257,396
— $
— $
12,892
295,887
— $
—
45,950
566,175
120
1,555,844
1,859,310 $
$
—
—
12,892 $
—
—
295,887 $
—
—
— $
120
1,555,844
2,168,089
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
$
$
2,168,089
—
December 31, 2018
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 $
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
131,848
444,859
—
—
— $
113
1,185,960
1,762,780
$
$
1,762,780
—
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
27. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
Receivables:
Securities borrowed
Securities failed to deliver
Trades in process of settlement
Other
Payables:
Securities loaned
Correspondents
Securities failed to receive
Other
December 31,
2019
2018
$
$
$
$
1,634,782 $
18,726
104,922
21,850
1,780,280 $
1,555,964 $
37,036
8,568
3,950
1,605,518 $
1,365,547
16,300
32,993
25,447
1,440,287
1,186,073
29,311
75,015
4,526
1,294,925
F-67
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
28. 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
2019
16,633 $
32,245
(33,206)
Year Ended December 31,
2018
16,988 $
34,328
(34,683)
16,633 $
2017
18,603
34,934
(36,549)
16,988
15,672 $
$
$
Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated
statements of operations.
29. Reserve for Losses and Loss Adjustment Expenses
A rollforward of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated
balance sheets, is as follows (in thousands).
Balance, beginning of year
Less reinsurance recoverables
Net balance, beginning of year
Incurred related to:
Current year
Prior years
Total incurred
Payments related to:
Current year
Prior years
Total payments
Net balance, end of year
Plus reinsurance recoverables
Balance, end of year
$
2019
20,552 $
(3,214)
17,338
December 31,
2018
30,213 $
(11,495)
18,718
2017
35,826
(9,433)
26,393
71,687
(2,929)
68,758
79,881
(535)
79,346
94,444
257
94,701
(60,310)
(11,449)
(71,759)
(66,009)
(14,717)
(80,726)
(83,332)
(19,044)
(102,376)
14,337
1,005
15,342 $
17,338
3,214
20,552 $
18,718
11,495
30,213
$
F-68
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).
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2019
2016
$
84,771 $
December 31, 2019
2017
Unaudited
85,189 $
87,899
Total of
Incurred
But Not
Reported
Reserves Plus Cumulative
Development
Number of
On Reported
Reported
Claims
Claims
2018
2019
84,076 $
88,025
75,217
$
83,943 $
87,534
73,261
71,687
316,425
220
225
1,160
5,430
20,184
20,740
15,293
14,218
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
December 31, 2019
2016
$
71,543 $
2017
Unaudited
81,682 $
77,675
Accident
Year
2016
2017
2018
2019
Accident
Year
2016
2017
2018
2019
2018
2019
83,169 $
86,319
61,922
Total $
83,596
87,247
71,903
60,310
303,056
197
13,566
Reserve for unpaid losses and allocated loss adjustment expenses, net of reinsurance $
All outstanding reserves prior to 2016, net of reinsurance
30. 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, 2019, total reinsurance recoverables and receivables had a carrying value
of $1.0 million, which is included in other assets within the consolidated balance sheet. There was no allowance for
uncollectible accounts at December 31, 2019, based on NLC’s quality requirements.
Reinsurers with a balance in excess of 5% of the Company’s outstanding reinsurance receivables at December 31, 2019
are listed below (in thousands).
Balances
Due From
A.M. Best
Reinsurers Rating
166 N/A
$
150 A+
90 A+
A
79
A
66
A-
55
52
A+
658
$
R+V Versicherung AG
Partner Reinsurance Company Ltd.
Arch Reinsurance Company
Aspen Bermuda Ltd
Lloyds Syndicate AML #2001
Fidelis Reinsurance
Everest Reinsurance Company
F-69
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).
Written
2019
Earned
Year Ended December 31,
2018
Written
Earned
Written
2017
Earned
Premiums from direct business
Reinsurance assumed
Reinsurance ceded
Net premiums
$ 125,157 $ 126,434 $ 129,611 $ 133,112 $ 137,091 $ 144,990
11,767
(14,459)
$ 131,114 $ 132,284 $ 133,779 $ 136,751 $ 136,961 $ 142,298
12,150
(12,280)
12,917
(8,749)
13,041
(7,191)
13,148
(7,191)
12,516
(8,877)
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
2019
Year Ended December 31,
2018
$ 68,130 $ 76,464 $ 138,358
(43,657)
$ 68,940 $ 79,347 $ 94,701
2,883
810
2017
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, 2019, NLC renewed its catastrophic excess of loss reinsurance coverage for a one year-period. At
December 31, 2019, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of
$8 million retention by NLIC and $2 million retention by ASIC. ASIC maintained an underlying layer of coverage,
providing $6 million of reinsurance coverage in excess of its $2 million retention to bridge to the primary program. The
reinsurance for NLIC and ASIC in excess of $8 million is comprised of three layers of protection: $12 million in excess
of $8 million retention and/or loss; $25 million in excess of $20 million loss; and $50 million in excess of $45 million
loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $2 million, respectively.
At December 31, 2019, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8
million in the aggregate.
NLC did not renew 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 through
December 31, 2019. During 2019, NLC retained 37.5% participation in this coverage.
During 2017, NLC experienced losses related to Hurricane Harvey in excess of retention. As of December 31, 2019, the
total gross losses and LAE incurred associated with Hurricane Harvey was $16.0 million. However, because the losses
exceeded retention, net exposure to NLC was $5.2 million retention and $1.5 million in reinstatement premiums. During
2019 and 2018, NLC experienced no significant catastrophes that resulted in losses in excess of retention at NLIC or
ASIC.
There were 9 tornado, hail, monsoon and wind storms during 2019 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
$19.5 million. During 2018, the 11 tornado, hail, monsoon and wind storms that exceeded retention had incurred losses
of $21.2 million, which had no reinsured recoverable amount at the 82.5% subscription level. During 2017, the 14
tornado, hail and wind storms that exceeded retention had incurred losses of $33.3 million, which developed a reinsured
F-70
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
recoverable of $1.8 million at the 100% 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 2017 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 $1.5 million in reinstatement premiums noted above related to
Hurricane Harvey in 2017, reinstatement premiums during 2019, 2018 and 2017 of $0.5 million, $(0.1) million and $1.4
million, respectively, were recorded as ceded premiums.
31. 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 chief operating decision maker, the Company’s President and Chief Executive Officer, to evaluate
segment performance, develop strategy and allocate resources.
The banking segment includes the operations of the Bank, and since August 1, 2018, the operations 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, 2019
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
$
379,258 $
7,280
41,753
231,524
182,207 $
51,308 $
(74)
404,411
366,031
89,762 $
(6,273) $
—
634,992
563,998
64,721 $
2,329 $
—
143,082
127,920
17,491 $
(5,541) $
—
2,221
50,968
(54,288) $
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Year Ended December 31, 2018
Net interest income (expense)
Provision (recovery) for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
$
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) $
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
20,225 $
—
(20,443)
(634)
416 $
Consolidated
441,306
7,206
1,206,016
1,339,807
300,309
19,380 $
—
(21,830)
(592)
(1,858) $
Consolidated
436,324
5,088
1,022,790
1,293,249
160,777
Banking
$
Banking
$
Year Ended December 31, 2017
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
Consolidated
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) $
19,555 $
—
(19,829)
(699)
425 $
421,748
14,271
1,205,064
1,369,255
243,286
Banking
Mortgage
Broker-Dealer Origination
Insurance
Corporate
All Other and Hilltop
Eliminations
Consolidated
December 31, 2019
Goodwill
Total assets
December 31, 2018
Goodwill
Total assets
$
247,368 $
$ 11,147,344 $
7,008 $
13,071 $
3,457,068 $ 2,357,415 $
$
247,368 $
$ 10,004,971 $
7,008 $
13,071 $
3,213,115 $ 1,627,134 $
F-71
291,435
23,988 $
254,639 $ 2,393,604 $ (4,437,622) $ 15,172,448
— $
— $
291,435
23,988 $
253,513 $ 2,243,182 $ (3,658,343) $ 13,683,572
— $
— $
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
32. Earnings per Common Share
The following table presents the computation of basic and diluted earnings per common share (in thousands, except per
share data).
Basic earnings per share:
Income attributable to Hilltop
2019
Year Ended December 31,
2018
2017
$
225,291 $
121,441 $
132,544
Weighted average shares outstanding - basic
92,345
94,969
97,137
Basic earnings per common share
$
2.44 $
1.28 $
1.36
Diluted earnings per share:
Income attributable to Hilltop
Weighted average shares outstanding - basic
Effect of potentially dilutive securities
Weighted average shares outstanding - diluted
$
225,291 $
121,441 $
132,544
92,345
49
92,394
94,969
98
95,067
97,137
216
97,353
Diluted earnings per common share
$
2.44 $
1.28 $
1.36
33. 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 and equity in undistributed
earnings of subsidiaries activity
Income tax benefit
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net
Comprehensive income
Year Ended December 31,
2018
42,000 $
37,500
3,089
12,265
4,893
36,628
38,589
(7,767)
79,371
125,727 $
(5,656)
120,071 $
2017
53,000
41,500
312
10,381
12,798
33,983
63,246
(15,577)
54,321
133,144
(879)
132,265
$
2019
143,000 $
36,950
5,933
11,474
2,221
50,968
125,662
(12,706)
94,609
232,977 $
20,046
253,023 $
$
$
F-72
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
2019
December 31,
2018
2017
$
116,471 $
54,405 $
96,764
1,523,549
533,844
219,740
2,393,604 $
1,459,984
483,593
245,200
2,243,182 $
1,340,093
603,631
66,490
2,106,978
53,418 $
215,780
2,124,406
2,393,604 $
58,319 $
215,620
1,969,243
2,243,182 $
46,442
148,455
1,912,081
2,106,978
$
$
$
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:
Capital contribution to bank and bank holding company 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:
Payments to repurchase common stock
Dividends paid on common stock
Net cash contributed from noncontrolling interest
Other, net
Net cash used in financing activities
2019
Year Ended December 31,
2018
2017
$
232,977 $
125,727 $
133,144
(94,609)
—
(123)
44,943
183,188
—
—
(17,302)
—
(17,302)
(73,385)
(29,627)
100
(908)
(103,820)
(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)
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
62,066
54,405
116,471 $
(42,359)
96,764
54,405 $
(21,526)
118,290
96,764
$
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-73
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
34. Recently Issued Accounting Standards
Accounting Standards Adopted During 2019
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. The Company adopted the amendments as of January 1, 2019, which did not have a
material effect on the Company’s consolidated financial statements.
In August 2017, FASB issued ASU 2017-12 which provides targeted improvements to accounting for hedging activities.
The FASB has issued various updates, improvements and technical corrections since the issuance of ASU 2017-12. The
purpose of the amendment 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. The amendment is effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2018. The Company adopted the standard on January 1, 2019. The Company has not
historically applied hedge accounting to its derivative transactions, so the provisions of the amendment did not have a
material effect on the Company’s consolidated financial statements.
In February 2016, FASB issued the Leasing Standard, which is codified in ASC 842, Leases, and is intended to increase
transparency and comparability among organizations and require lessees to record an ROU asset and a liability
representing the obligation to make lease payments for long-term leases. Accounting by lessors remains largely
unchanged. The Company adopted the standard on January 1, 2019, using the modified retrospective transition under the
option to apply the Leasing Standard at its effective date without adjusting the prior period comparative financial
statements. The Company elected the package of practical expedients to not reassess: (i) whether any existing contracts
are or contain a lease, (ii) the lease classification of any existing leases and (iii) initial direct costs related to existing
leases. The Company also elected to apply an additional practical expedient to include both the lease and nonlease
components of all leases as a single component and account for it as a lease. The Company implemented internal
controls and key system functionality to enable the preparation of financial information upon adoption. The
implementation of the Leasing Standard had a material impact on our consolidated balance sheets but did not have a
material impact on our consolidated statements of operations. On January 1, 2019, the Company recorded operating
lease liabilities of $121.8 million and ROU assets of $111.9 million upon adoption of the Leasing Standard. The lease
liabilities (at their present value) represent predominantly all of the future minimum lease payments required under
operating leases. The balance sheet effects of the new lease accounting standard also impacted regulatory capital ratios,
performance ratios and other measures which are dependent upon asset or liability balances. In addition, the Company
reassessed its accounting ownership of the Hilltop Plaza assets under construction as of January 1, 2019, under the build-
to-suit provisions of ASC 842 and concluded it is not the accounting owner. As such, the assets and liabilities of the
project were derecognized during the first quarter of 2019, with the $1.4 million offset representing deferred expenses
recognized on the project to date through January 1, 2019, recorded as an increase to retained earnings. Refer to Note 18
for more details regarding the Hilltop Plaza transaction.
Accounting Standards Issued But Not Yet Adopted
In December 2019, FASB issued ASU 2019-12 which simplifies the accounting for income taxes by removing certain
exceptions to the general principles in the ASC and is intended to improve consistency by clarifying and amending
existing guidance. The amendments are effective for annual periods beginning after December 15, 2020. As permitted
within the amendment, the Company elected to early adopt and prospectively apply the provisions of this amendment as
of January 1, 2020. The removal of the exceptions did not result in a material change in the Company’s current or
deferred income tax provisions and are not expected to have a material impact on the Company’s future consolidated
financial statements.
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
F-74
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. The Company adopted the provisions of this amendment as of January 1, 2020. The
impact of this amendment is limited to presentation and disclosure changes that are not expected to have an impact on
the Company’s 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. The Company adopted the provisions of these amendments as
of January 1, 2020. The impact of these amendments is limited to presentation and disclosure changes that are not
expected to have an impact on the Company’s future consolidated financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model that 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 FASB has issued various updates, improvements and technical corrections to the standard since the issuance of ASU
2016-13. 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 securities, the standard modifies the current
OTTI model by requiring entities to record an allowance for credit losses rather than reducing the carrying amount of
securities. Additionally, the new standard eliminates the current accounting model for PCI loans, but requires an
allowance to be recognized for purchase credit deteriorated (“PCD”) assets. 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 the Company for annual periods, and interim reporting periods within those annual periods, beginning after
December 15, 2019, with a cumulative-effect adjustment to retained earnings at the date of adoption. The Company
adopted the new standard as of January 1, 2020. The Company’s implementation efforts have included, among other
activities, the development, testing and validation of credit forecasting models and a new credit scoring system for
significant loan portfolio segments, reassessment of risk rating grades and matrix, as well as development of the policies,
systems and controls required to fully implement CECL. Upon adoption, and dependent on the current loan portfolio and
the range of current forecasts of future economic conditions, the Company estimates that the allowance for credit losses
will be between approximately $80 million and $100 million, inclusive of the estimate of change in reserve for unfunded
commitments of between $6 million and $9 million currently included in other liabilities within the consolidated balance
sheets, when adopted on January 1, 2020. The estimated increase is driven by the fact that under CECL the allowance
covers expected credit losses over the entire expected life of the loan portfolios and also takes into account forecasts of
expected future macroeconomic conditions. This estimated increase, net of tax, will largely be reflected within the
banking segment and as a decrease to opening retained earnings at January 1, 2020. While not material, the impact of the
adoption of CECL will also affect the Company’s regulatory capital, performance and other asset quality ratios. The
estimated range noted above and ultimate magnitude of the increase in allowance for credit losses upon adoption is
expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the
impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts at the time
of adoption.
F-75
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
35. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information is summarized as follows (in thousands, except per share data).
Year Ended December 31, 2019
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
Fourth
Quarter
$ 152,777 $ 161,956 $ 150,056 $ 150,040 $
Second
Quarter
Quarter
Quarter
Third
First
41,490
111,287
6,880
299,276
336,936
66,747
15,045
51,702
48,744
113,212
47
341,401
350,109
104,457
22,750
81,707
42,180
107,876
(672)
312,871
343,677
77,742
17,951
59,791
41,109
108,931
951
252,468
309,085
51,363
11,586
39,777
Full
Year
614,829
173,523
441,306
7,206
1,206,016
1,339,807
300,309
67,332
232,977
2,426
2,289
1,980
991
$ 49,276 $ 79,418 $ 57,811 $ 38,786 $
7,686
225,291
$
$
0.54 $
0.54 $
0.87 $
0.86 $
0.62 $
0.62 $
0.41 $
0.41 $
2.44
2.44
Cash dividends declared per common share
$
0.08 $
0.08 $
0.08 $
0.08 $
0.32
Year Ended December 31, 2018
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling
interest
Income attributable to Hilltop
Earnings per common share:
Basic
Diluted
Fourth
Quarter
$ 157,702 $ 148,326 $ 140,040 $ 133,360 $
Second
Quarter
Quarter
Quarter
Third
First
39,987
117,715
6,926
238,516
310,819
38,486
8,928
29,558
37,985
110,341
(371)
269,697
335,711
44,698
7,600
37,098
35,192
104,848
340
279,434
338,517
45,425
11,034
34,391
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
239
$ 28,115 $ 35,805 $ 33,080 $ 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
36. Subsequent Event
On January 30, 2020, Hilltop entered into an agreement to sell all of the outstanding capital stock of NLC, which
comprises the operations of the insurance segment, for a cash purchase price of $150.0 million, subject to post-closing
adjustments. Consummation of the transaction is subject to customary closing conditions, including required regulatory
approvals.
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, 2014, 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, 2019, 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: Ameris Bancorp; BancFirst Corporation; BancorpSouth Bank; Cadence
Bancorporation; Commerce Bancshares, Inc.; First Financial Bancorp; First Financial Bankshares, Inc.;
First Midwest Bancorp, Inc.; Flagstar Bancorp, Inc.; Hancock Whitney Corporation; Independent Bank
Group, Inc.; International Bancshares Corporation; Prosperity Bancshares, Inc.; Simmons First National
Corporation; South State Corporation; Texas Capital Bancshares, Inc.; TowneBank; Trustmark
Corporation; UMB Financial Corporation; Umpqua Holdings Corporation; WesBanco, Inc.; and Renasant
Corporation.
)
%
(
n
r
u
t
e
R
l
a
t
o
T
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
(10.0)
(20.0)
31/12/14
31/12/15
31/12/16
31/12/17
31/12/18
31/12/19
HTH
HTH Selected Peer Group
KBW NASDAQ Regional Bank Index
Date
12/31/2019
12/31/2018
12/31/2017
12/31/2016
12/31/2015
HTH
30.0
(8.4)
28.5
49.7
(3.7)
HTH Selected Peer Group
63.1
32.1
59.4
54.4
5.5
KBW NASDAQ Regional Bank
Index
35.8
12.8
39.9
40.4
3.5
CORPORATE INFORMATION
Corporate Headquarters
6565 Hilllcrest Avenue
Dallas, Texas 75205
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.
6565 Hillcrest Avenue
Dallas, Texas 75205
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.
Board of Directors
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
Kenneth D. Russell
Jonathan S. Sobel
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
Chief Executive Officer of National Lloyds
Corporation
Keith E. Bornemann
Executive Vice President, Principal Accounting Officer
and Corporate Controller
Jerry L. Schaffner
Chief Executive Officer of PlainsCapital Bank
Todd L. Salmans
Chairman of PrimeLending
Stephen Thompson
President and Chief Executive Officer of PrimeLending
Hill A. Feinberg
Chairman Emeritus of Hilltop Securities Inc.
M. Bradley Winges
President and Chief Executive Officer of Hilltop
Securities Inc.
6565 Hillcrest Avenue
Dallas, Texas 75205
Telephone: (214) 855-2177
Facsimile: (214) 855-2173